DBRS: JPMorgan Chase’s 4Q13 Earnings Remain Pressured by Legal/Reg. Costs; Revenues More Resilient

Summary:

• 4Q13 earnings (to common) of $5.1 billion down 7.8% from 4Q12, as settlements, one-time charges, and taxes weighed on results offsetting solid underlying business fundamentals.
• JPM revenues (DBRS-adjusted) of $23.4 billion declined by 3.0% YoY, but only 0.4% QoQ.
• DBRS rates JPMorgan Chase & Co. Issuer & Senior debt at A (high) with a Stable trend.

In DBRS Inc.’s (DBRS) view, 4Q13 JPMorgan Chase & Co. (JPM or the Company) results reflect earnings weakness, but better than expected revenue resilience considering the headwinds currently facing the Company. Specifically, earnings were negatively impacted from Madoff-related settlements and declines in mortgage production despite some one-time gains and a large reserve release. DBRS considers the Company’s top-tier market share positions the enable the generation of highly diversified revenues, an improving risk profile, strong liquidity, and solid capital as supportive of its rating level.

Corporate and Investment Banking revenues and net income (ex-DVA/FVA) were weaker both QoQ and YoY. Positively, the Commercial Banking and Asset Management segments performed well. Customer-centric and market-driven metrics such as average loans and deposits, client assets, credit card sales, and merchant processing volumes all improved during the quarter. Moreover, JPM also retained its top ranking for 2013 global investment banking fees with an 8.6% market share compared to 7.5% for 2012.

JPM continues to work through its legal and regulatory issues with legal expense of $11.1 billion in 2013 compared to $5.0 billion in 2012. While able to absorb even these outsized costs, DBRS analysis and surveillance will be focused on the medium and longer-term impact of ongoing litigation on the Company’s transactional and customer businesses, which could impair its reputation and ability to transact business over time.

JPM continues to maintain significant liquidity levels with $522 billion in high quality liquid assets including $329 billion in average deposit balances with banks. Capitalization was ample with an estimated Tier 1 Common ratio under Basel I up 20 bps to 10.7% and its estimated Basel III also up 20 bps to 9.5%. The Company anticipates full compliance with the Basel III and U.S. supplementary leverage ratio requirements by year-end 2014.

DBRS rates JPMorgan Chase & Co. Issuer & Senior debt at A (high) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]