CREDIT RATING REPORT OF JP MORGAN

ASSUMPTIONS:
1. Currency amounts expressed with$ are in U.S. dollars (USD) unless
otherwise denoted.
2. Credit Analysis as of 14 Nov 2014.
3. Business Analysis as of 14 Nov 2014.
4. Estimates as of 13 Nov 2014.
5. Committee members voting on rating do not own securities issued.
CONTENT
1.
2.
3.
4.
5.
6.

Credit Analysis
Business Analysis
Analyst Notes
Morningstar Analyst Forecasts
Comparable Company Analysis
Methodology

1) CREDIT ANALYSIS:
Morningstars credit rating of A+ for J.P. Morgan Chase reflects the companys
"fortress" balance sheet, excellent operating performance, and superior
management through the credit crisis. JPMs Tier 1 common ratio stands at 10%, a
very healthy number for a bank of its size and allows JPM to meet any new possible
regulatory requirements. Total nonperforming assets are less than 1% of the
balance sheet and allowance for loan losses stands at more than 4% of total
retained loans. Net interest margin has stabilized at a respectful 2.9%, and JPM
generates almost half of its revenue from sources other than traditional lending.
In our Stress Test analysis, we assigned an average underwriting quality rating to J.P.
Morgan's loan and securities portfolios. J.P. Morgan received a fair Stress Test score
as well as a fair Solvency Score, as its impressive earnings power and strong
reserve position were offset by its lower relative tangible common equity and
deposit funding levels when compared to all banks in the U.S., regardless of size.
We awarded J.P. Morgan a good Business Risk score due to its excellent
management, geographic and business line diversification, size, and narrow moat.

Capital Structure
With its 7.3% Tier 1 common ratio, J.P. Morgan meets the 2019 standards set by the
Basel III announcement. However, the additional burden for systemically important
banks--which J.P. Morgan will qualify as--has yet to be set. Aside from its strong
equity base, we believe J.P. Morgan continues to benefit from "too big to fail" status.
Despite the best efforts of Congress, the disappearance of too big to fail is not
likely, in our opinion. We note that the government stepped in with $25 billion of
funding earlier in this crisis--taking a ranking even below Tier 1 qualified trust
preferred stock--and while trying to unwind one large bank failure may be possible ,
another systemic crisis would probably to lead to another system wide bailout.
Financial Health
After sailing through two rounds of government stress tests, J.P. Morgan was the first
of the top four retail banks to repurchase its TARP funds and one of the first to raise
its dividend. J.P. Morgan remains well capitalized, with the resources to withstand
the economic recession. As of March 31, J.P. Morgan's Tier 1 common equity ratio
was 7.3% on a Basel III basis--meaning it already meets the 2019 basic standards.
Enterprise Risk
Despite some heroic actions during the crisis, J.P. Morgan's size and profits have
made the company a target of legislators looking to score political capital. This has
resulted in items like the upcoming reduction in debit card interchange fees.
Additionally, much of the Dodd-Frank bill was written so vaguely that it is difficult to
say with certainty the bank will not suffer permanent harm. On top of all of this, J.P.
Morgan is facing years of legal struggles associated with issues including robosigning, Bernie Madoff, and its purchases of Bear Stearns and WaMu.

2. Business Analysis
Thesis
J.P. Morgan Chase has received--and earned--high praise throughout the credit crisis.
While the company deserves kudos for its accomplishments during the crisis, as
well as for the mistakes it didn't make in the preceding years, we are more excited
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about its future opportunities. We believe much of its success is attributable to wellknown CEO Jamie Dimon and his tight grip on the risks the company takes as a
whole. Now, with a stronger-than-ever franchise, J.P. Morgan must show that it can
execute and meet its return targets. We believe management has laid out a clear
path for each of its divisions and must now prove that its glowing reputation is well
deserved.
Dimon joined J.P. Morgan in 2004 following the acquisition of Bank One, which he
then ran. The integration was not a smooth one, and returns suffered. By the time
Dimon assumed the top spot in 2006, he inherited a wide-ranging empire that did
not function all that well as a whole. Precrash returns on equity were only 8%-13%,
while other major players were posting returns in the high teens. Dimon set about
consolidating operations with a focus on\ profitability and intelligent risk-taking. He
assured that individual business lines did not simply shift questionable assets and
activities into other pockets of the firm. These efforts were key to J.P. Morgan's
success as the credit crisis hit.
Having created a "fortress balance sheet" leading up to the crisis, J.P. Morgan was
able to expand while rivals faltered. In 2008, the bank acquired Bear Stearns and
Washington Mutual--relative giants on their own--on terms so attractive they would
have been unthinkable only months before the deals were struck. While the bank-like all of its peers--accepted government Troubled Asset Relief Program capital
during the crisis, it was the first to return these funds to the taxpayer when the
storm began to pass. It was also one of the first to be approved for a dividend
increase. The new rate of $0.25 per quarter is meaningful, but still allows the bank
to expand its capital base to meet the upcomingBasel III requirements.
As a result of the savvy moves made during the crisis, J.P.Morgan is positioned to
have earnings exceed our estimated 11% cost of equity despite the hits it will take
from the financial reform bill and Basel III rules. J.P. Morgan's internal return on
equity goals average out to a 14.6% return on equity for the company through the
cycle.
Each business line's goals are attainable even with the burden of overdraft
regulation, debit card interchange fee losses, and higher capital standards. If J.P.
Morgan can continually hit its goals, this stock will be a winner for investors, but it
will require the discipline and close eye on risk that Dimon has become famous for.
Economic Moat
J.P. Morgan operates in a highly commoditized industry. However, its nationwide
footprint has allowed the company to achieve significant economies of scale,
lowering its operating costs per dollar of revenue compared with most of its smaller
competition. This is the primary basis for our narrow moat. Additionally, the
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company's strong reputation for safety has lured worried customers away from
competitors during this uncertain time.
Moat Trend
The potential for much greater regulatory restrictions is likely to reduce the bank's
ability to generate excess returns on invested capital. Additionally, roughly 27% of
J.P. Morgan's earnings in a normal year are generated from its investment bank,
where a sustainable competitive advantage is nearly impossible to achieve.
However, even considering the negative impact of legislation, we do not expect the
additional scrutiny to eliminate J.P. Morgan's ability to generate excess returns. The
company has a low-cost nationwide retail franchise, a strong asset-management
division, and the scale to compete in global custody.
The potential growth in these moat worthy businesses matches the downside of
regulation, causing us to believe our narrow moat rating is stable.
3. Analyst Notes: