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TEXT-Fitch: JP Morgan Q3 results highlight franchise strength

(The following statement was released by the rating agency)

Oct 12 - JP Morgan Chase

(JPM) reported record net income of $5.7 billion on the back of strong business performance across the company's major business lines. Revenues and earnings showed marked improvement on a year-on-year basis as well as sequentially reflecting improved business trends. Nonetheless, JPM recognized a number of significant items pertaining to increases in litigation reserves, reduction in mortgage provisions, gains from the extinguishment of debt, and charges related to new regulatory guidance on real estate portfolios. Adjusting for these items, Fitch Ratings estimates JPM had pretax income of $7.7 billion vs. reported pretax income of $7.9 billion.

Adjusting for DVA, the investment bank performed well with growth in investment banking fees and fixed income businesses reporting solid increases, particularly on Y-o-Y basis as last year's quarter was particularly weak. JPM reported higher Investment Bank VaR during the quarter, although this partly reflects previously announced plans to move the synthetic credit portfolio from the CIO into the investment bank and related model changes. JPM incurred incremental losses on its CIO synthetic credit portfolio during quarter, but within Fitch's expectations.

Card Services and Auto net income was down modestly sequentially to $954 million. Credit card outstanding continued to decline to $124.3 billion although purchase volumes were up vs. prior year. Auto originations were up 7% Y-o-Y, although outstandings were flat sequentially. Credit quality continues to modestly improve in this segment, although Fitch believes these improvements will begin to plateau. Results in Commercial Banking were strong on a Y-o-Y basis but more modest sequentially. Commercial loans continued to grow while credit quality remained solid.

JPM's Treasury and Security Services marked a modest decline in net income during the quarter attributed to seasonal activity in securities lending and depositary receipts, although assets under custody grew 12% to $18.2 trillion. The Asset Management segment was buoyed by improved market levels, as assets under supervision grew $225 billion to $2.0 trillion and assets under management were up $127 billion to $1.4 trillion. Fitch continues to regard these businesses as stable contributors to revenues and earnings.

The Retail Financial Services segment posted net income of $1.4 billion reflecting strong mortgage origination volumes. Within this, Consumer & Business Banking was weaker on both a sequential and Y-o-Y basis as revenues were negatively affected by reduced interchange fees and higher expenses related to investments in sales force and branches. Similar to many other banks, the deposit margin in this segment noticeably declined to 2.56% from 2.82% the prior year given the low rate environment.

Deposits continued to grow and were $394 billion. The mortgage business was strong with record mortgage production net income of $563 million reflecting strong loan origination volumes and wider margins offset by higher servicing costs. Mortgage application volume was up significantly as well, suggesting that volume trends will continue into next quarter. Servicing expenses were up 23% and will likely remain elevated reflecting industry changes to servicing standards.

JPM continues to make progress on meeting Basel III capital requirements. It reported a Tier 1 Common ratio of 8.4% for the quarter based on the proposed implementation outlined in U.S. regulators notice of proposed rulemakings (NPRs). Fitch expects that JPM will continue to build capital in anticipation of the additional capital requirements as a designated globally systemically important financial institution. While JPM ceased its share buy back program following losses in the CIO, Fitch expects that JPM may resume such activity if it re-submits its capital plans and receives approval from the Federal Reserve.

Contacts: Joo-Yung Lee Managing Director +1 212-908-0560 One State Street Plaza New York, NY 10004 Christopher Wolfe Managing Director +1 212 908-0771

Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com.

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