JPMorgan Chase & Co. — Q2 2020 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase is a global financial services firm operating through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset & Wealth Management and Corporate. The filing covers the three and six months ended June 30, 2020, with results heavily affected by the COVID-19 pandemic, market volatility and the January 1, 2020 adoption of CECL.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Total net revenue | $33.0 billion | $28.7 billion | 15% increase |
| Noninterest revenue | $19.1 billion | $14.3 billion | 33% increase |
| Net interest income | $13.9 billion | $14.4 billion | 4% decrease |
| Noninterest expense | $16.9 billion | $16.3 billion | 4% increase |
| Pre-provision profit | $16.0 billion | $12.5 billion | 28% increase |
| Provision for credit losses | $10.5 billion | $1.1 billion | Material increase |
| Net income | $4.7 billion | $9.7 billion | 51% decrease |
| Diluted EPS | $1.38 | $2.82 | 51% decrease |
| ROE / ROTCE | 7% / 9% | 16% / 20% | Decline |
For the six months ended June 30, 2020, net revenue was $61.2 billion, up 6%, while net income was $7.6 billion, down 60%, and diluted EPS was $2.17, down 60% from the prior-year period.
- Revenue drivers: Investment banking fees increased 54% to $2.9 billion. Principal transactions revenue increased 105% to $7.6 billion. CIB Markets revenue was $9.7 billion, up 79%, including Fixed Income Markets growth of 99% and Equity Markets growth of 38%.
- Revenue offsets: Net interest income declined 4% as lower rates reduced yields. Card income decreased 24% because of lower consumer spending and card sales volumes. Mortgage fees and related income increased 229% to $917 million.
- Credit costs: The provision for credit losses was $10.5 billion, including approximately $4.6 billion of wholesale allowance additions and $4.4 billion of consumer allowance additions, primarily in credit cards.
- Credit quality: The allowance for credit losses was $34.3 billion at June 30, 2020, compared with $14.3 billion at year-end 2019 and $14.3 billion at June 30, 2019. The allowance-to-retained-loans ratio was 3.32%, compared with 1.39% in the prior year. Nonperforming assets were $8.4 billion, up from $5.3 billion a year earlier.
- Balance sheet and funding: Total assets were $3.2 trillion, up 20% from December 31, 2019. Deposits were $1.9 trillion, up 24%, while loans were $978.5 billion, up 2%. Long-term debt was $317.0 billion, up 9%. The loans-to-deposits ratio declined to 51% from 61% at year-end 2019.
- Liquidity: Average LCR was 117%, with average HQLA of $651.2 billion and net excess HQLA of $94.8 billion. Additional unencumbered marketable securities were approximately $606 billion, and available borrowing capacity at FHLBs and the Federal Reserve discount window was approximately $281 billion.
- Cash flow: During the first six months, operating activities used $37.0 billion and investing activities used $183.6 billion, largely due to trading-asset growth, investment-security purchases and loan originations. Financing activities provided $451.4 billion, primarily from deposit growth, repurchase funding and long-term borrowings. Cash and deposits with banks increased by $230.1 billion.
- Capital: CET1 capital was $190.9 billion and the Standardized CET1 ratio was 12.4%; the Advanced CET1 ratio was 13.2%. The SLR was 6.8%, including temporary regulatory exclusions; excluding temporary relief, management reported an SLR of 5.7%.
Material changes versus the prior comparable period
- Net income fell sharply despite stronger revenue because credit-loss provisions increased by approximately $9.3 billion year over year.
- Consumer & Community Banking reported a $176 million net loss versus $4.2 billion of net income in Q2 2019, primarily because of higher credit provisions and lower card activity.
- Corporate & Investment Bank net income rose 85% to $5.5 billion, benefiting from strong Markets and investment-banking activity, partly offset by higher compensation and credit provisions.
- Commercial Banking reported a $691 million net loss versus $1.0 billion of net income, driven by a $2.4 billion credit-loss provision.
- Asset & Wealth Management net income declined 8% to $658 million; assets under management increased 15% to $2.5 trillion and total client assets increased 12% to $3.4 trillion.
- Consumer card sales volume declined 23% in Q2, while average deposits in the consumer banking business increased 20%. Firmwide average deposits increased 25%.
- The Firm adopted CECL, producing a $4.3 billion increase in the allowance for credit losses and a $2.7 billion reduction to retained earnings at adoption.
Guidance, outlook, commentary and unusual items
- Management expected full-year 2020 managed net interest income of approximately $56 billion, market dependent, and adjusted expense of approximately $65 billion.
- The Board intended to maintain the $0.90 quarterly common dividend for Q3 2020, subject to approval. Federal Reserve restrictions prohibited net common-share repurchases through at least the end of Q3 2020.
- Management recorded $678 million of markups on held-for-sale bridge-financing positions and a $510 million CIB gain from funding-spread tightening on derivatives. These followed significant first-quarter losses and may not represent recurring performance.
- The Firm provided approximately $28 billion of PPP loans at June 30, 2020, including approximately $20 billion in consumer-related businesses and $8 billion in wholesale businesses. PPP loans are SBA-guaranteed, and management did not expect material credit losses on them.
- Customer assistance included approximately $28.3 billion of retained consumer loans and $16.8 billion of retained wholesale loans still under payment deferral at June 30, 2020. Such programs may delay recognition of delinquencies, nonaccrual loans and charge-offs.
- Management’s second-quarter CECL forecast reflected a more prolonged downturn than the first-quarter forecast, with adverse scenarios weighted significantly. The filing states that future changes in unemployment, GDP, government support and the pace of recovery could materially change credit-loss estimates.
- The indicative Stress Capital Buffer requirement was 3.3%; the final requirement was expected by August 31, 2020 and was scheduled to become effective October 1, 2020.
- Legal proceedings had an estimated aggregate range of reasonably possible losses, in excess of reserves, from $0 to approximately $1.7 billion as of June 30, 2020. The filing states that actual losses could vary materially and that some matters cannot be estimated.
Most important facts for investors to verify
- Whether subsequent COVID-19 economic conditions, expiring payment deferrals and reduced government support lead to additional charge-offs and CECL allowance increases.
- The sustainability of unusually strong CIB Markets and investment-banking revenue, including the effect of valuation adjustments and bridge-financing marks.
- Deposit retention, loan demand, net interest income sensitivity to prolonged low rates and the effect of margin compression.
- Capital ratios after temporary CECL and SLR regulatory relief expires, including the final Stress Capital Buffer requirement.
- Actual credit performance of credit cards, residential real estate, commercial real estate, consumer and retail, automotive and oil-and-gas exposures.
- The amount and timing of PPP fee income, loan forgiveness and any related operational, regulatory or litigation risks.
- Developments in material litigation, benchmark-rate transition, Brexit implementation and other regulatory matters.