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Rating Action:

MOODY'S UPGRADES J.P. MORGAN CHASE'S RATINGS (SENIOR DEBT TO Aa3) REFLECTING UPCOMING MERGER; RATING OUTLOOK IS STABLE

29 Jun 2004
MOODY'S UPGRADES J.P. MORGAN CHASE'S RATINGS (SENIOR DEBT TO Aa3) REFLECTING UPCOMING MERGER; RATING OUTLOOK IS STABLE

Approximately $55 Billion in Debt Affected

New York, June 29, 2004 -- Moody's Investors Service upgraded the credit ratings of J.P. Morgan Chase & Company (JPM), including the ratings on the firm's bank subsidiaries' long-term deposits (to Aa2 from Aa3) and on its senior debt (to Aa3 from A1). These actions reflect the July 1st merger between JPM and Bank One Corporation. The combined entity will be named J.P. Morgan Chase & Company. The ratings of Bank One (deposits at Aa2) remain unchanged. All rating outlooks are stable.

The rating agency observed that the newly merged firm will have larger scale in retail and commercial banking, as well as a broader geographic footprint in the United Sates. Also the liquidity profile of the operating banks will improve due to the addition of Bank One's core retail deposits.

Moody's noted that this is a complex merger, involving several different business lines and creating execution risk. Nonetheless, both firms have management teams that are experienced at merger integration. Management is forecasting pre-tax cost savings of $2.2 billion over three years which Moody's thinks can be achieved.

Moody's said the upgrade reflects its expectation that the merger will be well executed, resulting in stronger, more stable and better balanced earnings in the future. Moody's will pay close attention to risk-adjusted returns on managed assets, since both JP Morgan and Bank One have lagged their peers on this measure in recent years.

Moody's pointed out that litigation risks pose an obstacle to future upgrades of JPM. Dimensioning the ultimate financial impact of Enron litigation is particularly difficult, given the early stage of litigation and the complexity of the claims. Until these cases are settled or there is greater clarity regarding possible adverse outcomes, future positive rating actions are unlikely, the rating agency said. At the same time, the current ratings incorporate the possibility of periodic additions to legal reserves which do not overwhelm the earnings capacity of the firm.

Moody's observed that JPM's wholesale operations have successfully reduced credit concentrations and improved asset quality. This should reduce the volatility of earnings from this segment in the future. The challenge for the firm will be to manage conflicts and maintain revenue momentum in this business, while continuing to reduce large client credit exposures.

The uncertainty regarding litigation costs and the volatility of capital markets earnings highlight the importance of an ample base of capital and prudent capital ratios. Moody's expects to see improvement in JPM's capital measures over time.

Moody's said that once cost synergies are obtained the new entity will continue to face the challenge of generating earnings growth in key businesses including credit cards and retail banking.

Today all rating outlooks are stable. The key drivers that could lead to positive rating actions for JPM will be substantial improvement in risk-adjusted returns on assets and stronger capital measures. Moody's preferred measure for risk adjusted returns is Pre-Provision-Profit less Consumer Net Charge-offs as a percentage of BIS risk-weighted managed assets. Both J.P. Morgan Chase and Bank One have performed below the median for Aa3-rated U.S. bank holding companies (2.8% for 2003). Moody's preferred measure for capital adequacy is Tangible Common Equity to BIS risk-weighted managed assets, where J.P. Morgan Chase has lagged behind the peer group median (7.3% at December 2003). Alternatively, weak merger execution could lead to minimal improvement, or even deterioration, of these ratios and this could lead to negative rating actions.

All long-term deposit and debt ratings of JPM and its subsidiaries were upgraded, including the following:

J.P. Morgan Chase & Co. -- senior debt from A1 to Aa3; subordinated debt from A2 to A1; and preferred stock, from A3 to A2.

JP Morgan Chase Bank -- rating for deposits from Aa3 to Aa2; subordinated debt, from A1 to Aa3; and bank financial strength from B to B+ .

Chase Manhattan Bank USA NA -- rating for deposits from Aa3 to Aa2; issuer rating from Aa3 to Aa2; bank financial strength C+ to B-.

All long-term deposit and debt ratings of ONE and its subsidiaries were affirmed, including the following:

Bank One Corporation -- senior debt Aa3; subordinated debt A1; and preferred stock A2

Bank One, N.A. -- rating for deposits, Aa2; and financial strength, B+

J.P Morgan Chase and Company is a major retail and wholesale banking firm. Upon completion of the merger on July 1, 2004 the firm will have tangible equity capital exceeding $53 billion.

New York
Peter E. Nerby
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Gregory W. Bauer
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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