Credit Analysis of Jp Morgan

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In 2014 the company’s revenue was $91,066 million, compared to $96,381 million in 2013, and $93,646 in 2012. Revenue decreased 0.6% from 2013-2014, and increased 2.9% from 2012-2013, respectively. (Figure 4)

The company’s operating income also increased from $25,914 million in 2013, to $29,792 million in 2014, and decreased from $28,917 million in 2012 to $25,914 million in 2013. Operating income as a percentage of volatility each year; 14.96% increased in 2013, and 11.59%% in 2012. Net income increase in consecutive years as well, $16,593 million in 2013, $20,093 million in 2014, and $19,877 in 2012. JP Morgan’s net income increased 21% between 2013 and 2014, increasing the company’s competitive position.

(Figure 5)

The company’s short term debt consists of notes, and obligations due within the fiscal year. JP Morgan currently has $2,154 of notes which mature in the year 2012. The company also redeemed its $1.25 billion, 4.85% notes on February 7th, 2012, prior to its August 15,2012 maturity. The long term debt due within one year increased from $1,755 in 2010, to $2,749 in 2011, a 56.6% increase. The notes payable, however, decreased from $1,467 to $541 or a 63% reduction from 2010 to 2011. Notes payable to banks decreased $889 million, or 67%, and notes payable to related companies fell 41% from $157 to $92 million. Notes payable trade, however, increased from $0 to $28 million. (Figure 6)

The company doesn’t look to have major risk default or downgrade risk. However, if there was a possibility of downgrade risk for JP Morgan, it would be over the long term. The long term downgrade risk can be attributed to the increase in outstanding long term debt, and the debt of the 2008 acquired the Bear Stearns Companies Inc., strengthening its capabilities across a broad range of businesses, including prime brokerage, cash clearing and energy trading globally.

Analysis of capacity to repay

A. Industry Trends

In the rest half of 2014, equity indices scaled new heights, bond markets kept credit spreads at post-crisis lows (Figure 7), and volatility stayed well below its long-term average (Figure 8). That said, recent concerns over global growth and geopolitical turmoil in Europe and the Middle East have caused equity market slides and a spike in volatility, adding a dose of caution to investor sentiment. (Deloitte, 2) Strong equity markets and reduced uncertainty propped up M&A activity, marked by the return of large deals. Equities trading revenues have also remained largely either stable or improved.

Capital markets firms are getting ready to move on after yet another year of intense change. Signs suggest acceleration may be near. According to Deloitte’s baseline projections, the U.S. economy will step into higher gear next year and bring along with it the long-foreseen rise in interest rates (Figure 9).

The 2014 surge probably reacted pent-up demand after years of repressed deal- making, so participants might expect activity to tail off in 2015 — especially once rates rise, increasing debt costs and potentially dampening valuations. But, on the other hand, the level of growth that would permit rising rates should be enough to keep M&A revenues robust, if not quite at the levels seen in 2014. (Deloitte, 3)

2014 marked a divergence from the capital markets firm’s revenue trends of the last few years. The traditional revenue driver at many investment banks, FICC trading, was undercut by declining volatility.1 Fortunately, the surge in merger activity helped offset the slowdown elsewhere. (Figure 10) In the meantime, exchanges and other market intermediaries have had to reexamine business models facing increasing challenges.

B. The Regulatory Environment

Regulatory action in the past few years has touched almost every capital market activity — ranging from over-the- counter (OTC) derivatives and equity market structure to securitization. Some of these measures have had pointed objectives, including ensuring a fair marketplace and curbing systemic risk. (Deloitte, 11) However, almost all regulation has sought to address one demand: greater transparency.

In 2015, market structure scrutiny will intensify. First, firms’ efforts to comply with the technology, control, and security requirements of the U.S. Securities and Exchange Commission’s (SEC’s) proposed Regulation Systems Compliance and Integrity (Reg. SCI) will gain pace through investment in the necessary reporting infrastructure. Second, high-frequency trader registration, improved disclosure of dark pool activity, and examinations of exchange pricing models will all be under consideration. Last, pilot programs proposed to spur liquidity in the trading of small stocks by altering tick-sizes will be conducted. (Deloitte, 11)

Despite some heroic action during the crisis, JP Morgan’s size and profits have made the company a target of legislators looking to score political capital. 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, JP Morgan is facing years of legal struggles associated with issues including robo-signing, Bernie Madoff, and its purchases of Bear Steams and WaMu. (Morningstar)

C. Basic Operating and Competitive Position

With its 7.3% Tier 1 Common ratio, JP Morgan meets the 2019 standards set by the Basel III announcement. However, the additional burden for systemically important banks-which JP Morgan will qualify as-has yet to be set. Despite the best efforts of Congress, the disappearance of too big to fail is not likely, in Morningstar analyst’s opinion. They noted 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 systemwide bailout. (Figure 11) (Morningstar)

D. Financial Position and Source of Liquidity

JP Morgan operates in a highly commodified industry. It has received and earned high praise throughout the credit crisis. By the time the JP Morgan’s CEO, Jamie 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%. (Figure 12)

JP Morgan primary focus on three markets: bonds, CDs, and EDF (Expected Default Frequency) The three market-implied