JPMorgan Chase & Co. — Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. reported unaudited results for the three months ended March 31, 2020. The firm is a global financial-services company with four principal operating segments: Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management, plus Corporate. The quarter was materially affected by the COVID-19 pandemic, market volatility, lower interest rates, and pressure on oil prices.
Key financial metrics
| Metric | 1Q20 | 1Q19 | Change |
|---|---|---|---|
| Total net revenue | $28.3 billion | $29.1 billion | Down 3% |
| Net interest income | $14.4 billion | $14.5 billion | Flat |
| Noninterest revenue | $13.8 billion | $14.7 billion | Down 6% |
| Noninterest expense | $16.9 billion | $16.4 billion | Up 3% |
| Provision for credit losses | $8.3 billion | $1.5 billion | Up $6.8 billion |
| Net income | $2.9 billion | $9.2 billion | Down 69% |
| Diluted EPS | $0.78 | $2.65 | Down 71% |
| Effective tax rate | 8.1% | 18.3% | Lower |
| Return on common equity | 4% | 16% | Lower |
| Return on tangible common equity | 5% | 19% | Lower |
- Pre-provision profit was $11.4 billion, down 10% from $12.7 billion.
- Average interest-earning assets increased 7% to $2.5 trillion, while the managed net yield declined to 2.37% from 2.57%.
- Loans at March 31, 2020 were $1.015 trillion, up 6% from December 31, 2019, primarily because wholesale clients drew on committed revolving facilities.
- Deposits rose 18% from year-end to $1.836 trillion. Long-term debt was $299.3 billion, up from $291.5 billion.
- Total assets increased 17% from year-end to $3.139 trillion; total stockholders’ equity was $261.3 billion.
- Cash used in operating activities was $120.8 billion and cash used in investing activities was $135.2 billion, offset by $362.3 billion provided by financing activities. Cash and deposits with banks increased by $103.9 billion.
- Average liquidity coverage ratio was 114%, with average high-quality liquid assets of $548.2 billion and net excess HQLA of $65.8 billion.
- Standardized CET1 capital ratio was 11.5%, total capital ratio was 15.5%, and supplementary leverage ratio was 6.0%, reflecting CECL transition provisions.
- Total allowance for credit losses was $25.4 billion, compared with $14.6 billion a year earlier; the allowance-to-retained-loans ratio was 2.32% versus 1.43%.
Material changes versus the prior comparable period
- Net income fell primarily because the provision for credit losses increased 454%, reflecting the expected effects of COVID-19, worsening macroeconomic forecasts, and lower oil prices.
- The firm recorded a $6.8 billion addition to credit-loss allowances related to economic deterioration, including approximately $4.4 billion in consumer portfolios and $2.4 billion in wholesale portfolios. CECL adoption also produced a $4.3 billion allowance increase and a $2.7 billion after-tax reduction to retained earnings at adoption.
- Noninterest revenue declined because of a $951 million CIB loss in Credit Adjustments & Other, principally from derivative funding-spread widening, and $896 million of markdowns on held-for-sale bridge-financing positions in CIB and Commercial Banking.
- CIB Markets revenue increased 32% to $7.2 billion, including Fixed Income Markets revenue of $5.0 billion and Equity Markets revenue of $2.2 billion, as client activity rose sharply during market disruption.
- Consumer & Community Banking net income fell 95% to $191 million, while Commercial Banking net income fell 86% to $147 million. Asset & Wealth Management net income was broadly stable at $664 million.
- End-of-period wholesale loans increased substantially because clients drew committed revolving credit facilities. Wholesale retained loans increased to $555.3 billion from $481.7 billion at year-end.
- The firm adopted CECL on January 1, 2020 and began reporting Wholesale Payments within CIB, including the realignment of Merchant Services from CCB. Prior periods were revised for presentation.
- Share repurchases were suspended on March 15, 2020 through the second quarter. The firm repurchased approximately $6.4 billion of common stock during the first quarter before the suspension; the quarterly common dividend remained $0.90 per share.
Guidance, outlook, commentary and risks
- Management expected second-quarter 2020 managed net interest income of approximately $14 billion, market dependent, and full-year managed net interest income of approximately $56 billion, also market dependent.
- Management expected full-year adjusted expense below $65 billion.
- Management expected additional allowance builds in the second quarter and warned that aggregate additions over the next several quarters could be meaningfully higher than in the first quarter if macroeconomic conditions deteriorated further.
- The credit-loss forecast used in the quarter assumed a roughly 25% decline in U.S. real GDP and unemployment above 10% in the second quarter, followed by a solid recovery in the second half of 2020. The filing emphasizes that these assumptions and the resulting allowance are highly uncertain.
- The firm provided payment assistance, including three-month payment deferrals and selected fee waivers or refunds, and participated in the SBA Paycheck Protection Program. As of May 4, 2020, it had funded approximately $29 billion under the PPP.
- Key risks include a prolonged pandemic, additional unemployment and business failures, further credit deterioration, market and valuation losses, higher risk-weighted assets, liquidity or capital pressure, ratings downgrades, operational and cybersecurity disruption, regulatory scrutiny of government programs, litigation, and uncertainty surrounding LIBOR/IBOR transition.
- Legal proceedings carried an estimated aggregate range of reasonably possible losses, in excess of established reserves, of up to approximately $1.3 billion as of March 31, 2020. The filing states that actual losses could vary significantly.
Investor verification checklist
- Verify subsequent-quarter credit-loss provisions, charge-offs, delinquencies, criticized exposures, and allowance coverage, particularly in credit cards, commercial real estate, consumer and retail, oil and gas, and other pandemic-sensitive sectors.
- Assess whether deposit inflows and liquidity metrics remained durable after the initial market shock, including the effect of Federal Reserve facilities and the Money Market Mutual Fund Liquidity Facility.
- Compare actual net interest income and expenses with the filing’s market-dependent 2020 outlook.
- Review the effect of suspended repurchases, dividends, preferred-stock issuance or redemption, and future regulatory capital requirements on CET1 and leverage ratios.
- Evaluate the sustainability of elevated CIB trading revenue and the effect of funding spreads, credit valuation adjustments, and market volatility.
- Monitor the outcome and reserve adequacy for material litigation, regulatory investigations, loan-sale indemnifications, and potential ratings downgrades.
- Confirm the accounting and capital effects of CECL adoption, the transition provisions, and subsequent changes to macroeconomic forecasts.