Fitch Affirms JPMorgan Chase's Ratings at 'A+/F1'; Outlook Stable

Wed Mar 26, 2014 3:32pm EDT

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(The following statement was released by the rating agency) NEW YORK, March 26 (Fitch) 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. The rating actions have been taken in conjunction with a review of support for banks globally and also as part of a periodic review of the Global Trading and Universal Banks, which comprise 12 large and globally active banking groups. Fitch's outlook for the sector is stable on balance. Earnings pressure in securities businesses and continued conduct and regulatory risks present in the GTUBs are offset by stronger balance sheets as capitalisation and liquidity remain sound. Fitch forecasts stronger GDP growth in most economies, which should contribute to a more balanced operating environment, but the operating environment is likely to remain challenging in 2014. Today's rating actions assume that JPM will perform adequately under the CCAR stress test, though Fitch has no visibility into any potential qualitative rejections for JPM, or any of the other 29 banks subject to regulatory stress testing. Although a qualitative rejection of a capital plan request under CCAR would be viewed negatively, it is not expected to have any rating implications for JPM. 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. The affirmation also reflects the firm's strong funding flexibility, given its deposit raising capabilities and uninterrupted access to the global capital markets through an economic cycle. JPM's Basel III tier 1 common equity ratio improved from an estimated 8.7% at year-end 2012 to 9.5% at year-end 2013, which is in-line with management's target but lower than the peer average. Capital improvements have been supported by growth in retained earnings and modest reductions in risk-weighted assets, due largely to non-core portfolio run-off. Management is targeting a ratio of 10% by the end of 2014 and 10%-10.5% longer-term, which Fitch believes is prudent, given the 9.5% minimum requirement. Fitch believes JPM is well positioned to maintain compliance with Basel III capital requirements, even with its higher G-SIFI loss absorbing buffer, given the superior earnings capacity of the bank. Fitch believes progress on compliance with the supplementary leverage ratio (SLR) will extend into 2015, as certain structural adjustments are required for the bank to reach a ratio of 6%. JPM converted some intercompany debt into equity during the fourth quarter, which contributed to a 40 basis point increase in the bank's SLR, to 4.7% at year-end. However, the conversion yielded an increase in the firm's double leverage to approximately 1.17 times (x), which Fitch believes is high, relative to historical standards. Further increases in double leverage would be viewed negatively. Fitch expects JPM to achieve full compliance with all regulatory requirements, well ahead of required implementation, which for SLR is 2018. The bank's liquidity profile remains sound, with $522 billion of high quality liquid assets at Dec. 31, 2013, up from $341 billion a year earlier. Fitch believes the growth was largely driven by JPM's efforts to accelerate compliance with the liquidity coverage ratio (LCR), which has been achieved. Additionally, clarity regarding the direction of the net stable funding ratio (NSFR) was released in a consultative document in January, and JPM believes it is currently compliant with the requirements, which Fitch views favorably. Earnings performance has been highly resilient, particularly on a relative basis, as the company remained profitable throughout the financial crisis and continued to post relatively solid returns despite the recognition of over $11.1 billion of legal expenses in 2013. This is a testament to the company's broad and diverse franchise. The firm had another strong year on a core basis in 2013. Fitch estimates that pre-tax earnings were essentially flat, on an adjusted basis, as weaker mortgage performance was offset by reduced provision expenses and stronger asset management revenue. Core operating expenses remained relatively flat, with efficiency measures funding higher costs associated with the control agenda. JPM made significant progress settling a variety of outstanding litigation during 2013 and early 2014, which Fitch views as a positive step in moving beyond the headline issues stemming from the financial crisis. 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. The Stable Outlook reflects expectations for continued operating consistency, although Fitch believes credit costs will become a growing headwind, as asset quality metrics rise from historical lows, and earnings are likely to continue to be challenged by relatively low interest rates. A continued focus on operational improvements is expected to offset the impact to some extent. Investment banking results will remain dependent upon market conditions, but JPM's strong market position and diverse product offering should yield peer-superior performance. RATING DRIVERS AND SENSITIVITIES - IDRs, VR AND SENIOR DEBT Going forward, Fitch believes JPM is going to be challenged to deliver 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 changes. However, Fitch expects that JPM's strong global franchise, liquidity risk management, and product diversity mitigate some of these concerns. Negative rating actions could result from reputational damage that impacts the firms market position and/or material asset quality weakening which pressures 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 internal reviews following material losses in the chief investment office. Further, significant risk management or operational failures that result in material losses to the firm could also result in a negative rating action. 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 third quarter of 2013 reflects JPM's desire to address outstanding legal issues, related largely to mortgage. To the extent JPM enters into any new and material litigation settlements, Fitch will consider whether these effectively diminish ongoing legal risks. Upward rating momentum for JPM is believed to be limited for the foreseeable future given that its current rating level is among the highest of its peer group and of the global bank universe. KEY RATING DRIVERS - SUPPORT RATING AND SRF JPM's Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's expectation that there remains an extremely high probability of support from the U.S. government ('AAA'/Outlook Stable) if required. This expectation reflects the U.S.'s extremely high ability to support its banks especially given its strong financial flexibility, though propensity is becoming less certain. Specific to JPM, Fitch's view of support likelihood is based mostly on its systemic importance in the U.S., its global interconnectedness given its size and operations in global capital markets, significant deposit market share and its position as a key provider of financial services to the U.S. economy. JPM's IDRs and senior debt ratings do not benefit from support because JPM's VR is above its SRF. However, in Fitch's view, there is a clear intention to reduce support for G-SIFIs in the U.S., as demonstrated by the Dodd Frank Act (DFA) and progress regulators have made on implementing the Orderly Liquidation Authority (OLA). The FDIC has proposed its single point of entry (SPOE) strategy and further initiatives are demonstrating the U.S. government's progress to eliminate state support for U.S. banks going forward, which increases the likelihood of senior debt losses if its banks run afoul of solvency assessments. KEY RATING DRIVERS & SENSITIVITIES - SUPPORT RATING AND SRF The SR and SRF are sensitive to progress made in finalizing the SPOE strategy and any additional regulatory initiatives that may be imposed on the G-SIFIs, including debt thresholds at the holding company. Fitch's assessment of continuing support for U.S. G-SIFIs has to some extent relied upon the feasibility of OLA implementation rather than its enactment into law (when DFA passed). Hurdles that remain include the resolution of how cross-border derivative acceleration/termination provisions are handled and that there is sufficient contingent capital at the holding company to recapitalize without requiring government assistance. Fitch expects that the SPOE strategy and regulatory action to ensure sufficient contingent capital will be finalized in the near term, but regardless of its finalization Fitch believes that sufficient regulatory progress continues to be made over the ratings time horizon. Therefore, Fitch expects to revise JPM's Support Rating to '5' and its SRF to 'No Floor' within the next one to two years, likely to be some point in late 2014 or 1H15. A revision of the SRF to 'No Floor' would mean no change to JPM's Long-term IDR and debt ratings because JPM's viability rating is above the SRF. 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 - LONG- AND SHORT-TERM DEPOSIT RATINGS JPM's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. The ratings of long and short-term deposits issued by JPM and its subsidiaries are primarily sensitive to any change in JPM's IDR. 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. Common equity double leverage rose in late 2013 as the firm converted certain intercompany debt into equity during the fourth quarter to boost the bank's SLR ratio. Double leverage is at the high-end of the peer group, at 1.17x at Dec. 31, 2013. Fitch would view further increases in double leverage negatively. 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 ST IDR. JPM is a leading global trading and universal bank with $2.4 trillion in total assets and $17.9 billion of net income for the year ended Dec. 31, 2013. Fitch has affirmed the following ratings: JPMorgan Chase & Co --Long-term IDR at 'A+'; --Long-term senior debt at 'A+'; --Senior shelf 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 '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'. 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'; --Short-term debt 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 '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'. Fitch will hold a teleconference to discuss sovereign support for banks and give an update on rating paths on Friday, March 28 at 15:00 GMT. Callers must register in advance using the link below and are requested to dial in early: here DA40C4B1FED21 Contact: Primary Analyst Meghan Neenan, CFA Senior Director +1-212-908-9121 Fitch Ratings, Inc., One State Street Plaza, New York, NY 10004 Secondary Analyst Joo-Yung Lee Managing Director +1-212-908-0560 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' (January 2014); --'Securities Firms Criteria' (January 2014); --'Assessing and Rating Bank Subordinated and Hybrid Securities' (January 2014); --'Rating FI Subsidiaries and Holding Companies' (August 2012). Applicable Criteria and Related Research: Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Rating FI Subsidiaries and Holding Companies here Global Financial Institutions Rating Criteria here Securities Firms Criteria 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. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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