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Buy JPMorgan stock, say banks

Brokers are still bullish on JPMorgan's stock, despite its shock $2 billion trading loss, underscoring how the derivatives saga is unlikely to serve as a blow to the bank's profitability. But its reputational and regulatory impact could be considerable, analysts conclude.

Buckets of ink have been spilt since JPMorgan disclosed on Thursday in after-hours trading that it had incurred “significant” mark-to-market losses in the order of $2 billion in its synthetic credit portfolio.

In the conference call with investors, chief executive Jamie Dimon struck a relatively more conciliatory tone compared with previous calls and dubbed the losses at the chief investment office – part of the bank’s treasury and securities division – a product of “errors, sloppiness and bad judgement”.

However, even after JPMorgan said that the division’s overall performance in the second quarter was an estimated $800 million loss compared with an expected $200 million profit and the bank’s new reputational risk premium, analysts at Nomura are still bullish on the stock - with shares in the US bank tumbling 9% in New York Friday morning trading.

Citing the bank’s capital strength and sustainable earnings trajectory, Nomura has a buy target on the stock with $50-a-share price target, a 22% upside compared with Thursday's close based on a nine-times 2013 earnings estimate.

In recent quarters, the bank has notched solid income from trading and mortgage brokering, combined with decent control over credit costs and expenses. In a research note on Friday, analysts at Credit Suisse also had an outperform call on the stock, with a $55-a-share price target, but warned of the shifting regulatory sands:

This loss is a blemish for a company that has otherwise executed extremely well throughout the crisis. We think that losses will be manageable, although volatile. The bigger issue could be potential implications for ongoing discussions regarding the Volcker Rule and other regulatory reform measures yet to be finalized. This could lend support to those in favor of a stricter interpretation of the Volcker Rule.

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