JPMorgan Chase & Co. 1Q10 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. filed an unaudited Form 10-Q for the three months ended March 31, 2010. The global financial services firm reported approximately $2.1 trillion of assets, $164.7 billion of stockholders’ equity, and operations in more than 60 countries. Its principal businesses included investment banking, consumer and commercial banking, transaction processing, and asset management.
Financial results and key metrics
| Metric | 1Q10 | 1Q09 | Change |
|---|---|---|---|
| Total net revenue | $27.7 billion | $25.0 billion | 11% |
| Pre-provision profit | $11.5 billion | $11.7 billion | (1%) |
| Provision for credit losses | $7.0 billion | $8.6 billion | (18%) |
| Net income | $3.3 billion | $2.1 billion | 55% |
| Diluted EPS | $0.74 | $0.40 | 85% |
| Return on common equity | 8% | 5% | Improved |
| Net interest income | $13.7 billion | $13.4 billion | 3% |
| Noninterest expense | $16.1 billion | $13.4 billion | 21% |
- Revenue growth was led by higher principal transactions revenue, strong Fixed Income Markets performance, higher securities gains, and improved private-equity results. Mortgage fees and credit-card income declined.
- Net interest income included approximately $1.8 billion from the January 1, 2010 consolidation of credit-card securitization trusts and other variable interest entities. Comparisons with 1Q09 are therefore affected by classification changes.
- The effective tax rate declined to 26.7% from 29.9%, partly because of tax benefits from resolved audits, tax-exempt income, business tax credits, and non-U.S. income.
- Net cash provided by operating activities was $19.1 billion; investing activities used $13.9 billion; financing activities provided $285 million. Cash and due from banks ended at $31.4 billion.
- At March 31, total assets were $2.136 trillion, deposits were $925.3 billion, long-term debt was $262.9 billion, and total stockholders’ equity was $164.7 billion.
- Management characterized liquidity as strong. Deposits exceeded loans, long-dated funding exceeded illiquid assets, and the Firm reported sufficient secured and unsecured funding capacity for on- and off-balance-sheet obligations.
- Capital remained strong: Tier 1 capital ratio was 11.5%, total capital ratio was 15.1%, Tier 1 leverage ratio was 6.6%, and Tier 1 common capital ratio was 9.1%. The Firm and its banking subsidiaries were reported as well-capitalized.
Material changes versus the prior comparable period
- The principal earnings improvement came from lower credit-loss provisions and higher revenue, partly offset by a substantial increase in litigation expense.
- Noninterest expense included $2.9 billion of litigation expense, compared with a $270 million net benefit in 1Q09. Mortgage-related matters were a significant component.
- Credit performance remained stressed. Firmwide net charge-offs increased to $7.9 billion from $4.4 billion, and the net charge-off rate rose to 4.46% from 2.51%. Nonperforming assets were $19.0 billion, compared with $14.7 billion a year earlier.
- The allowance for credit losses increased to $39.1 billion from $32.5 billion at year-end 2009, primarily because of the new VIE consolidation guidance. Excluding purchased credit-impaired loans, the allowance-to-retained-loans ratio increased to 5.64% from 4.53% a year earlier.
- The January 1, 2010 accounting adoption added $87.7 billion of assets and $92.2 billion of liabilities, reduced stockholders’ equity by approximately $4.5 billion, and reduced the Tier 1 capital ratio by 34 basis points.
- Segment performance was mixed: Investment Bank net income rose 54% to $2.5 billion; Asset Management rose 75% to $392 million; Commercial Banking rose 15% to $390 million; Retail Financial Services moved to a $131 million loss from $474 million of income; Card Services’ loss improved to $303 million from $547 million; and Treasury & Securities Services declined 9% to $279 million.
Guidance, outlook, risks and unusual items
- Management expected early economic recovery trends to continue but emphasized persistent unemployment, weak household finances, housing-price risk, elevated consumer losses, and potential regulatory changes.
- Retail Banking fee changes were expected to reduce annualized net income by approximately $500 million by the fourth quarter of 2010.
- Management maintained potential quarterly net charge-off guidance for residential real estate portfolios of up to $1.4 billion for home equity, $600 million for prime mortgage, and $500 million for subprime mortgage over the next several quarters, while noting that improving trends could prevent those levels.
- Residential real estate portfolio runoff was expected to reduce 2010 portfolio net interest income by more than $1.0 billion versus 2009, excluding interest-rate effects.
- Card Services average outstandings were expected to decline approximately 10% to 15% in 2010. The CARD Act was expected to reduce annual Card Services net income by approximately $500 million to $750 million. Management expected a Card Services net loss in 2Q10, although improved from 1Q10.
- Corporate securities gains were not expected to continue at the same magnitude as in 1Q10; recurring quarterly Corporate net income was expected to decline toward approximately $300 million, excluding unusual items.
- The Board’s decision on increasing the common dividend remained dependent on sustained economic and employment improvement, credit stabilization, earnings prospects, capital requirements, and regulatory considerations.
- The Firm recorded a $1.2 billion allowance addition for further deterioration in Washington Mutual purchased credit-impaired prime mortgage and option ARM pools.
- The Firm announced a planned acquisition of RBS Sempra Commodities’ global oil, global metals, and European power and gas businesses, subject to regulatory approval. The U.K. bonus payroll tax enacted in April 2010 was expected to have a material second-quarter compensation-expense impact, although the amount had not yet been quantified.
- Repurchase liability rose to $2.0 billion from $1.7 billion at year-end. Management stated that a hypothetical simultaneous 10% adverse change in key assumptions could increase the liability by approximately $1.7 billion.
- Litigation outcomes, mortgage repurchase claims, consumer credit deterioration, housing prices, unemployment, regulatory reform, market volatility, ratings downgrades, and VIE and derivative funding requirements were identified as significant risks.
Most important facts for investors to verify
- Separate underlying operating performance from the effects of VIE consolidation and other reported-versus-managed presentation changes.
- Track whether consumer net charge-offs, especially credit-card and residential real estate losses, improve as projected.
- Assess the adequacy of the $39.1 billion credit-loss allowance, including the $2.8 billion allowance for purchased credit-impaired loans.
- Review the $2.9 billion quarterly litigation expense, the $2.0 billion repurchase liability, and the potential range of future mortgage-related legal and repurchase losses.
- Monitor Card Act effects, overdraft-fee changes, mortgage repurchases, portfolio runoff, and the related earnings guidance.
- Verify liquidity and capital resilience under ratings downgrades, stress scenarios, VIE commitments, derivatives collateral requirements, and off-balance-sheet commitments totaling $955.4 billion.
- Review the pending RBS Sempra transaction and the expected second-quarter U.K. bonus payroll tax expense.