JPMORGAN CHASE & CO annual report, FY2017

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JPMorgan Chase & Co. 2017 Form 10-K 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 Form 10-K covers the fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter 2017 data.

Financial performance and key metrics

  • Full-year revenue: $99.6 billion, up 4% from $95.7 billion in 2016.
  • Net interest income: $50.1 billion, up from $46.1 billion, driven by higher rates and loan growth.
  • Noninterest revenue: $49.5 billion, broadly flat year over year.
  • Noninterest expense: $58.4 billion, up 5%, reflecting compensation, auto lease depreciation and continued investment.
  • Pre-provision profit: $41.2 billion, up 3%.
  • Provision for credit losses: $5.3 billion, slightly below 2016; lower wholesale provisions largely offset higher consumer and credit-card provisions.
  • Net income: $24.4 billion, down 1%; diluted EPS was $6.31, up from $6.19.
  • Unusual tax item: The Tax Cuts and Jobs Act reduced 2017 net income by approximately $2.4 billion and increased the effective tax rate to 31.9% from 28.4%.
  • Fourth-quarter 2017: Revenue was $24.2 billion, net income was $4.2 billion and diluted EPS was $1.07. Fourth-quarter results included the TCJA impact.
  • Profitability: ROE was 10%, ROTCE was 12%, ROA was 0.96% and the overhead ratio was 59%.
  • Balance sheet: Total assets were $2.534 trillion, loans were $930.7 billion and deposits were $1.444 trillion at year-end.
  • Debt and liquidity: Long-term debt was $284.1 billion. Average fourth-quarter HQLA was $560.1 billion and average LCR was 119%, with $88.0 billion of net excess HQLA.
  • Capital: Transitional CET1 ratio was 12.2%, fully phased-in standardized CET1 ratio was 12.1%, and fully phased-in supplementary leverage ratio was 6.5%.
  • Credit quality: Allowance for credit losses was $14.7 billion, nonperforming assets were $6.4 billion and the net charge-off rate was 0.60%.
  • Capital returns: The Firm repurchased $15.4 billion of common stock during 2017, paid $8.99 billion of dividends and had $9.8 billion remaining under its $19.4 billion repurchase authorization at year-end.

Material changes versus the prior comparable period

  • Revenue growth was led by higher net interest income, investment banking fees and asset-management fees, while Fixed Income Markets, mortgage and card-related revenue declined.
  • Average core loans increased 8%; period-end loans increased 4% and deposits increased 5%.
  • Consumer credit costs increased, particularly in credit cards, as newer loan vintages produced higher expected loss rates. The credit-card net charge-off rate rose to 2.95% from 2.63%.
  • Wholesale credit performance improved, particularly in Oil & Gas, Natural Gas Pipelines and Metals & Mining, producing a net reduction in the wholesale allowance.
  • Commercial Banking produced record revenue of $8.6 billion and net income of $3.5 billion, up 33%. Asset & Wealth Management produced record revenue of $12.9 billion and net income of $2.3 billion, up 4%.
  • CIB revenue declined 2% and net income was essentially flat, as strong investment banking and Treasury Services results were offset by lower Markets revenue, especially Fixed Income Markets.
  • Corporate reported a $1.6 billion net loss, primarily reflecting the TCJA tax impact, partly offset by a $645 million legal settlement benefit related to Washington Mutual matters.
  • The student loan portfolio was sold during 2017. The sale did not have a material impact on consolidated financial statements, although it contributed to reported consumer charge-offs.

Guidance, outlook, risks and unusual items

  • For 2018, management expected managed net interest income of $54 billion to $55 billion, excluding CIB Markets, subject to market conditions, and core loan growth of approximately 6% to 7%, excluding CIB loans.
  • Management expected adjusted expenses below $62 billion, excluding the impact of the new revenue-recognition standard, and an effective tax rate of approximately 19% to 20%.
  • Management expected relatively stable net charge-off rates outside Card; Card net charge-offs were expected to increase to approximately 3.25% in 2018.
  • The new revenue-recognition standard was expected to increase both noninterest revenue and expense by approximately $1.2 billion on a full-year 2018 managed basis, primarily in Asset & Wealth Management.
  • Key risks include economic and market volatility, higher consumer credit losses, interest-rate and funding risk, counterparty and clearing risk, regulatory and capital requirements, cybersecurity and operational failures, litigation, conduct and compliance matters, Brexit-related restructuring and intense competition.
  • Legal proceedings remained significant. The Firm estimated reasonably possible legal losses in excess of reserves at up to approximately $1.7 billion, although the estimate excluded matters for which a loss could not be reasonably estimated.
  • The Firm reported that its internal control over financial reporting was effective as of December 31, 2017, with no material weaknesses identified; PwC issued unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

  • Reconcile reported net income and the 31.9% effective tax rate for the $2.4 billion TCJA impact and any subsequent tax refinements.
  • Assess whether credit-card charge-offs, delinquencies and allowance additions continue to rise as newer vintages season.
  • Compare actual 2018 net interest income, expense, loan growth and tax-rate performance with management’s stated outlook.
  • Review capital distributions against fully phased-in capital requirements, the GSIB surcharge and regulatory approval under CCAR.
  • Evaluate liquidity using the LCR, HQLA, deposit stability, wholesale funding maturities and potential effects of credit-rating downgrades.
  • Review updates to litigation reserves, benchmark-rate matters, mortgage-related claims and other regulatory investigations.
  • Distinguish reported U.S. GAAP results from managed-basis and other non-GAAP measures when comparing segments or competitors.