September 28, 2017 / 9:20 PM / a year ago

Fitch Affirms JPMorgan Chase & Co. at 'A+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, September 28 (Fitch) Fitch Ratings has affirmed JPMorgan Chase & Co.'s (JPM) long-term Issuer Default Rating (IDR) at 'A+' and short-term IDR at 'F1'. Fitch has also affirmed JPM's Viability Rating (VR) at 'a+'. The Rating Outlook is Stable. The rating affirmations have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs). A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRs, VIABILITY RATINGS, SENIOR DEBT JPM's ratings affirmation reflects the strong underlying earnings capacity of the bank, given its dominant domestic franchise and growing international franchise, strong funding flexibility, given its deposit raising capabilities and uninterrupted access to the global capital markets through a variety of economic cycles, strong liquidity profile, solid capital ratios, and experienced management team, which has deep bench strength. JPM is on pace for another solid year of earnings performance on a core basis in 2017. Fitch estimates that adjusted pretax earnings were up about 11.7% year over year, adjusting for legal expenses, as growth in net-interest income and corporate & investment bank (CIB) revenue and declines in provision expenses more than offset an up-tick in non-interest expenses. Adjusted expenses were up about 4.6% year over year, but JPM is on pace to meet its annual target of $58 billion or less. Returns on tangible common equity were 14% through the first six months of 2017, which compares favorably to the global peer group. JPM's overall credit quality remains solid, with consumer and wholesale net charge-offs of 0.95% (excluding losses related to the transfer of the student loan portfolio to held-for-sale) and 0.02% for the half of 2017, respectively, compared with 0.87% and 0.12% for the comparable period in 2016. Consumer normalization trends have taken hold, with card losses increasing 32 basis points (bps) year over year, to 2.98% in the first half of 2017 (1H17), but management's medium target remains around 3.25%. Net charge-offs were $2.4 billion in the 1H17 (adjusted for the student loan sale), which is on-pace with management's full year-target of $5 billion. Fitch believes JPM's credit quality compares favorably to the peer group. JPM's Basel III tier 1 common equity (CET1) ratio reached 12.7% at June 30, 2017, which was well-above management's long-term minimum target of 11%. The ratio has grown significantly in recent years, with an increase in retained earnings and the issuance of perpetual preferred securities, and the gap with peers has narrowed meaningfully. In the second quarter of 2017 (2Q17), the CET1 ratio under the standardized approach was 12.5%, and JPM expects the standardized approach to be its binding constraint over the near term and is capitalizing operating segments accordingly. Additionally, JPM's Fitch Core Capital ratio was 11.8% at June 30, 2017, up from 10.9% at year-end 2015. Fitch believes JPM is well positioned to maintain compliance with Basel III capital requirements. In June 2017, JPM was informed that the Federal Reserve Board did not object to its 2017-2018 capital plan. Results from the 2017 Comprehensive Capital Analysis and Review (CCAR) showed a minimum CET1 ratio of 6.8% for the firm under the regulator's severely adverse scenario, which was above the 4.5% minimum requirement. Given CCAR results, JPM's board authorized a $19.4 billion common equity repurchase program and increased the dividend 12% to $0.56 per share. The new dividend equates to 30.7% of 2Q17 diluted earnings per share and the total payout would be about 76% of annualized 2Q17, assuming the full deployment of repurchase authority over the next four quarters. While the repurchase authority has increased meaningfully, Fitch believes the firm's capital plans are prudent given the earnings capacity of the bank. JPM submitted its updated resolution plan in October 2016, which included the creation of an intermediate holding company (IHC), JPMorgan Chase Holdings LLC (IHC), meant to improve the resolvability of JPM. Under this structure, JPM's holding company has contributed substantial liquidity and capital to IHC, which it will then hold for the benefit of material entities. IHC is not expected to have third-party debt. It will, instead, channel capital and liquidity among material entities as and when required to supplement pre-positioned resources at these entities. This structure is designed to prevent capital and liquidity provided by IHC from becoming unduly trapped in any legal entities, thus improving the likelihood of an orderly resolution. A committed credit facility from IHC will be in place to supplement dividends from IHC and JPMCB, allowing liquidity to flow to the holding company under business as usual (BAU) terms in order to service holding company obligations. The new structure has resulted in a meaningful increase in double leverage (176% at 1Q17), above 120%, which is a sensitivity outlined in criteria that would typically result in additional notching between JPM and its operating subsidiaries. However, the agency believes specific protections within the legal structure make it appropriate to look through the IHC when calculating double leverage and will provide for uninterrupted liquidity availability from the IHC under BAU. Additionally, Fitch believes that core double leverage, or double leverage assuming the IHC did not exist, will remain below 120%. The absence of additional notching between JPM and its subsidiaries is a noted variation from criteria. From a liquidity perspective, JPM's high-quality liquid assets (HQLA) remained strong, at $577 billion in the quarter, which was up $61 billion from 2Q16. Loans-to-deposits were 63.1% at quarter-end, which is down from a year ago despite strong loan growth, and remains below the peer average. Broadly, Fitch views management and governance as sound, with a deep bench of strength across its business units. On June 8, 2017, JPM announced that Chief Operating Officer, Matthew Zames, would be leaving the bank. While his departure removes a potential successor to CEO Jamie Dimon, his responsibilities are expected to be absorbed by other senior members of the management team. Additionally, Zames' departure likely signals Dimon's intention to retain his role, at least for the intermediate term, which Fitch views favorably. The Stable Outlook reflects expectations for continued operating consistency, superior funding flexibility, strong liquidity, and the maintenance of sufficient cushion on regulatory capital requirements. JPM has been relatively successful adapting its business model to the evolving regulatory landscape and is expected to continue to make adjustments in order to optimize its capital structure. The VRs remain equalized between JPM and its material operating subsidiaries. The common VR of JPM and its operating companies reflects the correlated performance, or failure rate between JPM and these subsidiaries. Fitch takes a group view on the credit profile from a failure perspective, while the IDR reflects each entity's non-performance (default) risk on senior debt. Fitch believes that the likelihood of failure is roughly equivalent, while the default risk at the operating company would be lower given TLAC. All U.S. bank subsidiaries carry a common VR, regardless of size, as U.S. banks are cross-guaranteed under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). DERIVATIVE COUNTERPARTY RATINGS DCRs have been affirmed for JPM, JPMorgan Chase Bank N.A. and Bear Stearns Companies, LLC because they either have significant derivatives activity or are counterparties to Fitch-rated structured finance transactions. The DCRs are at the same level as the respective companies' Long-Term IDRs because they have no definitive preferential status over other senior obligations in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR The SR and SRF reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that JPM becomes non-viable. In Fitch's view, implementation of the Dodd Frank Orderly Liquidation Authority legislation is now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors participating in losses, if necessary, instead of or ahead of the company receiving sovereign support. Any upward revision of the SR and SRF would be contingent on a positive change in the U.S.'s propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by JPM and its subsidiaries are all notched down from the common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated debt issued by the operating companies is rated at the same level as subordinated debt issued by JPM reflecting the potential for subordinated creditors in the operating companies to be exposed to loss ahead of senior creditors in JPM. Subordinated lower Tier 2 debt is rated one notch below the VR for loss severity, reflecting below average recoveries. Legacy Tier 1 securities are generally rated four notches below the VR, made up of two notches for high loss severity relative to average recoveries, and two further notches for non-performance risk, reflecting the fact that coupon omission is not fully discretionary. High and low trigger contingent capital Tier 1 instruments are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries as the instruments can be converted to equity or written down well ahead of resolution. In addition, they are also notched down three times for very high non-performance risk, reflecting fully discretionary coupon omission. DEPOSIT RATINGS The uninsured deposit ratings of JPMorgan Chase Bank N.A.'s and Chase Bank USA, N.A.'s are rated one notch higher than the banks' IDRs and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. SUBSIDIARY AND AFFILIATED COMPANY The Long-Term IDRs for the material U.S. operating entities are one notch above JPM's to reflect Fitch's belief that the U.S. single point of entry (SPE) resolution regime, the likely implementation of total loss absorbing capital (TLAC) requirements for U.S. G-SIBs, and the presence of substantial holding company debt reduces the default risk of domestic operating subsidiaries' senior liabilities relative to holding company senior debt. In our view these buffers would provide substantial protection to senior unsecured obligations in the domestic operating entities in the event of group resolution, as they could be used to absorb losses and recapitalize operating companies. Therefore, substantial holding company debt reduces the likelihood of default on operating company senior obligations. The 'F1+' Short-Term IDRs of JPM's bank subsidiaries reflects substantial liquidity at the banks and typically higher core deposit funding, liquidity resources at JPM that could be extended to the bank, and access to contingent liquidity sources such as Federal Home Loan Bank advances. JPM's and its non-bank operating companies' Short-Term IDRs at 'F1' reflect Fitch's view that there is less surplus liquidity at these entities than at the bank, particularly given their greater reliance on the holding company for liquidity. RATING SENSITIVITIES IDRs, VIABILITY RATINGS, & SENIOR DEBT Upward rating momentum for JPM could develop over-time should JPM continue to outperform the peer group from an earnings and asset quality perspective, retain its enhanced risk management discipline, avoid sizeable fines and penalties which could yield reputational damage, and maintain its leading position in the league tables, an appropriate capital buffer to regulatory capital minimums, and a superior funding and liquidity profile. Negative rating actions could result from reputational damage or legal sanctions that impact the firm's market position and/or material asset quality weakening which pressures JPM's earnings and its ability to build capital, deterioration in liquidity levels, material and unexpected litigation losses, and/or failure to address noted deficiencies in the firm's resolution plan which results in increased capital requirements and places the firm at a competitive disadvantage. Further, significant risk management or operational failures that result in material losses to the firm could also result in a negative rating action. DERIVATIVE COUNTERPARTY RATING DCRs are primarily sensitive to changes in the respective issuers' Long-Term IDRs. In addition, they could be upgraded to one notch above the IDR if a change in legislation (for example as recently proposed in the EU) creates legal preference for derivatives over certain other senior obligations and, in Fitch's view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR Since JPM's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the forseeable future. Any upward revision of the SR and SRF would be contingent on a positive change in the U.S.'s propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for JPM and its subsidiaries' subordinated debt and other hybrid capital ratings are primarily sensitive to a change in JPM's VRs. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example. LONG- AND SHORT-TERM DEPOSIT RATINGS The long-and short-term deposit ratings are sensitive to any change in JPM's long-and short-term IDR. SUBSIDIARY AND AFFILIATED COMPANIES Given that JPM's and the bank's VRs remain equalized, the bank's ratings are broadly sensitive to the same considerations that might affect JPM's VR. Fitch has affirmed the following ratings: JPMorgan Chase & Co --Long-Term IDR at 'A+'; --Long-Term senior unsecured debt at 'A+'; --Long-Term subordinated debt at 'A'; --Derivative Counterparty Rating at 'A+(dcr)'; --Preferred stock at 'BBB-'; --Short-Term IDR at 'F1'; --Short-term debt at 'F1'; --Viability at 'a+'; --Market linked securities at 'A+(emr)'; --Support at '5'; --Support Floor at 'NF'. JPMorgan Chase Bank N.A. --Long-Term deposits at 'AA'; --Long-Term IDR at 'AA-'; --Long-Term senior unsecured debt at 'AA-'; --Long-Term subordinated debt at 'A'; --Derivative Counterparty Rating at 'AA-(dcr)'; --Short-Term IDR at 'F1+'; --Short-Term debt at 'F1+'; --Short-Term deposits at 'F1+'; --Viability at 'a+'; --Market linked notes at 'AA-(emr)'; --Support at '5'; --Support Floor at 'NF'. Chase Bank USA, N.A. --Long-Term deposits at 'AA'; --Long-Term IDR at 'AA-'; --Long-Term senior unsecured debt at 'AA-'; --Long-Term subordinated debt at 'A'; --Short-Term IDR at 'F1+'; --Short-Term debt at 'F1+'; --Short-Term deposits at 'F1+'; --Viability affirmed at 'a+'; --Support at '5'; --Support Floor at 'NF'. JPMorgan Bank & Trust Company, National Association --Long-Term deposits at 'AA'; --Long-Term IDR at 'AA-'; --Short-Term IDR at 'F1+'; --Short-Term deposits at 'F1+'; --Viability affirmed at 'a+'; --Support at '5'; --Support Floor at 'NF'. JPMorgan Chase Bank, Dearborn --Long-Term deposits at 'AA'; --Long-Term IDR at 'AA-'; --Short-Term IDR at 'F1+'; --Short-Term deposits at 'F1+'; --Viability affirmed at 'a+'; --Support at '5'; --Support Floor at 'NF'. Bear Stearns Companies LLC --Long-Term IDR at 'A+'; --Long-Term senior unsecured debt at 'A+'; --Derivative Counterparty Rating at 'A+(dcr)'; --Short-Term IDR at 'F1'. J.P. Morgan Securities LLC --Long-Term IDR at 'AA-'; --Short-Term IDR at 'F1+'; --Short-Term debt at 'F1+'. J.P. Morgan Securities plc --Long-term IDR at 'AA-'; and --Short-term IDR at 'F1+'. J.P. Morgan AG --Long-term IDR 'AA-'; --Short-term IDR 'F1+'; --Short-term deposit rating 'F1+'; and --Support Rating '1'. Bank One Capital Trust III Chase Capital II Chase Capital III Chase Capital VI First Chicago NBD Capital I JPMorgan Chase Capital XIII, XXI, and XXIII --Preferred stock at 'BBB'. Bank One Corp --Long-Term subordinated debt at 'A'. JP Morgan & Co., Inc. --Long-Term senior debt at 'A+'; --Long-Term subordinated debt at 'A'. Morgan Guaranty Trust Co. of New York --Long-Term senior unsecured debt at 'AA-'. NBD Bank, N.A. (MI) --Long-Term subordinated at 'A'. Collateralized Commercial Paper Co., LLC --Short-Term debt at 'F1+'. Collateralized Commercial Paper II Co., LLC --Short-Term debt at 'F1+'. The Rating Outlooks are Stable. 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