JPMorgan Chase & Co.'s (JPM) third quarter 2015 (3Q15) results benefited
from the recognition of several unusual items, and while core results
were down from 3Q14, they were still solid, with an adjusted return on
tangible equity of approximately 12%. Increased market volatility,
interest rate uncertainty, and pressures in oil & gas had an impact on a
variety of segments, but Fitch Ratings believes the diversity of the
platform and the bank's market positioning in the businesses in which it
operates continued to support peer-superior performance.
Unusual items in the quarter included about $1 billion of firmwide legal
expenses, which includes CDS settlements and $2.2 billion of tax
benefits, both of which are after-tax numbers. JPM also recognized $591
million of consumer reserve releases in the quarter, which were
partially offset by a $310 million increase in wholesale reserves
related to select downgrades in the oil & gas portfolio.
Corporate and Investment banking (CIB) produced a return on equity of
8%, or 13% adjusting for legal expenses, tax benefits, and reserve
builds. Revenues were down in the quarter as strong investment banking,
advisory, and equity markets activity were more than offset by weaker
performance in fixed income markets, securities services, and treasury
services, which was largely anticipated by Fitch. Markets revenues were
down 16% from 3Q14, or down 6% adjusting for business simplification.
There was a $232 million reserve build in the quarter, which included
about $128 million directly associated with oil & gas exposure. Still,
net charge-offs in the segment, at 0.01% in the quarter, remain very
strong.
CIB reported average VaR of $57 million for the quarter, which was up
from $43 million in the prior quarter and $35 million in 3Q14, due
largely to an increase in fixed income VaR. Fitch expects segment VaR to
rise with increased market volatility. Overall, Fitch believes CIB
segment performance continues to benefit from the firm's global reach
and scale, and market share gains, at least on the margin, are likely to
continue.
The Consumer and Community Banking (CCB) segment produced a return on
equity of about 20% in the quarter due to a reduction in provision
expense and improved cost efficiencies. The business is committed to
reducing expenses by $2 billion by the end of 2017. Through 3Q15,
expenses have declined $600 million, or $700 million adjusting for legal
expense. Core loans were up 23% year over year, driven by growth in
mortgage loans, business banking, and auto.
Mortgage origination was up 41% year over year and about 2% sequentially
given a stronger pipeline and an improvement in the purchase market. JPM
continues to balance sheet high-quality mortgages, adding about $19
billion in the quarter. Mortgage servicing revenue continued to decline,
given a reduction in the servicing book, but servicing expenses are also
down as the bank looks to right-size the business. Fitch expects
mortgage servicing expenses to continue to improve in 4Q15. Credit
trends in the real estate portfolio remained strong, with non-purchased
credit impaired (PCI) losses of 0.10% in the quarter; down 11 basis
points (bps) sequentially. JPM released $575 million of reserves in the
mortgage portfolio during the quarter, including $200 million associated
with the non-credit-impaired portfolio and $375 million associated with
the PCI portfolio. Releases for both segments were supported by reduced
delinquencies and improving home prices.
The card, commerce solutions and auto segment generated a return on
equity (ROE) of 22%, which was a solid quarter, but down year over year.
Net interest income was up due to strong volume and a reduction in the
reserve for uncollectable interest and fees. However, non-interest
revenues were down due to the re-pricing of certain co-brand
partnerships to market, including the bank's relationships with United
Airlines and Southwest Airlines, partially offset by higher auto lease
volume and a 5.9% increase in card sales volume. Average card loans were
flat year over year and total segment loans grew about the same.
Credit performance remained pristine, with card net charge-offs
declining 20bps sequentially, to 2.41%. That said, delinquencies were up
9bps from the prior quarter, due in part to seasonality, and JPM expects
losses to be about 2.5% over the medium term. While net charge-off
dollars were down 7.6% from 3Q14, provision expense rose about 1%, to
account for portfolio growth. The allowance for loan losses for the
segment was 2.16% of ending loans in 3Q15, down 2bps sequentially. Fitch
believes credit metrics in the segment are at or near a bottom.
Commercial Banking's (CB) contribution to earnings was down in the
quarter given a decline in investment banking revenues, higher operating
expenses, and an increase in provision expense. Still, management
expects investment banking revenue in the segment to be at record levels
for the year, surpassing $2 billion, given a strong pipeline. Despite a
modest reserve build, partially attributable to oil & gas exposure,
credit performance remains strong, with no net charge-offs in the
quarter.
Market sentiment negatively affected asset management (AM) earnings in
the quarter given lower transactional revenues. The sale of the
retirement planning services business in 2014 also had an impact
year-over-year comparisons. Assets under management (AUM) declined to
$1.7 trillion at quarter-end as JPM experienced its first quarter of net
outflows in some time, driven by interest rate uncertainty and equity
market declines.
From a liquidity perspective, JPM's high quality liquid assets remained
strong, at $505 billion in the quarter, and the bank has reduced
non-operating deposits by more than $150 billion through 3Q15; outpacing
its year-end 2015 target by over $50 billion. Over the same period,
total deposits are down by approximately $90 billion, as growth in more
stable balances helped to offset the decline. Average deposits in the
CCB segment were up $38.3 billion from year-end 2014, while average CIB
deposits were down about $61.8 billion. 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 40bps
sequentially, to 11.4%, given earnings retention and a decline in
risk-weighted assets. The bank's capital ratio is now the same under
both the advanced and standardized approaches, and the standardized
ratio is expected to be the binding constraint going forward. The
supplementary leverage ratio (SLR) grew 30bps at the firm level and
40bps at the bank level, to reach 6.3% and 6.5%, respectively, at
quarter-end, which is compliant with regulatory requirements. In terms
of G-SIB requirements, JPM believes it is currently in the 4% bucket,
with regard to the buffer, given actions taken by the bank and final
U.S. rules. This is down from the 4.5% bucket previously, but remains at
the high-end of the peer group. Fitch regards JPM's capital levels to be
consistent with its current ratings and would expect the bank to achieve
full compliance with all regulatory requirements, well ahead of required
implementation.
JPM paid a dividend of $0.44 per share in the quarter, equating to a
payout of 26.2% of reported earnings per share, or a payout of 33.3%
adjusting for unusual items in the quarter. The bank repurchased $1.2
billion of equity in the quarter, leaving approximately $3.9 billion of
repurchase authority, based on the results of this year's CCAR process.
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