JPMorgan's Ratings Deteriorated

Moody's Investors Service changed its rating outlook on JPMorgan Chase & Co and subsidiaries to negative from stable. JPMorgan Chase & Co.'s (JPM) senior debt is rated Aa3 and the ratings on its lead bank, JPMorgan Chase Bank N.A., are

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Moody’s Investors Service changed its rating outlook on JPMorgan Chase & Co and subsidiaries to negative from stable. JPMorgan Chase & Co.’s (JPM) senior debt is rated Aa3 and the ratings on its lead bank, JPMorgan Chase Bank N.A., are B for bank financial strength (BFSR) and Aa1 for long-term deposits. Moody’s BFSRs represent Moody’s opinion of a banks intrinsic safety and soundness and, as such, exclude certain external credit risks and credit support elements.

The ratings continue to reflect JPM’s comparatively strong capital position, which is further supported by the company’s recent decision to cut its quarterly common dividend by approximately $1.25 billion; prudent liquidity; and a broad franchise that generates strong pre-tax, pre-provision income.

In the current recession, Moody’s is assuming JPM will not generate sizable amounts of capital because: 1) The recession, coupled with continued capital market illiquidity, could continue to dampen investment banking revenue, which remains an important revenue contributor to JPM.

2) An ailing housing market and higher unemployment have increased loss estimates on JPM’s residential mortgage portfolio. In particular, it has become more likely that additional charges will need to be taken against legacy WaMu’s $145 billion residential mortgage portfolio beyond JPM’s $30 billion marks taken against that portfolio. 3) Increased credit costs taken against JPM’s credit card portfolio are also very likely.

Moody’s said that the most likely reason for JPM’s rating to be downgraded would be that its adjusted tangible equity ratio falls towards 5% from its current level of approximately 7.9%. For this to occur in the medium-term, losses would need to be greater than Moody’s expects.

In addition to strong capital ratios, JPM’s bank financial strength rating of B is supported by JPM’s valuable franchise, which the credit crunch has not impaired.

“This level of capital gives JPMorgan flexibility to take heightened credit costs and still maintain good capital ratios,” says Sean Jones, senior vice president, Moody’s.

“Its sustainability in its major business lines are supported by high market share and good execution. If JPM’s capital ratios deteriorate more than anticipated, expect greater downward pressure on its standalone bank financial strength rating than on its deposit and senior and subordinated debt ratings, which incorporate systemic support.”

L.D.

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