Understanding Capital Adequacy & Risks: CAMELS Ratings (2018)

Capital adequacy, as it relates to the CAMELS rating system, shows the capacity of a business to sustain its capital despite the risks taken by the business. Capital adequacy can also be described as the ability of the business to point out and take control of such risks. The table below shows the minimum capita ration and well-capitalized ratios that the company together with its subsidiaries as of December 31, 2018.

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Table 1: Minimum Capital Ratios & Well-Capitalized Ratios

It is important to note that the table is described by the regulations issued by the FDIC, FederalReserve, and OCC that the company and its IDI subsidiaries are subject to. The CETI ratio stood at 1.875% comprising the difference of the capital conservation buffer of 2.5% and 2.625% phase-in of the firm's 3.5%. The firm's CETI, Tier 1, Total, and Tier 1 leverage minimum stood at 5%, 9.0%, 11.0% and 4.0% respectively. The ratios are higher than the base values depicting that Chase Bank is currently well-capitalized. Common Capital Ratio can be described as the amount of core capital of a given bank after deducting its preferred shares or any share that is characterized by a noncontrolling interest in the firm. The common capital ratio is also a ratio of core capital to risk-weighted assets. To get the Total RiskBased Capital Ratio which is an alternative measure to capital adequacy one dividends total risk-based capital by total risk-weighted assets, after which adjustments to riskweighted assets are subtracted from the answer.

Total RiskBased Capital Ratio is seen as an all-inclusive type of capital adequacy management which functions with both Tier 1 Common Capital Ratios and Leverage ratios to arrive at a general approximation of capital adequacy. The table below shows JPMorgan Chase's leverage-based capital and risk-based ratios utilizing the Basel III Standardized and Basel III Advanced Approaches. As of December 31, 2018, and 2017, JPMorgan Chase and its IDI subsidiaries had fulfilled their capital requirements that each was subject to and were also well-capitalized.

Table 2: Basel III Standardized Transitional and Advanced Transitional (2018)

Table 3: Basel III Standardized Transitional and Advanced Transitional (2017)

For purposes of computing the Tier 1 leverage ratio, total quarterly average assets that have been adjusted for the on-balance sheet is included in the adjusted average assets. Assets that are subject to deduction from Tier 1 capital include predominantly goodwill as well as other intangible assets.

(b)

A company's capital adequacy together with its IDI subsidiaries is assessed concerning the lower of the two ratios as computed under either advanced or standardized Basel III approaches. The evaluation is based on each of the risk-based capital ratios.

(c) The Tier 1 leverage ratio is not seen as a measure of capital based on risk.

(d) To be in line with the current period presentation, the prior period amounts have been adjusted.

Table 4: Basel III Advanced Fully Phased-in and Advanced Transitional (2017 & 2018)

As of 1st January 2018, the SLR was completely phased-in under Basel III. The amounts were computed as par the Basel III Transitional rules by December 31, 2017. Chase Bank's and company's total leverage exposure increased from $3,204,463 in 2017 to $3,269,988 in 2018 revealing that the company needs to check its liquidity and loan risks. Chase Bank's and company SLR dropped from 6.5% to 6.4% depicting that the firm's ability to issue consumer credit has decreased in 2018. Asset Quality In relation to the CAMELS rating system, asset quality can be defined as any given offbalance sheet activity or to the credit risk of assets on the portfolio of the bank. Changes in Asset Quality According to Appendix E of the Net Capital Rule's market and credit risk standards, J.P. Morgan Securities has the right to apply the alternative technique of calculating net capital if, apart from fulfilling its minimum net capital requirements, it also keeps up provisional maintain net capital of not less than $1.0 billion. Should the tentative net capital fall below $5.0 billion, it is the responsibility of J.P.Morgan Securities is required to notify the SEC. Morgan Securities kept up a tentative net capital in excess of the minimum and notification requirements as of December 31, 2018, J.P.The information tabulated below illustrates the company's net capital.

Table 5: Net Capital

Chase Bank's J.P. Morgan Securities actual net capital stood at $16,648M which is significantly higher than the minimum limit of $3,069M.

The tabulated information below illustrates consumer credit-related data in relation to the credit portfolio held by CCB. In the table, AWM holds primemortgage and home equity loans while Corporate holds prime mortgage loans.

Table 6: Consumer Credit Portfolio

These operating lease assets have been added to other assets on the consolidated balance sheets of the company. The risk of loss associated with these assets correlates to the residual value of the vehicles that have been leased and is managed via forecast of the lease residual value. (b) Incorporates specific business banking as well as auto dealer risk-rated loans which follow the wholesale technique for establishing the allowance for loan losses. CCB is responsible for managing these loans and hence for purposes of consistency in presentation, they are part of the consumer portfolio. The above statement shows that the company had net charge-offs of $467M associated with student loan portfolio. In 2018, about 69% of the PCI option adjustable-rate Mortgage portfolio could be modified into a fixed-rate of loans that can be amortized through the year.

Nonaccrual loans excluding mortgage loans have not been added in the nonaccrual loans premised on the government guarantee. Furthermore, as a general rule, its the policy of the company to free credit card loans from being categorized under nonaccrual status, as sanctioned by regulatory guidance that has been provided by the FFIEC. The average consumer loans held-for-sale dropped from $1.5 billion in 2017 to $387 Million in 2018. Management Quality The CAMELS rating system describes management quality as the capacity and readiness of both the board of directors and senior management systems to recognize, estimate, track and manage risks. Banks ought to be able to differentiate between putting their assets to work and becoming over-leveraged. Differentiating between the two is where the performance of the management is most crucial. A proficient manager can be able to alleviate risk and present the shareholders with a good return on their investment. Using return on assets is one of the best methods of effective ways of assessing management.

Table 7: Five-Year Summary of Consolidated Financial Highlights

The company's ROE gradually increased from 10% to 13% between 2014 and2018 while its ROA increased from 0.89 to 1.24 over the same period.

Table 8: Financial Performance of JP-Morgan Chase

The return on common equity increased to 13%, a significantly higher rate than in 2017 showing that the firm's ability to generate return using equity has increased. The company's provision for credit losses has decreased from $5290M to $4871M showing that the company's asset exposure to risks has increased depicting a lowered asset quality (Chase Bank, 2019). However, the tangible book value per share increased from $53.56 to $56.33 showing that the firm's book value of equity has increased, a likely factor for an increase in the asset (Chase Bank, 2019).

The company reported solid results for 2018, with a record net income of $32.5 billion and an EPS of $9.00 per share. The company's net revenue stood at $109.0 billion. Net income and EPS were still records for a whole year without considering the effect of the Tax Cuts & Jobs Acts. The firm's return on equity was at 13% with its return on average tangible common stockholder's equity, ROTCE being 17%. As such, the firm's assets have generated more revenue, and subsequently, the firm is expected to have higher revenue.

Net income increased by 33%, which shows the high level of net revenue and the effect of the lower U.S. federal statutory income tax rate due to the TCJA, partly offset by a rise in non-interest expense.

Total net revenue increased by 8% while net interest income stood at $55.1 billion which was an increase of 10% (Chase Bank, 2019). This increase in net interest income was piloted by the effect of higher rates, growth of loan as well as card margin expansion that was to a limited extent offset by lower CIB Markets net interest income. There was a 7% increase in on-interest revenue resulting in $54.0 billion (Chase Bank, 2019). The increase was steered by higher CIB markets noninterest revenue together with auto lease income, partly counterbalanced by markdowns on specific legacy private equity investments as well as the effect of higher financing spreads on derivatives

Noninterest expense increased by 7% totaling to $63.4 billion. The increase was primarily steered by investments like real estate, technology, marketing and higher revenue-related costs such as a lease on auto.

The provision for credit losses decreased from $5.3 billion to $4.9 billion in the prior year and hence showing a reduction in the consumer provision propelled by a lower addition to the credit card allowance for credit losses as well as lower net charge-offs. The lower net charge-offs were predominantly steered by recoveries from loan sales in the residential real estate portfolio, primarily counterbalanced by higher net charge-offs in the credit card portfolio, as forecasted (Chase Bank, 2019). The previous year also incorporated a net $218 million write-down documented concerning the disposal of the student loan portfolio. The reduction in the consumer provision was partly counterbalanced by a rise in the wholesale provision, indicating incorporations to the allowance for loan losses from specific client downgrades.

As of December 31, 2018, the firm recorded a total allowance for credit losses of $14.5 billion with a loan loss coverage ratio decreasing from 1.27% in the previous year to 1.23%excluding the PCI portfolio. During this time, the non-performing assets of the firm aggregated to $5.2 billion which was a decrease from$6.4 billion in the previous year. This reflected an improvement in credit performance in the consumer portfolio and cutbacks in the wholesale portfolio which includes repayments and loan sales. However, the core loans and average core loans increased by 7% revealing an increase in credit consumption.

Conclusion

The CAMELS Analysis was used to examine Chase Bank. This report regards to include some essential facets of the bank concerning each of the components of the CAMELS analysis. Via attentive careful observation, the report pointed out a strong rating for each of the CAMELS features. Concerning Sensitivity to Market Risk, Capital Adequacy, Earnings, and Asset Quality, Chase Bank has been allocated the highest score of 1 (Chase Bank, 2019). For the two other features, Management Quality and liquidity, Chase Bank received the second-highest score of 2. Following a careful deliberation of all the facets of the bank and notwithstanding the double ratings of 2, the comprehensive rating assigned to Chase Bank is 1. There is a strong assurance that Chase Bank is a profitable bank operating under proper management and their future as a firm bank is certain.

References

Chase Bank.,(2019). Annual Report. Retrieved from https://jpmorganchaseco.gcs-web.com/node/271651/html