DBRS Ratings Unchanged After Q4 Earnings of JPMorgan Chase – Senior at A (high)

DBRS is today commenting 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 Q4 and full-year 2009 results. The trend on all ratings is Stable. JPMorgan reported solid earnings of $3.3 billion in the fourth quarter, down 9% from Q3 2009, reflecting weaker revenues across most segments. Consumer credit costs remained elevated and the Company added another $1.9 billion to consumer loan loss reserves in the fourth quarter as the benefits of the nascent economic recovery have yet to be felt by households. Importantly, and while not necessarily reflected in revenues, DBRS notes that indications of franchise strength across most businesses were evident in the fourth quarter.

Consistent with recent quarters, the Investment Bank (IB) generated more than half of overall quarterly income, earning $1.9 billion in Q4 2009, down 1% from the strong third quarter. With revenues down 34% from Q3, a $2.2 billion linked-quarter decline in compensation expense drove fourth quarter IB results. The revenue decline in the quarter reflected tighter spreads across fixed income markets, lower overall volumes (especially in December) and a generally weaker fixed income trading performance. Credit portfolio performance also weighed on results due to negative credit valuation adjustments and hedging losses on retained loans, though DBRS expects some of these marks will reverse over time.

Consumer-related segments, Retail Financial Services (RFS) and Card Services, combined to lose $705 million in the fourth quarter as Card and the Consumer Lending subsegment of RFS continue to cope with elevated credit costs. The Retail Banking subsegment of RFS, however, earned $1 billion in Q4, similar to the third quarter. Commercial Banking results were impacted by higher credit costs and Q4 2009 net income declined 34% from Q3 to $224 million. Less credit sensitive segments, Treasury & Securities Services (TSS) and Asset Management, made similar revenue contributions as last quarter, though higher expenses (including credit provisions) drove a 22% decline in TSS income in the fourth quarter. Gains from the reduction of the abnormally high $340 billion corporate treasury portfolio again made a meaningful contribution to income, helping the Corporate/Private Equity Segment earn $1.2 billion in Q4.

As noted, however, despite the generally weaker revenue performance, indicators of franchise strength were evident across businesses. In the IB, investment banking fees were up nicely in the fourth quarter and the Company maintained or improved market share in most underwriting and advisory categories in 2009. In commercial banking, the Company is generating more revenues from investment banking products and has seen some pick-up in activity, notably among small businesses. DBRS sees this pick-up as reflecting the early stage of the economic recovery and actions taken by the Government, as well as improving market shares for the Company. In Asset Management, continued net asset inflows in fixed income and equities and good investment performance highlight the strength of the franchise. At year-end, JPMorgan reported $1.2 trillion of assets under management. There were also positive indicators in the more stressed consumer businesses, despite the persistence of elevated credit costs. Consumer spending on cards was up in the quarter and JPMorgan continues to increase retail relationships, evidenced by growth in net card accounts and checking accounts. DBRS also notes that JPMorgan’s ability and willingness to invest in its franchises, whether it be in additional headcount, marketing, or in its branch network, is a key differentiator that portends well for the future.

As expected, the cost of credit remained elevated in the quarter, driven primarily by consumer rather than wholesale exposures. The Company-wide provision for credit losses of $7.3 billion in Q4 added about $1 billion to the allowance for loan losses. Wholesale credit improved modestly from the linked quarter due to some loan sales and repayments resulting from restructurings. The allowance for wholesale losses declined to $7.1 billion at year end, but remained a solid 3.57% of retained wholesale loans. Nonperforming wholesale loans declined 10% in the quarter to $6.9 billion due in part to loan sales. Real-estate related wholesale exposures continue to display weakness.

With the wholesale allowance declining, JPMorgan’s provision added $1.9 billion to its allowance for consumer loan losses in the fourth quarter and at year end the allowance for consumer loan losses was $24.5 billion, or 6.63% of retained consumer loans excluding purchased impaired loans. Positively, from DBRS’s perspective, credit losses and the slowing pace of deterioration remain within management’s prior guidance, indicating a level of preparedness for the continued deterioration. After increasing 15% in Q3, nonperforming consumer loans increased 5% in the fourth quarter to $10.7 billion. Despite signs of moderate improvement, DBRS believes that lower credit costs will materialize only when households begin to more extensively benefit from the economic recovery in the form of a quickening pace of new job creation. Improved housing markets would also help as the Company reported higher loss severities in home lending. DBRS anticipates that this year’s home buying season will be important on this front.

Capital remains a strength, in DBRS’s view. At year end, the Company reported an estimated Tier 1 Common ratio of 8.8% and an estimated Tier 1 ratio of 11.1%, both higher than at the end of Q3. The Company estimates that implementation of FAS 166 and 167 will reduce regulatory ratios by an estimated 40 bps, but JPMorgan will remain well-positioned with a comfortable capital cushion and ample loss absorption capacity. Management expressed a desire to maintain a sizable cushion in light of uncertainty surrounding future capital rules and other regulatory requirements. DBRS views this as prudent and perceives that JPMorgan will be well-positioned to cope with potential taxes and fees currently being discussed by regulators and legislators.

DBRS also commented that financial markets remain somewhat fragile as does the economic recovery, which is still not generating adequate growth or creating sufficient jobs to reduce credit problems. As a result, the Company continues to operate in an uncertain environment.

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.