DBRS Ratings Unchanged After Q1 Earnings of JPMorgan Chase – Senior at A (high)

DBRS is today commenting that it views the performance of JPMorgan Chase & Co. (JPMorgan or the Company) in Q1 2009 as strong, given the challenging environment. DBRS’s ratings for JPMorgan, including its A (high) Issuer & Senior Debt rating and its R-1 (middle) Short-Term Instruments rating remain unchanged. The trend on all ratings is Stable.

JPMorgan reported net income of $2.1 billion on managed revenues of $26.9 billion and income before provisions and taxes (IBPT) of $13.5 billion. A record quarterly result from the Investment Bank (IB) with net income of $1.6 billion drove first quarter results. Strong performances in rates, emerging markets and credit trading led to $4.9 billion in quarterly fixed income market revenues. Other areas within IB also reflected strong quarterly performance as equity market revenues were a record $1.8 billion in the quarter and investment banking fees were $1.4 billion, helped by a 28% (unannualized) linked quarter increase in debt underwriting. In DBRS’s view, the IB performance reflected a more favorable trading environment, especially in fixed income, as well as the strength of the Company’s franchise.

The Company continued to work down legacy assets in Q1 2009. Writedowns on legacy leveraged lending commitments were $711 million in the quarter, leaving remaining commitments of $11.5 billion which are being carried at roughly 48% of face value. Net mortgage-related writedowns were $211 in Q1 2009, predominantly related to commercial mortgages. JPMorgan’s remaining mortgage exposure (including both trading portfolios and legacy assets) was $12.7 billion at March 31 and consisted of $6.5 billion of commercial mortgages and $6.2 billion of residential mortgages. Offsetting the negative marks to some extent, IB results included a $638 million benefit from the Company’s own spread widening in the quarter.

The strong IBPT performance, up 73% from Q4 2008, and the earnings coming from the IB, allowed JPMorgan to generate solid profits even with a provision for credit losses on a managed basis of $10.1 billion (up 18% from Q4 2008), which included a reserve build of $4.2 billion. Consumer-related segments displayed mostly positive trends in revenues and IBPT, nevertheless segment earnings were down versus Q4 2008 due to credit deterioration and continued reserve building. Commercial Banking reflected similar trends, though tighter spreads on liability balances pressured revenues. One positive sign for DBRS is that credit losses were largely within management’s prior guidance indicating a level of preparedness for the continued deterioration. Acquired WaMu portfolios continued to perform within expectations as well. At quarter-end, JPMorgan’s loan loss reserves of $27.4 billion represented 4.53% of total loans compared to 3.62% at year end. Reserves/NPLs declined slightly to 241% (from 260% at year-end), but continues to compare favorably to peers.

The Company’s other operating segments, where IBPT and income declined from the prior quarter, reflected market trends rather than any weakening in the franchise, in DBRS’s view. Lower customer deposits and less securities lending activity impacted results in Treasury & Securities Services, while Asset Management results reflected lower equity markets and investor preference for lower margin liquid products.

DBRS views positively JPMorgan’s further bolstering of its capital position and its estimated Tier 1 ratio of 11.3% at the end of Q1 2009, almost double the minimum level to be well-capitalized. Adding to its loss absorption capacity, the Company increased its tangible common equity to risk weighted asset ratio to 7.2%, up about 40 bps from year end. The Company’s liquidity also remains strong, in part due to its strong deposit franchise. Deposits in Retail Financial Services grew 3% in Q1 2009 to $370 billion, though Company-wide deposits declined 10% in the quarter to $907 billion.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.