July 14, 2016 - 4:02 PM EDT
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Fitch: JPM Logs Solid 2Q16 Results Despite Market Turbulence

JPMorgan Chase & Co. (JPM) logged strong 2Q16 earnings despite global market turbulence, according to Fitch Ratings. JPM's 2Q16 net income came in at $6.2 billion on the back of revenue growth of 5% quarter-on-quarter reflecting solid loan growth in consumer and wholesale banking and uptick in trading volumes, while overall credit costs stabilized. JPM continues to remain disciplined on expenses. There were few notable items during the quarter, and JPM reiterated its full year guidance.

The Corporate & Investment Bank (CIB) reported strong year-over-year revenues. Market volatility in the wake of the Brexit vote lifted fixed income and currency trading income in most products, which were up 35%, while Equity capital markets were up a more modest 2%. Conversely, investment banking revenues were down 15% year-over-year given market uncertainties. Lending was down 8% year-over-year reflecting mark-to-market losses on hedges of accrual loans. Credit costs were $235 million during the quarter mainly reflecting Oil & Gas credits, although energy loans appear to be stabilizing following increases in energy prices. Nonetheless, net charge-offs were relatively high at 0.32%.

The Consumer and Community Banking (CCB) segment continues to produce a strong return on equity of about 20% reflecting across the board revenue growth of 4% coupled with good expense control. Reported revenue was affected by $200 million one-time gain on the sale of Visa Europe as well as a mark-to-market loss on Square. Excluding these items, revenues were still up 2%. Auto originations came down $1.1 billion during the quarter to $8.5 billion, although average auto loans and leases outstanding grew a modest $3.2 billion. JPM continued to build reserves reflecting expected weakness in credit card as the company has expanded its underwriting standards, although credit card asset quality remains strong.

Commercial Banking (CB) revenues continued to build on loan growth and investment banking, with loan growth up 13%, year-over-year, while investment banking was up 23% quarter-over-quarter, albeit flat to last year. Commercial real estate (CRE) loan growth was notably strong, particularly when viewed year over year, growing 18%, while C&I was only 9%. JPM continues to push out non-operational deposits, which came down 13% year on year reflecting their more punitive treatment under the bank regulatory liquidity rules. Credit costs were muted during the quarter following builds in prior periods mainly related to Oil & Gas credits with charge-offs coming in at a still modest 14bps for the portfolio. Non-accrual loans held steady at $1.3 billion.

Asset management (AM) softened in the quarter reflecting weaker markets and lower performance fees. Despite this, AM turned in reasonable earnings and still strong ROE of 22%. Assets under management (AUM) rebounded slightly from the first quarter and came in at $1.7 trillion on inflows into long-term and liquidity products.

From a liquidity perspective, JPM's high-quality liquid assets remained strong, at $516 billion in the quarter, and the bank remained in compliance with the liquidity coverage ratio and the proposed net stable funding ratio requirements. JPM continued to grow average consumer deposits in CCB $21 billion during the quarter, more than offsetting the decline in CB and allowing JPM to report overall deposit growth. Fitch views the continued deposit shift positively, given the relative stability of retail deposits and favorable treatment in liquidity ratios.

JPM's Basel III fully phased in Common equity (CET1) ratio was up slightly to 11.9%, reflecting earnings retention and flat risk-weighted assets. CET1 was 12.1% under the standardized approach, which JPM believes will eventually be the binding constraint. The enhanced supplementary leverage ratio (ESLR) was 6.6% and 6.6% at the firm and bank level, respectively, putting the company in compliance well ahead of full implementation.

JPM raised its dividend $0.04 during quarter to $0.48 a share, while the dividend payout ratio fell slightly to 31% from the prior quarter. In addition, JPM supplemented this with $2.8 billion of share repurchases, resulting in a total payout of ratio of approximately 75%. JPM comfortably passed this years' Federal Reserve CCAR stress tests and received approval for its capital plan, which included share repurchases of $10 billion. Notwithstanding, given its higher GSIB surcharge, JPM's capital plans could be affected in the future to the extent the GSIB surcharge is included as part of the CCAR results.

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Fitch Ratings
Joo-Yung Lee, +1-212-908-0560
Managing Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Meghan Neenan, CFA, +1-212-908-9121
Senior Director
or
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[email protected]


Source: Business Wire (July 14, 2016 - 4:02 PM EDT)

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