Last Friday, Standard & Poor’s (S&P) Ratings Services lifted its outlook on JPMorgan Chase & Co. (JPM) to ‘Stable’ from ‘Negative.’ The rating agency is impressed by JPMorgan’s improved credit quality and its capability to generate outstanding earnings growth. The agency also believes that JPMorgan is now well positioned to deal with any setback from the economic revival.
S&P confirmed JPMorgan’s commercial paper rating at ‘A-1’ and senior unsecured debt rating at ‘A+’. Additionally, the rating agency affirmed counterparty credit rating on JPMorgan Chase Bank N.A., the company’s subsidiary, at ‘AA-/A-1+’.
Though the threats from financial regulations are likely to weigh on revenue growth of many of the U.S. banks, S&P believes that JPMorgan is on the right track to overcome the issues and maintain growth over the medium term. However, the rating agency expects a decline in net interest margin (NIM) and fall in loan demand, which will drag revenue growth this year. But with further plunge in provision for credit losses, the company’s overall results will improve.
S&P believes that JPMorgan is very well positioned to tackle any possible deterioration in the overall economy, which will lead to a fall in the credit quality. But still the rating agency stated that it could downgrade the outlook for the company, if the quality of loan portfolio declines or home prices fall significantly.
Apart from S&P, Fitch also maintains a ‘Stable’ outlook on JPMorgan. However, Moody’s Investors Service, the ratings arm of Moody’s Corp. (MCO), has a ‘Negative’ outlook on the company.
The confluence of strong client inflows, improved equity-centric activities, growth in credit cards and investment products coupled with steady international expansion will usher in meaningful revenue opportunities for JPMorgan. Furthermore, the rating upgrade by S&P will act as a positive catalyst and boost the investors’ confidence.
We anticipate that JPMorgan will continue to receive synergies from a reduction in reserves for future losses, business diversification and a strong capital position, but sluggish lending activity, weak customer trading and pressure on NIM as well as the impact of legal and regulatory challenges will drag down future earnings.
JPMorgan currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the shares.
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