TEXT-S&P: JPMorgan ratings unaffected by Q1 results

Fri Apr 13, 2012 2:28pm EDT

April 13 - Standard & Poor's Ratings Services today said its ratings on
JPMorgan Chase & Co. (JPM; A/Stable/A-1) are not affected by the
company's first-quarter results, which were slightly better than we expected,
considering the current operating conditions.	
	
JPM generated $7.4 billion of Standard & Poor's-adjusted pretax earnings, down 	
from $8.0 billion in first-quarter 2011. Results exclude a $1.1 billion gain 	
resulting from the settlement of the Washington Mutual bankruptcy case and a 	
$900 million loss due to the narrowing of JPM's credit spreads. We expect a 	
modest increase in pretax income in 2012, largely stemming from further credit 	
improvement.  	
	
JPM's Standard & Poor's-adjusted revenue rose by 5.5% in the first quarter 	
(year over year) to $27.2 billion, mainly because higher mortgage fees led to 	
an increase in Retail Financial Service revenue. Positively, investment 	
banking revenue, excluding credit spread adjustments, was roughly flat year 	
over year. Based on seasonal factors that will likely lower trading results, 	
as well as lower mortgage banking fees, we expect revenues to decline in the 	
coming quarters.	
	
The net interest margin (NIM) declined 9 basis points from fourth-quarter 2011 	
to 2.61%, largely because of a change in loan mix and excess deposits that 	
have not been redeployed. We expect the NIM to remain relatively flat for the 	
remainder of 2012. Positively, middle-market and wholesale lending continued 	
to grow in the first quarter.	
	
Consumer credit trends improved in the first quarter, with net charge-offs 	
down roughly 17.9% from the previous quarter. Early delinquencies across asset 	
classes improved in the first quarter. Nonperforming assets rose in the first 	
quarter because of new regulatory guidance. As a result, JPM reported as 	
nonaccrual loans $1.6 billion of performing junior liens that are subordinate 	
to nonaccrual senior liens. We expect net charge-offs to continue to decline 	
in 2012, albeit a more moderate decline than in 2011. JPM released roughly 	
$1.6 billion of reserves in the first quarter. Reserves (excluding those for 	
purchase impaired loans) relative to nonperforming loans were 194% in the 	
first quarter, lower than the fourth-quarter level of 223%. Although credit 	
trends seem to be improving, we are cautious of reserve coverage reductions at 	
this stage in the credit cycle.	
	
We believe direct exposure to the GIIPS countries (Greece, Ireland, Italy, 	
Portugal, and Spain) remains manageable but could have a negative ratings 	
impact if the European sovereign and financial crisis worsens. 	
	
JPM's Basel I Tier 1 common ratio was 10.4% in the first quarter, up 30 basis 	
points from the previous quarter. JPM repurchased $216 million of common stock 	
during the first quarter and has approval to repurchase $15 billion of shares 	
through first-quarter 2013. We assume that JPM's share repurchase will not 	
exceed 75% of earnings. Aggressive share repurchases above this level could 	
pressure ratings if total buybacks impede JPM's ability to increase its 	
risk-adjusted capital ratio (RAC), as measured by Standard & Poor's, to more 	
than 7.0% by the end of 2013. 	
	
We continue to evaluate possible adverse conditions in the housing market, 	
rule making from new legislation, particularly the Volcker Rule and derivative 	
legislation, and possible nonagency representation and warranty costs and 	
litigation concerns. Currently, we see these items as potentially pressuring 	
earnings, but not affecting ratings. We believe JPM has built a significant 	
litigation reserve, considerably higher than peers. We will also monitor the 	
size of future share buybacks and JPM's actions regarding the retirement of 	
trust preferred securities with regard to their potential impact on JPM's RAC 	
ratio, which currently is neutral to the ratings.	
	
Standard & Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the 	
world's foremost provider of credit ratings. With offices in 23 countries, 	
Standard & Poor's is an important part of the world's financial infrastructure 	
and has played a leading role for 150 years in providing investors with 	
information and independent benchmarks for their investment and financial 	
decisions.
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