Fitch Affirms JPMorgan Chase Ratings at 'A+/F1' Despite Legal Reserve; Outlook Stable

Fri Oct 11, 2013 4:29pm EDT

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(The following statement was released by the rating agency) NEW YORK, October 11 (Fitch) Following the announced $9.15 billion addition to litigation reserves in the quarter, Fitch Ratings has affirmed JPMorgan Chase & Co.'s (JPM) long-term Issuer Default Rating (IDR) at 'A+' and short-term IDR at 'F1'. Fitch has also affirmed JPM's Viability Rating (VR) at 'a+', its Support Rating at '1', and its Support Rating Floor (SRF) at 'A'. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release. KEY RATING DRIVERS - IDRs, VR AND SENIOR DEBT JPM's ratings affirmation reflects the strong underlying earnings capacity of the bank, given its dominant domestic franchise and growing international franchise, and progress made toward achieving compliance with heightened capital and liquidity requirements. While the litigation charge is significant, and beyond Fitch's expectations, the agency had considered possible ranges of mortgage-related costs in its analysis, and recognizes that growing legal costs are not unique to JPM. While the scope of current negotiations is unclear, Fitch believes the bank is striving to put the bulk of mortgage-related matters behind them. Legal costs are likely to remain elevated in coming quarters, but Fitch expects the incremental impact to earnings will be manageable. Still, the emergence of material and unexpected litigation losses could alter the agency's view, particularly given where the firm's current capitalization ratios compare to the broader peer group. Excluding the litigation charge, core operating performance was relatively solid during the quarter, with the exception of mortgage banking, which was hurt by rising interest rates and expected declines in origination volume. Consumer asset quality trends continued on a positive trajectory, and JPM recognized $1.6 billion of reserve releases, largely in real estate and credit card. Non-interest expenses improved modestly, with headcount reductions and efficiency improvements. The corporate and investment bank's results reflected a seasonally slower quarter, but results outperformed Fitch's expectations. Income was up year over year due to stronger debt and equity underwriting fees and strides made in improving the firm's market position in equities. Average Value-at-Risk (VaR) was down meaningfully from the third quarter of 2012 (3Q'12), at $45 million. Debt valuation adjustment (DVA) losses increased to $397 million from losses of $211 million a year ago. Mortgage production had a relatively weak quarter given a decline in origination volumes, while mortgage servicing posted a loss due to lower servicing revenue and a negative MSR valuation adjustment. Still, progress has been made in reducing core servicing expenses. Fitch expects mortgage revenue will remain challenged in coming quarters, as new originations fail to offset reductions in refinancing volume. Real estate portfolios had a solid quarter, due largely to improvements in credit and a $1.25 billion reduction in reserves. The commercial banking and asset management segments remained very steady performers within JPM, with commercial loan growth of 9% and asset under management growth of 12% year over year. The company reported a Basel III Tier I Common ratio of 9.3%, which is slightly below the 9.5% requirement, inclusive of the globally systemically important financial institution capital buffer. Additionally, JPM disclosed a firm supplementary leverage ratio (SLR) of 4.7% and a bank SLR of 4.3%, which compare to requirements of 5.5% and 6%, respectively. Fitch considers compliance with leverage ratios to be manageable, and will largely be achieved through management actions. Furthermore, JPM disclosed that its liquidity coverage ratio remains in excess of 100%, based on its interpretation of the standard. The Stable Outlook reflects expectations for continued operating consistency, although Fitch believes earnings could decline from current levels as the interest rate environment remains challenging, regulatory costs grow, and credit metrics, particularly in card and the commercial bank, normalize from unsustainable lows. Still, offsets could be achieved from improved performance in mortgage banking and stronger operating efficiencies. RATING DRIVERS AND SENSITIVITIES - IDRs, VR AND SENIOR DEBT Going forward, Fitch believes JPM is going to be challenged to continue to deliver consistent earnings growth, particularly in light of the current regulatory environment. Higher capital charges and what remains difficult market conditions present a challenge for all GTUBs, 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 product diversity mitigate some of these concerns. Fitch considers JPM's ratings to be particularly sensitive to the degree and scope of litigation risk going forward. Fitch recognizes that the large litigation charge taken during the quarter reflects JPM's desire to address outstanding legal issues. To the extent JPM enters into any litigation settlements, Fitch will consider whether these effectively diminish ongoing legal risks. Negative rating actions could result from material asset quality weakening which would pressure JPM's earnings and its ability to build capital, deterioration in liquidity levels, material and unexpected litigation losses, and/or failure to sufficiently address weaknesses noted in regulatory consent orders and the CCAR submission process in a timely fashion. Further, significant risk management or operational failures that result in material losses to the firm could also result in a negative rating action. Upward rating momentum for JPM is believed to be limited for the foreseeable future given the risk and governance issues the firm is still addressing. Further, its current rating level is among the highest of its peer group and relative to the global bank universe. KEY RATING DRIVERS - SUPPORT RATING AND SRF The affirmations of JPM's Support Rating and SRF are based on Fitch's view that the probability of support from the U.S. authorities for JPM, if required, remains extremely high in the near term due to the bank's systemic importance. However, JPM's ratings do not currently receive any uplift from support. RATING SENSITIVITIES - SUPPORT RATING AND SRF The Support Rating and SRF are sensitive to a change in Fitch's view of the ability or propensity of the U.S. sovereign to extend full support to the bank's senior creditors. There is a clear political intention to ultimately reduce the implicit state support for systemically important banks in Europe and the U.S., as demonstrated by a series of policy and regulatory initiatives aimed at curbing systemic risk posed by the banking industry. This might result in Fitch revising SRFs downward in the medium term, although the timing and degree of any change would depend on developments with respect to specific jurisdictions. Until now, senior creditors in major global banks have been supported in full, but resolution legislation is developing quickly and the implementation of creditor 'bail-in' is starting to make it look more feasible for taxpayers and creditors to share the burden of supporting large, complex banks. KEY RATING DRIVERS & SENSITIVITIES - 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. KEY RATING DRIVERS & SENSITIVITIES - HOLDING COMPANY 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 105.6% at year-end 2012. KEY RATING DRIVERS & SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY 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 short-term IDR benefits from JPMS's guarantee of the amounts payable by the repo seller, JPMCC, and as result its short-term IDR is equalized with that of JPMS. Collateralized Commercial Paper II Co., LLC's short-term IDR is based on the repo seller, JPMS's short-term IDR. JPM is a leading global trading and universal bank with $2.5 trillion in total assets and $12.6 billion of net income for the nine months ended Sept. 30, 2013. Fitch has affirmed the following ratings: JPMorgan Chase & Co --Long-term IDR at 'A+'; --Long-term senior debt at 'A+; --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 'AAemr'; --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'. 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 Chase Capital II Chase Capital III Chase Capital VI First Chicago NBD Capital I JPMorgan Chase Capital XIII, XXI, and XXIII --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-'. Collateralized Commercial Paper Co., LLC --Short-term debt at 'F1'. Collateralized Commercial Paper II Co., LLC --Short-term debt at 'F1'. Contact: Primary Analyst Joo-Yung Lee Managing Director +1-212-908-0560 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Christopher Wolfe Managing Director +1-212-908-0771 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' Aug. 15, 2012; --'Securities Firms Criteria' Aug. 15, 2012; --'Assessing and Rating Bank Subordinated and Hybrid Securities' Dec. 5, 2012; --'Rating FI Subsidiaries and Holdings Companies' Aug. 10, 2012. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Securities Firms Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities here Rating FI Subsidiaries and Holding Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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