October 12, 2017 / 6:15 PM / 10 months ago

Fitch: JPM Reports Earnings Growth Despite Markets Decline

(The following statement was released by the rating agency) NEW YORK, October 12 (Fitch) JPMorgan Chase & Co.'s (JPM) third quarter 2017 (3Q17) results benefited from higher interest rates, solid core loan growth, and positive operating leverage, which offset the impact of low volatility on markets revenue and an increase in credit costs, as consumer banking losses continued to normalize and the bank built card reserves, according to Fitch Ratings. Net earnings of $6.7 billion were up 7.1% year over year, which contributed to returns on equity (ROE) and tangible equity of 11% and 13% in the quarter, respectively, which Fitch expects to remain above average for the peer group. Corporate and Investment Banking (CIB) earnings were down 12.6% in 3Q17, year over year, as persistently low volatility (and the absence of several large fee events in 3Q16) contributed to a 9% decline in net revenue. Fixed income markets revenue was down 27% given low volatility and tight spreads, while equity markets were down a more modest 3.6%, with lower activity in exotic derivatives offset by strength in cash equities and prime services. Overall investment banking (IB) fees were down a modest 2% from 3Q16, as declines in equity underwriting were partially offset by a record third quarter in advisory fees and relatively consistent debt underwriting results. JPM maintained its leading market share in a variety of product categories in the quarter, and retained its number one ranking in global IB fees. Treasury services revenues were up a strong 15.4% given higher interest rates and strong organic growth. CIB's overhead expense ratio increased to 56% in the quarter driven largely by revenue declines, as compensation expenses were down in the quarter. Management indicated that 4Q17 volumes, to date, have been largely consistent with 2Q17 and 3Q17, and that next quarter's results will be challenged by comparisons to a record post-crisis quarter (4Q16). Consumer and Community Banking earnings were up 15.8% year over year, as average core loan growth of 8.2% combined with higher interest rates to push net interest income up 9%. These positive revenue trends were partially offset by higher new card acquisition costs and declines in mortgage revenue, due to lower servicing revenue, loan spread compression and reduced production margins. Still, JPM continues to gain share in mortgage as its origination volume was down about 0.7% in the quarter compared to market declines of closer to 15%. Segment expenses were up a modest 3%, adjusting for non-recurring benefits in the year ago quarter. Average card loan growth of 6.4% drove the expansion in core loans, although mortgage banking loans and auto loans were also up in the quarter. Auto loans expanded 1.7% year over year, despite the 5.4% decline in loan and lease origination volume. Average auto operating lease assets were up a significant 37% in 3Q17, and Fitch believes this portfolio is more exposed to declines in used vehicle values. That said, used auto prices appear to have stabilized more recently and net charge-offs on the auto portfolio were down 8 basis points (bps) year over year (to 41 bps), adjusting for a $50 million required charge related to the treatment of consumer bankruptcies. Auto delinquencies of 30-days were also down 15 bps from 3Q16. Card losses were up 36 bps in the quarter, but performance remains in-line with Fitch's expectations given continued seasoning of portfolio growth and normalization trends. JPM built $300 million of card reserves in the quarter. The commercial banking segment reported record revenue in 3Q17 and an ROE of 17%, supported by strong loan growth and higher deposit spreads. Average loan balances were up 10.3% from 3Q16, given strong growth across loan categories. The credit environment remains benign, with net charge-offs of 4 bps in the quarter and a reserve release related to the commercial real estate book. JPM continues to invest in the business, adding 200 bankers since the start of 2016, which contributed to the 7.2% increase in segment expenses in the quarter. Asset management reported record net income, benefiting from positive market movements and strong banking results, with a 9.8% increase in average loan balances, driven by mortgages. Average segment deposits were down 5.6% in 3Q17, year over year, as clients have increasingly moved cash into investment assets, the majority of which JPM has been able to retain. Flows into long-term products were a positive $21 billion (although negative in equity), while liquidity flows were $5 billion in the quarter. Assets under management were up nearly 10% annually. JPM continued to grow deposits in the quarter, up 5.5% on average, with continued strength in consumer balances. According to recent FDIC survey results, JPM now ranks number one in U.S. deposits. Loans-to-deposits were down modestly from a year ago, to 63.5%, which remains below the peer average. JPM's Basel III Tier 1 Common equity (CET1) ratio was up 30 bps from 3Q16, to 12.5%, given strong earnings and relatively flat risk-weighted assets. The bank's payout ratio was over 100% in the quarter, for the first time post-crisis, and management expects its CET1 ratio to now move lower over time, which has been anticipated by Fitch. The standardized capital ratio is now the bank's binding constraint, as the CET1 ratio under the advanced approach was 30 bps higher in the quarter. The bank's supplementary leverage ratio (SLR) was 6.6% in 3Q17, which was flat with the year ago quarter. JPM paid a dividend of $0.56 per share in the quarter, up $0.06 per share from the prior quarter, equating to a payout of about 31%. The bank repurchased nearly $4.8 billion of equity in the quarter, leaving approximately $14.6 billion of repurchase authority for the next three quarters, based on the results of this year's CCAR process. Contact: Meghan Neenan, CFA Managing Director +1-212-908-9121 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Joo-Yung Lee Managing Director +1-212-908-0560 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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