Fitch Affirms JPMorgan Chase & Co. at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed JPMorgan Chase & Co.'s (JPM) Long-Term Issuer Default Rating (IDR) at 'A+' and Short-Term IDR at 'F1'. Fitch has also affirmed JPM's Viability Rating (VR) at 'a+'. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release.

The rating affirmations have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (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, strong funding flexibility, given its deposit-raising capabilities and uninterrupted access to the global capital markets through an economic cycle, strong liquidity profile, solid capital ratios, and experienced management team, which has deep bench strength.

JPM's Basel III tier 1 common equity (CET1) ratio reached 11.7% at March 31, 2016, which was above management's long-term minimum target of 11.0%. 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. In first quarter 2016 (1Q16), the CET1 ratio under the standardized approach was 11.9%; JPM expects the standardized approach to be its binding constraint over the near term, and is capitalizing operating segments accordingly.

In 2015, JPM reduced its estimated G-SIB surcharge by 100 bps, to 3.5%, given an approximate $200 billion decline in non-operating deposits, a $22 billion reduction in level 3 assets, and a $15 trillion decline in notional derivative amounts. Fitch views this meaningful reduction favorably, as it puts the firm on more equal footing with the peer group. Fitch believes JPM is well positioned to maintain compliance with Basel III capital requirements, given the superior earnings capacity of the bank.

JPM had another solid year of earnings performance on a core basis in 2015. Fitch estimates that pretax earnings were up about 1.9% year over year, adjusting for legal expenses, DVA/FVA, and other non-recurring items of note, as lower non-interest expense more than offset lower net revenue and higher provision expenses. Looking ahead to the balance of 2016, Fitch expects a continuation of strong core operating performance, although credit costs will remain a headwind as asset quality metrics rise from historical lows, downgrades in energy-related industries continue, and legal and regulatory expenses remain elevated. A continued focus on operational improvements is expected to offset the impact to some extent and management expects adjusted expenses to be flat in 2016.

Exposure to the oil & gas industry was $42.1 billion at YE2015, which represented about 5.3% of the wholesale loan portfolio. About $24 billion of the exposure was investment grade, of which $4 billion was drawn, and $18 billion was non-investment grade, of which $9 billion was drawn. Exposure to metals & mining was $14 billion at YE2015, representing about 1.8% of the wholesale loan portfolio. Drawn exposure was $4.6 billion, of which 46% is investment grade (down from 55% at YE2014).

JPM added $529 million of reserves related to oil & gas and $162 million related to metals & mining in 1Q16. The firm also experienced about $48 million of net charge-offs in these sectors in the quarter and a $1 billion uptick in non-accrual loans. Using reasonable assumptions on draws and downgrades and considering spillover effects to related companies, the bank believes additional reserves could be about $500 million over the remainder of the year, or 0.25% of Tier 1 capital, although with a high degree of variability. Wholesale reserves were about 6.3% of drawn energy exposure at quarter-end. Overall, Fitch believes JPM's exposure to energy is manageable.

In March 2015, the firm's board authorized a $6.4 billion common equity repurchase program. The bank repurchased approximately $5.4 billion under that authority through 1Q16, leaving about $1 billion of availability under the program. However, JPM received a non-objection from the Federal Reserve regarding incremental share repurchases of $1.88 billion through the end of 2Q16, giving them aggregate remaining authority of about $2.9 billion. JPM's net payout ratio was approximately 48% including share repurchases in 2015. Fitch believes the firm's capital plans are prudent.

On April 13, 2016, the Federal Deposit Insurance Corporation and the Federal Reserve Board announced they had determined that JPM's resolution plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code. Areas of deficiency included liquidity, legal entity rationalization, governance mechanisms, and derivatives and trading activities. If the bank fails to remediate deficiencies by Oct. 1, 2016, it may be subject to more stringent prudential requirements. Fitch believes the bank will work diligently to address all deficiencies noted in the regulatory feedback.

The Stable Outlook reflects expectations for continued operating consistency, superior funding flexibility, strong liquidity, and stability 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 capital (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).

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 has now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors to participate 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.

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 profile, 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. and Chase Bank USA, N.A. 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 reflect 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.

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 remain 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 address noted deficiencies in the firm's resolution plan which results in increased capital requirements and places the firm at a competitive disadvantage, could also pressure ratings. Further, significant risk management or operational failures that result in material losses to the firm could also result in a negative rating action.

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.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since JPM's SR and SRFs are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the forseeable 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.

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 COMPANIES

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.

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.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1006060

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006060

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Meghan Neenan, CFA, +1-212-908-9121
Senior Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Joo-Yung Lee, +1-212-908-0560
Managing Director
or
Committee Chairperson
Christopher Wolfe, +1 212-908-0771
Managing Director
or
Media Relations, New York
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Meghan Neenan, CFA, +1-212-908-9121
Senior Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Joo-Yung Lee, +1-212-908-0560
Managing Director
or
Committee Chairperson
Christopher Wolfe, +1 212-908-0771
Managing Director
or
Media Relations, New York
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com