Fitch Affirms JPMorgan Chase's Ratings at 'A+/F1'; 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+', its support rating at '1', and its support rating floor (SRF) at 'A'. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release.

The rating actions have been taken as part of a periodic review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. On balance, Fitch's outlook for the sector is stable. The 12 banks have continued to strengthen their balance sheets in 9M14. Capitalisation has improved materially over the past two years and liquidity remains sound. This strengthening balances with continued pressure on earnings, particularly in securities businesses, and remaining material but unpredictable exposure to conduct and regulatory risks.

Fitch forecasts weak growth in the eurozone during 2015 while growth in the US and UK is expected to be somewhat stronger, which should help the GTUBs with a significant presence in these regions. Spikes in market volatility, most recently in October 2014, show that uncertainty remains over how expectations of rising interest rates in the US will affect financial markets. Our expectation is that rises in interest rates will be gradual and would follow improved prospects for the economy, which should help business volumes. Sharp and unexpected hikes in US interest rates would likely result in increased market volatility and, consequently, additional pressure on banks' earnings, although we believe that the GTUBs' risk appetite has declined.

Lower risk appetite should help the banks avoid material losses on trading positions but an adverse operating environment could result in a change of our outlook if earnings prospects suffer materially. For eurozone-focused banks, a prolonged deflationary scenario would put pressure on earnings and could result in a changed outlook.

KEY RATING DRIVERS - IDRs, VR 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 10.1% at Sept. 30, 2014, which was slightly above management's year-end target but lower than the peer average. Capital improvements have been supported largely by growth in retained earnings. Management is targeting a ratio of 10%-10.5% longer-term, which Fitch believes is prudent, although the target could evolve as further clarity emerges surrounding regulatory requirements. Still, Fitch believes JPM is well positioned to maintain compliance with Basel III capital requirements, even with its higher G-SIFI loss absorbing buffer, given the superior earnings capacity of the bank.

Fitch believes JPM has made meaningful progress on compliance with the supplementary leverage ratio (SLR) in 2014 and further improvement is expected in 2015. The firm gained compliance with the SLR in 3Q'14, reaching 5.5%, but the bank remains 30 basis points shy of the 6% requirement. In 2013, progress on the SLR came partially at the cost of an increase in the firm's double leverage, as the firm converted intercompany debt into equity. Double leverage increased to 1.17 times (x) at year-end 2013, which Fitch viewed as high, relative to historical standards, but double leverage declined to 1.11x at June 30, 2014, due to the net issuance of $7.3 billion in perpetual preferred stock in the first half of the year. Fitch expects JPM to achieve full compliance with all regulatory requirements, well ahead of required implementation, which for SLR is 2018.

The bank's liquidity profile remains sound, with $572 billion of high quality liquid assets at Sept. 30, 2014, up from $538 billion a year earlier. JPM is in compliance with the liquidity coverage ratio (LCR), although its buffer, of about 20%, is more modest following publication of the U.S. final rules, due to higher outflow assumptions across certain categories and a reference to peak outflows rather than cumulative outflows. JPM also believes it is in compliance with the net stable funding ratio (NSFR), which Fitch views favorably.

Earnings performance remains highly resilient, particularly on a relative basis, as the company remained profitable throughout the financial crisis and continues to post relatively solid returns despite the recognition of periodic legal expenses and continued investment in the control agenda. This is a testament to the company's broad and diverse franchise. Fitch estimates that adjusted pre-tax earnings were down about 4.3% through the first nine months of 2014, year-over-year, given weaker mortgage performance, a challenged debt capital markets environment, and an increase in loan loss provisions. That said, JPM continues to exhibit strong core loan growth, prudent operating expense controls, and solid contributions from card, commercial banking, and asset management.

JPM made significant progress settling a variety of outstanding litigation during 2013 and early 2014, but several investigations remain open, including those related to foreign exchange, for which JPM set aside legal reserves in 3Q'14. Legal costs are likely to remain elevated in coming quarters, but Fitch expects the incremental impact to earnings will be manageable. The emergence of material and unexpected litigation losses could alter the agency's view, particularly given where the firm's current capitalization ratios compare to the broader peer group.

The Stable Outlook reflects expectations for continued operating consistency, although Fitch believes credit costs will remain a headwind, as recent loan vintages season and asset quality metrics rise from historical lows, and earnings are likely to continue to be challenged by relatively low interest rates. A continued focus on operational improvements is expected to offset the impact to some extent, although JPM is expected to continue to incur costs associated with its control agenda. Investment banking results will remain dependent upon market conditions, but JPM's strong market position and diverse product offering should yield peer-superior performance.

RATING DRIVERS AND SENSITIVITIES - IDRs, VR AND SENIOR DEBT

Going forward, Fitch believes JPM is going to be challenged to deliver 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 that impacts the firms 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 office. 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 charge taken during the third quarter of 2013 reflects 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.

KEY RATING DRIVERS - SUPPORT RATING AND SRF

JPM's Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's expectation that there remains an extremely high probability of support from the U.S. government ('AAA'/Outlook Stable) if required. This expectation reflects the U.S.'s extremely high ability to support its banks especially given its strong financial flexibility, though propensity is becoming less certain. Specific to JPM, Fitch's view of support likelihood is based mostly on its systemic importance in the U.S., its global interconnectedness given its size and operations in global capital markets, significant deposit market share and its position as a key provider of financial services to the U.S. economy. JPM's IDRs and senior debt ratings do not benefit from support because JPM's VR is above its SRF.

However, in Fitch's view, there is a clear intention to reduce support for G-SIFIs in the U.S., as demonstrated by the Dodd Frank Act (DFA) and progress regulators have made on implementing the Orderly Liquidation Authority (OLA). The FDIC has proposed its single point of entry (SPOE) strategy and further initiatives are demonstrating the U.S. government's progress to eliminate state support for U.S. banks going forward, which increases the likelihood of senior debt losses if its banks run afoul of solvency assessments.

KEY RATING DRIVERS & SENSITIVITIES - SUPPORT RATING AND SRF

The SR and SRF are sensitive to progress made in finalizing the SPOE strategy and any additional regulatory initiatives that may be imposed on the G-SIFIs, including debt thresholds at the holding company. Fitch's assessment of continuing support for U.S. G-SIFIs has to some extent relied upon the feasibility of OLA implementation rather than its enactment into law (when DFA passed). A key hurdle that remains is whether sufficient contingent capital exists at the holding company to recapitalize without requiring government assistance.

Fitch expects that the SPOE strategy and regulatory action to ensure sufficient contingent capital will be finalized in the near term, but regardless of its finalization Fitch believes that sufficient regulatory progress continues to be made over the ratings time horizon. Therefore, Fitch expects to revise JPM's SR to '5' and its SRF to 'No Floor' likely during the first half of 2015.

KEY RATING DRIVERS & SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by JPM and by various issuing vehicles are all notched down from JPM's or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective nonperformance and relative Loss Severity risk profiles. Their ratings are primarily sensitive to any change in the VRs of JPM or its bank subsidiaries.

KEY RATING DRIVERS & SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

JPM's uninsured deposit ratings are rated one notch higher than the company's IDR 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.

The ratings of long and short-term deposits issued by JPM and its subsidiaries are primarily sensitive to any change in JPM's IDR.

KEY RATING DRIVERS & SENSITIVITIES - HOLDING COMPANY AND OPERATING SUBSIDIARY

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. This may result in a possible downgrade of JPM's holding company rating, an upgrade of operating company ratings, or no changes to ratings if Fitch's views the long-term debt requirement assigned to JPM as providing an insufficient amount of bail-in capital at the operating company level.

KEY RATING DRIVERS & SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY

The IDRs and VRs of JPM's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA and therefore IDRs and VRs are equalized across the group. JPMorgan Securities LLC (JPMS) is a wholly owned subsidiary that is the firm's U.S. broker dealer and is considered core to JPM's business. As a result its IDR is equalized with that of its parent JPM. Bear Stearns Companies, LLC and JPMorgan Clearing Corp. benefit from a parent guarantee and therefore their IDRs are equalized with JPM's. Collateralized Commercial Paper Co., LLC's short-term IDR benefits from JPMS's guarantee of the amounts payable by the repo seller, JPMCC, and as result its short-term IDR is equalized with that of JPMS. Collateralized Commercial Paper II Co., LLC's short-term IDR is based on the repo seller, JPMS's ST IDR.

JPM is a leading global trading and universal bank with $2.5 trillion in total assets and $16.8 billion of net income for the nine months ended Sept. 30, 2014.

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 '1';

--Support Floor at 'A'.

JPMorgan Chase Bank N.A.

--Long-term deposits at 'AA-';

--Long-term IDR at 'A+';

--Long-term senior debt at 'A+';

--Long-term subordinated debt at 'A';

--Short-term IDR at 'F1';

--Short-term debt at 'F1';

--Short-term deposits at 'F1+';

--Viability at 'a+';

--Market linked deposits at 'AA-emr';

--Market linked securities at 'A+emr';

--Support at '1';

--Support Floor at 'A'.

Chase Bank USA, N.A.

--Long-term deposits at 'AA-';

--Long-term IDR at 'A+';

--Long-term senior debt at 'A+';

--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 '1';

--Support Floor at 'A'.

JPMorgan Bank & Trust Company, National Association

--Long-term deposits at 'AA-';

--Long-term IDR at 'A+';

--Short-term IDR at 'F1';

--Short-term deposits at 'F1+';

--Viability at 'a+';

--Support at '1';

--Support Floor at 'A'.

JPMorgan Chase Bank, Dearborn

--Long-term deposits at 'AA-';

--Long-term IDR at 'A+';

--Short-term IDR at 'F1';

--Short-term deposits at 'F1+';

--Viability at 'a+';

--Support at '1';

--Support Floor at 'A'.

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';

--Market linked securities at 'A+emr'.

J.P. Morgan Securities LLC

--Long-term IDR at 'A+';

--Short-term IDR at 'F1';

--Short-term debt at 'F1'.

JPMorgan Clearing Corp (formerly Bear Stearns Securities Corp)

--Long-term IDR at 'A+';

--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 'A+'.

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'.

Additional information is available at www.fitchratings.com

Applicable Criteria and Related Research:

--'Global Financial Institutions Criteria' (January 2014);

--'Securities Firms Criteria' (January 2014);

--'Assessing and Rating Bank Subordinated and Hybrid Securities' (January 2014);

--'Rating FI Subsidiaries and Holdings Companies' (August 2012).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732556

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=935016

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Contacts

Fitch Ratings
Primary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Committee Chairperson
Gordon Scott
Managing Director
+44 20 3530 1075
or
Media Relations
Brian Bertsch
+1-212-908-0549
New York
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Committee Chairperson
Gordon Scott
Managing Director
+44 20 3530 1075
or
Media Relations
Brian Bertsch
+1-212-908-0549
New York
brian.bertsch@fitchratings.com