J.P. Morgan Chase & Co (NYSE:JPM) will likely post a second-quarter trading loss of $4 billion to $6 billion after unwinding most of its disastrous credit bets, according to a person familiar with the matter.
The bank has gotten out of more than half of the losing position, according to a person familiar with the matter. The bank dealt directly with Saba Capital Management to pay off that hedge fund's winning trades, according to a source familiar with the fund.
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Despite the loss, the banking company is still expected to deliver the "solidly profitable" results that CEO Jamie Dimon predicted last week in congressional testimony.
The bank declined to comment.
The company has a variety of tactics it can use to offset the derivatives trading losses, including selling appreciated securities to book one-time gains and drawing down reserves for the potential costs of bad loans and lawsuits.
The bank, the biggest in the United States by assets, earns about $5 billion each quarter.
J.P. Morgan shares fell more than 5 percent early Thursday following a New York Times article that said internal projections at the bank in Ap ril sa id the lo sses could reach $8 billion to $9 billion, assuming worst-case conditions.
The shares were down 3.8 percent at $35.38 in late afternoon while the KBW Bank stock index was down 1.4 percent.
"The stock is down more than most from The New York Times story," said Christopher Mutascio, an analyst at brokerage Stifel Nicolaus & Co.
On May 10, Dimon, the bank's CEO , pegged the loss at $2 billion and warned the figure could rise by an additional "$1 billion or more." He has not raised the loss estimate since, but has said the bank has made progress in limiting the loss.
Guessing the ultimate size of the loss has been a favorite pastime on Wall Street, with estimates running as high as $5.9 billion, based of movements of obscure credit market indexes at the heart of the trades.
J.P. Morgan's stock, at Thursday's late afternoon price of $35.38, was down 13.2 percent since t he bank's May 10 disclosure. It 's recovered slightly from its drop of nearly 17 percent in the first week after the disclosure of the trading loss.
WATCHING FOR IMPACT ON EARNINGS
Dimon has promised to give a more complete report on the situation on July 13 when the company releases results for the second quarter.
More important than the exact amount of the trading loss, investors should be concerned about the impact of J.P. Morgan's response to this debacle on the co mpany's earnings po wer, said Stifel Nicolaus' Mutascio.
"When they unwind that trade fully, those losses are going to be history," Mutascio said.
J.P. Morgan may move to keep up its profit by taking more one-time gains from selling securities that yield relatively high rates of interest, Mutascio said. Doing so would reduce profits in future quarters.
The bank has said it has already taken $1 billion of such gains to offset the losses. It sold a n estimated $25 billion of profitable securities to take the gains.
Investors may also find that J.P. Morgan's earnings power was exaggerated in the past by risk-taking that has now been reduced, Mutascio said. That would bode poorly for earnings in 2013 and 2014, he added.
The bank's Chief Investment Office, where the bad trades were made, is expected to rein in its bets in many markets.
Investors should also be concerned about the impact of the loss on the company's plans to buy back stock, analyst Andrew Marquardt of Evercore Partners said in a note Thursday.
The bank suspended its buyback program shortly after announcing the trading loss because, Dimon said, it wanted to continue building capital to meet higher minimums being set by regulators.