DBRS: JPM’s 3Q Results Mixed; Revenues Decline, but BS Simplified

Summary:
• JPM reported net income of $6.8 billion, or $5.4 billion excluding tax benefits, legal expense and net reserve releases.
• With further reductions in non-operational deposits combined with other balance sheet simplification, JPM believes they are now subject to a 4.0% GSIB surcharge rather than 4.5%.
• DBRS rates JPMorgan Chase & Co. Issuer & Senior Debt (unsolicited) at A (high) with a Stable trend

DBRS, Inc. (DBRS) views JPMorgan Chase & Co.’s (JPM or the Company) 3Q15 results as mixed. Positively, JPM reported solid core loan growth, potentially reduced its GSIB surcharge and maintained its market leading position for Global Investment Banking fees. However, with the exception of Corporate, all other business segments reported lower net revenues both quarter-over-quarter (QoQ) and year-over-year (YoY) reflecting business simplification and the difficult operating environment that included interest rate uncertainty and higher volatility. Overall, net revenues declined by 7% YoY on a reported basis.

Evidencing franchise strength, the Consumer & Business Banking segment now has over 22 million active mobile customers, an increase of 21%, and has added over 900,000 households over the past year. Higher volatility kept many clients on the sidelines depressing Markets revenue, although Equity Markets was stronger YoY driven by strong results in derivatives and cash. The Company guided towards lower Markets revenues in 4Q, but investment banking fees should remain solid, especially considering the strong M&A pipeline.

A mix shift away from cash and securities into higher yielding loans helped drive net interest margin and higher net interest income sequentially. Moreover, loan pipelines remain strong with the Company expecting further solid loan growth in 4Q, as JPM is seeing good demand in the consumer space and reasonably good sentiment in the business banking space, which are good signs for both JPM and the overall U.S. economy.

Significant items in the quarter included a $2.2 billion tax benefit related to tax matters during the financial crisis and $1 billion (after-tax) of firm-wide legal expense, which remains elevated.

Adjusting for legal expense, noninterest expense totaled $14.0 billion, which was down both QoQ and YoY. The Company noted it remains on track to achieve $4.8 billion in expense savings by 2017. Despite lower expenses, the adjusted overhead ratio inched up in the quarter to 60% reflecting the difficult revenue environment.

During the quarter, JPM was able to further reduce non-operational deposits, as well as total assets despite strong core loan growth, as the Company works to simplify its balance sheet, which DBRS views positively. As a result of these actions, JPM now believes it falls firmly in the 4% GSIB surcharge bucket rather than the 4.5% bucket it was in previously. A smaller balance sheet and capital retention also helped improve the Company’s CET1 and supplementary leverage ratios. Overall, the balance sheet remains strong in DBRS’s view.

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

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