Fitch: JPMorgan Chase Results Largely As Expected; Credit Trends Remain Positive

JPMorgan Chase & Co.'s (JPM) net income of $5.3 billion for the fourth quarter of 2013 (4Q'13), reflected a continuation of strong credit trends and asset management performance, stable investment banking and commercial banking results, weak mortgage production, and a variety of significant items (including a new funding valuation adjustment [FVA]), which netted to approximately $407 million of after-tax losses. Returns on tangible common equity were 14% for the quarter compared to 15% a year earlier.

As previously announced, quarterly results included additional litigation expenses, due largely to announced Madoff settlements. These charges, in addition to negative DVA and FVA adjustments, were largely offset with gains on the sale of Visa shares, a real estate gain, and reserve releases in real estate and card services. Legal costs are likely to remain elevated in coming quarters, but Fitch expects the incremental impact to earnings will be manageable. Still, the emergence of material and unexpected litigation losses could alter the agency's view, particularly given where the firm's current capitalization ratios compare to the broader peer group.

Results for the Corporate and Investment Bank (CIB) were relatively flat year over year after adjusting for a $1.5 billion loss from implementing a FVA framework for OTC derivatives and structured notes. DVA losses of $536 million in the quarter were similar to a $567 million adjustment in 4Q'12. Investment banking fees experienced a mix shift, with declines in debt underwriting being offset by strength in equities. The CIB average VaR remained relatively low, at $42 million for the quarter.

Net income in the Consumer and Community Banking (CCB) segment, was up from 4Q'12, as declines in provision expenses and non-interest costs offset a drop in revenue, due largely to declines in mortgage. Origination volume was down 54.5% year over year and 42.5% from the prior quarter, which appears to be in-line with other large market participants. Production income would have been marginally positive without $404 million of non-MBS related legal expenses in the quarter, but income is expected to be negative in 1Q'14 given the challenging market conditions. The servicing business turned a modest profit and expenses were close to the $600 million target, adjusting for an addition to compensatory fee expense reserves. Credit trends in the real estate portfolio remained on a positive trajectory, leading to $950 million of reserve reductions, including a $750 million reduction related to purchased credit-impaired loans. Fitch expects additional reserve releases in real estate in 2014.

The credit card business remains strong, with record sales volume and what appears to be a bottoming of loan balances. Net charge-off and delinquency rates improved modestly and supported a $300 million reserve release. Fitch believes credit metrics are nearing a trough and expects minimal reserve releases, if any, in 2014.

Commercial Banking (CB) remains a very steady performer within JPM, and had net income of $693 million in the quarter. Loan growth was solid in the segment with end of period balance up 7% year-on-year and corporate deposits were up about 3%. Credit quality remained very strong, with net charge-offs of 0.07%. Asset Management (AM) generated strong results with net income of $568 million. This reflects solid net inflows of $23 billion. Assets under management (AUM) reached $1.6 trillion during the quarter.

The bank's core net interest margin, which excludes the impact of CIB's market-based activities, was up 4 basis points sequentially, to 2.64% due to higher investment securities yields. JPM is forecasting relatively stable NIM over the near term as stronger security yields are offset by continued loan spread compression.

The bank's liquidity profile remains sound, with $522 billion of high quality liquid assets. Additional clarity regarding the direction of the net stable funding ratio (NSFR) has been released in a consultative document, and JPM believes the firm is currently compliant with requirements.

JPM's Basel III Tier 1 Common ratio reached 9.5% at year-end; in-line with the bank's target. Management expects this ratio to reach 10% by year-end 2014, with a longer-term target in a 10%-10.5% range. The supplementary leverage ratio (SLR) was 4.7% at year-end for the firm and the bank. JPM expects this ratio to reach 5% at the firm level by year-end 2014, with a 5.5% target longer-term. Fitch regards JPM's capital levels to be consistent with its current ratings and would expect the bank to achieve full compliance with all regulatory requirements, well ahead of required implementation.

Additional information is available at 'www.fitchratings.com'.

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