The latest disclosures about the magnitude of the trading losses suffered by J.P. Morgan’s chief investment office (CIO) don’t affect its credit ratings, says Fitch Ratings in a new report.
On Friday morning, the bank issued its latest earnings release, and announced that it will be restating its first quarter earnings. The firm said its CIO trading loss came in at US$4.4 billion in the second quarter, and it disclosed a year to date loss of US$5.8 billion. However, much of the latest quarterly loss was offset by a variety of one-time gains that were recorded in the period, and the firm reported net income of US$5.0 billion.
Fitch says that these latest disclosures will not prompt immediate rating action, and that the firm’s ratings remain on rating watch negative.
The rating agency says it believes the financial implications of the trading loss are probably largely contained, and that this is not the primary driver behind any future rating action. Reputational damage also appears to be manageable for now, it says. However, it notes that uncertainty regarding the LIBOR investigation adds to further potential issues on that front.
To resolve the rating watch negative, Fitch says it will focus on the bank’s operational and risk management weaknesses, assessing its risk controls and governance, risk metrics and modeling, and how its valuation process is conducted.
It notes that future CIO trading losses on its synthetic credit portfolio, and the size of this exposure, remain unclear. Fitch also says it believes that the firm’s decision to move these positions from the CIO and over to its investment bank is “logical given the expertise of JPM’s credit derivatives desk and more granular risk framework”. But, it adds that future disclosures on these positions will likely be limited, given this change.