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Fitch: JPMorgan's 2Q17 Earnings Supported by Loan Growth and Higher Interest Rates
July 14, 2017 / 6:01 PM / 5 months ago

Fitch: JPMorgan's 2Q17 Earnings Supported by Loan Growth and Higher Interest Rates

(The following statement was released by the rating agency) NEW YORK, July 14 (Fitch) JPMorgan Chase & Co.'s (JPM) second quarter 2017 (2Q17) results benefited from good core loan growth, higher short-term interest rates and the continuation of benign credit costs partially offset by new credit card account origination costs, lower mortgage banking net revenue and lower markets revenue in the corporate and investment bank (CIB) segment according to Fitch Ratings. Net income of $7 billion was up 13% year over year (YoY), which contributed to the firm's 12% return on common equity in 2Q17, up from 10% in the year-ago quarter. Similarly, return on tangible equity was 14% in 2Q17, up from 13% in 2Q16. These performance metrics are expected to remain above those of the peer group over the balance of the year as benefits from loan growth and higher interest rates, combined with continued expense discipline, provide continued earnings momentum. This quarter's results included a $406 million legal benefit related to settlements with the Federal Deposit Insurance Corporation and Deutsche Bank in relation to the receivership of Washington Mutual. The legal benefit was recognized as non-interest revenue for the firm. Excluding this benefit Fitch calculates that JPM's return on average equity would have been 10.3%. Net income in the firm's Consumer and Community Banking (CCB) segment was $2.2 billin, down 16% from the prior year due to lower mortgage banking net revenue. The decline in this revenue was due to higher rates that led to increased funding costs, lower production margins due to higher volumes in the correspondent channel, and lower mortgage servicing rights (MSR)-related hedging revenues. Offsetting this was 13% annual net revenue growth in consumer and business banking, reflecting continued strong deposit growth and increased margins amid higher interest rates. Card, Consumer Solutions and Auto was down 3% YoY, but this comparison was impacted by $200 million of non-core items in last year's 2Q. Excluding this, net revenue would have been up 2%, driven by higher net interest income and higher auto lease volumes, which were up 8.2% compared to the year-ago period. CCB's non-interest expenses were up 8% relative to the prior year due to business growth and investments in marketing. CCB's provisions for losses were $1.4 billion, up $193 million YoY primarily due to a build in credit card reserves. Results in CIB were mixed, with overall net revenue down 3% from the prior year. Strong performance from Investment Banking across multiple products combined with 35% growth in lending-related revenue was offset by weaker performance in the trading businesses. Markets and Investor Services net revenue was collectively down 11% from the prior year with lower revenue in Rates, Credit, and Commodities amid sustained low volatility and tighter credit spreads. Fitch expects Markets revenue to remain variable given its high correlation to market conditions. Securities services net revenue was up 8% primarily due to higher interest rates. Given the mixed revenue performance in CIB, non-interest expenses declined 5% versus the prior year due to lower compensation expenses. Credit costs in CIB improved by $53 million in 2Q17 from 2Q16 primarily due to better performance of energy related credits. Net income in JPM's Commercial Bank segment was strong, growing 30% YoY due to higher net interest income amid strong loan growth and higher deposit spreads. In addition, the segment benefited from a significant $130 million reserve release related to energy exposure. JPM's Asset and Wealth Management segment performed well, with net income up 20% YoY. Assets under management (AUM) was up 11% relative to the prior year to a record $1.9 trillion, dthe result of higher market values and positive net flows into liquidity products. JPM's liquidity position continues to be strong. Total deposits grew 8% YoY to $1.4 trillion primarily due to growth in interest-bearing accounts. Additionally, the loan-to-deposit ratio remained strong and below peer averages at 63%. JPM's Basel III Tier 1 Common Equity ratio was up to 12.5% under the standardized approach, which management believes will be the bank's binding constraint capital ratio. The Enhanced Supplementary Leverage Ratio (ESLR) was 6.7% at the parent, well above regulatory requirements. JPM paid a dividend of $0.50 per share in the quarter equating to a dividend payout of about 27%. The bank repurchased $3 billion of common equity in the quarter. Including share repurchases, total payout in the quarter was about 72%. On June 22, 2017, the Federal Reserve released the results of the Dodd-Frank Act Stress Tests (DFAST) results which JPM passed. Fitch estimates that JPM was affected adversely by the global market shock and counterparty default scenarios relative to other DFAST institutions. The binding capital ratio for JPM under DFAST was the ESLR. On June 28, 2017, JPM received a non-objection to its annual capital plan under the Federal Reserve's Comprehensive Capital Analysis and Review, which authorizes the firm to repurchase up to $19.4 billion of common equity between July 1, 2017 and June 30, 2018. 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