DBRS Ratings Unchanged After Q3 Earnings of JPMorgan Chase – Senior at A (high), Stable

DBRS has today commented that its ratings for JPMorgan Chase & Co. (JPMorgan or the Company), including its A (high) Issuer & Senior Debt rating are unchanged following the release of the Company’s Q3 2009 results. The trend on all ratings is Stable. JPMorgan reported strong earnings of $3.6 billion in the quarter as continued strength in the Investment Bank (IB), and another meaningful contribution from the Company’s $350 billion corporate treasury portfolio allowed JPMorgan to absorb still elevated consumer credit costs and add $1.5 billion to its overall loan loss reserves.

DBRS sees JPMorgan’s Q3 2009 results as reflecting the impressive earnings power of the franchise, as well as the diversity of its businesses. Third quarter net revenues were a record $26.6 billion and income before provisions and taxes (IBPT) was $13.2 billion up 9% from the prior quarter and more than 2.5x IBPT generated in the challenging Q3 2008. Business performance was again mixed. Some businesses, notably the IB, continued to benefit from a favorable trading environment. Others struggled with increased pressure on spreads and still elevated credit costs. Results were helped by $900 million of trading income from JPMorgan’s corporate treasury portfolio. Given JPMorgan’s franchise and improved competitive positions, DBRS anticipates that it can sustain its underlying IBPT at a pace that will enable it to cope with challenges posed by a weak economy, revenue headwinds and elevated credit costs.

Solid Q3 2009 results across the IB businesses demonstrated the strength of JPMorgan’s IB franchise and underscore the Company’s ability to sustain its IBPT in DBRS’s view. Overall, IB net revenues increased 3% from Q2 2009 to $7.5 billion. Net income was up a more impressive 31% to $1.9 billion thanks to a $492 million decline in provisions which resulted, in part, from a $348 million reduction in the allowance for credit losses. In the consumer businesses, earnings remained weak as modest revenue increases were offset by elevated credit costs. Retail Financial Services earned $7 million in the quarter (down $8 million from Q2 2009) on revenues of $8.2 billion. Segment provisions were just under $4 billion. On a managed basis, Card Services lost $700 million in the third quarter as compared to a $672 million loss last quarter. This segment is expected to continue to be a drag on JPMorgan’s earnings until 2011.

Providing an important stable component of earnings, JPMorgan’s smaller, less consumer credit-sensitive operating segments continued to perform reasonably well in the quarter. Asset Management saw net asset inflows of $34 billion in the quarter and the Company reported Assets under Management of $1.3 trillion at September 30, 2009 up 8% from June 30, 2009. The segment earned $430 million in Q3 2009, a 22% increase from Q2 2009. TSS revenues were pressured by lower spreads on deposit and liability products and net income declined 20% from Q2 2009 to $302 million. Commercial Banking reported revenue and IBPT levels similar to Q2 2009 though elevated credit costs resulted in a 7% decline in net income to $341 million.

Strength in revenues and IBPT allowed JPMorgan to again cope with the rising credit costs it faces across its businesses. Managed net charge-offs of $8.1 billion were 5% higher than the second quarter and total NPAs were up 16% to $20.4 billion, a slower rate of growth than seen in the prior quarter. Positively, from DBRS’s perspective, credit losses remain within management’s prior guidance indicating a level of preparedness for the continued deterioration. The Company again reported some stability in early stage delinquencies across mortgage and card portfolios, and the degree of reserve build declined. The Company’s $9.8 billion provision (on a managed basis) added about $1.6 billion to credit reserves in the quarter, slightly below Q2 2009’s $1.8 billion reserve build. At September 30, 2009 the allowance for loan losses was $30.6 billion. DBRS notes that $1.1 billion of the firm-wide reserve build in Q3 2009 related to estimated deterioration in the purchased credit-impaired Washington Mutual loans. Excluding these loans, JPMorgan’s allowance for loan losses represented 5.3% of total loans on a managed basis.

Adding to the Company’s loss absorption capacity, the estimated Tier 1 Common Capital to Risk weighted assets ratio increased to 8.2% as of the end of Q3 2009, up about 50 bps from the end of the second quarter. The estimated Tier 1 ratio was also up about 50 bps to 10.2% at quarter end.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.