TEXT-Fitch revises JPMorgan Chase & Co rating outlook to stable
Oct 10 - Fitch Ratings has affirmed JPMorgan Chase & Co.'s (JPM) Long-term Issuer Default rating (IDR) at 'A+' and Short-term IDR at 'F1'. Fitch also affirmed JPM's Viability Rating (VR) at 'a+', its Support Rating at '1' and its Support Rating Floor at 'A'. The Rating Outlook has been revised to Stable from Rating Watch Negative. A full list of ratings follows at the end of this release. Today's rating action on JPM was taken in conjunction with Fitch's global trading and universal bank periodic review. Fitch's outlook for the industry is stable on balance. The positive rating drivers include improved liquidity, funding, capitalization and more streamlined businesses, all partly driven by regulation. Offsetting these positive drivers are substantial earnings pressure, regulatory uncertainty and heightened legal and operational risk. RATING ACTION RATIONALE The ratings affirmations reflect JPM's dominant domestic franchise and growing international franchise. The firm continues to maintain a leading position in its businesses, particularly in U.S. domestic commercial banking and investment banking. It has not suffered meaningful damage to its franchise from the losses in its Chief Investment Office (CIO). The firm has not demonstrated any material weakening in funding flexibility or access to the capital markets as a result of the CIO incident. Fitch believes that most of the risk management weaknesses were centralized in the CIO and have been addressed or are being remediated. Importantly, some broader risk governance issues such as greater centralization of processes are also being addressed by the firm. The Stable Outlook recognizes that the firm still has some work to do in addressing its risk governance weaknesses arising from the losses in the CIO. However, the firm appears to have identified and addressed most of the problems in the CIO and has similarly looked across the entire firm to enhance its risk management and governance framework. Fitch believes the firm is committed to a best-in-class risk framework and will continue to address any unresolved issues. The firm's significant earnings power, diverse earnings sources, strong front-end risk culture, leading franchise, and liquidity management are core strengths. Capital is also sufficient for its rating level, though JPM tends to be a more aggressive capital manager than some of its global peers. Share repurchases have been suspended for 2012 but Fitch expects these to resume in 2013, which is negative for credit ratings in a business that is not contracting. Basel III Tier 1 Common Ratio is estimated to be 7.9% at 2Q'12 and the firm should comfortably reach Basel III capital requirements within the prescribed time frame. The mortgage business, particularly JPM's real estate portfolios continue to have relatively weak asset quality. However, the firm's charge-off rates, non-performing assets and late stage delinquencies continue to improve. JPM's diverse business franchise and underwriting have helped to offset this weakness, but the improving trend has also benefited from the impact of quantitative easing on the U.S. economy and could, therefore, be vulnerable to any change in this. The credit card business has performed very well and Fitch expects that there will likely be some deterioration in card asset quality as the business reverts to more historical performance. Commercial banking, Treasury & Security Services and the Asset Management businesses remain stable performers. Like other global trading and universal banks, Fitch believes the investment bank creates greater volatility in JPM's earnings and serves as a rating constraint. While the agency recognizes the firm's leading position in IB, the business is vulnerable to cyclicality and more sensitive to market conditions than many of its other business lines. In addition, IB has been an important component of the firm's earnings. Given the company's size and scale in many businesses, along with many other large financial firms, continues to be subject to various investigations and litigation. The most costly so far are mortgage related, including foreclosures and repurchases. LIBOR investigations are pending as well as several litigations stemming from the crisis and as a result of the CIO losses. Fitch believes the firm manages liquidity well, though wholesale funding is a meaningful component which mainly supports its global broker/dealer operations. However, the company has a solid core deposit base, mainly in the U.S. RATING DRIVERS & SENSITIVITIES - VR, IDRs & SENIOR DEBT Going forward JPM is going to be challenged to continue to deliver consistent strong revenues, particularly in light of the current regulatory environment and the low interest rate environment. Higher capital charges and difficult market conditions present a challenge for all global trading and universal banks, which may be encouraged to seek more aggressive ways to generate profits that take advantage of regulatory loopholes. However, Fitch expects that JPM's strong global franchise, liquidity risk management, and current earnings power from its diverse businesses mitigate some of these concerns. JPM's ratings could be sensitive to weakening in the global (particularly the U.S.) macro-environment that goes beyond what Fitch's stress tests incorporate. Slow on-going growth or recession would affect asset quality and investment banking activity. Material asset quality weakening across asset classes could put negative pressure on the ratings unless the capital buffer is strengthened. Further, significant risk management or operational failures that result in material losses to the firm could also result in a negative rating action. Fitch believes that the rating is currently constrained and therefore upward rating momentum is unlikely for the foreseeable future. RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR JPM's current 'A+' Long-term IDR is equalized with its 'a+' VR, which remains above its support rating floor. JPM's '1' Support Rating 'A' Support Rating Floor factor in government support in the event of need for JPM and other U.S. G-SIFIs. While Fitch believes the broad policy goal is to no longer provide full support to systemically important banks, this is progressing at an uneven pace globally. Fitch could reassess its support ratings for U.S. G-SIFIs if global market conditions normalize and resolution regimes become more harmonized across international jurisdictions. At JPM's current VR, the firm's Long-term IDR would not be affected by a change in support rating floor. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by JPM and by various issuing vehicles are all notched down from JPM's or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective nonperformance and relative loss severity risk profiles. Their ratings are primarily sensitive to any change in the VRs of JPM or its bank subsidiaries. HOLDING COMPANY RATING DRIVERS AND SENSITIVITIES JPM's IDR and VR are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. It has modest double leverage of 107% at 2Q12. SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES The IDRs and VRs of JPM's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA and therefore IDRs and VRs are equalized across the group. JPMorgan Securities LLC (JPMS) is a wholly owned subsidiary that is the firm's U.S. broker dealer and is considered core to JPM's business. As a result its IDR is equalized with that of its parent JPM. Bear Stearns Companies, LLC and JPMorgan Clearing Corp. benefit from a parent guarantee and therefore their IDRs are equalized with JPM's. Collateralized Commercial Paper Co., LLC's ST IDR benefits from JPMS's guarantee of the amounts payable by the repo seller, JPMCC, and as result its ST IDR is equalized with that of JPMS. Collateralized Commercial Paper II Co., LLC's ST IDR is based on the repo seller, JPMS's ST IDR. JPM is a leading global trading and universal bank with $2.3 trillion in total assets and $5.0 billion of net income as of June 30, 2012. Fitch has affirmed the following ratings: JPMorgan Chase & Co --Long-term IDR at 'A+'; --Long-term senior debt at 'A+; --Long-term debt guaranteed by TLGP at `AAA'; --Long-term subordinated debt at 'A'; --Preferred stock at 'BBB-'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'; --Viability at 'a+'; --Market linked securities at 'A+emr'; --Support at '1'; --Support Floor at 'A'. JPMorgan Chase Bank N.A. --Long-term deposits at 'AA-'; --Long-term IDR at 'A+'; --Long-term senior debt at 'A+'; --Long-term subordinated debt at 'A'; --Short-term IDR at 'F1'; --Short-term debt at 'F1'; --Short-term deposits at 'F1+'; --Viability at 'a+'; --Market linked deposits at 'AA-emr'; --Market linked securities at 'A+emr'; --Support at '1'; --Support Floor at `A'. Chase Bank USA, N.A. --Long-term deposits at 'AA-'; --Long-term IDR at 'A+'; --Long-term senior debt at 'A+'; --Long-term subordinated debt at 'A'; --Short-term IDR at 'F1'; --Short-term debt at 'F1'; --Short-term deposits at 'F1+'; --Viability at 'a+'; --Support at '1'; --Support Floor at 'A'. Custodial Trust Co. --Long-term deposits (market linked securities) at 'AA-emr'; JPMorgan Bank & Trust Company, National Association --Long-term deposits at 'AA-'; --Long-term IDR at 'A+'; --Short-term IDR at 'F1'; --Short-term deposits at 'F1+'; --Viability at 'a+'; --Support at '1'; --Support Floor at 'A'. JPMorgan Chase Bank, Dearborn --Long-term deposits at 'AA-'; --Long-term IDR at 'A+'; --Short-term IDR at 'F1'; --Short-term deposits at 'F1+'; --Viability at 'a+'; --Support at '1'; --Support Floor at 'A'. Bear Stearns Companies LLC --Long-term IDR at 'A+'; --Long-term senior debt at 'A+'; --Long-term subordinated debt at 'A'; --Short-term IDR at 'F1'; --Market linked securities at 'A+emr'. J.P. Morgan Securities LLC --Long-term IDR at 'A+''; --Short-term IDR at 'F1'. JPMorgan Clearing Corp (formerly Bear Stearns Securities Corp) --Long-term IDR at 'A+'; --Short-term IDR at 'F1'. Bank One Capital Trust III Bank One Capital Trust VI Chase Capital II Chase Capital III Chase Capital VI First Chicago NBD Capital I JPMorgan Chase Capital X-XIV, XVI, XIX, XXI, XXIII, and XXIV --Preferred stock at 'BBB'. Bank One Corp --Long-term subordinated debt at 'A'. JP Morgan & Co., Inc. --Long-term senior debt at 'A+'; --Long-term subordinated debt at 'A'. Morgan Guaranty Trust Co. of New York --Long-term senior debt at 'A+'. NBD Bank, N.A. (MI) --Long-term subordinated at to 'A'. Providian National Bank --Long-term deposits at 'AA-'. Washington Mutual Bank --Long-term deposits at 'AA-'. Fitch has affirmed ratings on the following special purpose vehicles: Collateralized Commercial Paper Co., LLC --Short-term debt at 'F1'. Collateralized Commercial Paper II Co., LLC --Short-term debt at 'F1'. Fitch has withdrawn the following ratings: Custodial Trust Co. --Long-term IDR at 'A+'; --Short-term IDR at 'F1'; --Viability at 'a+'; --Support at '1'. Banc One Financial LLC --Short-term IDR at 'F1''; --Short-term debt at 'F1'. The ratings for Custodial Trust Co. are being withdrawn because the entity has been merged into J.P. Morgan Chase Bank N.A. The ratings for Banc One Financial LLC are being withdrawn as the entity is no longer used for funding purposes.
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