DBRS Comments on 4Q12 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 4Q12 results. For the quarter, JPMorgan reported earnings of $5.7 billion, down slightly from the previous quarter.

In general, DBRS sees JPMorgan’s performance as solid, reflecting good underlying momentum across the franchise as well as continued positive trends in credit, but also the challenges in the current environment, which is pressuring NIM and exerting upward pressure on expenses. Fourth quarter results were impacted by a couple of notable items. The Company recorded $900 million of pre-tax expenses ($558 million after tax) for mortgage-related matters, primarily related to the recent Independent Foreclosure Review (IFR) settlement that was offset by a $620 million benefit from unrelated tax adjustments in the quarter. In addition, DVA reduced revenues by $567 million in 4Q12, which was up from 3Q12’s DVA losses of $211 million. Excluding these items as well as securities gains, DBRS-calculated income before provisions and taxes (IBPT) was $9.3 billion, down around 2% from 3Q12.

Adjusted revenues in the quarter were $24.1 billion, up slightly from 3Q12. Despite the low rate environment and continued pressure on NIM, net interest income grew 1% QoQ to $11.1 billion. This was driven primarily by growth in average securities, fed funds and reverse repo balances, though period end loan balances were also up 2% from 3Q12. In the Corporate and Investment Bank, trading revenues were down QoQ, in line with prior guidance and overall expectations for the industry. DBRS anticipates that JPMorgan’s performance, especially in Fixed Income Currencies and Commodities, will continue to compare favorably to peers. Overall, Total Markets & Investor Services revenues were $4.5 billion in the quarter, down $1.0 billion from 3Q12. At the same time, Total Banking revenues increased $311 million QoQ, driven by strong debt underwriting. Consumer & Community Banking (CCB), which includes Consumer & Business Banking (CBB), Mortgage Banking, and Card, Merchant Services & Auto (CSA) reported 4Q12 net revenues of $12.4 billion, down 3% from 3Q12. Stable results from CBB and CSA along with continued strength in mortgage production contributed to the resilient revenues, though profitability in this segment was impacted by the noted IFR settlement. Offsetting this pressure somewhat was a 41% QoQ reduction in loan loss provisions, yet CCB’s reported net income still declined 15% QoQ to $2.0 billion. DBRS notes that trends in Commercial Banking and Asset Management remained positive as both segments reported record quarterly revenues and higher QoQ net income.

As noted, credit continued to improve in the quarter as non-performing assets (NPAs) and net charge-offs (NCOs) declined QoQ, supporting the $1.1 billion reduction in loan loss provisions. Adjusting for the OCC guidance related to consumers who have gone through bankruptcy that was issued in 3Q12, Real Estate Portfolio charge-offs were $520 million in 4Q12, down from $595 million in 3Q12. JPMorgan released $700 million of reserves for these portfolios, which accounted for around 80% of the Company-wide reduction in the allowance for loan losses. DBRS notes that there was no reserve release in CSA (though modest releases may occur in 1H13) despite card delinquencies and charge-offs declining further in the quarter. Also, the Company’s wholesale portfolios reported another quarter of net recoveries and nonaccrual balances remain quite low at 0.49% of total wholesale loans. As such, JPMorgan’s reserves remain adequate in DBRS’s view, covering 2.43% of total loans and 153% of Non-Performing Loans at year end. With regard to mortgage repurchases, JPMorgan realized total repurchase losses of $196 million in 4Q12 and the repurchase liability declined $249 million QoQ to $2.8 billion. Notably, new repurchase demands of $818 million were down 54% QoQ and 48% below 4Q11 levels. On current trends, further moderate reductions in repurchase reserves are expected.

In DBRS’s view JPMorgan’s sound funding and liquidity profile coupled with 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 5% QoQ to $1.2 trillion) and liquidity levels remain very high, evidenced by a global liquidity reserve of $491 billion at year end. JPMorgan also announced that it intends to be in full compliance with LCR requirements before the end of 2013. 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 11.0% at year end, and factoring in Basel 2.5, the estimated Tier 1 Common ratio was 9.9%. The estimated Basel III Tier 1 Common ratio at quarter end was 8.7%, up from of 8.4% at September 30, 2012 and about 150 bps higher than year-end 2011 levels. The Company expects its Basel III Tier 1 Common ratio will exceed 9.5% by year end 2013.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]