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