DBRS Comments on 3Q12 Earnings of JPMorgan – Senior at A (high), Trend Remains Stable

DBRS, Inc. (DBRS) has today commented that its ratings for JPMorgan Chase & Co. (JPMorgan or the Company), including its A (high) Issuer & Senior Debt rating are unchanged following the release of the Company’s 3Q12 results. For the quarter, JPMorgan reported earnings of $5.7 billion, up from 2Q12 earnings of $5.0 billion.

Despite the low interest rate environment that continues to put pressure on spread income and ongoing Eurozone concerns, JPMorgan grew adjusted revenues $200 million from 2Q12 to $25.2 billion, excluding DVA losses and gains on the redemption of trust preferreds. Adjusted revenues for 2Q12 exclude CIO trading losses and securities gains, $755 million of DVA gains and a $545 million gain on its Bear Stearns-related first-loss note. Further highlighting the core earnings power of the JPMorgan franchise, adjusted IBPT (excluding securities gains) was a solid $9.3 billion in third quarter, up about 4% from 2Q12. DBRS sees this level of earnings generation ability in combination with solid capital and liquidity as affording the Company ample capacity to absorb the potentially substantial costs associated with legacy mortgage lending and other litigation.

In DBRS’s view, third quarter results reflect continued positive underlying momentum across the Company’s diverse businesses. Highlights included Mortgage Banking, where results were solid again this quarter thanks to record originations of $47.3 billion, and the Investment Bank (IB), which continues to generate strong results, fuelled by the Company’s leading fixed income franchise. Excluding DVA, IB net income was $1.7 billion in the quarter (up $300 million from 2Q12) on revenues of $6.5 billion. Fixed income trading revenues (ex-DVA) were $3.7 billion, up 4% from 2Q12. JPMorgan also reported 15% QoQ growth in investment banking fees, driven by strong debt underwriting.

Third quarter IB results also included the impact of the synthetic credit portfolio that was transferred from the CIO in July and added more than $30 billion of risk-weighted assets to the IB. For the quarter, this portfolio generated only modest losses for fixed income trading, though, more importantly from DBRS’s perspective, the risks associated with this portfolio have been reduced considerably. Though risks remain, the range of potential losses has likely declined from the $800 million to $1.6 billion range provided in July. DBRS notes that the portion of the portfolio that remained in the CIO was effectively closed out in the quarter, resulting in a charge of $449 million in the Treasury/CIO division.

Credit trends continued to improve in the quarter. Excluding the impact of new regulatory guidance, net charge-offs (NCOs) and Non-Performing Assets (NPAs) declined further in 3Q12. The new guidance requires that consumer loans discharged under Chapter 7 bankruptcy and not reaffirmed by the borrower be written down to the value of collateral and placed on nonaccrual, regardless of delinquency status. Around $2.8 billion of mortgage loans as well as some card and auto loans were affected by the new rule, but DBRS notes that JPMorgan expects significant recoveries on these loans given that 97% of affected mortgage loans are current. This guidance also contributed to the $1.6 billion QoQ increase in Company-wide loan loss provisions to $1.8 billion and came despite further declines in card NCOs and a $900 million reserve release related to legacy real estate portfolios. With regard to mortgage repurchases, JPMorgan realized total repurchase losses of $268 million in 3Q12 and the repurchase liability declined $194 million QoQ to $3.1 billion. Based on current trends, further moderate reductions in repurchase reserves are expected.

As noted, JPMorgan’s sound funding and liquidity profile and solid capital levels afford it greater flexibility, relative to many banks, to cope with the challenging market conditions and manage through the evolving regulatory environment. The Company continues to attract substantial amounts of deposits (up 2% QoQ to $1.1 trillion) and liquidity levels remain very high, evidenced by a global liquidity reserve of $449 billion at September 30. With respect to capital, JPMorgan maintains a comfortable cushion and ample loss absorption capacity. The Company reported an estimated Basel I Tier 1 common ratio of 10.4% at quarter end, up 50 bps from the prior quarter. The estimated Basel III Tier 1 Common ratio at quarter end was 8.4%, up from of 7.9% at June 30, 2012. DBRS notes that this ratio reflects Basel 2.5 as well as the recent Notice of Proposed Rulemaking.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: William Schwartz
Approver: Alan G. Reid
Initial Rating Date: 22 June 2001
Most Recent Rating Update: 15 May 2012

For additional information on this rating, please refer to the linking document under Related Research.