JP Morgan says downgrade will impact derivatives business

“We see a small impact on our derivatives flows from this,” said a spokeswoman for the bank, which has largely downplayed the rating agencies’ actions. The spokeswoman added that JP Morgan Chase is still rated at “the top-end of our peer group”. But she was unable to comment specifically on which areas of its derivatives business would be most affected.

Rating agencies Standard & Poor’s (S&P) and Fitch have lowered JP Morgan Chase’s long-term credit rating from AA to AA-. The rating agencies acted after JP Morgan Chase warned that it expects third-quarter earnings to be well below the second quarter. The bank cited a weak trading performance and losses on loans to telecom and cable companies.

In a conference call to credit analysts today, S&P analyst Tanya Azarchs said she was “very disturbed” by the “uncharacteristic” trading performance of JP Morgan Chase. Azarchs said JP Morgan Chase told S&P it had lost money from proprietary trading and that this was “not from one big position but several”. She would not comment on the nature of these deals. JP Morgan Chase offered no comment either.

S&P analysed JP Morgan Chase’s derivatives portfolio and found it had $43 billion of net collateral counterparty exposure. “This is a high number,” said Azarchs. “But the ratings are not altogether disturbing. It tends to be relatively high quality,” she added.

Azarchs warned that if JP Morgan Chase is downgraded again it would have a significant effect on its derivatives trading business. “It would put the bank as a counterparty on derivatives, for example, out of the A range,” she said.

One US bank analyst suggested that S&P was giving JP Morgan Chase “too much slack” by not being tough enough on the firm. But Azarchs replied: “It’s important to keep it in perspective. It is still profitable, and we expect [JP Morgan Chase] to be profitable in every quarter of this year.”

William Harrison, chief executive of JP Morgan Chase, said yesterday he was disappointed with his bank’s results. “As much as we have focused on reducing credit portfolio concentrations in recent years, it is clear that further reductions are necessary, and we will continue to address that issue as an integral part of our credit policies.”