DBRS: JPM Reports Solid 2Q14 Results Despite Continued Headwinds in CIB and Mtg Banking

Summary:
• 2Q14 net income of $6.0 billion, a 13% increase sequentially, but down 8% YoY following continued headwinds in CIB and Mortgage Banking.
• Further strengthening of the balance sheet, with improved capital, leverage and asset quality.
• DBRS rates JPMorgan Chase & Co. Issuer & Senior debt at A (high) with a Stable trend.

DBRS, Inc. (DBRS) considers JPMorgan Chase & Co.’s (JPM or the Company) 2Q14 results as further illustrating the benefit of the Company’s powerful, global universal franchise, which contributed to solid underlying earnings and strong returns. In the quarter, JPM reported net income of $6.0 billion on net revenues of $24.5 billion, as continuing headwinds in the Corporate & Investment Bank (CIB), particularly in the trading businesses, and Mortgage Banking were offset by strong returns in the Commercial Banking and Asset Management business. The Commercial Banking division reported a 6% year-on-year (YoY) increase in net income and a 9% YoY increase in loan balances, driven by growth in Commercial Real Estate (CRE). In Asset Management, assets under management (AuM) reached record levels, at $1.7 trillion, an increase of 16% YoY.

While JPM continues to face headwinds related to investigations (e.g. foreign exchange, high frequency trading) and ongoing litigation issues, DBRS views these issues as facing the industry as a whole and are not Company-specific. Furthermore, JPM has demonstrated its continued ability to absorb the associated costs through its high level of underlying earnings. This quarter included an addition to legal expense reserves of $500 million, post-tax.

Headwinds in the CIB primarily reflected the difficult operating environment in the quarter with low levels of activity and low volatility. While net revenues in the CIB increased 2% sequentially (ex-FVA/DVA), net revenues were down 6% YoY with broad weakness across the Company’s Fixed Income and Equity Sales & Trading (S&T) businesses, as macro products and commodities were impacted by low volatility and client activity remained subdued. JPM did, however, benefit from an uptick in Investment Banking fees, to $1.8 billion, driven by strong advisory and equity underwriting performance, which enabled the Company to maintain its number one ranking for Global Investment Banking fees.

Lower origination volumes continued to negatively impact net revenues in Mortgage Banking, as JPM narrows its focus on mortgage production to higher quality borrowers and maintains pricing discipline. Demonstrating this, mortgage origination volumes were down 1% quarter-on-quarter (QoQ) and a notable 66% YoY. The weak Mortgage Banking performance, however, was partially mitigated by strong returns in the Consumer & Business Banking (CBB) division, net revenues continuing an upward trend and net income recording double digit increases QoQ and YoY. CBB reported record business banking loan originations of $1.9 billion, up 46% YoY.

The Company has continued to strengthen the balance sheet and posted solid capital ratios at end 2Q14. The estimated Basel III fully loaded Common Equity Tier 1 (CET1) ratio was 9.8%, up 20 basis points (bps) from end-1Q14, while both the Firm and Bank supplementary leverage ratios were up 30bps at 5.4% and 5.6%, respectively. Asset quality trends also remained solid, with retained nonperforming loans down 20% YoY and 6% sequentially, to $7.6 billion.

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.

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.