OREANDA-NEWS. JPMorgan Chase & Co. (JPM) produced modest net revenue and earnings growth in the fourth quarter of 2015 (4Q15), year over year, as expected declines in market activity and higher provision expenses were more than offset by overall cost efficiencies and strong core loan growth, according to Fitch Ratings. Market volatility and depressed oil & gas prices continued to plague a variety of segments, but the diversity of JPM's business model and its strong market positioning supported the generation of record revenues and earnings for the year. JPM's return on tangible common equity was 13% in 2015, which Fitch believes is strong for the peer group.

Unusual items in the quarter included $417 million of post-tax legal expense, offset by $318 million of after-tax benefits related to a legal settlement. Non-recurring items (on a pre-tax basis) included an $85 million gain associated with the sale of a branch, a $160 million gain on the initial public offering of Square, a $50 million impairment on leased corporate aircraft, and a $178 million benefit associated with recognizing the unamortized discount on certain debt securities called at par.

For the first time in a long time, no reserve releases were noted, but there were reserve builds of $124 million associated with the oil & gas portfolio and $35 million related to metals & mining. While additional reserve builds in these portfolios are expected in 2016, JPM does not believe they will be significant unless commodity prices flat-line from here for an extended period. However, should that occur, incremental reserves could be upwards of $750 million, which was about 0.38% of Tier I capital at 4Q15.

Corporate and Investment Banking (CIB) had a relatively quiet quarter but generated a respectable return on equity (ROE) of 10%. As expected, revenues were down, almost across the board, as declines in debt underwriting hurt investment banking revenues and weaker currency and emerging markets activity negatively impacted markets revenue. There was a $76 million reserve build in the quarter, which included about $63 million of oil & gas exposure. Still, net charge-offs in the segment, at 0.02%, remain very strong. Operating expenses fell 20.4% from 4Q14 given reductions in legal and compensation expense. Management had committed to $2.8 billion of expense reductions in CIB by the end of 2017 and was about $1.3 billion through that target at year-end 2015 (YE15).

The Consumer and Community Banking (CCB) segment produced a ROE of about 18% in the quarter driven by cost efficiencies and strong core loan growth, offset to some extent by higher provision expenses. JPM is committed to reducing segment expenses by $2 billion by the end of 2017 and the bank was halfway through that target at YE15. Core loans were up 25% year over year, driven by growth in mortgage loans, business banking, and auto.

Mortgage originations were down 2.2% in 4Q15 year over year, but on-balance sheet loans were up 21.6% as JPM continued to retain high quality loans, adding $16 billion of loans in the quarter and about $60 billion for the year. This supported an 11.4% annual increase in net interest income for the segment. Mortgage servicing revenue continued to decline, given a reduction in the servicing book, and management expects non-interest revenue to be down about $700 million in 2016. Credit trends in the real estate portfolio remained strong, with non-PCI losses of 0.13% in the quarter; down 20 basis points (bps) from 4Q14, driven by improvements in home equity and prime mortgage.

The card, commerce solutions and auto segment generated an ROE of 24%, which was a solid quarter, but year over year comparisons were impacted by several non-recurring items. Net interest income was up due to loan growth, while non-interest revenues were relatively flat on an adjusted basis. Operating expenses rose 3.7% year over year given higher auto lease depreciation expense and growth in marketing expenses.

Credit performance was strong, with card net charge-offs up 1 bp sequentially and down 6 bps from 4Q14, to 2.42%. Card delinquencies were down 1 bps year over year. Card charge-offs were 2.51% for the year and JPM expects losses to be relatively flat in 2016. Segment net charge-off dollars were down 9.6% from 4Q14, but provision expense rose about 6.4%, given an absence of reserve releases combined with loan growth. The allowance for loan losses, for the segment, was 2.07% of ending loans in 4Q15, down 9 basis points sequentially. Fitch believes credit metrics in the segment are at-or-near a bottom.

Commercial Banking's (CB) contribution to earnings was up sequentially but down year over year given a reduction in investment banking revenues, higher operating expenses, and an increase in provision expense. Still, investment banking revenue was a record $2.2 billion for the year. The growth in operating expenses was impacted by $50 million of impairment on leased corporate aircraft and higher investment in controls. Provision expense included $60 million of higher reserves for the oil & gas portfolio and $26 million for the metals & mining book. That said; segment credit performance remained strong with net charge-offs of just 4 bps. Average segment loans grew 13.9% year over year, driven by commercial real estate and commercial & industrial portfolios.

Asset management (AM) earnings were down 6.1% in the quarter given lower performance fees on alternative products. Assets under management (AUM) declined 1.2% due largely to outflows in fixed income products, though total flows were positive for the year. Average loans were up 6.7% in 4Q15, year over year, given growth in mortgage and traditional loans, which supported expansion in net interest income.

From a liquidity perspective, JPM's HQLA remained strong, at $496 billion in the quarter and the bank reduced non-operating deposits by about $200 billion for the year; which was double the bank's initial target. Over the same period, total deposits are down by approximately $83.7 billion, as growth in more stable balances helped to offset the decline. Fitch views this shift favorably, given the relative stability of retail deposits and favorable treatment in liquidity ratios.

JPM's Basel III Tier 1 Common equity (CET1) ratio rose 20 bps sequentially, to 11.6%, given earnings retention and a decline in risk-weighted assets. The bank's capital ratio was 10 bps lower under the advanced approach in 4Q15, but JPM believes the standardized ratio will eventually be the binding constraint. The supplementary leverage ratio (SLR) was 6.5% and 6.6% at the firm and bank level, respectively.

In terms of G-SIB requirements, JPM reported a surprise reduction in its Method 2 G-SIB surcharge, and is now in the 3.5% bucket, according to its calculations. This was driven by a reduction in non-operating deposits, a decrease in level 3 assets and a reduction in over-the-counter derivative notional amounts. Additional work is expected in order to ensure the maintenance of the current buffer, but Fitch views the reduction favorably, particularly if it has no meaningful impact on JPM's market position and earnings potential.

JPM paid a dividend of $0.44 per share in the quarter, equating to a payout of 33.3% of reported earnings per share. The bank repurchased $1.2 billion of equity in the quarter, leaving approximately $2.7 billion of repurchase authority, based on the results of last year's CCAR process.