(The following statement was released by the rating agency)
Oct 12 - Standard & Poor's Ratings Services today said that its ratings on JPMorgan Chase & Co. (JPM; A/Negative/A-1) are not affected by the company's third-quarter results, which were above our expectations, given current operating conditions.
Standard & Poor's adjusted pretax earnings were roughly $7.3 billion, up from roughly $3.9 billion in the prior-year period. Results include a litigation expense of $700 million but exclude an $889 million gain resulting from the elimination of some of its trust preferred securities (TRUPS).
Positively, risk from JPM's synthetic credit portfolio, which resulted in significant trading losses in the first two quarters, has been significantly reduced. The portfolio generated only a modest loss in the third quarter. In addition, firmwide average Value at Risk (VaR) declined to $115 million in the third quarter, down from $201 million the previous quarter.
JPM's Standard & Poor's adjusted revenue rose by 12.0% in the third quarter (year over year) to $25.2 billion, mostly as a result of stronger Investment Banking revenue, largely because of strong debt underwriting results and favorable year-over-year comparisons. Given new support mechanisms in the eurozone and the absence of another flare-up in the crisis, we expect fourth-quarter results to remain strong versus fourth-quarter 2011. Separately, Retail Financial Services benefitted from continued strong mortgage volume, reflecting historically low mortgage rates and high margins. We expect this trend to continue at least through the fourth quarter.
The net interest margin (NIM) declined 4 basis points (bps) sequentially, to 2.43%, largely as a result of run-off of higher-yielding assets and limited reinvestment opportunities. Given the flattening of the yield curve, we expect the NIM to continue to decline over the next few quarters. The impact on net interest income should be offset somewhat by growth in JPM's loan book in the coming quarters, particularly in jumbo loans.
Credit quality improved but was obfuscated in the third quarter by new guidance that resulted in higher nonperforming assets. As a result, nonperforming assets totaled $12.5 billion, including $1.7 billion related to the new regulatory guidance, versus nonperforming assets of $11.4 billion the previous quarter. We expect net charge-offs to continue to decline in 2013, albeit at a more moderate pace than 2012. Although JPM released roughly $900 million, reserves are adequate compared with nonperforming loans.
We believe direct exposure to GIIPS countries (Greece, Ireland, Italy, Portugal, and Spain) remains manageable, but a worsening of the European crisis could still have a negative ratings impact.
JPM's Basel I Tier 1 common ratio totaled 10.4% in the third quarter, up 50 bps sequentially. We believe that JPM's share repurchase program, which is currently suspended, will commence in the first quarter of 2013, assuming regulatory approval, and would subsequently slow the rate at which JPM builds capital.
Our rating outlook on JPM remains negative as we continue to assess possible further fallout from JPM's risk management missteps. We continue to look into JPM's risk management practices to ensure that missteps were isolated to JPM's CIO unit, and we await the outcome of an internal assessment of the company's risk management practices by its Board of Directors. We also continue to assess if and how future capital plans affect the company's ability to build capital. Furthermore, we need to assess ongoing legal issues and ensure that JPM is adequately reserved.
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(New York Ratings Team)