Business context and reporting period
JPMorgan Chase & Co. filed its Form 10-K for the fiscal year ended December 31, 2020. The filing includes fourth-quarter 2020 results and audited full-year financial statements. The Firm operates globally across Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset & Wealth Management and Corporate. Total assets were $3.4 trillion and stockholders’ equity was $279.4 billion at year-end. The Firm had 255,351 employees in 62 countries.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total net revenue | $119.5 billion | $115.4 billion | Up 4% |
| Noninterest expense | $66.7 billion | $65.3 billion | Up 2% |
| Pre-provision profit | $52.9 billion | $50.1 billion | Up 5% |
| Provision for credit losses | $17.5 billion | $5.6 billion | Up 213% |
| Net income | $29.1 billion | $36.4 billion | Down 20% |
| Diluted EPS | $8.88 | $10.72 | Down 17% |
| ROE | 12% | 15% | Down 3 percentage points |
| ROTCE | 14% | 19% | Down 5 percentage points |
| Overhead ratio | 56% | 57% | Improved |
Fourth-quarter net income was $12.1 billion, or $3.79 diluted EPS, on $29.2 billion of revenue. The quarter included a $1.9 billion benefit from the provision for credit losses, compared with provisions of $611 million in the third quarter and $1.4 billion in the fourth quarter of 2019. Fourth-quarter ROE was 19% and ROTCE was 24%.
- Noninterest revenue increased to $65.0 billion for the year, driven by stronger markets revenue, investment banking fees and mortgage production revenue.
- Net interest income declined 5% to $54.6 billion as lower interest rates and deposit-margin compression more than offset balance-sheet growth and stronger CIB Markets net interest income.
- Investment banking fees increased 26% to $9.5 billion. CIB Markets revenue increased 41% to $29.5 billion, including Fixed Income Markets revenue of $20.9 billion and Equity Markets revenue of $8.6 billion.
- Consumer & Community Banking net income fell 50% to $8.2 billion, primarily because of higher credit-loss provisions. CIB net income rose 43% to $17.1 billion, Commercial Banking net income fell 35% to $2.6 billion, and Asset & Wealth Management net income rose 4% to $3.0 billion.
Balance sheet, credit, cash flow, debt and liquidity
- Total assets increased 26% to $3.386 trillion, primarily reflecting deposit inflows, higher trading assets and larger investment securities balances.
- Period-end deposits rose 37% to $2.144 trillion; average deposits increased 25% to $1.907 trillion. The loans-to-deposits ratio declined to 47% from 64%.
- Loans increased 2% to $1.013 trillion. The Firm held approximately $27 billion of PPP loans at year-end, substantially guaranteed by the SBA.
- Long-term debt declined 3% to $281.7 billion. The Firm issued $3.0 billion of fixed-to-floating subordinated notes due 2031 during 2020.
- Total allowance for credit losses was $30.7 billion, compared with $14.3 billion at year-end 2019. The allowance for loan losses to retained loans increased to 2.95% from 1.39%. Nonperforming assets increased to $10.9 billion from $5.1 billion.
- Net charge-offs declined to $5.3 billion, or 0.55% of average retained loans, from $5.6 billion and 0.60% in 2019. Management attributed the lower charge-offs partly to payment assistance and government stimulus.
- Net cash used in operating activities was $79.9 billion, and net cash used in investing activities was $261.9 billion. Financing activities provided $596.6 billion, primarily through deposit growth and secured funding. Cash and deposits with banks increased by $264.0 billion.
- The average fourth-quarter Firm liquidity coverage ratio was 110%, with approximately $697.1 billion of eligible HQLA and $740 billion of unencumbered marketable securities at year-end. Management identified approximately $1.4 trillion of liquidity sources.
- Standardized CET1 capital was $205.1 billion, or 13.1%; the Tier 1 capital ratio was 15.0%, total capital ratio was 17.3% and SLR was 6.9%. The reported SLR benefited from temporary exclusions of U.S. Treasury securities and Federal Reserve deposits; excluding that relief, management reported an SLR of 5.8%.
Material changes versus the prior comparable period
- COVID-19 caused a substantial increase in expected credit losses and reduced consumer spending, card volumes and certain fee revenues. The 2020 provision included $12.2 billion of net additions to credit-loss allowances.
- The Firm adopted CECL on January 1, 2020, increasing the allowance for credit losses by approximately $4.3 billion and reducing retained earnings by $2.7 billion after tax.
- Wholesale criticized exposure increased to $41.6 billion from $15.1 billion, driven mainly by downgrades in Consumer & Retail, Oil & Gas and Real Estate. The investment-grade percentage of the wholesale portfolio declined to 71% from 74%.
- Deposits, investment securities and trading assets expanded materially, while net interest income declined because of the low-rate environment.
- Common-share repurchases were suspended after the first quarter. The Firm repurchased 50.0 million shares for $6.4 billion during 2020, versus $24.1 billion in 2019.
- Brexit was completed on December 31, 2020, requiring a more fragmented and potentially more costly U.K. and EU operating model. The Firm also continued its transition away from LIBOR and other IBOR benchmarks.
- The Firm acquired cxLoyalty’s Global Loyalty business and 55ip on December 31, 2020, contributing to a $1.4 billion increase in goodwill from business combinations.
Guidance, outlook, commentary, risks and unusual items
- For 2021, management expected managed net interest income of approximately $55 billion, subject to market conditions, and adjusted expense of approximately $69 billion. First-quarter managed net interest income was expected to be approximately $13 billion. Fourth-quarter managed net interest income was expected to exceed $14 billion, market dependent.
- Investment banking fees were expected to be flat versus the fourth quarter of 2020 in the first quarter of 2021, depending on market conditions.
- The Federal Reserve permitted share repurchases to resume in the first quarter of 2021, subject to restrictions. The Board authorized a new program of up to $30 billion, and management expected up to $4.5 billion of first-quarter 2021 repurchases while maintaining the $0.90 quarterly common dividend, subject to Board approval.
- Management’s credit outlook remained highly sensitive to the duration of the pandemic, vaccination progress, government stimulus and borrower payment assistance. COVID-related deferrals totaled $10.7 billion in consumer loans and approximately $1.6 billion in wholesale loans at year-end.
- Legal expense was $1.1 billion in 2020, compared with $239 million in 2019. The Firm disclosed an aggregate range of reasonably possible legal losses, in excess of recorded reserves, from zero to approximately $1.5 billion, although some matters could not be estimated.
- The Firm remains subject to a Federal Reserve consent order concerning foreign exchange trading and a DOJ Deferred Prosecution Agreement, together with a related CFTC order, concerning precious metals and U.S. Treasuries investigations. Combined monetary amounts under the 2020 resolutions were approximately $920 million.
- Key risks include COVID-19-related credit deterioration, regulatory and capital changes, liquidity and funding stress, interest-rate and market volatility, cyber and operational failures, litigation, benchmark-rate transition, Brexit-related costs, climate risks and intense competition.
- Management concluded that internal control over financial reporting was effective at December 31, 2020, with no material weaknesses identified. PwC issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether government support and loan-deferral expirations lead to delayed consumer and wholesale charge-offs beyond the $30.7 billion year-end allowance.
- The sustainability of 2020’s unusually strong CIB Markets and investment-banking performance, as well as the impact of low rates on net interest income and deposit margins.
- The extent to which reported capital and leverage ratios depend on temporary CECL and SLR regulatory relief.
- The timing and amount of 2021 share repurchases, dividend approvals and any changes to Federal Reserve distribution restrictions.
- Potential losses, penalties or restrictions related to legal proceedings, the Federal Reserve consent order, the DOJ DPA and other regulatory matters.
- Progress and costs associated with Brexit implementation, LIBOR transition, acquisitions and the planned U.K. digital retail bank.
- Exposure to criticized industries, particularly real estate, Consumer & Retail and Oil & Gas, and the performance of loans that remain under or recently exited COVID-19 assistance programs.