JPM 2Q Results Solid; Focus on Balance Sheet Optimization, Expense Controls

Summary:
• JPM’s 2Q15 results were solid with net revenues of $24.5 billion supported by business and geographic diversity
• Balance sheet optimization efforts contributed to a sizable reduction in non-operating deposits, mainly from within the CIB, contributing to a 30 bp increase in the Company’s SLR to 6%
• 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) 2Q15 results as solid, demonstrating the benefit of earnings diversity. Net income of $6.3 billion in the quarter was up 6% sequentially and increased 5% Year-on-Year (YoY). Given the challenges of the current environment, DBRS views JPM as performing well and operating in line with its current rating level.

Earnings growth in Consumer & Community Banking (CCB) helped to offset lower Corporate & Investment Bank (CIB) results and, to a lesser extent, lower Commercial Banking and Asset Management results. While CCB revenues were supported by growth in fee income and card sales volumes, bottom line results improved to a greater extent benefitting from lower levels of provisioning and expense reductions.

CIB results were weaker following a strong 1Q, though the Company continues to perform well in its underwriting and equities markets businesses. JPM also reported strength in macro products despite an overall decline in fixed income markets revenues. Revenues in Commercial Banking were stable, with lower earnings driven by investment in controls and reserve build. Modest revenue growth in Asset Management was offset by higher legal expenses.

JPM continues to drive down expenses despite still elevated regulatory-related expense, as well as litigation costs. The Company’s efforts to simplify its operations and expense control initiatives have contributed to a cost/income ratio of 61% in the quarter. Also contributing to the bottom line are declining credit costs, however the pace of improvement is slowing, perhaps signaling a cyclical trough.

DBRS views JPM’s balance sheet optimization efforts positively from a ratings perspective, as it improves the Company’s positioning given evolving regulatory capital requirements, which could include an increased risk-based capital buffer. JPM reduced its balance sheet by 5% in the quarter to $2.4 trillion. Non-operating deposits were reduced by approximately $100 billion, with a corresponding reduction in lower-yielding cash assets of approximately $89 billion. This balance sheet reduction contributed to an increase in the Company’s supplementary leverage ratio (SLR) to 6%, up 30 bps Quarter-on-Quarter (QoQ), while also providing a boost to net interest income with the reduction in lower-yielding cash assets. Risk-based capitalization also improved with a fully loaded Basel III advanced CET1 ratio of 11%, up 40 bps sequentially. Despite elevated capital levels, JPM reported a solid ROE of 11% in the quarter.

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.