DBRS: JPM 1Q Results Demonstrate Strong Franchise with Cont’d Momentum Despite Regulatory Headwinds

Summary:
• JPM’s 1Q15 results were strong, driven by revenue growth in the CIB, with record 1Q Advisory revenues and strong Markets results on the back of macro tailwinds
• Regulatory uncertainty remains a concern, given the potential for higher capital requirements, which could prove challenging in generating competitive returns on capital
• 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) 1Q15 results as strong, demonstrating the health of the franchise across its diverse businesses. Continued momentum was evident across all business segments, with sequential earnings growth driven by the Corporate & Investment Bank (CIB). The quarter was fairly clean, but did include $687 million in pre-tax firmwide legal expenses, down from $1.1 billion in 4Q14, which contributed to the Quarter-on-Quarter (QoQ) improvement in earnings. JPM reported net income of $5.9 billion in 1Q15, up 20% QoQ, on net revenues of $24.1 billion, up 6% sequentially.

While all segments performed well, the CIB provided the largest QoQ lift to results primarily driven by revenue growth in Currencies & Emerging Markets and Rates, while Equity Markets and Advisory also contributed to the improved results.

The Company continues to improve its capital levels with a fully loaded Basel III advanced CET1 ratio of 10.6%, up 40 basis points (bps) sequentially. Even with elevated capital levels, returns improved further with ROE reaching a solid 11% in the quarter, up from 9% in the prior quarter. DBRS notes that JPM has to generate more net income to achieve the same hurdle rate for return on capital than most global peers given its elevated capital requirements.

DBRS views regulatory headwinds as JPM’s biggest challenge. There remains considerable uncertainty regarding the final U.S. risk-based capital rules for Global Systemically Important Bank Holding Companies (G-SIBs), potentially adding to JPM’s already elevated buffer of 2.5% over regulatory minimums per the Basel Committee, which remains at the highest populated tier buffer. While 2015 CCAR results generally proved to be a non-event for U.S. G-SIBs, future outcomes have the potential to be impacted by evolving regulatory requirements. As U.S. rules are adjusted and finalized, JPM’s capital requirements could increase further, including its CCAR minimum requirement. DBRS views JPM as having the ability to adjust by generating capital organically, but achieving competitive returns on capital have the potential to become a greater challenge. Nonetheless, JPM continues to produce strong and recurrent earnings that generally outperform peers.

JPM’s success in controlling expenses is another important factor, with expense levels trending downward even with higher revenues, which typically drive higher levels of variable compensation and expenses related to higher volumes. As the CIB accounts for approximately one-third of the Company’s compensation expense, its relatively low 2014 comp/net revenues ratio of 32% in the CIB is an important contributor to this performance. The Company’s efforts to simplify its operations and expense control initiatives are also playing a role in achieving JPM’s cost/income ratio of 62% in the quarter.

Continued positive trends in credit performance are also contributing to bottom line returns, despite lower levels of reserve releases. Provisions of $959 million in 1Q15, or just 10% of DBRS-adjusted income before provisions and taxes, remain at relatively low levels. Nonaccrual loans continue to trend downward, reaching $7.0 billion in 1Q15, down from $8.3 billion a year ago.

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.