DBRS Confirms JPMorgan Chase & Co. at A (high), Stable Trend

DBRS, Inc. (DBRS) has today confirmed all ratings for JPMorgan Chase & Co. (JPMorgan or the Company) and related entities, including JPMorgan’s Issuer & Senior Debt rating of A (high) and its Short-Term Instruments rating of R-1 (middle). The trend on all ratings is Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

JPMorgan’s ratings and Stable trend reflect its powerful universal banking franchise, the resilient earnings generation of its diverse businesses and its solid financial profile. JPMorgan’s powerful U.S. banking franchise provides a strong cornerstone for stable revenue generation and geographic reach across the country with its super-regional branch banking business. It is enhanced by the Company’s leading credit card business and other nationwide lending businesses, as well as its solid commercial banking franchise. Another key foundation of the Company’s franchise is its sizable global capital markets business, with top-tier rankings across numerous banking, markets and investor services products and services. Adding further diversification to overall earnings are JPMorgan’s extensive global fee-based businesses, including its sizable treasury and securities services, asset management and private banking businesses.

DBRS views JPMorgan’s rating as well-placed given the still challenging operating environment, where litigation costs remain extremely elevated. While the Company has made notable progress in putting its legal issues in the past including the $13.0 billion settlement in 4Q13 with various governmental parties, JPMorgan continues to negotiate the terms of other settlements and is also the subject of a criminal investigation by the Department of Justice (DOJ). Continued success in advancing its franchise and sustained strong financial results that demonstrate JPMorgan’s ability to cope with the challenging environment could bring positive rating pressure, especially if combined with further progress in reducing its outstanding litigation exposure.

Conversely, a negative rating action could arise if investor/client confidence is adversely impacted by a JPMorgan-specific scenario, particularly another event of the size and scope of the Chief Investment Office (CIO) losses in 2012 or the significant mortgage-related settlement in 2013. Furthermore, if the criminal investigation by the DOJ leads toward a guilty plea by the Company, DBRS would view any resultant signs of franchise impairment or material reversal of earnings momentum as potentially negatively pressuring the rating. Importantly, DBRS believes that ongoing litigation hasn’t impacted the Company’s transactional and customer business, with strength in various franchise metrics including growth in client deposits across all business segments, increased assets under management/custody (AUM/AUC) and growth in card sales volumes and merchant processing volumes. That said, JPMorgan’s ratings would likely be pressured if it is unable to settle its legal liabilities reasonably and move out the legal and media cycle, which could cause reputational damage and impair its ability to transact business over time.

From DBRS’s perspective, the Company’s is well-positioned given its resilient and substantial earnings power, coupled with sound funding, ample liquidity and solid capital levels that afford it greater flexibility, relative to many banks, to manage through the current environment characterized by low interest rates, higher compliance and regulatory costs and subdued client activity. Underpinning the rating is JPMorgan’s consistent ability to generate robust revenues and income before provisions and taxes (IBPT). Demonstrating this, the Company reported DBRS-adjusted net revenues of $96.8 billion in 2012 and $96.1 billion in 2013, while DBRS-adjusted IBPT generation of $32.0 billion 2012 and $25.6 billion in 2013 demonstrates solid underlying business fundamentals. Returns have been helped by a significant level of reserve releases in recent quarters, as credit quality has improved, benefitting the bottom line. Provisions of $225 million in 2013 were just 0.8% of DBRS-adjusted IBPT and well below peak provisioning levels of over $30 billion annually. Nonperforming assets continues to show an improving trend, reaching a manageable $9.5 billion in 1Q14 after peaking at $20.4 billion in 3Q09.

JPMorgan’s solid funding and liquidity profile is anchored by its $1.3 trillion global deposit base, which is the largest among U.S. banks. Reflecting the Company’s business mix and funding needs, wholesale funding reliance is sizable but is well-managed and is appropriately diversified across sources and maturities. Capital levels remain solid and with a Tier 1 Common ratio of 9.5%, based on Basel III advanced approach, fully phased-in. DBRS notes while the Company’s ratio meets the proposed regulatory minimum, its large bank peers have already established cushions above their fully loaded CET1 ratios. Nonetheless, with strong earnings enabling organic capital generation and management’s commitment to solid capital ratios, DBRS expects JPMorgan’s capitalization will remain sound and improve over the intermediate term.

With regard to risk management, DBRS views the Company as having taken significant steps and dedicated large-scale resources to remedy the issues in the CIO and to reduce complexity in its organizational structure. The CIO losses in 2012 raised serious questions about the ability of the Company to monitor and manage the risks across its large and complex franchise. Importantly, however, JPMorgan’s strong earnings generation capacity meant the financial impact of the trading losses were readily absorbable. That being said, these issues are in JPMorgan’s not-so-distant past and DBRS continues to look for the Company to demonstrate the effectiveness of its improved processes and management of risks across the organization.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2012). Other applicable methodologies include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include company documents, the Federal Reserve, 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
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 22 June 2001
Most Recent Rating Update: 20 November 2013

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