DBRS Confirms JPMorgan Chase & Co. at AA (low), Trend Remains Stable

DBRS, Inc. (DBRS) confirmed the ratings of JPMorgan Chase & Co. (JPM, JPMorgan or the Company), including the Company’s Long-Term Issuer Rating of AA (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, JPMorgan Chase Bank, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

The ratings confirmation reflects JPM’s powerful franchise, strong and consistent earnings, continued progress adjusting to regulatory requirements and scrutiny, and robust balance sheet fundamentals. DBRS sees the Company as continuing to enhance its franchise by executing on strategic initiatives, including investments in technology and innovation. While DBRS sees JPM as willing to take risk where its sees commensurate reward, it also appears that the Company has materially reduced its risk profile and addressed the complexity in its businesses. The risks associated with JPM’s wide-ranging capital markets activities are incorporated into the current ratings level. The ratings also consider the heightened regulatory scrutiny and enhanced capital demands that come with being a large, complex, globally systemically important bank.

The Company’s large U.S. branch banking franchise, leading credit card business and other nationwide lending businesses, and its solid commercial banking franchise provide for strong and 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, contribute to JPMorgan’s overall diversity, both by business line, as well as by geography. Collectively, DBRS views JPMorgan the top banking franchise globally.

For 9M17, JPMorgan reported net income of $20 billion on net revenues of $75 billion; JPM’s top and bottom lines have proven strong and resilient, averaging a substantial $94 billion in net revenues annually and $22 billion in net income over the past five years. Earnings have been gradually trending upward since 2013 with revenue growth and expense control. Indeed, expenses are down a notable 20% since 2013, while revenues have ticked up 1%. The Company’s overhead ratio is now down to 58% as compared to a target of 55%. The Company is generating peer-high returns with an ROE of 11% and a ROAA of 1.1% in 9M17.

JPM’s credit metrics continue to demonstrate good trends and are generally in line with, or compare favorably, to U.S. large bank peers. The Company focuses on lending to high quality borrowers, and this is demonstrated in very low nonperforming asset (NPA) balances and net charge offs. 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 86% as of 3Q16 versus a peer average of 58%. Market risk levels also remain low, though low client activity and low volatility are factoring into these 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 $1.8 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 $1.4 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. Reflective of its high level of liquidity, the Company had $568 billion of High Quality Liquid Assets at year-end, which represented 22% of total assets. JPM reported an LCR of 120% and estimates that it is compliant with the proposed 100% minimum for NSFR.

DBRS views JPMorgan as having strong capitalization that provides a substantial cushion to absorb unexpected losses. As of 3Q17, JPM reported a fully-loaded common equity tier 1 (CET1) ratio of 12.8% (advanced) and 12.5% (standardized), as well as a supplementary leverage ratio of 6.6%. Given its business mix, DBRS views it as appropriate that the Company maintains a sizable cushion of capital over regulatory minimum requirements, which require JPM to maintain a CET1 ratio of at least 10.5%. As such, JPM intends to operate with a Basel III CET1 capital ratio between 11% and 12.5% over time.

JPM is a leading global financial services firm with approximately $2.6 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.

The Grid Summary Scores for JPM are as follows: Franchise Strength – Very Strong; Earnings Power – Very Strong/Strong; Risk Profile – Strong; Funding & Liquidity – Very Strong/Strong; Capitalisation – Very Strong/Strong.

RATING DRIVERS
DBRS views JPM as well-placed in its current rating category and sees positive rating action as limited since the Company generally runs with a higher level of risk than higher-rated institutions. While DBRS views JPM as well-positioned to reap the benefits of being a global franchise, this is balanced by the need to manage risk across a large and complex organization. Over the longer-term, if JPM continues to demonstrate continued success in managing risks across the organization, DBRS sees the potential for positive rating pressure.

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 methodology are the Global Methodology for Rating Banks and Banking Organisations (May 2017), 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, Senior Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: June 22, 2001
Most Recent Rating Update: August 2, 2017

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 in connection with this rating action.

This is an unsolicited credit rating.