DBRS Ratings Unchanged After Q2 Earnings of JPMorgan Chase – Senior at A (high)

DBRS has today commented that its ratings for JPMorgan Chase & Co. (JPMorgan or the Company), including its A (high) Issuer & Senior Debt rating and its R-1 (middle) Short-Term Instruments rating, remain unchanged following the Company’s second quarter results. The trend on all ratings is Stable.

Reflecting the strength and diversity of its businesses, JPMorgan reported Q2 2009 net income of $2.7 billion on record managed revenues of $27.7 billion and income before provisions and taxes (IBPT) of $14.2 billion. Business performance was mixed. Some businesses benefited strongly from renewed activities in capital markets, while others struggled with increasing pressure on margins and still elevated credit costs. DBRS does not expect Consumer Lending (a sub-segment of Retail Financial Services) or Card Services to contribute positively to earnings in the near term. Results were helped by gains of $820 million on JPMorgan’s corporate treasury portfolio. Revenue headwinds were more evident as the Company’s net interest margin is being pressured by the persistent low rate environment and the run-off of certain higher-yielding loan products, as well as reduced demand for credit in some areas. Although still high, a modest decline in provisions is a positive reversal from the past upward trend. Given JPMorgan’s franchise and improved competitive positions, DBRS anticipates that it can sustain its underlying IBPT at a pace that will enable it to cope with challenges posed by still disrupted financial markets, a weak economy, revenue headwinds and elevated credit costs.

Solid results in the Investment Bank (IB) demonstrated the strength of the Company’s diversified IB businesses and underscore the Company’s ability to sustain its IBPT in DBRS’s view. Equity underwriting had a record quarter, with revenues of $1.1 billion compared to $308 million in Q1 2009 and $542 million in the year ago quarter. For the second consecutive quarter, fixed income trading produced record revenues ($4.9 billion, up 1% from Q1 2009) on strength across all products. Overall, however, IB net income of $1.5 billion was down 8% from the prior quarter, on revenues of $7.3 billion. Weak equity trading results and hedging losses in the credit portfolio accounted for the revenue and income decline from the prior quarter. Legacy asset exposures did not detract from second quarter results and, in fact, made modest positive contributions. Leveraged lending exposures (funded and unfunded) declined 31% in Q2 2009 to $3.3 billion while mortgage related exposures of $12.6 billion, split evenly between residential and commercial, were down $100 million in the current quarter.

In the consumer businesses, earnings remained weak as revenue headwinds were more visible and credit costs are still elevated. In Consumer Lending, a weaker MSR hedging result also impacted second quarter results. Consumer Lending reported a second quarter net loss of $955 million, $566 million wider than the Q1 2009 loss. Provisions of $3.5 billion were actually down 2% from Q1 2009, but are still high. In Retail Banking (the other sub-segment of RFS), second quarter trends were more positive and reflected the continued strengthening of the franchise. Compared to Q1 2009, revenues grew 4% and net income increased 12% to $970 million. Average deposits were up 1% to $348 billion in the quarter and checking accounts showed solid growth. On a managed basis Card Services lost $672 million in the second quarter as compared to a $547 million loss last quarter. Net revenue declined 5% from the prior quarter to $4.9 billion. Provisions, though down 1% from Q1 2009, remained elevated at $4.6 billion.

Providing an important stable component of earnings, JPMorgan’s smaller, less consumer credit-sensitive operating segments performed well in the second quarter. TSS, Asset Management and Commercial Banking all reported solid revenue and IBPT growth and each displayed positive operating leverage.

Strength in revenue and IBPT allowed JPMorgan to again cope with the rising credit costs it faces across its businesses. Managed net-charge offs of $7.7 billion were 31% higher than the first quarter and total NPAs were up 20% to $17.5 billion. Positively, from DBRS’s perspective, credit losses were largely within management’s prior guidance indicating a level of preparedness for the continued deterioration. Moreover, the Company reported some stability in early stage delinquencies across mortgage and card portfolios, and the degree of reserve build declined. On a managed basis, the Company’s $9.7 billion provision added $2 billion to credit reserves in the quarter, following a reserve build of over $4 billion in Q1 2009. This boosted JPMorgan’s allowance for loan losses to $29.1 billion or 5% of total loans (ex-WaMu impaired loans and WaMu cards). Other measures of reserve adequacy, including 198% coverage of Company wide non-performers, were also strong and compared favorably to peers.

In the second quarter, JPMorgan repurchased $25 billion of preferred shares issued to the U.S. Treasury through the TARP Capital Purchase Program, and bolstered its capital with a $5 billion issuance of common equity. Adding to the Company’s loss absorption capacity, the estimated tangible common equity to risk weighted assets ratio increased to 7.7% as of the end of Q2 2009, up about 40 bps from the end of the first quarter. The estimated Tier 1 ratio was up similarly (if TARP preferred capital is excluded from Q1 2009) to 9.7% at quarter end.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.