Business context and reporting period
JPMorgan Chase & Co. filed its Form 10-K for the fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter 2011 data. The Firm is a diversified global financial-services company operating through Investment Bank, Retail Financial Services, Card Services & Auto, Commercial Banking, Treasury & Securities Services, Asset Management and Corporate/Private Equity. At year-end, it reported $2.3 trillion of assets, $183.6 billion of stockholders’ equity, 5,508 U.S. branches and approximately 260,157 employees.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total net revenue | $97.2 billion | $102.7 billion | Down 5% |
| Net income | $19.0 billion | $17.4 billion | Up 9% |
| Diluted EPS | $4.48 | $3.96 | Up 13% |
| Pre-provision profit | $34.3 billion | $41.5 billion | Down 17% |
| Provision for credit losses | $7.6 billion | $16.6 billion | Down 54% |
| Noninterest expense | $62.9 billion | $61.2 billion | Up 3% |
| Return on common equity | 11% | 10% | Up 1 percentage point |
| Effective tax rate | 29.1% | 30.1% | Down 1 percentage point |
Fourth-quarter 2011 net income was $3.7 billion, diluted EPS was $0.90, and total net revenue was $21.5 billion. Fourth-quarter provision for credit losses was $2.2 billion and noninterest expense was $14.5 billion.
- Revenue and margins: Net interest income declined to $47.7 billion from $51.0 billion, and the net yield on average interest-earning assets declined to 2.74% from 3.06%. The reported overhead ratio increased to 65% from 60%.
- Credit: Net charge-offs fell 48% to $12.2 billion, the net charge-off rate declined to 1.78% from 3.39%, and nonperforming assets declined 33% to $11.0 billion. The allowance for credit losses declined to $28.3 billion from $33.0 billion.
- Balance sheet and liquidity: Total deposits increased 21% to $1.128 trillion, while loans increased 4% to $723.7 billion. Long-term debt declined to $256.8 billion from $270.7 billion. Management estimated the Global Liquidity Reserve at approximately $379 billion, compared with $262 billion at year-end 2010.
- Capital: Basel I Tier 1 capital was 12.3%, total capital was 15.4%, Tier 1 leverage was 6.8% and Tier 1 common was 10.1%, compared with 9.8% Tier 1 common in 2010. Management estimated the Basel III Tier 1 common ratio at approximately 7.9%.
- Cash flow: Operating activities provided $95.9 billion, investing activities used $170.8 billion, and financing activities provided $107.7 billion. Cash and due from banks increased by $32.0 billion to $59.6 billion.
Material changes versus the prior comparable period
- Improved consumer and wholesale credit performance drove a substantially lower credit-loss provision and higher net income despite lower revenue.
- Lower revenue reflected reduced net interest income, securities gains, mortgage fees and principal-transactions revenue. Asset-management, administration and commissions revenue increased.
- Expense growth reflected higher compensation, increased headcount, technology and business investment, higher FDIC assessments, and elevated mortgage-servicing and foreclosure costs. Litigation expense was $4.9 billion, down from $7.4 billion in 2010.
- Mortgage Production and Servicing generated a $1.8 billion net loss, compared with $569 million of income in 2010. Mortgage servicing was affected by a $7.1 billion MSR fair-value loss, partially offset by $5.6 billion of hedging gains and a $1.7 billion increase in foreclosure- and default-related fees and assessments.
- Commercial Banking reported record net revenue of $6.4 billion and net income of $2.4 billion. Card Services & Auto net income increased to $4.5 billion, while Retail Financial Services net income declined modestly to $1.7 billion.
- The Firm increased its quarterly common dividend from $0.05 to $0.25 per share and repurchased $8.95 billion of common stock and warrants during 2011.
Guidance, outlook, risks and unusual items
- Management expected 2012 Consumer & Business Banking net income to be reduced by approximately $400 million from spread compression and annualized net income to be reduced by approximately $600 million from the Durbin Amendment.
- Management estimated 2012 mortgage repurchase losses of approximately $350 million per quarter, quarterly Real Estate Portfolios net charge-offs of approximately $900 million, and a 10% to 15% decline in the residential real-estate portfolio.
- Management expected the Card net charge-off rate to rise seasonally to approximately 4.50% in the first quarter of 2012 from 4.33% in the fourth quarter of 2011.
- Key risks include the European sovereign-debt crisis, market volatility, housing prices and unemployment, counterparty and liquidity risk, credit-rating downgrades, operational and cybersecurity failures, litigation, and the continuing implementation of Dodd-Frank, the Volcker Rule, derivatives regulation and Basel III.
- The Firm was subject to a $3.6 billion mortgage repurchase liability at year-end and estimated reasonably possible additional repurchase losses of up to approximately $2 billion. Aggregate reasonably possible legal losses in excess of established reserves were estimated at up to approximately $5.1 billion.
- After year-end, JPMorgan agreed in principle to a mortgage-servicing and origination settlement involving approximately $1.1 billion of cash payments, $500 million of refinancing relief and $3.7 billion of additional borrower relief. Management stated that prior-period results reflected estimated costs and that the settlement’s incremental effect was not expected to be material.
- The filing reports effective disclosure controls and internal control over financial reporting, with no material weaknesses identified as of December 31, 2011.
Most important facts for investors to verify
- Whether improving charge-offs and delinquencies continue to offset declining net interest margins and higher regulatory and servicing costs.
- The adequacy of mortgage repurchase, litigation and foreclosure-related reserves, including exposures excluded from the recorded repurchase liability because they are being evaluated as litigation.
- The sensitivity of MSR valuations, residential real-estate losses and PCI loan cash-flow estimates to interest rates, home prices, prepayments and unemployment.
- The final impact of Dodd-Frank, Basel III, the Volcker Rule, derivatives rules, debit-interchange limits and other U.S. and non-U.S. regulatory changes on capital, liquidity, revenue and returns.
- The sustainability of the $1.128 trillion deposit base, the estimated $379 billion liquidity reserve and the Firm’s ability to maintain funding access if credit ratings or market conditions deteriorate.
- The comparability of managed-basis, tax-equivalent and other non-GAAP segment measures with reported U.S. GAAP results and peer disclosures.