DBRS Confirms JPMorgan Chase & Co. at AA (low), Trend Remains Stable

DBRS, Inc. (DBRS) confirmed the ratings of JPMorgan Chase & Co. (JPM, JPMorgan or the Company), including the Company’s Long-Term Issuer Rating of AA (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, JPMorgan Chase Bank, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The ratings confirmation reflects JPM’s powerful franchise, strong and consistent earnings, and robust balance sheet fundamentals. DBRS sees the Company as continuing to enhance its franchise by focusing on organic growth and consolidating its strong positioning across its diverse business lines. Furthermore, given JPM’s substantial earnings power, DBRS sees JPMorgan as having the resources to continually invest in technology, systems and process enhancements.

While JPMorgan’s size and scale provide many benefits, particularly with its ability to spread costs across a broader platform, managing risk across such a large, complex organization is a critical challenge. DBRS recognizes that the Company has materially reduced its risk profile and addressed the complexity in its businesses, partially resulting from enhanced regulatory scrutiny.

The ratings consider the benefits to JPM from its willingness to take on more risk where opportunities offer commensurately high rewards, while remaining relatively conservative about taking risk in illiquid positions or taking risk where returns are more moderate. The ratings also incorporate the risks associated with JPM’s wide-ranging capital markets activities, where the Company has consolidated its leading global positioning.

RATING DRIVERS
DBRS views JPM as well-placed in its current rating category and sees positive rating action as limited since the Company generally runs with a higher level of risk than similarly-rated peers. Over the longer-term, if JPM demonstrates continued success in managing risks across a large and complex organization, DBRS sees the potential for positive rating pressure.

Negative ratings pressure could arise if JPM’s financial profile weakens or if its risk appetite increases materially. If investor/client confidence is adversely impacted by a JPMorgan-specific scenario, particularly a large event, the ratings would likely come under pressure.

RATING RATIONALE
JPMorgan’s powerful franchise encompasses strong, diverse businesses that contribute to strong and consistent earnings. The U.S. banking franchise combines a strong branch banking franchise, with a virtually nationwide reach, a leading credit card business along with other scaled nationwide lending businesses, including residential mortgage and auto lending. Furthermore, the Company also has a strong commercial banking business. Supporting its global reach, JPM operates a significant investment banking and capital markets franchise, where it maintains leading market shares, and a sizable asset and wealth management franchise with $2.1 trillion in assets under management (AUM). DBRS also sees the Company as having success in cross-selling products across the franchise, allowing JPM to achieve deeper client relationships. Collectively, DBRS views JPMorgan as having the top banking franchise globally.

The Company’s results highlight the resiliency and impressive revenue generating capability of JPMorgan’s diverse franchise. This franchise and its strong earnings capacity are critical underpinnings of the Company’s ratings. Earnings are also benefitting from lower provisioning and the lower tax rate. Net income of $25 billion in 9M18 is up a substantial 26% YoY, reflecting improved pre-tax earnings (+15% YoY) and the lower tax rate. Moreover, net income has steadily increased since 2013. Overall, the Company’s returns have outperformed the peer group, and DBRS expect that this will continue going forward. Most recently, JPM reported an ROACE of 14% and ROAA of 1.3% in 9M18.

JPMorgan is the largest U.S. bank by deposits (domestic and foreign) with $1.5 trillion in total deposits. This large deposit base, including $677 billion deposits sourced through the CCB segment, anchors the Company’s sound funding profile. The Company’s organic deposit growth has been solid and core deposits readily fund the Company’s entire loan portfolio. Meanwhile, JPMorgan’s reliance on wholesale funds, which comprised 33% of total funding at 3Q18, reflects primarily its capital markets businesses. DBRS expects that wholesale funding reliance has the potential to increase, particularly with rising rates and increasing competition for deposits, but DBRS views JPMorgan’s wholesale funding as appropriately diversified by instrument, maturity and investor type and views the Company as having ready access to capital markets globally. Overall, the Company reported an LCR of 115% as of 3Q18.

JPMorgan has strong capitalization that provides a substantial cushion to absorb unexpected losses. Moreover, the composition of capital is strong, as the vast majority of capital is comprised of common equity. As of 3Q18, JPM reported a fully-loaded CET1 ratio of 12.9% (advanced) and 12.0% (standardized), as well as a supplementary leverage ratio of 6.5%. The Company also reported a strong tangible common equity/tangible assets ratio of 7.1% at the end of 3Q18.

The Grid Summary Scores for JPM are as follows: Franchise Strength – Very Strong; Earnings Power – Very Strong/Strong; Risk Profile – Strong; Funding & Liquidity – Very Strong/Strong; Capitalisation – Very Strong/Strong.

Notes:

All figures are in USD unless otherwise noted.

The applicable methodology are the Global Methodology for Rating Banks and Banking Organisations (July 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Lisa Kwasnowski, Senior Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: June 22, 2001
Most Recent Rating Update: December 20, 2017

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

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