J.P. Morgan Chase Plans New Five-Year Benchmark Issuance See Page 5 for the full Analyst Note from 22 Jun 2011 Morningstar Credit Committee credit@morningstar.com Committee members voting on rating do not own securities issued Credit Analysis as of 14 Apr 2011 Business Analysis as of 14 Apr 2011 Estimates as of 13 Apr 2011 Currency amounts expressed with $ are in U.S. dollars (USD) unless otherwise denoted. Contents Summary Credit Analysis Business Analysis Analyst Notes Morningstar Analyst Forecasts Comparable Company Analysis Methodology 1 2 3 5 8 10 11 Credit Perspective 10 May 2011 Morningstar s credit rating of A+ for J.P. Morgan Chase reflects the company s "fortress" balance sheet, excellent operating performance, and superior management through the credit crisis. JPM s 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. These factors led to a raw credit score in the BBB+ rating category. However, we expect the bank to grow earnings and capital rapidly over the next several years. Taking into account these factors, and given its size and importance to the global economy, J.P. Morgan was assigned a rating of A+, a threenotch upgrade from its model-driven score. Ratio Analysis (%) Capital Metrics 2009 2010 2011(E) 2012(E) Tier 1 Capital Ratio 11.1 12.1 Tangible Common Equity/Tangible Assets Credit Quality Allowance for Loan Losses/Net Charge-offs 5.3 5.6 6.0 6.0 137.6 136.3 168.0 177.6 Net Charge-Offs/Gross Loans 3.3 3.6 2.1 1.6 Earnings Metrics Return on Assets 0.6 0.8 1.0 1.1 Return on Average Common Equity 7.0 10.2 11.8 12.7 Net Interest Margin 2.8 2.8 2.5 2.8 Efficiency Ratio 51.7 60.4 62.9 60.2 Operating Summary (USD Mil) 2009 2010 2011(E) 2012(E) Net Interest Income 51,152 51,001 47,901 54,865 Non-Interest Income 48,172 48,728 50,445 50,525 Net Revenue 99,324 99,729 98,346 105,390 Non-Interest Expense 52,352 61,196 62,611 64,083 Pre-Tax, Pre-Provision Earnings 48,082 41,498 36,935 42,507 Provision for Loan Losses 32,015 16,639 5,449 6,350 Net Income 11,728 15,764 19,891 22,910 Capital Structure Prior Year Prior Quarter Current Book Equity 156.57 Bil 168.31 Bil 172.8 Bil Total Deposits 925.3 Bil 930.37 Bil 995.83 Bil Debt 362.39 Bil 340.34 Bil 352.34 Bil Source: Morningstar Issuer Profile J.P. Morgan Chase is one of the top four bank holding companies in the United States, based on assets. It is the top corporate syndicated lender and operates banking offices globally. It is also a large investment bank specializing in debt markets, and it operates large units focused on securities custody, credit cards, asset management, and cash flow servicing. Page 1 of 12
Credit Analysis Business Risk Summary Size (Assets in USD Mil) 2,212,488 Economic Moat Rating Narrow Equity Uncertainty Rating (uncertainty of equity residual) High Geographic/Business Line Concentration Very Low Management Grade Excellent Dependence on Capital Markets Low Business Risk Score Good Stress Test Summary (USD Mil, as of Dec 2010) Tangible Common Equity 122,688 Risk Weighted Assets 1,193,529 Tangible Assets 2,145,448 Post-Stress TCE/Risk-Weighted Assets(%) 9.8 Post-Stress TCE/Tangible Assets(%) 5.5 Potential Loan Losses/TCE(%) 51.1 Potential Securities Losses/TCE(%) 29.0 Stress Test Score Fair Solvency Score Summary (as of Dec 2010) Ratio(%) (NPAs + Past-Due Loans)/Assets 2.8 Allowance/(NPAs + Past-Due Loans) 50.0 (NPAs + Past-Due Loans)/Tangible Common Equity 58.8 Tangible Common Equity/Tangible Assets 5.0 Deposits/Liabilities 47.9 Pre-Tax, Pre-Provision Earnings/Average Assets 1.9 Solvency Score Fair Solvency Score History Credit Rating Pillars Peer Group Comparison JPM Sector Business Risk 2.6 3.6 Stress Test 5.0 4.0 Solvency Score 4.7 4.0 Distance to Default 6.0 3.7 Credit Rating A+ A- 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. 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 systemwide bailout. 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 robo-signing, Bernie Madoff, and its purchases of Bear Stearns and WaMu. Source: Morningstar Estimates Note: Scoring is on a scale 1-10; 1 being Best and 10 being Worst. Page 2 of 12
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 about its future opportunities. We believe much of its success is attributable to well-known 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 upcoming Basel 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 commodified 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 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 Page 3 of 12
Business Analysis division, and the scale to compete in global custody. The potential growth in these moatworthy businesses matches the downside of regulation, causing us to believe our narrow moat rating is stable. Page 4 of 12
Recent Notes from our Credit and Equity Analysts J.P. Morgan Chase Plans New Five-Year Benchmark Issuance 22 Jun 2011 J.P. Morgan Chase JPM (A+) is coming to market today with a new five-year benchmark issuance. Details on pricing and size are yet to be determined, but we think fair value on the new issuance would be in the area of 150 basis points above Treasuries, which also is in line with where the existing five-year trades. We remain positive on J.P. Morgan from a credit perspective, as the firm is well capitalized with a solid balance sheet. As investors begin to look to the financial sector to pick up yield for rating, JPM is a top choice. Investors with a little more risk appetite can look to names such as Citigroup C (A-), where they can pick up more than 50 basis points of spread over JPM for a lower rating of just two notches. Losing 'Too Big to Fail' Not Too Big a Deal for Our Ratings 08 Jun 2011 Recently, there has been a lot of press about the rating agencies and how they incorporate "too big to fail" status into their bank ratings. One rating agency gives some banks as much five notches of uplift for TBTF. With the possibility that further rulemaking associated with the Dodd-Frank financial reform bill will eliminate TBTF, the rating agencies are preparing the market for the possibility of massive downgrades in the banking sector. rated and trade almost in line with U.S. Treasuries. We were also concerned that political backlash against rescues of financial firms could lead to a lack of protection in the future, regardless of the economic consequences. We therefore incorporate only a one-notch rating upgrade for the largest banks, acknowledging the possibility of assistance without basing our ratings on political analysis. Without TBTF status, it appears that rating agencies would rate big banks like Citibank C and Bank of America BAC in the mid to high BBB area, down from their low AA/high A current ratings. Five-year credit default swaps on Citi and B of A are about 140 and 160 basis points, respectively. It is clear to us that the market already discounts the TBTF status, and while we expect some increase in CDS should the TBTF status be more explicitly removed, we doubt that it would have a meaningful impact. Counteracting the loss of TBTF is the overall improvement in the health of the big banks. Recently, we upgraded Citi from BBB+ to A- as the bank has raised its Tier 1 common ratio more than 200 basis points in the past year to 11.3%. We also placed Citi bonds on our investment-grade Best Ideas list. We believe bond investors should evaluate the banks on their stand-alone merits and invest accordingly, as shaking hands with the government becomes far more risky as free-market advocates gain sway in Congress. But even on that basis, bank bonds still trade wide to the rest of the market and bond investors who do their homework will benefit from the juicy yields. For Morningstar, the possibility of certain banks losing their TBTF status would have little effect. We generally give a one-notch upgrade from our model-driven rating for the effects of TBTF. We have always believed that businesses should be rated on their merits, rather than as extensions of the federal government. In our view, if the large banks truly possess long-term TBTF status, then they should be JPM Plans to Issue New 10-Year Benchmark Issuance 05 May 2011 J.P. Morgan Chase (A+) is coming to market today with a new 10-year benchmark issuance. There are no details on exact size, but we expect the size to be over $1 billion. The price talk is 150 basis point area. Last October J.P. Morgan Page 5 of 12
Recent Notes from our Credit and Equity Analysts came to market with another 10-year benchmark deal that priced in the 180 area, but that issuance has subsequently tightened to the 140s. This new is issuance looks several basis points cheaper to the existing 10-year, and we expect it to trade well on the opening break. We remain positive on J.P. Morgan from a credit perspective, as the firm remains well capitalized with a solid balance sheet. For comparison, Bank of America's (A-) 10-year notes trade in the 175 area, and we believe the J.P. Morgan notes represent a slightly better value, given our better credit outlook for it. consent order will help settle the robo-signing foreclosure problems with regulators, but J.P. Morgan still faces the fines and settlement with the state attorneys general. Credit quality continues to improve. Credit card losses were down to 6.2% of average loans compared with 7.1% last quarter, and prime mortgage net charge-offs were down to 1.06% of average loans from an adjusted 1.56% last quarter. This improvement in losses and continued improvement in delinquencies allowed the bank to release $2.5 billion of reserves during the quarter--primarily from its credit card operations. J.P. Morgan Takes Mortgage Charge but Reports Stellar First-Quarter Results 13 Apr 2011 J.P. Morgan JPM beat street and our expectations for the first quarter, earning $1.28 per share. Investment banking, asset management, and treasury services results were all excellent. Credit cards continued to show improvement. However, consumer banking results were hurt by a large one-time mortgage-related charge and continued losses from mortgage putbacks and loan losses. Overall, we were pleased with the results and are maintaining our fair value estimate. The bank recorded a $1.1 billion charge on its mortgage servicing asset. This is a result of a consent order from the OCC that will increase the expenses related to foreclosing on a home. Since the MSR asset is the capitalized future income J.P. Morgan expects to earn off of its $1 trillion of serviced mortgages throughout the lives of the loans, the charge looks large--but it is really the up-front recognition of slightly higher expenses over several years. This is a one-time charge, and we are not concerned by the presence of a consent order at the bank. In fact, every major lender is likely to face similar charges when they report. The Going forward, we think the bank must continue to gain market share to grow its balance sheet. Total loans contracted once again, as consumer loan declines were not quite offset by commercial loan growth. We are pleased with the commercial loan growth; it is another positive sign that our economy is getting stronger. However, unless the bank can find a way to offset consumer payoffs with new loans, we think the bank will struggle to show any meaningful growth despite its new branch building efforts. Finally, we come to capital. J.P. Morgan increased its Basel III Tier 1 common ratio by 30 basis points this quarter to 7.3%. This rapid growth will be offset somewhat by the newly increased $0.25 quarterly dividend and share buyback program. However, we suspect capital will continue to accumulate on the balance sheet. Jamie Dimon promptly shot down any hopes of a second dividend increase in 2011, which does not worry us. It just means that J.P. Morgan will have plenty of room to give shareholders another large increase next year. Page 6 of 12
Recent Notes from our Credit and Equity Analysts J.P. Morgan Raises Dividend, Plans $15 Billion Buyback 18 Mar 2011 J.P. Morgan JPM increased its quarterly dividend to $0.25 per share, up from just $0.05 after the successful completion of its government stress test. The company, trading at a significant discount to our fair value estimate, also announced a $15 billion share repurchase authorization--with up to $8 billion eligible for use in 2011. We view this quite favorably, as repurchasing shares at a discount should create considerable value for shareholders. At an annualized rate of $1 per share, the new dividend payout ratio would be 17%, below the bank's long-range target of 30%. Considering our assumption that the bank's normalized earnings power is currently in the neighborhood of $6.50--we assume the dividend will be able to reach the $2 during the next few years. mortgages in the quarter (after adding about $1 billion last quarter) to account for the expected legal fighting over private-label putbacks. It appears to us that J.P. Morgan is gearing up to face the same type of pressure that Bank of America BAC is experiencing. J.P. Morgan and Washington Mutual combined to issue $647 billion of private-label mortgages. While these issues are likely to cause to a few billion of losses, it will be over the course of several years. We believe the company has plenty of room to increase its dividend; it already meets the 2019 levels under Basel III. Having submitted its stress test, the bank is now waiting for the results from the regulators, which are expected sometime at the end of the quarter. Consequently, we expect J.P. Morgan will announce a dividend raise in the second quarter. We currently expect the rate to be somewhere near $0.25 per quarter. J.P. Morgan Reports 2010 Earnings 14 Jan 2011 J.P. Morgan Chase JPM earned $3.96 per share in 2010 and $1.12 in the fourth quarter, once again showing it is one of the top performers in the banking industry. The results were in line with our estimates, so we are leaving our fair value estimate unchanged. As credit losses have come down, J.P. Morgan's core earnings power is shining through. While the firm is still burdened with several problems related to the credit crisis, we expect its earnings to continue to rise throughout the next year. J.P. Morgan took an additional $2.1 billion of credit reserves against the Washington Mutual portfolio, the result of higher losses in the home equity portfolio than the company expected when it purchased the portfolios from the FDIC in 2008. On its Chase portfolio, the company released reserves, as we saw improvements in credit cards and autos. J.P. Morgan added $1.5 billion to its litigation reserve for Page 7 of 12
Morningstar Equity Corporate Research Credit Research JPMorgan Chase & Co JPM (NYSE) QQQQ A+ Last Business PriceRiskFair Value Stress Test Consider BuySolvency Consider Score Sell Uncertainty Distance To Default Economic Economic Moat Moat Trend Industry Stewardship Group Sector Morningstar Credit Rating Industry Group 40.45 Good USD 61.00 USD Fair 36.60 USD Fair 103.70 USD High Fair Narrow Narrow Stable Banks A Financial A+ Services Banks Morningstar Analyst Forecasts Income Statement (USD Mil) Forecast Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Net Interest Income 38,779 51,152 51,001 47,901 54,865 Provision for Losses on Loans 20,979 32,015 16,639 5,449 6,350 Net Interest Income after Provision 17,800 19,137 34,362 42,452 48,516 Non-Interest Income 26,913 48,172 48,728 50,445 50,525 Net Revenue 65,692 99,324 99,729 98,346 105,390 Net Revenue After Provision (excluding Gains on Sale) 44,713 67,309 83,090 92,897 99,041 Gains on Sale 1,560 1,110 2,965 1,200 1,200 Net Revenue After Provision (including Gains on Sale) 46,273 68,419 86,055 94,097 100,241 Non-Interest Expense 43,500 52,352 61,196 62,611 64,083 Operating Income 1,213 14,957 21,894 30,286 34,958 (excluding Gains on Sale) Taxes -926 4,415 7,489 9,918 11,570 Minority Interest, net of income taxes 0 0 Income after Taxes 3,699 11,652 17,370 21,568 24,587 Cumulative Effect of Accounting Change 0 0 After-tax Non-recurring Items -1,906-76 0 0 Discounted Operations 0 0 Preferred Dividends 674 1,606 1,677 1,677 Net Income attributable to common shareholders, 3,025 11,652 15,764 19,891 22,910 Excluding All After-tax items Net Income attributable to common 4,931 11,728 15,764 19,891 22,910 shareholders, including all after-tax items Average Diluted Shares Outstanding 3,733 3,942 3,977 3,977 3,977 Diluted EPS Excluding Charges 0.81 2.96 3.96 5.01 5.77 Diluted EPS Including Charges 1.32 2.98 3.96 5.01 5.77 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data The information as originally contained reported. herein The information is not represented contained or herein warranted is not to be represented accurate, correct, warranted complete, to or be timely. accurate, This correct, report is complete, for information timely. purposes This report only, is and for should information not be purposes considered only, a solicitation and should not to buy be or considered sell any security. a solicitation Redistribution to buy or sell is prohibited any security. without Redistribution written permission. prohibited To order without reprints, written call permission. +1 312-696-6100. To order To license reprints, the research, call +1 312-696-6100. call +1 312-696-6869. Page 11 8 of of 1216
Morningstar Equity Corporate Research Credit Research JPMorgan Chase & Co JPM (NYSE) QQQQ A+ Last Business PriceRiskFair Value Stress Test Consider BuySolvency Consider Score Sell Uncertainty Distance To Default Economic Economic Moat Moat Trend Industry Stewardship Group Sector Morningstar Credit Rating Industry Group 40.45 Good USD 61.00 USD Fair 36.60 USD Fair 103.70 USD High Fair Narrow Narrow Stable Banks A Financial A+ Services Banks Morningstar Analyst Forecasts Balance Sheet (USD Mil) Mil) Earning Assets Dec 2009 Dec 2010 Dec 2011 Dec 2012 Cash and Due from Banks 26,206 27,567 29,348 30,962 Interest Bearing Deposits at Banks 63,230 21,673 38,238 40,341 Federal Funds Sold and Securities Borrowed 315,034 222,554 233,682 245,366 or Purchased Under Agreement to Resell Brokerage Receivables 0 0 Other Receivables (excluding interest 0 0 receivables) Trading Assets 411,128 489,892 524,184 560,877 Investment Securities Held to Maturity 0 0 Investment Securities Available-for-Sale 360,390 316,336 338,480 362,173 Financial Instruments Owned, at Fair Value 0 0 (trading securities) Other Earning Assets 0 123,587 132,238 141,495 Loans Held for Sale 0 0 Loans and Leases 633,458 692,927 675,443 697,685 Unearned Discount 0 0 Allowance for Loan Losses -31,602-32,266-23,641-19,186 Net Loans and Leases 601,856 660,661 651,802 678,499 Non-Earning Assets Forecast Premises & Equipment, Net 11,118 13,355 13,847 14,374 Premises & Equipment, Gross 11,118 13,355 13,847 14,374 (Accumulated Depreciation) 0 0 Interest Receivables 67,427 70,147 73,654 77,337 Goodwill 48,357 48,854 48,854 48,854 Identifiable Intangibles 4,621 4,039 3,274 2,595 Deferred Tax Assets 0 0 Other Non-Earning Assets (Other Real Estate 122,622 118,940 124,887 131,131 Owned etc.) Total Assets 2,031,989 2,117,605 2,212,488 2,334,004 Liabilities Dec 2009 Dec 2010 Dec 2011 Dec 2012 Total Deposits 938,367 930,369 981,539 1,035,524 Customer Deposits 938,367 930,369 981,539 1,035,524 Federal Funds Purchased and Securities Loaned 261,413 276,644 296,009 316,730 or Sold under Agreements to Repurchase Brokerage Payables 0 0 Trading Liabilities 125,071 146,166 149,767 160,251 Financial Instruments Sold, but not yet pur- 0 0 chased at Fair Value Other Payables 162,696 170,330 178,847 187,789 Short-Term Debt 97,534 92,672 91,268 95,796 Long-Term Debt 266,318 247,669 243,917 256,017 Additional Debt 0 0 Total Short-Term, Long-Term 363,852 340,341 335,185 351,813 and Other Debt Deferred Tax Liabilities 0 0 Other Liabilities (bank acceptance outstanding, 15,225 77,649 81,531 85,608 accrued expenses, etc.) Total Liabilities 1,866,624 1,941,499 2,022,878 2,137,714 Equity Forecast Common Stock 4,105 4,105 4,105 4,105 Paid-in Capital 97,982 97,415 97,415 97,415 Retained Earnings 62,481 73,998 88,594 95,274 Preferred Equity 8,152 7,800 7,800 7,800 Treasury Stock -7,196-8,160-8,160-8,160 Accumulated Other Comprehensive Income -91 1,001-91 -91 Other Equity -68-53 -53-53 Shareholders Equity 165,365 176,106 189,610 196,290 Total Liabilities & Shareholders Equity 2,031,989 2,117,605 2,212,488 2,334,004 (including Minority Interest) Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data The information as originally contained reported. herein The information is not represented contained or herein warranted is not to be represented accurate, correct, warranted complete, to or be timely. accurate, This correct, report is complete, for information timely. purposes This report only, is and for should information not be purposes considered only, a solicitation and should not to buy be or considered sell any security. a solicitation Redistribution to buy or sell is prohibited any security. without Redistribution written permission. prohibited To order without reprints, written call permission. +1 312-696-6100. To order To license reprints, the research, call +1 312-696-6100. call +1 312-696-6869. Page 12 9 of of 1216
Morningstar Equity Corporate Research Credit Research JPMorgan Chase & Co JPM (NYSE) QQQQ A+ Last Business PriceRiskFair Value Stress Test Consider BuySolvency Consider Score Sell Uncertainty Distance To Default Economic Economic Moat Moat Trend Industry Stewardship Group Sector Morningstar Credit Rating Industry Group 40.45 Good USD 61.00 USD Fair 36.60 USD Fair 103.70 USD High Fair Narrow Narrow Stable Banks A Financial A+ Services Banks Comparable Company Analysis These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order. Profitability Analysis Last Historical Year Net Interest Margin % Efficiency Ratio % Non Interest Income % of Revenue Company/Ticker Revenue (Mil) 2009 2010 2011(E) 2012(E) 2009 2010 2011(E) 2012(E) 2009 2010 2011(E) 2012(E) Wells Fargo & Co WFC US 84,755 USD 4.2 4.1 3.8 4.0 55.3 59.5 62.2 60.6 47.7 47.2 47.4 47.5 Citigroup Inc C US 85,601 USD 2.9 3.2 2.8 3.0 58.9 55.3 61.5 58.3 39.7 36.2 39.4 37.9 Bank of America Corp DE BAC US 108,661 USD 2.9 2.9 2.7 2.8 55.0 63.5 69.9 64.8 60.0 52.6 53.9 53.2 Average 3.3 3.4 3.1 3.3 56.4 59.4 64.5 61.2 49.1 45.3 46.9 46.2 JPMorgan Chase & Co JPM US 99,729 USD 2.8 2.8 2.5 2.8 51.7 60.4 62.9 60.2 48.5 48.9 51.3 47.9 Leverage Analysis Assets/Equity Tangible Common Equity/ Tangible Assets % Tier I Ratio % Last Historical Year Company/Ticker Total Debt (Mil) 2009 2010 2011(E) 2012(E) 2009 2010 2011(E) 2012(E) 2009 2010 2011(E) 2012(E) Wells Fargo & Co WFC US 212,384 USD 11.1 10.0 10.0 10.2 6.4 7.5 7.5 7.5 9.3 11.2 NA NA Citigroup Inc C US 459,973 USD 12.2 11.7 10.9 12.3 6.5 6.9 7.6 6.5 11.7 12.9 NA NA Bank of America Corp DE BAC US 508,393 USD 9.6 9.9 9.3 8.8 4.5 5.9 6.5 7.2 10.4 11.2 NA NA Average 11.0 10.5 10.1 10.4 5.8 6.8 7.2 7.1 10.5 11.8 NA NA JPMorgan Chase & Co JPM US 340,341 USD 12.3 12.0 11.7 11.9 5.3 5.6 6.0 6.0 11.1 12.1 NA NA Liquidity Analysis (per share amounts in USD) Last Historical Year Loans/Deposits % Short-Term Debt % of Liabilities Liquid Assets (% of Total Assets) Company/Ticker Market Cap (Mil) 2009 2010 2011(E) 2012(E) 2009 2010 2011(E) 2012(E) 2009 2010 2011(E) 2012(E) Wells Fargo & Co WFC US 148,465 USD 92.0 86.6 82.8 81.5 3.5 4.9 4.2 3.9 22.8 25.5 26.3 26.4 Citigroup Inc C US 121,207 USD 66.5 72.0 70.3 68.5 4.1 4.5 4.4 4.1 54.5 56.0 55.9 56.4 Bank of America Corp DE BAC US 112,881 USD 87.0 88.9 84.6 81.8 3.5 2.9 2.7 2.4 36.9 38.7 38.4 39.3 Average 81.8 82.5 79.2 77.3 3.7 4.1 3.8 3.5 38.1 40.1 40.2 40.7 JPMorgan Chase & Co JPM US 160,736 USD 64.1 71.0 66.4 65.5 5.2 4.8 4.5 4.5 57.9 50.9 52.6 53.1 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data The information as originally contained reported. herein The information is not represented contained or herein warranted is not to be represented accurate, correct, warranted complete, to or be timely. accurate, This correct, report is complete, for information timely. purposes This report only, is and for should information not be purposes considered only, a solicitation and should not to buy be or considered sell any security. a solicitation Redistribution to buy or sell is prohibited any security. without Redistribution written permission. prohibited To order without reprints, written call permission. +1 312-696-6100. To order To license reprints, the research, call +1 312-696-6100. call +1 312-696-6869. Page 14 10 of 16 12
Morningstar Corporate Credit Rating Morningstar s Credit Methodology for Banks 3 Offers a proprietary measure of the credit quality of companies on our coverage list. 3 Encapsulates our in-depth modeling and quantitative work in one letter grade. 3 Allows investors to rank companies by each of the four underlying components of our credit ratings, including both analyst-driven and quantitative measures. 3 Provides access to all the underlying forecasts that go into the rating, available through our institutional service. Purpose The Morningstar Corporate Credit Rating measures the ability of a firm to satisfy its debt and debt-like obligations. The higher the rating, the less likely we think the company is to default on these obligations. The Morningstar Corporate Credit Rating builds on the modeling expertise of our securities research team. For each company, we publish: 3 Five years of detailed pro-forma financial statements 3 Annual estimates of free cash flow 3 Annual forecasts of return on invested capital 3 Scenario analyses, including upside and downside cases 3 Forecasts of leverage, coverage, and liquidity ratios for five years 3 Estimates of off balance sheet liabilities These forecasts are key inputs into the Morningstar Corporate Credit Rating and are available to subscribers at select.morningstar.com. Methodology We feel it s important to perform credit analysis through different lenses qualitative and quantitative, as well as fundamental and market-driven. We therefore evaluate each company in four broad categories. Business Risk Business Risk captures the fundamental uncertainty around a firm s business operations and the cash flow generated by those operations. Key components of the Business Risk rating include the Morningstar Economic Moat Rating and the Morningstar Uncertainty Rating. Stress Test Score Morningstar s Bank Stress Test Score evaluates a bank s ability to handle additional losses in its loan and securities portfolios. While based on the stress tests conducted under the Supervisory Capital Assessment Program, the Stress Test Score differs in two important ways. First, it is conducted on a rolling basis each quarter. Thus, it continually measures a bank s ability to handle additional stress beyond any already recognized losses. Morningstar Research Methodology for Determining Corporate Credit Ratings Competitive Analysis Cash-Flow Forecasts Scenario Analysis Quantitative Checks Rating Committee BB A C CC BBB AAA D B CCC AA Analyst conducts company and industry research: Management interviews Conference calls Trade show visits Competitor, supplier, distributor, and customer interviews Assign Economic Moat Rating Analyst considers company financial statements and competitive dynamics to forecast future free cash flows to the firm. Analyst derives estimate of Stress Test Score Analysts run bull and bear cases through the model to derive alternate estimates of enterprise value. Based on competitive analysis, forecasts, and scenario analysis, the analyst assigns Business Risk. We gauge a firm s health using quantitative tools supported by our own backtesting and academic research. Morningstar Bank Solvency Score Distance to Default Senior personnel review each company to determine the appropriate final credit rating. Review modeling assumptions Approve company-specific adjustments AAA AA A BBB BB B CCC CC C D UR UR+ UR- Extremely Low Default Risk Very Low Default Risk Low Default Risk Moderate Default Risk Above Average Default Risk High Default Risk Currently Very High Default Risk Currently Extreme Default Risk Imminent Payment Default Payment Default Under Review Positive Credit Implication Negative Credit Implication Page 11 of 12
Morningstar Corporate Credit Rating Morningstar s Credit Methodology for Banks Second, the Bank Stress Test Score utilizes Morningstar analysts forecasts of future pre-tax, pre-provision earnings and expenses for individual banks. Morningstar analysts also account for differences in underwriting standards and credit quality between banks by adjusting loss rates based on their assessments. The Stress Test Score is then based on a bank s expected capital position at the end of a twoyear period of elevated losses. As an absolute measure of capital, the average Bank Stress Test Score across our coverage universe will increase as total banking system capital increases, and will decrease when financial companies add leverage. Bank Solvency Score The Morningstar Bank Solvency Score is a quantitative assessment of a bank s health based on bank-specific accounting metrics. Much like the CAMELS rating utilized by bank regulators, the Bank Solvency Score measures a bank s most recent performance in four key areas: capital adequacy, asset quality, earnings power, and liquidity. Overall Credit Rating The four component ratings roll up into a single preliminary credit rating. To determine the final credit rating, a credit committee of at least five senior research personnel reviews each preliminary rating. We review credit ratings on a regular basis and as events warrant. Any change in rating must be approved by the Credit Rating Committee. Investor Access Morningstar Corporate Credit Ratings are available on Morningstar.com. Our credit research, including detailed cash-flow models that contain all of the components of the Morningstar Corporate Credit Rating, is available to subscribers at select.morningstar.com. Distance to Default The Distance to Default rating is a quantitative, marketbased measure of a company s current financial health. (Distance to Default serves as the basis for Morningstar s Financial Health Grade.) The underlying model treats the equity of a firm as a call option on that firm s assets. Based on estimates of asset volatility and the Black- Scholes option-pricing model, we can estimate the likelihood that the value of the company s assets falls below the value of its liabilities, implying likely default. For each of these four categories, we assign a score, which we then translate into a descriptive rating along the scale of Very Good / Good / Fair / Poor / Very Poor. Page 12 of 12