Oct 12 - Standard & Poor's Ratings Services today said that its ratings on
JPMorgan Chase & Co. (JPM; A/Negative/A-1) are not affected by the
company's third-quarter results, which were above our expectations, given
current operating conditions.
Standard & Poor's adjusted pretax earnings were roughly $7.3 billion, up from
roughly $3.9 billion in the prior-year period. Results include a litigation
expense of $700 million but exclude an $889 million gain resulting from the
elimination of some of its trust preferred securities (TRUPS).
Positively, risk from JPM's synthetic credit portfolio, which resulted in
significant trading losses in the first two quarters, has been significantly
reduced. The portfolio generated only a modest loss in the third quarter. In
addition, firmwide average Value at Risk (VaR) declined to $115 million in the
third quarter, down from $201 million the previous quarter.
JPM's Standard & Poor's adjusted revenue rose by 12.0% in the third quarter
(year over year) to $25.2 billion, mostly as a result of stronger Investment
Banking revenue, largely because of strong debt underwriting results and
favorable year-over-year comparisons. Given new support mechanisms in the
eurozone and the absence of another flare-up in the crisis, we expect
fourth-quarter results to remain strong versus fourth-quarter 2011.
Separately, Retail Financial Services benefitted from continued strong
mortgage volume, reflecting historically low mortgage rates and high margins.
We expect this trend to continue at least through the fourth quarter.
The net interest margin (NIM) declined 4 basis points (bps) sequentially, to
2.43%, largely as a result of run-off of higher-yielding assets and limited
reinvestment opportunities. Given the flattening of the yield curve, we expect
the NIM to continue to decline over the next few quarters. The impact on net
interest income should be offset somewhat by growth in JPM's loan book in the
coming quarters, particularly in jumbo loans.
Credit quality improved but was obfuscated in the third quarter by new
guidance that resulted in higher nonperforming assets. As a result,
nonperforming assets totaled $12.5 billion, including $1.7 billion related to
the new regulatory guidance, versus nonperforming assets of $11.4 billion the
previous quarter. We expect net charge-offs to continue to decline in 2013,
albeit at a more moderate pace than 2012. Although JPM released roughly $900
million, reserves are adequate compared with nonperforming loans.
We believe direct exposure to GIIPS countries (Greece, Ireland, Italy,
Portugal, and Spain) remains manageable, but a worsening of the European
crisis could still have a negative ratings impact.
JPM's Basel I Tier 1 common ratio totaled 10.4% in the third quarter, up 50
bps sequentially. We believe that JPM's share repurchase program, which is
currently suspended, will commence in the first quarter of 2013, assuming
regulatory approval, and would subsequently slow the rate at which JPM builds
Our rating outlook on JPM remains negative as we continue to assess possible
further fallout from JPM's risk management missteps. We continue to look into
JPM's risk management practices to ensure that missteps were isolated to JPM's
CIO unit, and we await the outcome of an internal assessment of the company's
risk management practices by its Board of Directors. We also continue to
assess if and how future capital plans affect the company's ability to build
capital. Furthermore, we need to assess ongoing legal issues and ensure that
JPM is adequately reserved.
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.(New York Ratings Team)