Fitch Affirms JPMorgan Chase & Co. at 'A+'; Outlook Stable
The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUB), which comprises 12 large and globally active banking groups. Fitch's outlook for the GTUBs is stable as we expect the stable outlook for the groups' commercial banking and wealth and asset management businesses in 2016 to mitigate pressure on earnings from capital markets activities, particularly in fixed income trading.
As globally active universal banks, the 12 GTUBs are among the most affected by evolving regulation, which is bringing capital and resource constraints to some businesses. This means that business models are being adjusted. Specific changes and their timing vary by bank. In the medium term, we believe that the GTUBs with the strongest franchises in their core businesses, sound business models and clear strategies are best placed in this environment, and these company profiles are an important rating factor for many of the GTUBs.
KEY RATING DRIVERS
IDRs, VIABILITY RATINGS AND SENIOR DEBT
JPM's ratings affirmation reflects the strong underlying earnings capacity of the bank, given its dominant domestic franchise and growing international franchise, and significant progress made toward achieving compliance with heightened capital and liquidity requirements. The affirmation also reflects the firm's strong funding flexibility, given its deposit raising capabilities and uninterrupted access to the global capital markets through an economic cycle.
JPM's Basel III tier 1 common equity ratio reached 11.4% at Sept. 30, 2015, which was only 60 basis points from management's long-term target of 12.0%. 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. JPM must build to higher regulatory minimums, given its expected G-SIB surcharge, but actions by the bank in 3Q15 may have reduced its G-SIB buffer by 50 bps to 4.0%. In 3Q15, advanced approach and standardized approach capital ratios became aligned and JPM expects the standardized approach to be its binding constraint going forward, and is capitalizing operating segments accordingly. Fitch believes JPM is well positioned to maintain compliance with Basel III capital requirements, even with its higher surcharge, given the superior earnings capacity of the bank.
In early 2015, JPM raised its quarterly dividend $0.04 per share, to $0.44. Its payout through the first nine months of 2015 was approximately 27.4% on a diluted per share basis. In March, the firm received a non-objection from the Federal Reserve to its revised capital plan as a result of the annual CCAR process. JPM has the authority to repurchase $6.4 billion of equity from 2Q15 to 2Q16. The bank repurchased $2.5bn of equity in 2Q15 and 3Q15, leaving approximately $3.9 billion of repurchase authority, based on the results of this year's CCAR process.
JPM reports that it is in compliance with the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), which Fitch views favorably. Through 3Q15 the bank reduced non-operating deposits by more than $150 billion; outpacing its year-end target by over $50 billion. Total deposits are down more than $90 billion since the start of the year, but deposits in the consumer and community banking segment are up $36.6 billion, given an increased focus on more stable funding. Fitch views the deposit shift favorably, given the relative stability of retail deposits and favorable treatment in liquidity ratios. Overall the bank's liquidity profile remains sound, with $505 billion of high quality liquid assets at Sept. 30, 2015.
Earnings performance remains highly resilient, particularly on a relative basis, given the firm's global reach and strong market position in a variety of business lines. Adjusting for legal expenses, pre-tax earnings are down only 1.8% through the first three quarters of 2015, year over year, despite an increase in provision expenses and a decline in the markets business. Credit costs are expected to be a growing headwind heading into 2016, given portfolio growth and normalization in certain asset categories, as are legal costs and continued investment in the control agenda, but market share gains and improved operating efficiencies are expected to serve as an offset.
JPM adjusted its operating expense guidance in 3Q15, reducing full year expectations by $500 million, to $56.5 billion, which Fitch believes is achievable with flat adjusted expenses in the fourth quarter. The bank is targeting $2 billion of expense saves in consumer and community banking and another $2.8 billion of cost reductions in the investment bank over the next several years. Fitch believes these results are achievable and noted progress on these goals was evident through 3Q15.
Legal expenses amounted to $2.3 billion through the first three quarters of the year, up 31.4% year over year. Legal costs are likely to remain elevated in coming quarters, but Fitch expects the incremental impact to earnings will be manageable. Still, the emergence of material and unexpected litigation losses could alter the agency's view, particularly if capital ratios are negatively impacted.
The Stable Outlook reflects expectations for continued operating consistency, superior funding flexibility, strong liquidity, and gradual growth in capital ratios. 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 total loss absorbing capacity (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).
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 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.
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 to 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.
RATING SENSITIVITIES
IDRs, VIABILITY RATINGS AND SENIOR DEBT
Going forward, Fitch believes JPM is going to be challenged to deliver meaningful earnings growth, particularly in light of the current regulatory environment. Higher capital charges and what remains difficult market conditions present a challenge for all GTUBs, which may be encouraged to seek more aggressive ways to generate profits that take advantage of regulatory changes. However, Fitch expects that JPM's strong global franchise, liquidity risk management, and product diversity mitigate some of these concerns.
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 sufficiently address weaknesses noted in regulatory consent orders and internal reviews following material losses in the chief investment officer. Further, significant risk management or operational failures that result in material losses to the firm could also result in a negative rating action.
Fitch considers JPM's ratings to be particularly sensitive to the degree and scope of litigation risk going forward. Fitch recognizes that the large litigation charges taken in recent years reflect JPM's desire to address outstanding legal issues. To the extent JPM enters into any new and material litigation settlements, Fitch will consider whether these effectively diminish ongoing legal risks.
Upward rating momentum for JPM is believed to be limited for the foreseeable future given that its current rating level is among the highest of its peer group and of the global bank universe.
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 COMPANY
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.
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 foreseeable future.
Any upward revision to 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.
Fitch has affirmed the following ratings:
JPMorgan Chase & Co
--Long-Term IDR at 'A+';
--Long-Term senior debt at 'A+';
--Senior shelf at 'A+';
--Long-Term subordinated debt at 'A';
--Preferred stock at 'BBB-';
--Short-Term IDR at 'F1';
--Commercial paper 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 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 at 'a+';
--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 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 debt at 'A+';
--Long-Term subordinated debt at 'A';
--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+'.
JPMorgan Clearing Corp (formerly Bear Stearns Securities Corp)
--Long-Term IDR at 'AA-';
--Short-Term IDR at 'F1+'.
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 debt at 'AA-'.
NBD Bank, N.A. (MI)
--Long-Term subordinated at 'A'.
Washington Mutual Bank
--Long-Term deposits at 'AA'.
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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