DBRS Comments on 1Q13 Earnings of JPMorgan; Sr A (high)

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 1Q13 results. For the quarter, JPMorgan reported record earnings of $6.5 billion, up nearly 15% over the quarter and 33% over the year.

In general, DBRS sees JPMorgan’s performance as solid, reflecting good underlying momentum across the franchise, as well as continued positive trends in credit. Nonetheless, the operating environment remains challenging with constrained loan demand, pressured net interest margin (NIM), and high regulatory and compliance expenses. The first quarter results included a DVA benefit to revenues of $126 million, compared to 4Q12’s DVA loss of $567 million. Excluding this item as well as adjusting for securities gains, DBRS-calculated income before provisions and taxes (IBPT) was $9.4 billion, up 1% from 4Q12. DBRS also notes that 1Q13 included two significant reserve releases, which strengthened net income; $650 million from real estate portfolios and $500 million from card services.

Adjusted revenues in the quarter were $24.5 billion, up 1.5% from 4Q12, but down 3.9% from 1Q12. The low interest rate environment’s impact on loan and investment yields combined with weak loan demand and portfolio runoff continued to pressure net interest income, which fell 1.7% QoQ and 6.3% YoY to $10.9 billion. Similarly, QoQ firm-wide and core NIMs fell 3bps to 2.37% and 2 bps to 2.83%, respectively. The Company guided to modest spread compression and a 1% decline in net interest income for the full year 2013.

In the Corporate and Investment Bank (excluding the impact of DVA), net revenues were up 22% QoQ, but down 2.3% YoY, as a rebound from the prior quarter still didn’t overcome the prior year’s stronger performance. DBRS anticipates that JPMorgan’s performance, especially in Fixed Income Currencies and Commodities (FICC - where JPMorgan is ranked #1 in revenue share), will continue to compare favorably to peers. Overall, Total Markets & Investor Services revenues were $7.2 billion in the quarter, up $2.7 billion from 4Q12 primarily from the FICC rebound. At the same time, Total Banking revenues decreased $186 million QoQ, as the decline in advisory was only partially offset by growth in lending.

Consumer & Community Banking (CCB), which includes Consumer & Business Banking (CBB), Mortgage Banking, and Card, Merchant Services & Auto (CSA) reported 1Q13 net revenues of $11.6 billion, down 6% from 4Q12 due primarily to lower mortgage fees, lower margins and portfolio run off. CBB was down modestly due to lower margins and two less days in the quarter. Meanwhile, CSA, despite 2% lower revenue, benefited from the aforementioned $500 million reserve release and lower expenses. Continued strength in mortgage servicing and production contributed to the resilient mortgage revenues, though application volume dropped 7.9%. The aforementioned $650 million real estate portfolio reserve release also aided results through a $202 million provision credit. DBRS notes that Commercial Banking results were down due to flat revenues and higher expense, while Asset Management had another strong quarter with record net long-term product inflows.

As noted, credit continued to improve in the quarter with non-performing assets (NPAs) and charge-offs (COs) declining QoQ (but recoveries also declined), supporting a modest $39 million reduction in loan loss provisions. The Company’s wholesale portfolios reported another quarter of net recoveries and nonaccrual balances fell even lower to 0.43% of total wholesale loans. As such, JPMorgan’s reserves remain adequate in DBRS’s view, covering 2.27% of total loans and 153% of nonaccrual loans (excluding credit card) at 1Q13. With regard to mortgage repurchases, JPMorgan realized total repurchase losses of $212 million in 1Q13 and the repurchase liability declined $137 million QoQ to $2.7 billion. Notably, new repurchase demands of $1.2 billion were up 44% QoQ, but were 28% below 1Q12 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 0.7% QoQ to $1.2 trillion) and liquidity levels remain very high as evidenced by the “High Quality Liquid Asset” (HQLA) figure of $413 billion at 1Q13. JPMorgan also reiterated its intention 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 10.2% at quarter end, factoring in Basel 2.5. The estimated Basel III Tier 1 Common ratio at quarter end was 8.9%, up from 8.7% at December 31, 2012 and was about 170 bps higher than year-end 2011 levels. The Company expects its Basel III Tier 1 Common ratio to exceed 9.5% by year end 2013.

In March, the Federal Reserve announced its results for the Comprehensive Capital Analysis and Review (CCAR). Under the severely adverse scenario, JPMorgan Chase & Co.’s Tier 1 common and leverage ratios were 5.56% and 4.10% respectively at their minimums and the Fed did not object to its planned capital actions. The Company subsequently announced its intention to increase its common dividend to $0.38 per share effective 2Q13 and is authorized to repurchase an additional $6 billion in common equity between 2Q13 and 1Q14. The Federal Reserve also asked the Company to submit an additional capital plan by 3Q13 to address weaknesses identified in its capital planning processes which may require modification to the announced capital distributions.

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

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