Fitch Upgrades JPMorgan Chase Bank to 'AA-'; Affirms JPMorgan Chase & Co at 'A+'; Outlooks Stable

LONDON--(BUSINESS WIRE)-- Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) and senior debt rating of JPMorgan Chase Bank N.A. and the Long-Term IDR of J.P. Morgan Securities LLC to 'AA-' from 'A+' and upgraded the Short-Term IDRs and debt ratings of both to 'F1+' from 'F1'. At the same time, the agency has affirmed JPMorgan Chase & Co.'s (JPM) Long-Term and Short-Term IDRs at 'A+' and 'F1', respectively. The Outlooks on the Long-Term IDRs are Stable.

JPM's Long-Term IDR is driven by its Viability Rating (VR), which has been affirmed at 'a+'. The upgrade of JPM's operating subsidiaries' IDRs to one notch above their VRs reflects the expected implementation of total loss absorbing capital (TLAC) requirements for U.S. Global Systemically Important Banks (G-SIBs) and the presence of a substantial debt buffer in the holding company.

A full list of rating actions follows at the end of this rating action commentary.

The rating actions are in conjunction with Fitch's review of sovereign support for banks globally, which the agency announced in March 2014. In line with its expectations announced in March last year and communicated regularly since then, Fitch believes legislative, regulatory and policy initiatives have substantially reduced the likelihood of sovereign support for U.S., Swiss and European Union commercial banks. At the same time, Fitch has taken into account progress with the U.S. single point of entry (SPE) resolution regime and TLAC implementation for U.S. G-SIBs.

Fitch believes that, in line with our Support Rating (SR) definition of '5', extraordinary external support while possible can no longer be relied upon for JPM or its subsidiaries. We have, therefore, downgraded their Support Ratings (SR) to '5' from '1' and revised their Support Rating Floors (SRF) to 'No Floor' from 'A'.

The ratings actions are also part of a periodic portfolio review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. A strong rebound in earnings from securities businesses in 1Q15 is a reminder of the upside potential banks with leading market shares can enjoy. However, regulatory headwinds remain strong, with ever higher capital requirements, costs of continuous infrastructure upgrades and a focus on conduct risks.

As capital and leverage requirements evolve, GTUBs are reviewing the balance of their securities operations with other businesses and adapting their business models to provide the most capital efficient platforms for the future. We expect the GTUBs' other core businesses, including retail and corporate banking, wealth and asset management, to perform well as economic growth, which we expect to be strongest in the U.S. and UK, will underpin revenue. However, pressure on revenue generation in a low-interest environment is likely to persist, particularly in Europe, but low loan impairment charges in domestic markets should help operating profitability.

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 10.6% at March 31, 2015, which is only 40 basis points from management's year-end target of 11.0%. The ratio has grown significantly in recent years and the gap with peers has narrowed as JPM must build to higher regulatory minimums, given its expected G-SIB surcharge. Capital improvements have been supported largely by growth in retained earnings. Management is targeting a ratio of 12% 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 surcharge, given the superior earnings capacity of the bank. JPM gained compliance with the supplementary leverage ratio (SLR) in 1Q15 as the bank ratio reached 6.0%.

In March 2015, the firm received a non-objection from the Federal Reserve to its revised capital plan as a result of the annual CCAR process. The board intends to increase the common dividend by $0.04 per share, to $0.44, beginning in 2Q15, which equates to a 30.3% payout based on 1Q15 diluted earnings per share. JPM also has the authority to repurchase $6.4 billion of equity from 2Q15 to 2Q16. JPM repurchased about $1.9 billion of common equity during the first quarter, which compared to about $2 billion of remaining authorization based on the prior year's CCAR process.

The bank's liquidity profile remains sound, with $614 billion of high quality liquid assets at March 31, 2015, up from $538 billion a year earlier. JPM reports that it is in compliance with the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), which Fitch views favorably. In 1Q15, the bank made progress toward its goal of reducing non-operating deposits by $100 billion by year-end 2015. Ending deposits grew $5 billion quarter-over-quarter, but did include a mix shift, with $28 billion of growth in retail deposits and a $24 billion decline in deposits in the investment bank. Fitch views this shift favorably, given the relative stability of retail deposits and favorable treatment in liquidity ratios.

Earnings performance remains highly resilient, particularly on a relative basis, given the firm's global reach and strong market position in a variety of business lines. Credit costs are expected to be a headwind over the near-term, given portfolio growth and normalization in certain asset categories, as are interest rates, legal costs, and continued investment in the control agenda, but market share gains and improved operating efficiencies are expected to serve as an offset. JPM is targeting a 55% efficiency ratio in three years, with $2 billion of targeted expenses saves in consumer and community banking and another $2.8 billion of cost reductions in the investment bank. Fitch believes these results are achievable and noted progress on these goals was evident in 1Q15.

The Stable Outlook reflects expectations for continued operating consistency, superior funding flexibility, strong liquidity, and gradual growth in capital ratios. JPM has been relatively successful adapting its business model to the evolving regulatory landscape and is expected to continue to make adjustments in order to optimize its capital structure.

The VRs remain equalized between JPM and its material operating subsidiaries. The common VR of JPM and its operating companies reflects the correlated performance, or failure rate between JPM and these subsidiaries. Fitch takes a group view on the credit profile from a failure perspective, while the IDR reflects each entity's non-performance (default) risk on senior debt. Fitch believes that the likelihood of failure is roughly equivalent, while the default risk at the operating company would be lower given TLAC. All U.S. bank subsidiaries carry a common VR, regardless of size, as U.S. banks are cross-guaranteed under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).

The Long-Term IDRs for the material U.S. operating entities are one notch above JPM's to reflect Fitch's belief that the U.S. single point of entry (SPE) resolution regime, the likely implementation of total loss absorbing capital (TLAC) requirements for U.S. G-SIBs, and the presence of substantial holding company debt reduces the default risk of domestic operating subsidiaries' senior liabilities relative to holding company senior debt. In our view these buffers would provide substantial protection to senior unsecured obligations in the domestic operating entities in the event of group resolution, as they could be used to absorb losses and recapitalize operating companies. Therefore, substantial holding company debt reduces the likelihood of default on operating company senior obligations. As at end-2014, JPM had hybrid and senior debt as a percent of risk-weighted assets (RWA) of approximately 11%; more than its Pillar 1 capital requirement.

The 'F1+' Short-Term IDRs of JPM's bank subsidiaries reflects substantial liquidity at the banks and typically higher core deposit funding, liquidity resources at JPM that could be extended to the bank, and access to contingent liquidity sources such as Federal Home Loan Bank advances. JPM's and its non-bank operating companies' Short-Term IDRs at 'F1' reflect Fitch's view that there is less surplus liquidity at these entities than at the bank, particularly given their greater reliance on the holding company for liquidity.

RATING SENSITIVITIES - IDRs, VR AND SENIOR DEBT

Going forward, Fitch believes JPM is going to be challenged to deliver meaningful 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 or legal sanctions that impact the firm's 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 officer. Further, significant risk management or operational failures that result in material losses to the firm could also result in a negative rating action. Fitch's rating action assumes that any potential criminal charges as they relate to foreign exchange manipulations will not materially impact ongoing business operations. Absent that, ratings may be adversely impacted, though Fitch has limited visibility into this outcome.

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 charges taken in recent years reflect 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 AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

The SR and SRF reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that JPM becomes non-viable. In Fitch's view, implementation of the Dodd Frank Orderly Liquidation Authority legislation is now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors participating in losses, if necessary, instead of or ahead of the company receiving sovereign support.

Any upward revision to the SR and SRF would be contingent on a positive change in the U.S.'s propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view.

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

Subordinated debt and other hybrid capital issued by JPM and its subsidiaries are all notched down from the common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated debt issued by the operating companies is rated at the same level as subordinated debt issued by JPM reflecting the potential for subordinated creditors in the operating companies to be exposed to loss ahead of senior creditors in JPM. This is also supported by the FSB's proposal to have internal TLAC rank senior to regulatory capital at the operating company. Their ratings are primarily sensitive to any change in the common VR. They have, therefore, been affirmed due to the affirmation of the common VR.

KEY RATING DRIVERS AND SENSITIVITIES - DEPOSIT RATINGS

The upgrade of JPMorgan Chase Bank N.A.'s and Chase Bank USA, N.A.'s deposit ratings is based on the upgrade of their IDRs. Deposit ratings are one notch higher than senior debt reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S.

SUBSIDIARY KEY RATING DRIVERS AND SENSITIVITIES

Bear Stearns Companies LLC and JP Morgan & Co., Inc. are wholly owned subsidiaries of JPM, therefore their IDRs and debt ratings are aligned with the parent.

The rating actions are as follows:

JPMorgan Chase & Co

--Long-Term IDR affirmed at 'A+';

--Long-Term senior debt affirmed at 'A+';

--Senior shelf affirmed at 'A+';

--Long-Term subordinated debt affirmed at 'A';

--Preferred stock affirmed at 'BBB-';

--Short-Term IDR affirmed at 'F1';

--Commercial paper affirmed at 'F1';

--Viability affirmed at 'a+';

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

--Support downgraded to '5' from '1';

--Support Floor revised to 'NF' from 'A'.

JPMorgan Chase Bank N.A.

--Long-Term deposits upgraded to 'AA' from 'AA-';

--Long-Term IDR upgraded to 'AA-' from 'A+';

--Long-Term senior debt upgraded to 'AA-' from 'A+';

--Long-Term subordinated debt affirmed at 'A';

--Short-Term IDR upgraded to 'F1+' from 'F1';

--Short-Term debt upgraded to 'F1+' from 'F1';

--Short-Term deposits affirmed at 'F1+';

--Viability affirmed at 'a+';

--Market linked deposits upgraded to 'AAemr' from 'AA-emr';

--Support downgraded to '5' from '1';

--Support Floor revised to 'NF' from 'A'.

Chase Bank USA, N.A.

--Long-Term deposits upgraded to 'AA' from 'AA-';

--Long-Term IDR upgraded to 'AA-'from 'A+';

--Long-Term senior debt upgraded to 'AA-' from 'A+';

--Long-Term subordinated debt affirmed at 'A';

--Short-Term IDR upgraded to 'F1+' from 'F1';

--Short-Term debt upgraded to 'F1+' from 'F1';

--Short-Term deposits affirmed at 'F1+';

--Viability affirmed at 'a+';

--Support downgraded to '5' from '1';

--Support Floor revised to 'NF' from 'A'.

JPMorgan Bank & Trust Company, National Association

--Long-Term deposits upgraded to 'AA' from 'AA-';

--Long-Term IDR upgraded to 'AA-' from 'A+';

--Short-Term IDR upgraded to 'F1+' from 'F1';

--Short-Term deposits affirmed at 'F1+';

--Viability affirmed at 'a+';

--Support downgraded to '5' from '1';

--Support Floor revised to 'NF' from 'A'.

JPMorgan Chase Bank, Dearborn

--Long-Term deposits upgraded to 'AA' from 'AA-';

--Long-Term IDR upgraded to 'AA-' from 'A+';

--Short-Term IDR upgraded to 'F1+' from 'F1';

--Short-Term deposits affirmed at 'F1+';

--Viability affirmed at 'a+';

--Support downgraded to '5' from '1';

--Support Floor revised to 'NF' from 'A'.

Bear Stearns Companies LLC

--Long-Term IDR affirmed at 'A+';

--Long-Term senior debt affirmed at 'A+';

--Long-Term subordinated debt affirmed at 'A';

--Short-Term IDR affirmed at 'F1'.

J.P. Morgan Securities LLC

--Long-Term IDR upgraded to 'AA-' from 'A+';

--Short-Term IDR upgraded to 'F1+' from 'F1';

--Short-Term debt upgraded to 'F1+' from 'F1'.

JPMorgan Clearing Corp (formerly Bear Stearns Securities Corp)

--Long-Term IDR upgraded to 'AA-' from 'A+';

--Short-Term IDR upgraded to 'F1+' from '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 affirmed at 'BBB'.

Bank One Corp

--Long-Term subordinated debt affirmed at 'A'.

JP Morgan & Co., Inc.

--Long-Term senior debt affirmed at 'A+';

--Long-Term subordinated debt affirmed at 'A'.

Morgan Guaranty Trust Co. of New York

--Long-Term senior debt upgraded to 'AA-' from 'A+'.

NBD Bank, N.A. (MI)

--Long-Term subordinated affirmed at 'A'.

Washington Mutual Bank

--Long-Term deposits upgraded to 'AA' from 'AA-'.

Collateralized Commercial Paper Co., LLC

--Short-Term debt upgraded to 'F1+' from 'F1'.

Collateralized Commercial Paper II Co., LLC

--Short-Term debt upgraded to 'F1+' from 'F1'.

Additional information is available at www.fitchratings.com

Applicable Criteria and Related Research:

--'Global Bank Rating Criteria' (March 20, 2015).

Applicable Criteria and Related Research:

Global Bank Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984980

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150519007178/en/

Fitch Ratings
Primary Analyst:
Meghan Neenan, CFA, +1-212-908-9121
Senior Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Joo-Yung Lee, +1-212-908-0560
Managing Director
or
Committee Chairperson
Gordon Scott, +44 20 3530 1075
Managing Director
or
Alyssa Castelli, +1-212-908-0540
Media Relations, New York
[email protected]
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
[email protected]

Source: Fitch Ratings

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