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Fitch: JPM Investment Bank Performance Supports Solid Quarter
April 13, 2017 / 4:23 PM / 8 months ago

Fitch: JPM Investment Bank Performance Supports Solid Quarter

(The following statement was released by the rating agency) NEW YORK, April 13 (Fitch) JPMorgan Chase & Co.'s (JPM) first quarter 2017 (1Q17) results benefited from strong investment banking results, rising interest rates, core loan growth, and the continuation of a relatively benign credit environment, according to Fitch Ratings. Net earnings of $6.4 billion were up 16.8% year-over- year, which contributed to returns on equity (ROE) and tangible equity of 11% and 13% in the quarter, respectively. Fitch expects this to remain above average for the peer group. While investment banking activity is hard to predict, Fitch believes higher interest rates combined with continued loan growth and expense discipline should provide earnings upside in 2017. Unusual items in the quarter included a $400 million tax benefit related to the vesting of employee equity awards, reflected largely in the corporate and investment bank (CIB), $140 million of legal expenses, included largely in asset management, and a $160 million write-down of the student loan portfolio, which was transferred to held-for-sale, in the consumer and community banking (CCB) segment. CIB produced record first quarter net income and investment banking fees, which were up 63.8% and 34.1% from a year ago, respectively, given stronger activity compared to a relatively weak 1Q16. Debt and equity underwriting volumes were both solid in the quarter given the continuation of low absolute interest rates and a strong IPO market. Markets revenues were better than expected, up 12.5% from 1Q16, as March activity picked up relative to the first two months of the quarter. Fixed income markets revenue was up 17.5% and was led by securitized products and strong rates activity. JPM maintained its leading market share in a variety of product categories in the quarter, and it continued to gain share. CIB's overhead expense ratio increased to 54% in the quarter driven largely by growth in performance-based compensation. JPM also increased CIB's capital allocation by $6 billion from the prior quarter, to $70 billion, given growth in the business and continued advancements in modeling capital allocations at a more granular level. Despite these factors, the segment's ROE remained strong at 18%. Revenue and earnings in CCB continued to decline, despite loan growth and higher interest rates, given declines in mortgage revenue, and an increase in credit provisions, auto lease depreciation, and card acquisition costs. Average core loan growth was 11% for the segment, with the auto book up 6.6% year over year despite increased caution in the market given weaker used vehicle values. Still, JPM's auto portfolio performance remains sound, with 30-day delinquencies down 1 basis point (bp) from a year ago and net charge-offs amounting to 0.5%, up 6 bps from 1Q16. Card losses ticked-up more meaningfully (32 bps), but performance remains in-line with Fitch's expectations given continued seasoning of portfolio growth and normalization trends. Mortgage revenue was down 18% from a year ago, despite modest growth in the mortgage book, given a 7% decline in the servicing book and lower mortgage servicing rights (MSR) risk management results. Mortgage originations were flat with a year ago, but down 23% from the prior quarter. The commercial banking segment reported record revenue and net income in 1Q17, supported by loan growth, higher deposit spreads, higher investment banking revenue (up 33.7% from 1Q16), and reserve releases related to the oil & gas portfolio. Average loan balances were up 11.8% year over year. Commercial and industrial loan growth slowed in the quarter, and balances were relatively flat on a sequential quarter basis. Similarly, growth in commercial real estate slowed, but remained ahead of the industry. While Fitch remains focused on the credit quality of these portfolios, given the intense competition in recent years, performance remains strong, with 2 bps of net recoveries in the segment for the quarter. Asset management revenues were up from a year ago on record loan balances, record deposit balances, and record assets under management. However, net income was down in the quarter due to higher segment legal expenses. Flows into long-term products were positive in the quarter, but negative in equity. Assets under management were up nearly 10% annually, with higher markets and overall net inflows. From a liquidity perspective, JPM's high-quality liquid assets (HQLA) remained strong, at $524 billion. Loans-to-deposits were down modestly from a year ago, to 63%, given strong deposit growth (11% in CCB segment), and remains below the peer average. JPM's Basel III Tier 1 Common equity (CET1) ratio was up 20 basis points in the quarter, sequentially, to 12.4%, given strong earnings and flat risk-weighted assets. The bank's capital ratio was also 12.4% under the fully phased-in standardized approach and JPM believes the standardized ratio will eventually be the bank's binding constraint. The supplementary leverage ratio (SLR) was 6.6% and 6.7% at the firm and bank level, respectively. JPM paid a dividend of $0.50 per share in the quarter, up $0.02 per share from the prior quarter, equating to a payout of about 30%. The bank repurchased $2.8 billion of equity in the quarter, leaving approximately $3.3 billion of repurchase authority for the next quarter, based on the results of last year's CCAR process. Including share repurchases, the total payout in the quarter was about 71%. 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