JPMorgan Chase & Co. 2016 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, 2016, including fourth-quarter results, and was filed February 28, 2017. At year-end, the Firm reported $2.5 trillion of assets and $254.2 billion of stockholders’ equity.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total net revenue | $95.668 billion | $93.543 billion | 2% |
| Net interest income | $46.083 billion | $43.510 billion | 6% |
| Noninterest expense | $55.771 billion | $59.014 billion | (5)% |
| Provision for credit losses | $5.361 billion | $3.827 billion | 40% |
| Net income | $24.733 billion | $24.442 billion | 1% |
| Diluted EPS | $6.19 | $6.00 | 3% |
| ROE | 10% | 11% | Down 1 point |
| ROTCE | 13% | 13% | Flat |
Fourth-quarter 2016 net income was $6.727 billion, or $1.71 diluted EPS, on $23.376 billion of net revenue. Fourth-quarter provision for credit losses was $864 million and noninterest expense was $13.833 billion.
Year-end loans were $894.765 billion, up 7%; core loans were $806.152 billion, up 10%; and deposits were $1.375 trillion, up 7%. Long-term debt was $295.245 billion, compared with $288.651 billion in 2015. The loans-to-deposits ratio remained 65%.
Cash flow from operating activities was $20.196 billion, while investing activities used $114.949 billion, principally reflecting loan growth, increased deposits with banks, and securities purchased under resale agreements. Financing activities provided $98.271 billion, primarily from deposit growth, secured financing, and long-term borrowings. Cash and due from banks increased $3.383 billion.
Credit metrics weakened modestly but remained favorable overall: the allowance for credit losses was $14.854 billion, nonperforming assets were $7.535 billion, and the net charge-off rate was 0.54%, compared with 0.52% in 2015. The allowance-to-retained-loans ratio declined to 1.55% from 1.63%, or 1.34% excluding residential real estate purchased credit-impaired loans.
Capital and liquidity remained strong. The Basel III Advanced Transitional CET1 ratio was 12.4%, the total capital ratio was 15.5%, and the Tier 1 leverage ratio was 8.4%. Fully phased-in CET1 was estimated at 12.2%, the supplementary leverage ratio was 6.5%, and high-quality liquid assets totaled $524 billion. Management stated that the Firm was compliant with the fully phased-in U.S. LCR.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher net interest income across business segments and stronger Markets revenue in CIB. These benefits were partly offset by lower card income and lower asset management fees.
- Noninterest expense declined $3.243 billion, principally because legal expense improved from a $2.969 billion expense in 2015 to a $317 million benefit in 2016.
- Credit costs increased $1.534 billion, mainly from higher credit card losses and allowance additions, lower residential real estate allowance releases, and downgrades in Oil & Gas and Natural Gas Pipelines portfolios.
- Average core loans increased 15%, consumer deposits grew strongly, card sales volume increased 10%, merchant processing volume increased 12%, and active mobile customers increased 16% to 26.5 million.
- CIB net income increased 34% to $10.815 billion, supported by stronger Markets revenue and lower expenses. Commercial Banking net income increased 21% to $2.657 billion, while AWM net income increased 16% to $2.251 billion. CCB net income declined 1% to $9.714 billion because of higher credit costs.
- The Firm repurchased 140.4 million common shares for $9.082 billion and declared $1.88 per common share of dividends. At year-end, $6.1 billion remained available under the $10.6 billion repurchase authorization.
- The Firm adopted accounting guidance moving DVA changes on fair-value-option liabilities to OCI and recognizing excess employee share-based-payment tax benefits in income tax expense. Management reported no material impact on the consolidated financial statements.
Guidance, outlook, risks, contingencies and unusual items
For 2017, management expected first-quarter net interest income to increase modestly from the fourth quarter. Assuming no further change in interest rates from December 31, 2016, full-year net interest income was expected to be approximately $3 billion above 2016, with average core-loan growth of approximately 10%.
Management expected approximately $5 billion of 2017 net charge-offs, a consumer allowance increase of approximately $300 million, and adjusted Firmwide expense of approximately $58 billion excluding legal expense. Card and mortgage noninterest revenue were expected to decline because of portfolio amortization, mortgage servicing runoff, margin compression, and the nonrecurrence of certain 2016 gains.
The Firm established JPMorgan Chase Holdings LLC as an intermediate holding company and reported that regulators determined its 2016 resolution submission adequately remediated deficiencies identified in its 2015 plan. The Firm nonetheless remains subject to additional resolution-plan requirements, TLAC funding requirements, capital and liquidity rules, and potential restructuring if future plans are deemed not credible.
Material risks include market volatility, credit deterioration, liquidity or funding disruption, ratings downgrades, cybersecurity and operational failures, model and valuation risk, intense competition, Brexit-related uncertainty, changing U.S. and international regulation, and legal or regulatory enforcement. Legal proceedings had an estimated aggregate range of reasonably possible losses, in excess of established reserves, from zero to approximately $3.0 billion at year-end; the filing states that some matters cannot yet be estimated and actual losses may differ materially.
Unusual or nonrecurring items included the prior-year $514 million legal-settlement benefit, 2016 gains related to the sale of Visa Europe interests and redemption of trust preferred securities, and the absence of 2015’s substantial tax benefits from audit resolutions. The Firm also reported a $7.5 billion transfer of securities from available-for-sale to held-to-maturity.
Most important facts for investors to verify
- Reconcile reported U.S. GAAP results with managed-basis and other non-GAAP measures, particularly ROTCE, TBVPS, core loans, and segment revenue.
- Assess whether rising credit card charge-offs, newer loan vintages, and Oil & Gas-related downgrades could require additional provisions.
- Review the allowance methodology and sensitivity disclosures, including the potential effects of higher unemployment, lower housing prices, wholesale rating downgrades, and the forthcoming CECL standard.
- Evaluate the sustainability of 2016 expense reductions, especially the unusually favorable legal-expense comparison.
- Monitor 2017 net interest income, loan growth, deposit spreads, card and mortgage revenue, and the effect of interest-rate changes.
- Review capital distributions against Basel III, CCAR, GSIB, TLAC, and future fully phased-in capital requirements.
- Examine legal proceedings, regulatory consent orders, mortgage-related matters, FX and benchmark investigations, and the stated $0 to approximately $3.0 billion range of reasonably possible losses above reserves.
- Consider the Firm’s dependence on subsidiaries for Parent Company dividends and debt service, including restrictions on intercompany transfers and bank dividends.