DBRS: JPM 3Q14 Revenues Strong Across Key Businesses; Elevated Legal Expenses Pressure Bottom Line

Summary:
• Solid 3Q14 net income of $5.6 billion with strength in underlying fundamentals across businesses, despite absorbing elevated legal expense of $1 billion largely related to foreign exchange investigation
• Highlights include positive signs in Corporate and Investment Bank (CIB) demonstrating robust franchise, record performance in Asset Management (AM) and strength across its consumer businesses
• DBRS rates JPMorgan Chase & Co. Issuer & Senior debt at A (high) with a Stable trend

DBRS Inc. (DBRS) views JPMorgan Chase & Co.’s (JPM or the Company) 3Q14 results as solid with improving trends across key businesses. Net revenues of $24.3 billion were supported by JPM’s continued strength across its consumer businesses, growth in asset management fees driven by long-term net inflows and positive signs in the CIB that all demonstrate the robustness and diversity of the franchise. Some weakness continues to be evident in Mortgage Banking due to market conditions despite reported market share gains in focus areas. Expense controls remain important, helping to offset elevated litigation charges, which had an outsized impact this quarter with legal expense of approximately $1 billion related to the foreign exchange investigation.

The Company continues to demonstrate positive trends in credit performance. Credit costs remain low with provisions for credit losses of $757 million, or just 8% of DBRS-calculated adjusted income before provisions and taxes. Total nonaccrual loans continue on a declining trajectory, now at $7.5 billion as compared to $9.2 billion a year ago. Customer metrics also exhibited positive trends in the quarter with growth in customer deposits, reaching $1.3 trillion and comprising close to 60% of the liability stack as of 3Q14. Additionally, JPM experienced $24 billion of net asset inflows in its Asset Management business driving record assets under management of $1.7 trillion.

Regulatory requirements continue to be a focus as the rules are evolving and being finalized, with shifts in business mix (i.e. sale of physical commodities business) and simplification of the business model contributing to reductions in run-rate revenues and expenses. Common Equity Tier 1 (CET1) capital of $163 billion contributed to a CET1 ratio of 10.1%, based on the advanced approach, fully phased in, above JPM’s 10% target ratio. The Firm Supplementary Leverage Ratio (SLR) of 5.5% is approximately 50 basis points above the elevated U.S. requirement, affording JPM some flexibility to utilize its balance sheet in order to gain customer wallet share.

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

Note:
All figures are in U.S. Dollars unless otherwise noted.