DBRS: JPM Results Reflect Diversity and Depth of Franchise Despite Weakness in CIB and Mtg Banking

Summary:
• 1Q14 net income of $5.3 billion, flat to prior quarter, but down 19% year-on-year (YoY) showing some weakness in the CIB in what is typically a seasonally strong quarter, as well as further slowdown in Mortgage Banking
• In the absence of significant one-time charges and settlements weighing on results, the quarter was fairly clean though legal issues remain outstanding and could have a lumpy impact on expenses in future quarters
• DBRS rates JPMorgan Chase & Co. Issuer & Senior debt at A (high) with a Stable trend.

DBRS Inc. (DBRS) sees JPMorgan Chase & Co.’s (JPM or the Company) 1Q14 results as demonstrating the depth of its global franchise, with its diverse business lines and extensive product range that contribute to its resilient underlying earnings. Some weakness was evident in the Corporate & Investment Bank (CIB) and in Mortgage Banking, which primarily reflected the difficult operating environment in the quarter. Importantly from a longer-term perspective, DBRS sees JPM as continuing to operate a powerful franchise with strong returns and a high level of capital and liquidity. JPM continues to face headwinds related to investigations (foreign exchange, high frequency trading) and ongoing litigation issues, which have the potential to impact the Company’s transactional and customer businesses. That being said, JPM has been able to absorb the associated costs, along with elevated regulatory and compliance costs, while improving its capital and liquidity position.

While net revenues in the CIB increased 7% sequentially (ex-funding value adjustment/debt value adjustment), net revenues were down 15% YoY with weakness across all products and regions on lower levels of client activity. Given that Q1 is typically a strong quarter in the CIB businesses, the trend of declining revenues throughout 2013 with only a slight uptick in 1Q14 does not bode well for CIB revenue growth in the near-term. Lower client activity levels will likely continue to pressure net revenues sector-wide. Across the industry, profitability and returns are also pressured by increased compliance costs, and liquidity/capital requirements, as the industry adjusts to the still challenging environment.

In Mortgage Banking, net revenues declined 30% quarter-on-quarter (QoQ) and 42% YoY with lower volumes. While a decline was generally expected, particularly given the slow start to the year with the impact of severe weather conditions, as well as a still tight housing inventory, the weakness was more notable given the decline in JPM’s mortgage origination volumes (down 27% QoQ and 68% YoY), as the Company is being more selective in extending credit. A lower pace of reserve releases also reduced the bottom line, which is expected to continue going forward.

The Company maintains strong funding and liquidity metrics, including $538 billion in high quality liquid assets (22% total assets) and deposits of $1.3 trillion (57% of total liabilities). Capitalization is also ample with an estimated Basel III Tier 1 Common ratio of 9.5% (advanced approach, fully phased-in) and estimated supplementary leverage ratios of 5.1% at the Company-level and 5.3% at the Bank-level (fully phased-in).

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.]