Fitch Affirms JPMorgan's (JPM) Ratings Following Q2 Numbers; Mortgage Trends Continue on Positive Trajectory
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Overall, J.P. Morgan's (NYSE: JPM) earnings release today did not present information that would prompt immediate rating action, according to Fitch Ratings. The firm's ratings remain on Rating Watch Negative. JPM was able to achieve relatively strong profitability for the quarter ($5.0 billion net income) despite the significant CIO losses of $4.4 billion. JPM's $7.0 billion core earnings were flat on a linked quarter basis and down about 14% year-over-year.
CIO trading losses were essentially fully offset by one-time gains, which included $1.0 billion of CIO securities gains, $2.1 billion in reserve releases, $755 million in DVA gains, and a $545 million recovery on a Bear Stearns-related first-loss note. Absent these one-time gains, the firm would have had pre-tax earnings of $2.6 billion.
YTD losses of $5.8 billion were disclosed. Future losses and the size of this exposure remain unclear, though JPM expects losses under an extreme scenario could be $0.8-$1.6 billion. Fitch believes that the firm's decision to move these positions, with about $30 billion of risk-weighted assets, to the investment bank is logical given the expertise of JPM's credit derivatives desk and more granular risk framework. Future disclosures on the positions will likely be limited
given this change.
Resolution of the Rating Watch Negative would center on operational and risk management weaknesses. This includes an assessment of JPM's risk controls and governance, risk metrics and modeling across the firm, and how its valuation process is conducted, which resulted in the 1Q'12 restatement due to unreliable trader marks. Fitch believes the financial implications are probably largely contained and not the primary driver behind any future rating action. Reputational damage appears to be manageable for now, but uncertainty regarding the LIBOR investigation adds to further potential issues on that front.
JPM's decline in investment banking revenues for 2Q'12 was not surprising given market conditions and the firm continues to retain its leading position in the business. Other business segment earnings were in line with expectations and relatively stable. Positively, credit trends continue to improve, with card performance particularly strong, resulting in the roughly $750 million reserve release in that segment (of the total $2.1 billion reserve release). It is unlikely to see much in further credit card reserve releases in the future.
In addition, mortgage credit trends also continue on their positive trajectory. However, repurchase risk remains a concern as the GSEs have appeared more aggressive in their repurchase risks in the industry overall. Therefore, while JPM is seeing positive developments and actually reversed some of its provision related to repurchases ($10 million), timing and cure rates could result in future provisions. While Fitch believes that housing trends may see some stabilization, further weakening could result in a reversal in mortgage reserve releases or provisioning.
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CIO trading losses were essentially fully offset by one-time gains, which included $1.0 billion of CIO securities gains, $2.1 billion in reserve releases, $755 million in DVA gains, and a $545 million recovery on a Bear Stearns-related first-loss note. Absent these one-time gains, the firm would have had pre-tax earnings of $2.6 billion.
YTD losses of $5.8 billion were disclosed. Future losses and the size of this exposure remain unclear, though JPM expects losses under an extreme scenario could be $0.8-$1.6 billion. Fitch believes that the firm's decision to move these positions, with about $30 billion of risk-weighted assets, to the investment bank is logical given the expertise of JPM's credit derivatives desk and more granular risk framework. Future disclosures on the positions will likely be limited
given this change.
Resolution of the Rating Watch Negative would center on operational and risk management weaknesses. This includes an assessment of JPM's risk controls and governance, risk metrics and modeling across the firm, and how its valuation process is conducted, which resulted in the 1Q'12 restatement due to unreliable trader marks. Fitch believes the financial implications are probably largely contained and not the primary driver behind any future rating action. Reputational damage appears to be manageable for now, but uncertainty regarding the LIBOR investigation adds to further potential issues on that front.
JPM's decline in investment banking revenues for 2Q'12 was not surprising given market conditions and the firm continues to retain its leading position in the business. Other business segment earnings were in line with expectations and relatively stable. Positively, credit trends continue to improve, with card performance particularly strong, resulting in the roughly $750 million reserve release in that segment (of the total $2.1 billion reserve release). It is unlikely to see much in further credit card reserve releases in the future.
In addition, mortgage credit trends also continue on their positive trajectory. However, repurchase risk remains a concern as the GSEs have appeared more aggressive in their repurchase risks in the industry overall. Therefore, while JPM is seeing positive developments and actually reversed some of its provision related to repurchases ($10 million), timing and cure rates could result in future provisions. While Fitch believes that housing trends may see some stabilization, further weakening could result in a reversal in mortgage reserve releases or provisioning.
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