JPMorgan Chase & Co. — Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. is a global financial services firm operating through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset & Wealth Management, and Corporate. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparisons to the three months ended March 31, 2016 and the December 31, 2016 balance sheet. The interim financial statements were reviewed by PricewaterhouseCoopers LLP, not audited.
Key financial metrics
| Metric | 1Q17 | 1Q16 | Change |
|---|---|---|---|
| Total net revenue | $24.675 billion | $23.239 billion | 6% |
| Net interest income | $12.064 billion | $11.380 billion | 6% |
| Noninterest revenue | $12.611 billion | $11.859 billion | 6% |
| Pre-provision profit | $9.656 billion | $9.402 billion | 3% |
| Provision for credit losses | $1.315 billion | $1.824 billion | (28%) |
| Net income | $6.448 billion | $5.520 billion | 17% |
| Diluted EPS | $1.65 | $1.35 | 22% |
| Effective tax rate | 22.7% | 27.2% | Down 450 bps |
| Noninterest expense | $15.019 billion | $13.837 billion | 9% |
Reported net margin was approximately 26.1%, compared with approximately 23.8% in the prior-year quarter. The overhead ratio increased to 61% from 60%. ROE was 11%, ROTCE was 13%, and book value per share was $64.68. Tangible book value per share was $52.04, up 6% year over year.
- Balance sheet: Total assets were $2.546 trillion, up 2% from December 31, 2016. Loans were $896.0 billion, deposits were $1.423 trillion, long-term debt was $289.5 billion, and total stockholders’ equity was $255.9 billion.
- Liquidity: HQLA was $528 billion. Management stated that secured and unsecured funding capacity was sufficient for on- and off-balance-sheet obligations. The loans-to-deposits ratio was 63%, down from 65% at year-end 2016. The Firm was compliant with the 100% minimum LCR effective January 1, 2017; the filing does not provide a specific LCR percentage.
- Capital: The transitional Basel III CET1 ratio was 12.5%, Tier 1 capital ratio was 14.3%, total capital ratio was 15.6%, and Tier 1 leverage ratio was 8.4%. Fully phased-in CET1 was approximately $183.9 billion and the fully phased-in SLR was 6.6%.
- Credit quality: The allowance for credit losses was $14.5 billion, compared with $15.0 billion a year earlier. Nonperforming assets were $6.8 billion, down from $8.0 billion. Net charge-offs were $1.654 billion, or a 0.76% annualized rate; excluding the student-loan write-down, the rate would have been 0.54%.
- Cash flow: Operating activities used $20.036 billion, investing activities used $27.037 billion, and financing activities provided $43.605 billion. Cash and due from banks decreased by $3.389 billion during the quarter.
Material changes versus comparable periods
- Revenue growth reflected higher net interest income from loan growth and higher rates, as well as stronger investment banking and Markets activity. Investment banking fees increased 36% and principal transactions revenue increased 34%.
- Mortgage fees and related income declined 39% to $406 million, primarily due to lower MSR risk-management results and lower servicing revenue. Card income declined 30%, primarily because of higher new-account origination costs.
- Noninterest expense rose 9%, driven by higher compensation, legal expense, auto lease depreciation, FDIC-related expense, technology spending, and a Foundation contribution. Legal expense was $218 million versus a $46 million benefit in the prior-year quarter.
- The lower firmwide provision was primarily caused by a wholesale allowance release, particularly in Oil & Gas, partly offset by higher consumer losses and the student-loan transaction.
- Corporate & Investment Bank net income increased 64% to $3.241 billion, while Commercial Banking net income increased 61% to $799 million. Consumer & Community Banking net income declined 20% to $1.988 billion, and Asset & Wealth Management net income declined 34% to $385 million.
- Average core loans increased 9% year over year. CCB average core loans and deposits each increased 11%; AWM assets under management increased 10% to $1.841 trillion.
Guidance, outlook, commentary, risks and unusual items
- Management expected second-quarter 2017 net interest income to be approximately $400 million higher than first-quarter 2017 net interest income. Full-year 2017 net interest income was expected to increase approximately $4.5 billion from 2016, based on market-implied rates at quarter-end.
- Adjusted 2017 firmwide expense was expected to be approximately $58 billion, excluding firmwide legal expense.
- Management expected approximately $5 billion of 2017 total net charge-offs, excluding the $467 million student-loan write-down in the first quarter. Card’s 2017 average net charge-off rate was expected to remain below 3.00%.
- The student-loan portfolio was transferred to held-for-sale and written down to estimated fair value. The transaction produced a $467 million charge-off and a $218 million increase in provision after use of a $249 million allowance. The portfolio had a $6.3 billion carrying value at March 31, 2017, and a subsequent sale was expected to close over the following several months without a material consolidated financial statement impact.
- Legal proceedings remained a significant contingency. The Firm estimated reasonably possible aggregate legal losses in excess of established reserves from zero to approximately $2.3 billion, while noting that actual results could differ materially and that some matters could not be estimated.
- Key risks include economic and geopolitical conditions, interest-rate and market volatility, credit deterioration, regulatory and capital changes, litigation, credit-rating downgrades, liquidity, operational and cyber risks, model and valuation uncertainty, competition, expense control, and the implementation of new accounting standards.
- The Firm submitted its 2017 CCAR capital plan on April 5, 2017; the Federal Reserve expected to respond by June 30, 2017. The Board had increased the quarterly common dividend to $0.50 per share and authorized common-equity repurchases of up to $10.6 billion through June 30, 2017.
- Management expected the future CECL accounting standard, effective January 1, 2020, to increase the allowance for credit losses, but the amount remained under evaluation.
Investor verification points
- Verify the sustainability of revenue gains in CIB Markets and investment banking, which were important contributors to the quarter’s results.
- Separate recurring credit performance from the unusual $467 million student-loan write-down when assessing charge-offs and consumer-credit trends.
- Monitor Card net charge-offs, newer-account seasoning, delinquency trends, and the expected sub-3% full-year Card charge-off rate.
- Assess whether expense growth, legal costs, FDIC expense, technology investment, and auto lease depreciation remain consistent with the $58 billion adjusted expense outlook.
- Review the potential range and timing of litigation losses, including mortgage, benchmark-rate, foreign-exchange, interchange, and Washington Mutual-related matters.
- Track capital distributions against Basel III, CCAR, TLAC, and fully phased-in capital requirements, including the pending 2017 CCAR response.
- Evaluate interest-rate sensitivity, liquidity metrics, credit-rating exposure, and contingent collateral or termination requirements on derivatives.
- Confirm the eventual closing and accounting treatment of the student-loan portfolio sale and the implementation impact of forthcoming accounting standards.