DBRS Confirms JP Morgan Chase at A (high) Following WaMu Acquisition; Changes Trend to Positive

DBRS has today confirmed all ratings for JPMorgan Chase & Co. (JPMorgan or the Company) and related entities, including JPMorgan’s Issuer & Senior Debt rating of A (high). At the same time, DBRS has changed the trend on all long-term ratings and the short-term rating at JP Morgan Chase Bank, N.A., JPMorgan’s primary bank subsidiary, to Positive from Stable. The short-term rating at JPMorgan remains Stable at R-1 (middle).

These rating actions follow the announcement that JPMorgan has agreed to acquire all deposits, certain liabilities and substantially all the assets of Washington Mutual’s banking operations for $1.9 billion in cash effective immediately. Related to this acquisition, the Company has priced a $10 billion capital raise, which is expected to close on September 30, 2008.

DBRS views the acquisition positively, as it enhances JPMorgan’s already-strong retail banking franchise in several important markets that have attractive economic characteristics. It creates the second largest branch network within the United States, with a strong market presence in most markets. Specifically, the combined franchise will have 5,410 branches with $911 billion in deposits, operating in 23 states. With this combination, the Company’s assets will rise to $2.05 trillion. Furthermore, the acquisition adds to the already-substantial earnings generation capabilities of the Company. It provides additional resources with which the Company can cope with increased credit losses and write-downs in a deteriorating environment without invading capital. The expected $10 billion capital raise enables the Company to maintain its strong balance sheet as it absorbs these acquired assets and navigates the difficult operating environment. Most capital metrics are expected to decline only modestly or remain largely the same when compared to Q2 2008 metrics.

While strengthening its retail banking franchise, however, JPMorgan has also significantly increased its exposure to residential housing-related assets by approximately $176 billion. In considering this additional exposure to this very stressed sector, DBRS does take comfort that JPMorgan has marked down this loan portfolio by $30.7 billion, which the Company estimates are the remaining embedded losses within the portfolio under a stress scenario. However, if the housing market deterioration is worse than currently anticipated, JPMorgan could incur additional losses.

If JPMorgan continues to generate positive earnings in the coming quarters and loan loss provisioning and reserve building stabilizes, the ratings could be upgraded. DBRS notes that the enactment of a government plan to provide relief on illiquid assets would be viewed positively for the Company’s ratings, if over the coming months it helped stabilize mortgage-related assets and housing values and reduced liquidity pressures in the financial markets. If no government action is taken, the deterioration in the financial system and the housing markets could accelerate, putting pressure on the economy. In such an environment, the trend could revert back to Stable.

Note:
All figures are in U.S. dollars unless otherwise noted.