S&P Feels Better About JPMorgan Chase (JPM); Revises Outlook to Stable

March 27, 2013 5:21 PM EDT
S&P has revised its outlook on JPMorgan Chase & Co. (NYSE: JPM) from Negative to Stable on risk-management corrective actions.

  • We believe JPMorgan Chase & Co. (JPM) has successfully addressed our concerns regarding risk-management missteps in its Chief Investment Office portfolio and that corrective actions should prevent additional issues from arising.

  • We are revising our ratings outlook on JPM and its banking subsidiaries to stable from negative.

  • We are affirming our 'A/A-1' issuer credit ratings on JPM and our 'A+/A-1' ratings on its banking subsidiaries.

  • The outlook is stable, reflecting our expectation that the company should be able to continue delivering industry-leading results while taking risks commensurate with, and already considered in, the current ratings.

    Standard & Poor's Ratings Services today said it revised the ratings outlook on JPMorgan Chase & Co. (JPM) and its banking subsidiaries to stable from negative. At the same time, we affirmed our 'A/A-1' issuer credit ratings on JPM and our 'A+/A-1' issuer credit ratings on its banking subsidiaries.

    "The outlook revision reflects our belief that JPM has successfully addressed our concerns related to its Chief Investment Office losses, risk-management practices, and governance issues," said Standard & Poor's credit analyst Stuart Plesser. "Specifically, we believe that risk-management missteps were isolated to the CIO unit and that JPM has properly remediated them, or is in the process of doing so. In addition, we believe the synthetic credit portfolio, which gave rise to the CIO losses, has been wound down, for the most part, and additional losses, if any, will be immaterial."

    However, the investment strategy in the CIO was aggressive, in our view. Although we consider the losses resulting from the SCP to be an egregious oversight by management, the bank has taken swift corrective actions, the CIO risk-management missteps appear to be an isolated event, and the losses--in the context of the company's overall earnings power--were manageable.

    The ratings outlook on JPM is stable, reflecting our belief that the company has remediated, or is in the process of remediating, missteps in risk management and that these missteps are isolated to the CIO unit.

    We could lower our ratings on JPM if there is an unexpected failure in risk-management practices that leads us to question the company's ability to manage its complex balance sheet, if we believe management is embarking on a risky business or investment strategy beyond what is already factored into the rating, or if material regulatory or legal issues arise. We could also downgrade JPM if the recent spate of management changes hurts the company's strategy, risk profile, and profitability. Finally, we could also lower the ratings on JPM if capital build proves inadequate relative to our expectations. We currently project that JPM will continue to increase capital and that its risk-adjusted capital (RAC) ratio, which was 6.3% at the end of the fourth quarter, will reach 7.0%-7.5% over the next 18-24 months. Our RAC projection includes annual earnings of roughly $18 billion to $20 billion and a payout ratio of less than 70%. We believe an upgrade at this time is unlikely.

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