JPMorgan Chase & Co. — 1Q19 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. is a global financial services firm with operations in consumer banking, investment banking, commercial banking, transaction processing, asset management and wealth management. This unaudited Form 10-Q covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018, and balance-sheet comparisons to December 31, 2018.
At March 31, 2019, the Firm reported $2.7 trillion of assets, $259.8 billion of total stockholders’ equity and 255,998 employees. The four principal reportable businesses are Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking and Asset & Wealth Management, plus Corporate.
Financial performance and key metrics
| Metric | 1Q19 | 1Q18 | Change |
|---|---|---|---|
| Total net revenue | $29.1 billion | $27.9 billion | Up 4% |
| Net interest income | $14.5 billion | $13.3 billion | Up 9% |
| Noninterest revenue | $14.7 billion | $14.6 billion | Up 1% |
| Noninterest expense | $16.4 billion | $16.1 billion | Up 2% |
| Pre-provision profit | $12.7 billion | $11.8 billion | Up 8% |
| Provision for credit losses | $1.5 billion | $1.2 billion | Up 28% |
| Net income | $9.2 billion | $8.7 billion | Up 5% |
| Diluted EPS | $2.65 | $2.37 | Up 12% |
| Effective tax rate | 18.3% | 18.3% | Flat |
Reported ROE was 16%, ROTCE was 19%, and the overhead ratio improved to 56% from 58%. Book value per share increased to $71.78 from $67.59, while tangible book value per share increased to $57.62 from $54.05.
Average interest-earning assets were $2.3 trillion, up 5%, and the managed net interest yield increased to 2.56% from 2.48%. The increase in net interest income reflected higher rates, balance-sheet growth and changes in mix, partly offset by lower CIB Markets net interest income.
At March 31, 2019, loans were $956.2 billion, deposits were $1.493 trillion, long-term debt was $290.9 billion and total assets were $2.737 trillion. The loans-to-deposits ratio was 64%, compared with 67% at year-end 2018.
Cash used in operating activities was $80.9 billion, compared with $35.1 billion in the prior-year quarter. Investing activities provided $36.3 billion and financing activities provided $69.4 billion, resulting in a $23.8 billion increase in cash, due from banks and deposits with banks. Operating cash flow was significantly affected by trading-asset and securities-borrowed activity and should be interpreted in the context of financial-institution balance-sheet movements.
The allowance for credit losses was $14.6 billion. Net charge-offs were $1.4 billion and the net charge-off rate was 0.58%, compared with 0.59% in 1Q18. Nonperforming assets were $5.6 billion, down from $6.4 billion a year earlier but up from $5.2 billion at December 31, 2018.
Capital and liquidity remained above stated regulatory requirements. The standardized CET1 ratio was 12.1%, the Tier 1 capital ratio was 13.8%, the total capital ratio was 15.7%, the Tier 1 leverage ratio was 8.1% and the supplementary leverage ratio was 6.4%. Average LCR was 111%, with average HQLA of $520.0 billion and net excess HQLA of $52.7 billion. The Firm also reported approximately $281 billion of unencumbered marketable securities and approximately $265 billion of available borrowing capacity.
Material changes versus the prior comparable period
- Net interest income increased 9%, primarily due to higher rates and balance-sheet growth.
- Investment banking fees increased 6%; debt underwriting and advisory revenue were higher, while equity underwriting revenue declined.
- CIB Markets revenue declined 17%, or 10% excluding approximately $500 million of prior-year fair-value gains associated with accounting guidance adoption. Lower client activity affected Fixed Income and Equity Markets.
- Noninterest expense increased 2% due to investments in technology, marketing, real estate and personnel, partly offset by lower performance-based compensation, lower FDIC expense and a net legal benefit.
- The provision for credit losses increased $330 million, primarily because of a $135 million allowance addition related to select Commercial and Industrial client downgrades. The prior-year period included a $170 million allowance reduction related to an Oil & Gas exposure.
- Consumer & Community Banking net income increased 19% to $4.0 billion, while Corporate & Investment Bank net income decreased 18% to $3.3 billion. Commercial Banking net income increased 3% to $1.1 billion, and Asset & Wealth Management net income decreased 14% to $661 million. Corporate reported net income of $251 million versus a prior-year loss of $383 million.
- Common-stock repurchases totaled $5.1 billion, or 49.5 million shares, and the quarterly common dividend was $0.80 per share.
- The Firm adopted new lease accounting guidance on January 1, 2019, recognizing $8.2 billion of operating lease liabilities and $8.1 billion of right-of-use assets, with no material income-statement effect.
Guidance, outlook, commentary, risks and unusual items
Management stated that there were no updates to the 2019 outlook provided in the 2018 Form 10-K. The Firm continued preparing for Brexit, including legal-entity, client-documentation and operational readiness. Brexit-related regulatory, legal, liquidity and market-infrastructure uncertainty remained.
The Firm expects to adopt the current expected credit loss standard on January 1, 2020. Management estimated that the allowance related to loans and commitments could increase by approximately $4 billion to $6 billion, primarily driven by credit cards. This estimate remains subject to model, portfolio, economic and management judgments.
Management identified material sensitivities in credit-loss estimates, including an estimated $800 million increase in modeled annual credit-card losses from a 100-basis-point increase in unemployment, and an estimated $1.7 billion increase from a one-notch downgrade in internal risk ratings across the wholesale loan portfolio, before offsetting or correlated effects.
Legal proceedings remained numerous and included foreign-exchange, benchmark-rate, metals, interchange and other matters. The estimated aggregate range of reasonably possible losses in excess of established reserves was $0 to approximately $1.4 billion as of March 31, 2019, excluding matters for which a reasonable estimate could not be made. Actual losses may differ materially.
Other notable items included a $100 million contribution to the JPMorgan Chase Foundation, a $1.85 billion issuance of Series EE preferred stock, redemption of $925 million of Series T preferred stock, and $949 million of after-tax other comprehensive income. The Firm reported no goodwill impairment at March 31, 2019.
Key ongoing risks include economic and geopolitical conditions, market volatility and liquidity, credit deterioration, interest-rate movements, regulatory and capital requirements, funding and credit-rating changes, litigation, operational and cyber risks, model and valuation uncertainty, and the ability to control expenses and maintain effective controls.
Important facts for investors to verify
- Reconcile reported U.S. GAAP results with managed-basis and other non-GAAP measures, particularly ROTCE, tangible book value per share, pre-provision profit and credit ratios excluding purchased credit-impaired loans.
- Monitor credit-card charge-offs, delinquency trends, wholesale criticized exposures and the potential 2020 CECL allowance increase of $4 billion to $6 billion.
- Assess the sustainability of net interest income growth as interest rates, deposit costs, loan balances and asset mix change.
- Evaluate CIB Markets performance and the effect of prior-year fair-value gains on reported comparisons.
- Review capital distributions, the remaining common-equity repurchase authorization, preferred-stock issuance and the impact of fully phased-in Basel III requirements.
- Review liquidity metrics, secured funding, long-term debt, collateral and potential collateral or termination requirements associated with credit-rating downgrades.
- Assess exposure to litigation, regulatory investigations, Brexit, off-balance-sheet commitments, guarantees, securitizations and other contingent liabilities.
- Confirm the final impact of CECL adoption, ongoing model validation and economic conditions when the standard is adopted on January 1, 2020.