Business Context and Reporting Period
JPMorgan Chase & Co. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The firm is a global financial services company operating through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset & Wealth Management, and Corporate. The interim financial statements received a review by PricewaterhouseCoopers LLP without identified material modifications.
At September 30, 2019, the firm reported $2.8 trillion of assets, $264.3 billion of stockholders’ equity, 3.14 billion common shares outstanding, and approximately 257,444 employees.
Key Financial Metrics
| Metric | Third quarter 2019 | Year-to-date 2019 | Comparable change |
|---|---|---|---|
| Total net revenue | $29.3 billion | $87.3 billion | Up 8% quarterly; up 5% year to date |
| Net income | $9.1 billion | $27.9 billion | Up 8% quarterly; up 10% year to date |
| Diluted EPS | $2.68 | $8.15 | Up 15% quarterly; up 16% year to date |
| Noninterest expense | $16.4 billion | $49.2 billion | Up 5% quarterly; up 3% year to date |
| Provision for credit losses | $1.5 billion | $4.2 billion | Up 60% quarterly; up 25% year to date |
| Pre-provision profit | $12.9 billion | $38.1 billion | Up 11% quarterly; up 8% year to date |
- Net interest income was $14.2 billion in the quarter and $43.1 billion year to date. Quarterly net interest income increased 2%, while the net interest yield declined to 2.41% from 2.53%.
- Noninterest revenue was $15.1 billion in the quarter, up 13%, supported by Fixed Income Markets, Home Lending and Auto. Mortgage fees included approximately $350 million of gains on certain loan sales.
- Quarterly effective tax rate was 20.4%; the nine-month rate was 17.9%, including approximately $1.0 billion of tax benefits from resolving certain tax audits.
- Return on common equity was 15% for both the quarter and nine-month period; return on tangible common equity was 18% and 19%, respectively. The overhead ratio was 56%.
Balance Sheet, Liquidity, Debt and Capital
- Total assets increased 5% from December 31, 2018, to $2.765 trillion. Investment securities rose 51% to $394.3 billion, while loans declined 4% to $945.2 billion, primarily due to Home Lending loan sales and lower CIB balances.
- Deposits increased 4% to $1.525 trillion. The loans-to-deposits ratio improved to 62% from 67% at year-end 2018.
- Long-term debt increased 5% to $296.5 billion. Short-term borrowings declined 29% to $48.9 billion, while repurchase-related funding increased materially with CIB activity.
- Average liquidity coverage ratio was 115%, supported by $537.5 billion of average high-quality liquid assets and $69.0 billion of net excess HQLA. Management stated that funding capacity was sufficient for on- and off-balance-sheet obligations.
- Capital remained above regulatory minimums: standardized CET1 ratio was 12.3%, Tier 1 capital ratio was 14.1%, total capital ratio was 15.9%, Tier 1 leverage ratio was 7.9%, and supplementary leverage ratio was 6.3%.
- The firm repurchased $17.25 billion of common equity during the first nine months and had $22.45 billion remaining under its $29.4 billion authorization. The quarterly common dividend increased to $0.90 per share.
Cash Flow and Credit Quality
- For the first nine months, operating activities used $77.0 billion of cash, investing activities used $38.2 billion, and financing activities provided $96.0 billion. Cash and deposits with banks declined by $22.2 billion.
- The allowance for credit losses was $14.4 billion at September 30, 2019, equal to 1.42% of retained loans, compared with 1.39% a year earlier. The increase in coverage excluding purchased credit-impaired loans was to 1.32% from 1.23%.
- Net charge-offs were $1.371 billion in the quarter and $4.135 billion year to date; the annualized firmwide net charge-off rate was 0.58% quarterly and 0.59% year to date.
- Nonperforming assets were $5.3 billion, up from $5.0 billion a year earlier. The increase primarily reflected select wholesale client downgrades, partly offset by improved consumer performance.
- Credit card loans increased 8% from the prior year, with a 2.95% quarterly net charge-off rate. Wholesale nonaccrual loans increased to $1.7 billion from $1.0 billion at year-end 2018.
Material Changes Versus Prior Comparable Period
- Consumer & Community Banking quarterly net income increased 5% to $4.3 billion, driven by 7% revenue growth, including higher mortgage production, card and auto activity. Credit card loans rose 8%, while Home Lending loans declined 16% from the prior year.
- Corporate & Investment Bank quarterly net income increased 7% to $2.8 billion. Markets revenue increased 14% to $5.1 billion, led by a 25% increase in Fixed Income Markets. Year-to-date CIB net income declined 8%, reflecting weaker Equity Markets and prior-year gains.
- Commercial Banking quarterly net income declined 14% to $937 million due to lower net interest income, higher expenses and a credit-loss provision versus a prior-year benefit. Year-to-date net income declined 7%.
- Asset & Wealth Management quarterly net income declined 8% to $668 million and year-to-date net income declined 9%, as revenue was broadly flat and expenses increased. Assets under management rose 8% to $2.246 trillion.
- Corporate reported quarterly net income of $393 million versus a $145 million loss in the prior year, and nine-month net income of $1.472 billion versus a $664 million loss, helped by higher net interest income, investment securities gains and tax benefits.
- Mortgage servicing rights declined to $4.4 billion from $6.4 billion a year earlier, reflecting faster prepayments and valuation effects from lower rates.
Guidance, Outlook, Risks and Unusual Items
- Management expected full-year 2019 managed net interest income to be below $57.5 billion, market dependent; adjusted expense to be approximately $65.5 billion; and net charge-offs to be approximately $5.5 billion.
- The firm planned to adopt the current expected credit loss standard on January 1, 2020. Management estimated that the allowance for loans and commitments could increase by approximately $4 billion to $6 billion, primarily driven by credit cards, subject to refinement.
- Brexit implementation remained subject to legal, regulatory, client-readiness and operational uncertainty, including possible disruption to market connectivity, contract continuity and liquidity access.
- The firm continued preparations for the expected discontinuation of LIBOR and other IBORs, including fallback language and transition to alternative reference rates such as SOFR.
- Management identified risks from economic and geopolitical conditions, interest rates, market volatility, credit deterioration, regulatory changes, litigation, cybersecurity, operational failures, technology changes, reputation, funding access and credit-rating downgrades.
- Aggregate reasonably possible legal losses in excess of established reserves were estimated at $0 to approximately $1.3 billion as of September 30, 2019. The filing states that actual losses could vary significantly and that certain matters could not yet be estimated.
- New lease accounting resulted in recognition of approximately $8.2 billion of operating lease liabilities and $8.1 billion of right-of-use assets beginning January 1, 2019, without a material income-statement effect.
Investor Verification Priorities
- Verify the sustainability of revenue growth given reliance on market activity, mortgage loan-sale gains, investment securities gains and other valuation-sensitive items.
- Assess the effect of lower interest rates and potential additional rate cuts on net interest income, deposit margins, mortgage prepayments and MSR valuations.
- Monitor credit card growth, charge-offs, wholesale downgrades and the anticipated $4 billion to $6 billion CECL adoption increase.
- Reconcile reported U.S. GAAP results with managed-basis and other non-GAAP measures, including ROTCE, tangible book value and net interest yield excluding CIB Markets.
- Review liquidity and funding exposure arising from repurchase agreements, derivatives, collateral requirements, credit-rating triggers and off-balance-sheet commitments.
- Follow Brexit, LIBOR transition, regulatory investigations, benchmark-rate litigation, FX matters and the disclosed range of reasonably possible legal losses.
- Confirm capital distributions, preferred-stock redemptions and issuances against applicable regulatory capital and TLAC requirements.