JPMORGAN CHASE & CO annual report, FY2019

JPMorgan Chase & Co. 2019 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, 2019, with quarterly data including the fourth quarter. The filing was dated February 25, 2020.

At December 31, 2019, the Firm reported $2.7 trillion of assets, $261.3 billion of total stockholders’ equity, 4,976 U.S. branches, and 256,981 employees. The consolidated financial statements received an unqualified audit opinion from PricewaterhouseCoopers LLP, and management reported effective internal control over financial reporting with no material weaknesses.

Financial performance and key metrics

Metric	2019	2018	Change
Total net revenue	$115.6 billion	$109.0 billion	6%
Pre-provision profit	$50.1 billion	$45.6 billion	10%
Provision for credit losses	$5.6 billion	$4.9 billion	15%
Net income	$36.4 billion	$32.5 billion	12%
Diluted EPS	$10.72	$9.00	19%
Return on common equity	15%	13%	Up 2 percentage points
Return on tangible common equity	19%	17%	Up 2 percentage points
Overhead ratio	57%	58%	Improved

Net interest income was $57.2 billion, up 4%, reflecting balance-sheet growth, mix, and higher average short-term rates, partly offset by higher deposit costs. Noninterest revenue was $58.4 billion, up 8%, supported by Consumer & Community Banking growth and stronger Markets revenue. Noninterest expense was $65.5 billion, up 3%, reflecting investments in employees, technology, real estate, and marketing, partly offset by lower FDIC charges.

The effective tax rate was 18.2%, compared with 20.3% in 2018. The 2019 rate benefited from approximately $1.1 billion of tax benefits related to the resolution of certain tax audits.

Balance sheet, liquidity, debt, and cash flow

• Total assets increased 2% to $2.687 trillion.
• Deposits increased 6% to $1.562 trillion, while the loans-to-deposits ratio improved to 61% from 67%.
• Total loans declined 3% to $959.8 billion, primarily due to Home Lending loan sales and lower CIB balances, partly offset by growth in Card and Asset & Wealth Management.
• Investment securities increased 52% to $398.2 billion, primarily from purchases of U.S. Treasuries, government agency securities, and mortgage-backed securities.
• Long-term debt increased 3% to $291.5 billion; short-term borrowings declined 41% to $40.9 billion.
• Average fourth-quarter liquidity coverage ratio was 116%, with $545.3 billion of high-quality liquid assets and $75.9 billion of net excess HQLA.
• Additional liquidity sources included approximately $315 billion of unencumbered marketable securities and $322 billion of available borrowing capacity at Federal Home Loan Banks and the Federal Reserve discount window.
• Cash provided by operating activities was $6.0 billion, cash used in investing activities was $54.0 billion, and cash provided by financing activities was $33.0 billion. Cash and deposits with banks declined by $15.2 billion during the year.
• Contractual cash obligations totaled $2.248 trillion, including $250.4 billion of long-term debt obligations and $177.6 billion of off-balance-sheet obligations.

Capital, credit quality, and shareholder returns

• Standardized CET1 capital was $187.8 billion and the CET1 ratio was 12.4%, compared with 12.0% in 2018. The Advanced CET1 ratio was 13.4%.
• The Tier 1 capital ratio was 14.1%, total capital ratio was 16.0%, Tier 1 leverage ratio was 7.9%, and supplementary leverage ratio was 6.3%.
• The Firm stated that it expects to operate with a Basel III CET1 ratio of approximately 11.5% to 12% over the medium term.
• The allowance for credit losses was $14.3 billion, with a 1.39% allowance-to-retained-loans ratio. Excluding residential real estate purchased credit-impaired loans, the ratio was 1.31%, up from 1.23%.
• Nonperforming assets declined to $4.5 billion from $5.2 billion. Net charge-offs increased to $5.6 billion from $4.9 billion, and the net charge-off rate increased to 0.60% from 0.52%.
• The Firm repurchased 213.0 million common shares for $24.1 billion during 2019 and had $15.6 billion remaining under its $29.4 billion repurchase authorization at year-end.
• Common dividends declared were $3.40 per share, compared with $2.72 in 2018. The common dividend payout ratio was 31%.
• External TLAC was $386.4 billion, or 25.5% of risk-weighted assets, and eligible long-term debt was $161.8 billion, or 10.7%, each exceeding applicable minimum requirements.

Material changes versus the prior comparable period

• Net income rose 12%, while diluted EPS rose 19%, benefiting from higher revenue, operating leverage, and a lower effective tax rate.
• Consumer & Community Banking revenue increased 7% to $55.9 billion and net income increased 12% to $16.6 billion. Card loans grew 7%, while Home Lending loans declined 9% due partly to loan sales.
• Corporate & Investment Bank revenue increased 5% to $38.3 billion and net income increased 1% to $11.9 billion. Markets revenue increased 7%, led by Fixed Income Markets.
• Commercial Banking revenue declined 1% to $9.0 billion and net income declined 7% to $3.9 billion, reflecting lower deposit margins and higher credit-loss provisions.
• Asset & Wealth Management revenue increased 2% to $14.3 billion, while net income declined 1% to $2.8 billion. Assets under management increased 19% to $2.4 trillion.
• Corporate reported net income of $1.1 billion versus a $1.2 billion loss in 2018, primarily reflecting higher net interest income, investment-securities gains, and the 2019 tax audit benefit.
• The Firm adopted new lease accounting guidance in 2019, recognizing operating lease liabilities of $8.5 billion and right-of-use assets of $8.2 billion at year-end.

Guidance, outlook, commentary, and unusual items

• For 2020, management expected managed net interest income of approximately $57 billion, market dependent; adjusted expense of approximately $67 billion; net charge-offs just over $6 billion; and a reported effective tax rate of approximately 20%.
• For the first quarter of 2020, management expected managed net interest income of approximately $14.2 billion, adjusted expense of approximately $17 billion, and a reported effective tax rate of approximately 17%. Markets revenue was expected to increase by mid-teens percentage points year over year, subject to market conditions.
• Management expected higher 2020 charge-offs primarily from Card growth and mix, while continuing to characterize credit trends as favorable and charge-off rates as historically low.
• CECL was adopted January 1, 2020. The allowance for credit losses increased by $4.3 billion, retained earnings decreased by $2.7 billion after tax, and the Firm elected to phase the regulatory capital impact over 2020–2023. The estimated CET1 ratio impact was approximately 4 basis points per year during the transition.
• Brexit created continued legal, regulatory, operating-model, and market-liquidity uncertainty. The Firm had migrated certain client activity and employees to EU entities but expected a potentially more fragmented and costly European operating model.
• The Firm identified the expected discontinuation of LIBOR and other IBORs around or after 2021 as a significant transition risk affecting loans, derivatives, securities, funding, accounting, taxation, litigation, and client relationships.
• The Firm remained subject to consent orders concerning foreign-exchange trading and referral-hiring practices and continued to face regulatory investigations, litigation, cybersecurity, conduct, compliance, and model-risk exposure.
• Management identified fair value measurements, mortgage servicing rights, credit-loss allowances, goodwill, taxes, and litigation reserves as significant judgment areas. Level 3 assets were $13.5 billion, and MSRs declined to $4.7 billion from $6.1 billion, primarily because of lower rates and faster prepayments.
• The estimated aggregate range of reasonably possible legal losses in excess of established reserves was $0 to approximately $1.3 billion at December 31, 2019, excluding matters for which a reasonable estimate could not be made.

Most important facts for an investor to verify

• Reconcile reported GAAP revenue and net income with management’s managed-basis and non-GAAP measures, including ROTCE, TBVPS, and adjusted expense.
• Assess whether the 2020 outlook remained achievable after the subsequent COVID-19 economic shock, interest-rate reductions, market volatility, and credit deterioration; the filing predates those developments.
• Review the CECL adoption impact and subsequent allowance changes, especially the increase primarily associated with Card exposures.
• Monitor Card charge-offs, wholesale criticized exposures, allowance coverage, and concentrations in real estate, consumer credit, oil and gas, and other cyclical sectors.
• Evaluate liquidity and capital buffers against stress scenarios, including the effects of dividends, share repurchases, regulatory changes, and potential ratings downgrades.
• Review LIBOR transition execution, contract fallback provisions, litigation exposure, and possible effects on earnings, capital, and client products.
• Review outstanding consent orders, regulatory investigations, legal proceedings, cybersecurity controls, and the disclosed range of reasonably possible legal losses.
• Verify changes in mortgage servicing rights valuations and the sensitivity of MSRs to prepayment speeds, interest rates, and discount spreads.