Lowering his 1996 earnings expectations for J.P. Morgan & Co., Brown Brothers Harriman & Co. analyst Raphael Soifer downgraded the money-center bank to "hold" from "buy."
The analyst reduced his 1996 earnings estimates 13.3%, to $6.50. He also reduced his 1995 estimates 3.2%, to $6 a share. The revisions put Mr. Soifer well below the Wall Street consensus on J.P. Morgan of $6.26 a share in earnings for 1995 and $6.98 for 1996.
The market, however, shrugged off news of the revisions. J.P. Morgan's share price rose 37.5 cents, to $79.875, in quiet post-Christmas trading.
Mr. Soifer is the second analyst in as many weeks to downgrade J.P. Morgan. Charles Peabody of UBS Securities earlier downgraded the bank to "hold" from "buy," citing weakening trading conditions.
Mr. Soifer declared that "our previous estimate of $7.50 per share is wishful thinking at this time." He added: "As income from other sources grows, J.P. Morgan's reliance on asset and liability management and equity investment securities will decline."
These two areas have been critical parts of the firm's success, he said.
Mr. Soifer expects asset and liability management's contribution to pretax income to decline to 32% in 1996 from 38% in this year's first three quarters, and equity investment's contribution to decline to 14% from 22%.
Asset and liability management represents the company's interest rate positions, including fixed-income securities and derivatives holdings. In 1994 the company earned $872 million in this area.
Most of asset and liability management's choice positions have been sold and already realized this year, Mr. Soifer said.
"As of Sept. 30, the estimated fair value of all of Morgan's on- and off-balance-sheet positions exceeded their carrying value by $1.6 billion pretax, down from $2.2 billion at yearend 1994," he said. "Thus, there are fewer unrealized gains left to take, or to allow to flow through the net interest income."
Similarly, many of the bank's lucrative equity positions traded for Morgan's own account were realized in 1995, he said.
"They have been in a harvesting mode the last couple of quarters, and to use a wine analogy, what is left is now less ready to be drunk," he added. In 1994, the company earned $640 million trading equities for its own account.
Nonetheless, Mr. Soifer is still bullish on the stock long term. He expects the shares to rise to $100 a share within the next year, and rates the stock a "long-term outperform."
The stock is trading at 1.5 times book value, he said. With banks and brokerage firms, he said, "you try to buy them close to book and sell them close to two times book."
Mr. Soifer dismissed weakening trading conditions as a factor, saying that while trading will be seasonally weak in the fourth quarter, it was already built into Brown Brothers' estimates. And trading should pick up again in the new year, he said.
Mr. Soifer added that Wall Street consensus estimates on the bank will fall rapidly once disappointing fourth-quarter returns are released.
In other news, bank stocks were listless through much of an uneventful trading day Tuesday. The Standard & Poor's index of major banks rose 0.56%. The overall S&P rose 0.38%.
Shares of Wells Fargo & Co. and First Bank System Inc. both rose as the companies compete to buy First Interstate Bancorp.
Wells shares rose 75 cents to $214.50, while First Bank shares also rose 75 cents to $50.625. Wells hostile offer is now worth $142.86 per First Interstate share, and First Bank's friendly offer is worth $131.625 per share.
First Bank issued a press release Tuesday taking issue with Wells' statement last week it was on the same timeline with the First Bank offer.
First Bank said the Federal Reserve would have to evaluate the impact on competition in the California market of a Wells merger with First Interstate, so to say the two bids are on the same timetable is misleading.