Fitch: Loan Growth, Investment Bank Support Solid Third Quarter for JPM

NEW YORK--()--JPMorgan Chase & Co. (JPM) reported a solid third quarter of 2016 (3Q16), according to Fitch Ratings, as a 13% return on tangible equity was supported by 15% core loan growth, record third-quarter revenue in the commercial & investment bank (CIB), record consumer deposit growth, expense controls, and a continuation of a relatively benign credit environment.

JPM recorded a $50 million net reserve release related to oil & gas in 3Q16, as a reserve build in CIB was more than offset by a reserve release in the commercial bank. Management indicated that paydowns, opportunistic sales, and upgrades more than offset the impact of downgrades. Should the current energy environment remain consistent, JPM does not anticipate further significant reserve builds in 4Q16.

Net revenues in CIB set a record for a fiscal third quarter, with 13.2% growth in investment banking and 32.6% growth in markets. Debt underwriting had its highest third quarter ever and equity underwriting fees were up 38% year over year. Fixed income markets were up 47.8% from a relatively weak 3Q15, driven, in part, by strong activity in rates due to post-Brexit activity and uncertainty around central bank actions. Equities were up a more modest 0.8%, given tougher year-over-year cash equity volume. Segment provision expense was down meaningfully from a year ago, despite a modest reserve build for oil & gas in CIB, and net charge-offs matched 3Q15 levels, at 0.01%. Operating expense reductions reflected lower legal expenses and tight expense controls, yielding an overhead ratio of 52%.

The Consumer and Community Banking (CCB) segment posted net revenue growth of 4.1% versus the prior year, but net income declined 16.2% given a $225 million reserve build, higher card origination costs, the impact of card program renegotiations, and higher FDIC surcharges. The segment also included $175 million of unusual expenses related to liabilities assumed for a merchant in bankruptcy and an increase in reserves for mortgage servicing. Still, core loan growth was a strong 19% and deposits grew at a record 11% pace, with more than half of that growth coming from existing customers. Segment credit trends remained relatively benign, with net charge-offs of 1%; up 1 bps sequentially, but down 2 bps year over year.

The mortgage business had a solid quarter, with growth in production margins, net interest income, and mortgage servicing rights risk management. Mortgage originations were down 9.4% in 3Q16 year over year, but on-balance sheet loans were up 9.1% as JPM continued to retain high-quality loans, adding about $19.4 billion over the past year.

Card sales volume was up 10% year over year and new accounts opened increased by 700,000, due, in part, to positive response to JPM's launch of the Sapphire Reserve card. Strong growth in card loans and portfolio seasoning combined to push card losses up 10 bps year over year, while 30- and 90-day delinquencies were up 15 bps and 9 bps, respectively. JPM built credit card reserves by $200 million in the quarter. While Fitch expects the bank's card loss ratio to increase over time, it is likely to be a gradual up-tick to a new normal, reflecting an improved customer profile versus the pre-crisis portfolio.

The topic of cross-selling and structuring appropriate employee compensation has been an area of interest for customers and investors in recent weeks, given industry news. In its conference call, JPM reiterated that its goal is not purely volume based; instead its strategy is to develop deep and engaged customer relationships in order to gain client wallet share over time. Compensation structures are designed accordingly and reviewed annually to ensure alignment with objectives.

A $121 million reserve release in commercial banking, which included $50 million of oil & gas releases, in 3Q16 helped support record net income for the segment. Revenues were also up, as 13.3% average growth in the loan book fueled an increase in net interest income and several large transactions pushed gross investment banking fees up 57%, year over year, to $600 million. Segment credit performance remained strong with net charge-offs of 10 bps; half of which was oil & gas related.

Asset management was a solid contributor to overall results, with higher net income driven by improved spreads and loan growth. Assets under management were up 3.6% annually, with higher markets and inflows into long-term products.

From a liquidity perspective, JPM's high-quality liquid assets (HQLA) remained strong, at $539 billion in the quarter, which was up $23 billion from the prior quarter. However, management indicated that liquid assets were up significantly more and that excess liquidity at the bank is not included in HQLA. Loans-to-deposits were 64.5% at quarter-end, which is up modestly from a year ago, but remains below the peer average.

JPM's Basel III Tier 1 Common equity (CET1) ratio was flat, at 11.9% for the quarter, as earnings retention offset loan growth. The bank's capital ratio was 12.1% under the fully phased-in standardized approach and JPM believes the standardized ratio will eventually be the binding constraint. The supplementary leverage ratio (SLR) was 6.6% and 6.6% at the firm and bank level, respectively.

JPM paid a dividend of $0.48 per share in the quarter, equating to a payout of about 30%. The bank repurchased $2.3 billion of equity in the quarter, leaving approximately $8.3 billion of repurchase authority for the next three quarters, based on the results of last year's CCAR process. Including share repurchases, the total payout in the quarter was about 70%.

JPM recently submitted its 2016 resolution filing. Areas of deficiency on the prior submission included liquidity, legal entity rationalization, governance mechanisms, and derivatives and trading activities. Fitch believes the bank has and will continue to work diligently to address all deficiencies noted in regulatory feedback. For Fitch's broader commentary on the public portion of all recently submitted resolution plans, please refer to "Fitch: Resolution Plans to Bring Structural Change to US GSIBs", which was published on Oct. 13, 2016 and is available at www.fitchratings.com.

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or
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Contacts

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