DBRS Upgrades JPMorgan Chase & Co. Senior Debt to AA (low), Trend Now Stable

DBRS, Inc. (DBRS) has today upgraded most of the ratings for JPMorgan Chase & Co. (JPM, JPMorgan or the Company) and related entities, including JPMorgan’s Issuer & Senior Debt rating to AA (low) from A (high) and JPMorgan Chase Bank, N.A.’s Deposits & Senior Debt to AA from AA (low). At the same time, JPM’s Short-Term Instruments rating was confirmed at R-1 (middle). The trend on ratings is now Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The upgrade reflects JPM’s continued success in enhancing its franchise by executing on its strategy while improving returns across business segments, combined with continued progress in adjusting to evolving regulatory requirements. Also reflected in the upgrade is the range of actions that the Company has taken to materially reduce its risk profile and address the complexity in its businesses. The ratings are supported by the Company’s diversified and highly scaled universal banking franchise, its robust and resilient earnings generation across its businesses, and its overall strong financial profile.

The ratings also consider the heightened regulatory scrutiny and enhanced capital demands that come with being a large, complex, globally systemically important bank (G-SIB). DBRS has also factored into its ratings JPM’s wide-ranging capital markets activities with a still notable level of market risk, which support the franchise value, but elevate risk levels. With CIB trading assets comprising approximately 15% of total balance sheet, the Company has good diversification outside of assets that are typically marked-to-market, but this does expose JPM to potential large market movements and market disruptions. JPM’s willingness to take risk where it sees commensurate reward is also factored into the current rating level.

The Stable trend reflects DBRS’s view that JPM is well-positioned to continue to manage through the current challenging operating environment, including rising, but still low, interest rates, uncertainties that are impacting client activity levels, and increased regulatory burdens. With improving profitability metrics, the Company has demonstrated its ability to succeed in this prolonged challenging environment.

The Company’s large U.S. branch banking franchise, leading credit card business and other nationwide lending businesses, as well as its solid commercial banking franchise provide for consistent revenue generation, as well as geographic diversity. Additionally, the Company’s large global capital markets business, with top-tier rankings across numerous banking, markets and investor products and services, along with its extensive global fee-based businesses, including its sizable treasury and securities services, asset management and private banking businesses, contributing to JPMorgan’s overall diversity, both by business line as well as by geography. Collectively, DBRS views JPMorgan as one of the banking industry’s top franchises.

For 9M16, JPMorgan reported net income of $18 billion on net revenues of $72 billion; this compares to net income of $19 billion on net revenues of $71 billion in 9M15. JPM’s top and bottom lines have proven resilient despite the challenging operating environment, averaging $95 billion in net revenues annually and $20 billion in net income over the past few years. With continued revenue growth and efficiency gains contributing to bottom line returns (overhead ratio of 58% in 9M16, down from 63% in 9M15), JPM is generating peer-high returns. DBRS notes that JPMorgan remains focused on reducing expenses through further simplification of its business model and improved technology, targeting an overhead ratio of approximately 55%. While the Company-wide provision for credit losses was up in 9M16 to $4.5 billion, as compared to $2.5 billion in 9M15, this level continues to be manageable at 15% of income before provisions and taxes (IBPT). Overall, for 9M16, JPM generated a solid ROE of 10%.

Credit fundamentals continue to demonstrate improvement, with declining nonperforming asset (NPA) balances and net charge offs, and are generally in line with peers. Continuing good asset quality trends are important to maintaining the rating. The Company reports reserve levels that compare favorably to U.S. large bank peers, with reserves/gross NPAs of 73% as of 3Q16 versus a peer average of 58%. Market risk levels also appear to have been reduced, with an average total VaR of $47 million in 9M16, down notably from post-crisis levels. From an operational risk perspective, JPM has put much of its material legacy litigation issues behind it, with the estimated upper range of possible losses beyond current litigation reserves of $3.1 billion. While still sizable, this is much reduced from $5.8 billion at the end of 2014.

DBRS views JPM’s funding and liquidity as strong, supported by its $1.3 trillion global deposit base, the largest among U.S. banks. Reflecting the Company’s business mix and funding needs, wholesale funding reliance is sizable, but has trended down. Moreover, DBRS views JPMorgan’s funding and liquidity as well-managed and appropriately diversified across both sources and maturities. DBRS expects wholesale funding to increase somewhat at the holding company due to the proposed TLAC rules. Importantly, DBRS expects the impact of TLAC on issuance plans and earnings to be manageable. Reflective of its high level of liquidity, the Company had $539 billion of High Quality Liquid Assets (HQLA) at year-end, which represented 21% of total assets. JPM reports that it is fully compliant with the fully phased-in U.S. liquidity coverage ratio (LCR) requirements and estimates that it is compliant with the proposed U.S. net stable funding ratio (NSFR) requirements.

Driven by earnings retention and lower risk-weighted assets, JPM’s capital ratios have reflected continued improvement and are in line with the global peer group. Specifically, the Company’s fully-phased in Basel III Common Equity Tier 1 (CET1) ratio was a strong 11.9% at year-end and its supplementary leverage ratio (SLR) was a solid 6.6% at the holding company, well above current requirements. Reflecting the range of actions that the Company has taken to simplify its balance sheet, its G-SIB surcharge is estimated to be 3.5%, improved from 4.5% estimated last year. Furthermore, JPM received a nonobjection from regulators to its 2016 DFAST/CCAR submission, and also received positive feedback on its 2015 resolution plan resubmission stating that the identified deficiencies in the original submission have been adequately remedied.

JPM is a leading global financial services firm with approximately $2.5 trillion in total assets. Highly diversified, JPM is a leader in investment banking, financial services for consumers and businesses, financial transaction processing and asset management.

RATING DRIVERS
Given the recent upgrade and current challenging environment, DBRS views positive rating action over the near- to medium-term as remote. Over the longer-term, JPM ratings could be constrained by various factors, including the still evolving regulatory environment and the Company’s business model, which generally runs with a higher level of risk than higher-rated institutions. While DBRS views JPM as well-positioned to reap the benefits of a more substantial global economic recovery, it will remain challenged to manage a more complex, expanding organization in an evolving environment that is highlighted by regulatory change.

Negative ratings pressure could arise if JPM’s financial profile weakens or if its risk appetite increases materially. If investor/client confidence is adversely impacted by a JPMorgan-specific scenario, particularly a large event, the ratings would likely come under pressure.

Notes:
All figures are in USD unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Roger Lister
Initial Rating Date: June 22, 2001
Most Recent Rating Update: November 6, 2015

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.