JPMorgan Chase & Co. — 3Q18 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 nine months ended September 30, 2018. The Firm reported $2.6 trillion of assets and $259.0 billion of stockholders’ equity at quarter-end.
Key financial metrics
| Metric | 3Q18 | 3Q17 | 9M18 | 9M17 |
|---|---|---|---|---|
| Total net revenue | $27.3B | $25.6B | $82.9B | $76.2B |
| Net interest income | $13.9B | $12.8B | $40.7B | $37.1B |
| Noninterest expense | $15.6B | $14.6B | $47.7B | $44.6B |
| Provision for credit losses | $948M | $1.5B | $3.3B | $4.0B |
| Net income | $8.4B | $6.7B | $25.4B | $20.2B |
| Diluted EPS | $2.34 | $1.76 | $7.00 | $5.22 |
| Effective tax rate | 21.6% | 29.6% | 20.4% | 26.9% |
| ROE / ROTCE | 14% / 17% | 11% / 13% | 14% / 18% | 11% / 14% |
Net margin was approximately 31% in the third quarter, compared with approximately 26% in the prior-year quarter. The reported overhead ratio was 57% in both periods. Net interest yield on average interest-earning assets increased to 2.51% from 2.37%.
- Period-end loans were $954.3 billion, up 3% from December 31, 2017; core loans were $899.0 billion, up 4%.
- Deposits were $1.459 trillion, up 1% from year-end 2017, and the loans-to-deposits ratio was 65%.
- Long-term debt was $270.1 billion, down 5% from year-end 2017.
- Total assets were $2.615 trillion, up 3% from year-end 2017; total stockholders’ equity was $259.0 billion.
- Average liquidity coverage ratio was 115%, with $535 billion of average high-quality liquid assets and $68 billion of net excess HQLA.
- Fully phased-in CET1 ratio was 12.0% under the Standardized approach and 12.9% under the Advanced approach; the supplementary leverage ratio was 6.5%.
- Allowance for credit losses was $14.2 billion, nonperforming assets were $5.0 billion, and the nine-month net charge-off rate was 0.52%.
- Cash provided by operating activities was $13.8 billion for the first nine months, while investing activities used $39.8 billion and financing activities provided $16.3 billion. Cash and deposits with banks declined by $12.2 billion during the period.
Material changes versus prior comparable periods
- Third-quarter net income increased 24%, revenue increased 7%, and diluted EPS increased 33%. For the first nine months, net income increased 26%, revenue increased 9%, and diluted EPS increased 34%.
- Revenue growth reflected a 9% increase in net interest income, driven by higher rates and loan and deposit growth, and a 4% increase in noninterest revenue. Principal transactions revenue and equity-market activity were stronger, while mortgage-related revenue declined.
- Expenses increased 7%, primarily from higher compensation, technology, marketing, real estate and transaction-related costs as the Firm invested in growth and infrastructure.
- The provision for credit losses declined 35% in the quarter, primarily because of a consumer allowance reduction and lower consumer charge-offs. Credit card losses increased as newer vintages seasoned.
- The effective tax rate declined materially following the Tax Cuts and Jobs Act. The quarter included a $132 million net tax benefit from updated estimates related to deferred taxes and deemed repatriation; the nine-month benefit was $305 million.
- Consumer & Community Banking net income increased 60% in the quarter, while CIB net income increased 3%, Commercial Banking increased 24% and Asset & Wealth Management increased 7%. Corporate recorded a $145 million loss versus $78 million of income.
- Corporate’s results included approximately $220 million of markdowns on legacy private-equity investments. Nine-month results also reflected $371 million of investment-securities losses and the absence of a $645 million legal-settlement benefit recorded in 2017.
Guidance, outlook, risks and unusual items
- Management expected full-year 2018 managed net interest income of approximately $55.5 billion, noninterest revenue growth of 7%–8%, adjusted expense of approximately $63.5 billion excluding Firmwide legal expense, and an effective tax rate of approximately 20%.
- Management expected average core-loan growth, excluding CIB, of 6%–7% for full-year 2018. These expectations depend on market conditions and other economic, regulatory and competitive factors.
- The Firm adopted significant accounting standards in 2018, including revenue recognition, fair-value recognition for certain equity investments, hedge accounting and restricted-cash presentation. Certain prior periods were retrospectively revised without affecting net income in the case of the revenue-presentation change.
- The Firm expects adoption of the current expected credit loss standard on January 1, 2020. Management expects the allowance for loans and commitments to increase, with the most significant effect expected in credit cards, but the amount remained under evaluation.
- The Firm reported numerous legal and regulatory matters. Aggregate reasonably possible losses in excess of established reserves were estimated at up to approximately $1.6 billion, although the range excludes matters for which a loss could not be estimated and actual outcomes may differ materially.
- Key ongoing risks include economic and geopolitical conditions, market volatility and liquidity, credit deterioration, regulatory and capital requirements, litigation, technology and cybersecurity, operational controls, funding access and credit-rating downgrades.
- The Firm’s controls and procedures were evaluated as effective at September 30, 2018, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether revenue growth and the 2018 outlook remain sustainable after separating rate-driven net interest income, tax effects and one-time accounting benefits.
- Credit-card loss trends, allowance coverage and the potential impact of the 2020 CECL adoption.
- Expense growth relative to revenue, including technology, compensation, auto-lease depreciation and legal costs.
- Exposure to market volatility, investment-securities losses, legacy private-equity marks and fair-value Level 3 assets.
- Status and ultimate cost of material litigation, including the stated $0 to approximately $1.6 billion reasonably possible loss range.
- Capital distributions, including the $0.80 quarterly common dividend, $14.1 billion of nine-month common-stock repurchases and the remaining $16.3 billion authorization at September 30, 2018.
- Liquidity and funding resilience, including the effect of debt maturities, secured financing activity, ratings changes and derivative downgrade triggers.