JPMorgan Chase & Co. — 2Q18 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. is a global financial services firm with operations in consumer banking, investment banking, commercial banking, transaction processing, asset management and wealth management. The filing covers the quarter and six months ended June 30, 2018. Financial statements are unaudited and prepared under U.S. GAAP. Prior-period amounts were revised for certain accounting-standard adoptions effective January 1, 2018.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Change vs. 2Q17 | Six months ended June 30, 2018 | Change vs. 1H17 |
|---|---|---|---|---|
| Total net revenue | $27.753 billion | 8% | $55.660 billion | 10% |
| Net interest income | $13.485 billion | 10% | $26.797 billion | 10% |
| Noninterest revenue | $14.268 billion | 6% | $28.863 billion | 9% |
| Noninterest expense | $15.971 billion | 8% | $32.051 billion | 7% |
| Provision for credit losses | $1.210 billion | Flat | $2.375 billion | (6%) |
| Net income | $8.316 billion | 18% | $17.028 billion | 26% |
| Diluted EPS | $2.29 | 26% | $4.66 | 34% |
| Overhead ratio | 58% | Up from 57% | 58% | Down from 59% |
Quarterly return on common equity was 14%, return on tangible common equity was 17%, and return on assets was 1.28%. Book value per share was $68.85 and tangible book value per share was $55.14. Common dividends declared were $0.56 per share in the quarter and $1.12 per share year to date.
Balance sheet, liquidity and capital
- Total assets were $2.590 trillion at June 30, 2018, compared with $2.534 trillion at December 31, 2017.
- Total loans were $948.4 billion, up 2% from year-end; core loans were $889.4 billion. Deposits were $1.452 trillion, up 1%, and the loans-to-deposits ratio was 65%.
- Long-term debt was $273.1 billion, down 4% from year-end. Short-term borrowings were $63.9 billion, up 23%.
- Total stockholders’ equity was $257.5 billion and common stockholders’ equity was $231.4 billion.
- Average liquidity coverage ratio was 115%, above the 100% regulatory minimum. Average high-quality liquid assets were $529 billion, with $71 billion of net excess HQLA. The filing also reports approximately $215 billion of unencumbered marketable securities and $292 billion of available borrowing capacity.
- The fully phased-in Standardized CET1 ratio was 12.0%, Advanced CET1 ratio was 12.8%, total capital ratios were 15.4% and 15.9%, respectively, and the supplementary leverage ratio was 6.5%. The Firm stated that it exceeded applicable regulatory minimums and remained well-capitalized.
Cash flow and credit quality
For the six months ended June 30, 2018, operating activities provided $576 million of cash, investing activities used $38.974 billion, and financing activities provided $13.766 billion. Cash, due from banks and deposits with banks decreased by $26.124 billion to $405.180 billion. Investing cash outflows primarily reflected increased securities purchased under resale agreements and higher net loan originations.
- Total allowance for credit losses was $14.367 billion at June 30, 2018, compared with $14.480 billion a year earlier. The allowance for loan losses was $13.250 billion and the allowance for lending-related commitments was $1.117 billion.
- Nonperforming assets were $5.767 billion, down from $6.432 billion a year earlier. The firmwide net charge-off rate was 0.56% for the first six months, compared with 0.65% in the prior-year period; the 2017 rate included $467 million related to the student-loan portfolio sale.
- Credit card net charge-offs increased as newer vintages seasoned. Credit card 30-day-plus and 90-day-plus delinquency rates were 1.65% and 0.85%, respectively, at quarter-end.
- Wholesale credit quality was described as stable. Criticized wholesale exposure declined to $11.2 billion from $15.6 billion at year-end 2017.
Material changes versus comparable periods
- Net income growth reflected higher revenue and the lower U.S. federal statutory tax rate under the Tax Cuts and Jobs Act, partially offset by higher expenses.
- Net interest income benefited from higher rates and loan growth, although CIB Markets net interest income declined because of higher funding costs.
- Markets revenue increased 13% in the quarter, including Equity Markets growth of 24%. Investment banking fees rose 17%, while asset-management and administration fees rose 6%.
- Noninterest expense increased due to higher performance-based compensation, technology investment, auto-lease depreciation, transaction-related costs and a $174 million loss on liquidation of a legal entity.
- Card income declined 13% in the quarter. Results included an approximately $330 million adjustment to the credit-card rewards liability due to higher assumed redemption rates.
- Corporate reported a $136 million net loss, compared with $570 million of net income in 2Q17. The comparison was affected by the absence of a $645 million prior-year legal-settlement benefit and current-period investment-securities losses.
- Accounting changes included retrospective revenue-recognition presentation, fair-value gains of $505 million in first-quarter 2018 on certain equity investments, revised hedge accounting, and restricted-cash presentation changes. These items affect comparability and, in some cases, had no impact on net income.
Guidance, outlook, risks and unusual items
Management did not update the outlook provided in the first-quarter 2018 Form 10-Q. Following Federal Reserve non-objection to the 2018 capital plan, the Board announced its intention to raise the quarterly common dividend to $0.80 beginning in the third quarter and authorized up to $20.7 billion of common-equity repurchases from July 1, 2018 through June 30, 2019.
Key risks include economic and geopolitical conditions, market volatility and liquidity, credit deterioration, regulatory and capital changes, interest-rate movements, funding costs, cyber and operational risks, litigation, reputational damage, model and valuation uncertainty, and the ability to control expenses. The Firm estimates aggregate reasonably possible legal losses, in excess of established reserves, from zero to approximately $1.7 billion at June 30, 2018, although certain matters cannot be estimated.
The Firm expects adoption of the current expected credit loss standard on January 1, 2020 and anticipates that it will increase credit-loss allowances, but the amount remains under evaluation. The Firm also expects a substantial balance-sheet increase from adoption of the new lease standard on January 1, 2019, with no material change expected in operating-lease expense recognition.
Important facts for investors to verify
- Whether revenue and expense growth, particularly net interest income and Markets revenue, is sustainable after accounting changes, tax effects and fair-value gains.
- The effect of the $330 million card-rewards liability adjustment, $174 million legal-entity liquidation loss, investment-securities losses and the absent $645 million prior-year legal benefit.
- Credit-card loss and delinquency trends as newer loan vintages season, and the adequacy of the $14.4 billion allowance for credit losses.
- The eventual capital impact of the planned $0.80 dividend and up to $20.7 billion repurchase authorization.
- Implementation effects of CECL, lease accounting and other regulatory capital proposals, including the proposed stress-buffer and enhanced supplementary-leverage-ratio frameworks.
- Potential outcomes and timing of material litigation, regulatory investigations and off-balance-sheet commitments, including $1.046 trillion of lending-related commitments and the disclosed legal-loss range.