JPMorgan Chase & Co. — 2Q17 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 and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods. The filing was signed August 2, 2017.
Financial performance and condition
| Metric | 2Q17 | 2Q16 | Change | Six months 2017 | Six months 2016 |
|---|---|---|---|---|---|
| Total net revenue | $25.5 billion | $24.4 billion | +4% | $50.1 billion | $47.6 billion |
| Net interest income | $12.2 billion | $11.3 billion | +8% | $24.3 billion | $22.7 billion |
| Noninterest expense | $14.5 billion | $13.6 billion | +6% | $29.5 billion | $27.5 billion |
| Provision for credit losses | $1.2 billion | $1.4 billion | -13% | $2.5 billion | $3.2 billion |
| Net income | $7.0 billion | $6.2 billion | +13% | $13.5 billion | $11.7 billion |
| Diluted EPS | $1.82 | $1.55 | +17% | $3.47 | $2.89 |
| ROE / ROTCE | 12% / 14% | 10% / 13% | Higher | 11% / 14% | 10% / 12% |
Reported net margin was approximately 27.6% in 2Q17 and 26.9% for the first six months, calculated from reported net income and total net revenue. The overhead ratio was 57% in 2Q17 and 59% year to date.
- At June 30, 2017, total assets were $2.56 trillion, loans were $908.8 billion, deposits were $1.44 trillion and stockholders’ equity was $258.5 billion.
- Long-term debt was $293.0 billion, including $221.0 billion of unsecured long-term debt.
- Average core loans grew 8% year over year in 2Q17. The loans-to-deposits ratio was 63%, compared with 65% at December 31, 2016.
- High-quality liquid assets were $577 billion, including $366 billion of eligible cash and $211 billion of eligible securities. Management stated that the Firm was compliant with the liquidity coverage ratio requirement.
- Transitional Basel III CET1, Tier 1 and total capital ratios were 12.6%, 14.4% and 16.0%, respectively. Fully phased-in CET1 ratios were 12.5% under the Standardized approach and 12.7% under the Advanced approach; the fully phased-in supplementary leverage ratio was 6.6%.
- The allowance for credit losses was $14.5 billion. Nonperforming assets declined to $6.4 billion from $7.8 billion at June 30, 2016. The reported six-month net charge-off rate was 0.65%, or 0.54% excluding the $467 million student-loan transfer charge-off.
- Six-month cash flow was negative: operating activities used $13.0 billion, investing activities used $37.1 billion and financing activities provided $47.9 billion, resulting in a $2.1 billion decrease in cash and due from banks.
Material changes versus prior comparable periods
- Revenue growth was led by higher net interest income, reflecting higher rates and loan growth, and by stronger investment banking, asset management and operating lease revenue.
- Noninterest revenue increased only 2% in 2Q17 because higher investment banking and other revenue was partly offset by lower Markets revenue, lower mortgage revenue and higher credit-card acquisition costs.
- Fixed Income Markets revenue declined 19% in 2Q17 amid low volatility, reduced client flows and tighter credit spreads. CIB total revenue declined 3%, although CIB net income increased 9% due to lower expenses and a credit-loss benefit.
- Consumer & Community Banking net income declined 16% in 2Q17 and 18% year to date. Mortgage revenue fell 42% in the quarter, while card net charge-offs and the credit-card allowance increased.
- Commercial Banking net income increased 30% in 2Q17 and 43% year to date, supported by loan growth, higher deposit spreads and lower credit-loss provisions.
- Asset & Wealth Management net income increased 20% in 2Q17 but declined 9% year to date because of higher expenses, including legal and compensation costs. Assets under management increased 11% to $1.9 trillion.
- Corporate reported $570 million of 2Q17 net income versus a $166 million loss in the prior-year quarter, primarily reflecting a $645 million legal settlement benefit related to Washington Mutual matters. The prior-year period included a substantial legal benefit in expense.
- The Firm repurchased $3.0 billion of common stock in 2Q17 and $5.8 billion in the first six months. The Board authorized up to $19.4 billion of common equity repurchases for July 1, 2017 through June 30, 2018.
Guidance, outlook, risks and unusual items
- Management expected 2017 net interest income to increase approximately $4 billion from 2016, subject to market conditions; adjusted expenses were expected to be approximately $58 billion excluding Firmwide legal expense.
- Management expected approximately $5 billion of 2017 net charge-offs, excluding the $467 million student-loan portfolio transfer charge-off, and average core-loan growth of approximately 8%.
- Card net charge-offs were expected to rise but remain below 3% for 2017. Investment banking fees were expected to be lower in the second half of 2017 than in the strong prior-year period.
- The Firm transferred its student-loan portfolio to held-for-sale in the first quarter and sold substantially all of it in the second quarter. The transfer generated a $467 million charge-off and a $218 million increase in provision after allowance utilization; the subsequent sale was not material to consolidated financial statements.
- Legal proceedings remained significant. Management estimated reasonably possible legal losses in excess of established reserves at up to approximately $1.9 billion, although the range excluded matters for which an estimate could not be made. Actual losses could differ materially.
- Key risks include credit-card loss normalization, wholesale exposure to Oil & Gas and related industries, market volatility and low trading volumes, interest-rate and mortgage-servicing-rights sensitivity, regulatory and capital changes, liquidity or credit-rating downgrades, litigation, cyber and operational risks, and model or valuation uncertainty.
- Management estimated that the remaining long-term debt issuance needed for TLAC compliance was not material and considered the timing manageable. The filing also identified potential future balance-sheet recognition of operating lease liabilities and a potentially higher allowance under the forthcoming current expected credit loss standard.
Investor verification priorities
- Verify the sustainability of net interest income growth as funding costs increase and rates, loan mix and deposit betas change.
- Monitor credit-card charge-offs, delinquency trends, allowance coverage and the effect of newer, higher-loss account vintages.
- Separate recurring earnings from the $645 million Washington Mutual-related legal benefit and assess future legal reserves against the stated $1.9 billion reasonably possible loss range.
- Reconcile reported versus managed-basis and other non-GAAP metrics, including ROTCE, tangible book value per share and fully phased-in capital ratios.
- Assess liquidity and funding resilience, including HQLA, deposit stability, commercial paper, long-term debt, rating-triggered collateral requirements and off-balance-sheet commitments.
- Review the accounting and eventual capital impact of the student-loan sale, upcoming revenue and financial-instrument standards, lease accounting and the expected credit-loss standard.