JPMorgan sells $10 billion shares, faces Q3 loss

By Elinor Comlay and Tenzin Pema NEW YORK/BANGALORE (Reuters) - JPMorgan Chase & Co (JPM.N) capped off its purchase of Washington Mutual Inc (WM.N) on Friday by selling $10 billion of stock, more than it expected, while analysts warned the company faces a third-quarter loss. The company told investors Thursday night it bought WaMu's assets for $1.9 billion and would look to raise about $8 billion in capital to make up for write-downs resulting from the purchase of WaMu's toxic debt. On Friday, the company sold nearly 247 million shares at $40.50 a share. At midday, JPMorgan shares were trading at $44.44, up 2.25 percent, on the New York Stock Exchange. The deal makes JPMorgan the second-largest U.S. bank by deposits and marks the largest bank failure in U.S. history. It saddles JPMorgan with the troublesome mortgages that caused painful write-downs and credit losses for the thrift. "It's too early to know if JPMorgan is a big winner or loser from this deal," said James Ellman, portfolio manager at hedge fund Seacliff Capital. "This dramatically increases their deposits...but it could end up being very expensive." JPMorgan is taking on $296 billion of tangible assets from Washington Mutual, at least some portion of which are mortgages. JPMorgan believes that the returns from these assets will make the deal a good one over time, even if losses exceed its expectations. JPMorgan said it would write down more than $30 billion from this acquisition and incur $1.5 billion of pre-tax costs, but expects to realize an equal amount of annual savings, mostly by the end of 2010. It expects the transaction to add to earnings immediately, and increase earnings 70 cents per share by 2011. Analysts at competing banks seemed to agree. "The acquisition makes sense strategically and financially, on all fronts consistent with what we have come to expect from this management team," wrote Susan Roth Katzke at Credit Suisse. She set a new price target of $55 from a prior range of $50 to $55, and rates JPMorgan "outperform." But Katzke also raised doubts about JPMorgan's current business, saying she was "less confident in the cost of the current credit and capital markets cycle to the bank's existing operations." The near- to intermediate-term outlook remains challenged in light of higher costs in credit cards and the retail bank, as well as the increasing likelihood of sustained lower revenues from JPMorgan's capital markets business, Citigroup analyst Keith Horowitz wrote in a note to clients. He maintained his "hold" rating on the stock. LATEST VICTIM The U.S. housing bust and credit crisis crippled Washington Mutual, once the largest thrift in the United States, and its share price evaporated, falling from $36.47 in October 2007 to $1.50 on September 16. After the announced takeover its shares hovered around 16 cents. WaMu joins Bear Stearns Cos, Lehman Brothers (LEHMQ.PK) and AIG (AIG.N) on the list of the credit crisis' victims. But costs from the acquisition as well as JPMorgan's existing business should lead to a third-quarter loss of 25 cents a share Credit Suisse's Katzke said, while Goldman Sachs' William Tanona saw a quarterly loss of 10 cents a share. His prior estimate was a profit of 40 cents a share. Katzke cut her 2008 profit view to $1.65 a share from $2.50, while Tanona cut his 2008 profit view for JPMorgan to $1.60 a share from $2.30. But Tanona raised his 2009 earnings estimates for the bank to $3.95 a share from $3.45, saying he expected the Washington Mutual deal to add to earnings as early as next year. (Editing by Jarshad Kakkrakandy, Leslie Gevirtz) ʘ