JPMorgan Chase & Co. — 1Q18 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. is a global financial services firm with operations in Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset & Wealth Management, and Corporate. The filing covers the three months ended March 31, 2018; financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and key metrics
| Metric | 1Q18 | 1Q17 | Change |
|---|---|---|---|
| Total net revenue | $27.9 billion | $24.9 billion | 12% |
| Net interest income | $13.3 billion | $12.1 billion | 10% |
| Noninterest revenue | $14.6 billion | $12.9 billion | 13% |
| Noninterest expense | $16.1 billion | $15.3 billion | 5% |
| Pre-provision profit | $11.8 billion | $9.7 billion | 22% |
| Provision for credit losses | $1.2 billion | $1.3 billion | (11%) |
| Net income | $8.7 billion | $6.4 billion | 35% |
| Diluted EPS | $2.37 | $1.65 | 44% |
| Effective tax rate | 18.3% | 22.7% | Lower year over year |
| ROE / ROTCE | 15% / 19% | 11% / 13% | Improved |
Average interest-earning assets were $2.2 trillion and the managed net interest yield was 2.48%, up 15 basis points year over year. Average core loans increased 7% firmwide, while deposits increased 6% on average. Period-end loans were $934.4 billion and deposits were $1.487 trillion.
At March 31, 2018, total assets were $2.610 trillion, total stockholders’ equity was $256.2 billion, and long-term debt was $274.4 billion. Book value per share was $67.59 and tangible book value per share was $54.05. The quarterly common dividend was $0.56 per share. The Firm repurchased 41.4 million common shares for $4.7 billion during the quarter.
Operating cash flow was negative $35.1 billion, investing cash flow was negative $45.0 billion, and financing cash flow was positive $60.6 billion, producing a $16.5 billion decrease in cash, due from banks and deposits with banks. Average HQLA was $539.0 billion and the average liquidity coverage ratio was 115%. Additional liquidity included approximately $244 billion of unencumbered marketable securities and $287 billion of available borrowing capacity.
Capital remained above regulatory requirements: the Basel III Standardized CET1 ratio was 11.8%, Tier 1 capital ratio was 13.5%, total capital ratio was 15.3%, Tier 1 leverage ratio was 8.2%, and fully phased-in SLR was 6.5%.
Material changes versus the prior comparable period
- Net income rose 35%, aided by higher revenue, operating leverage, and the lower U.S. federal statutory tax rate following the Tax Cuts and Jobs Act.
- Net interest income benefited from higher rates and loan growth, partly offset by lower CIB Markets net interest income.
- Noninterest revenue benefited from stronger Markets, asset management, card, auto lease and mortgage servicing results. Investment banking fees declined 8% because of lower debt and equity underwriting fees.
- Noninterest expense increased 5%, primarily from compensation, technology, professional services, transaction costs and auto lease depreciation.
- Credit performance was generally stable. The allowance for credit losses was $14.5 billion, the allowance-to-retained-loans ratio excluding PCI loans was 1.25%, and nonperforming assets were $6.4 billion versus $6.8 billion in 1Q17.
- Credit card net charge-offs increased with the seasoning of newer vintages. The prior-year period included a $218 million student-loan portfolio write-down and $467 million of related net charge-offs; the portfolio was sold in 2017.
- CCB net income increased 67% to $3.3 billion; CIB net income increased 23% to $4.0 billion; Commercial Banking net income increased 28% to $1.0 billion; AWM net income doubled to $770 million. Corporate reported a $383 million net loss versus $35 million of net income in 1Q17.
Guidance, outlook, risks and unusual items
- Management expected full-year 2018 managed net interest income of $54 billion to $55 billion, core loan growth excluding CIB loans of 6% to 7%, and managed noninterest revenue growth of approximately 7%.
- Adjusted full-year expense guidance was approximately $63 billion, including an estimated $1.2 billion impact from revenue-recognition accounting changes. The expected full-year effective tax rate was approximately 20%.
- Management expected full-year net charge-off rates to remain relatively flat across wholesale and consumer portfolios except Card; the expected 2018 Card net charge-off rate was approximately 3.25%. Expected Card Services net revenue rate was at least 11.25%.
- New accounting standards adopted January 1, 2018 increased reported revenue and expense presentation without affecting prior-period net income. Recognition-and-measurement guidance produced $505 million of fair-value gains on certain equity investments in 1Q18.
- Corporate results included $245 million of investment securities losses and approximately $130 million of losses on legacy private-equity investments.
- Key risks include credit deterioration, credit-card seasoning, market volatility and liquidity conditions, interest-rate movements, cybersecurity and operational risk, regulatory and capital changes, litigation, ratings downgrades, accounting estimates, and macroeconomic or geopolitical disruptions.
- Legal proceedings remained significant. Management estimated reasonably possible losses in excess of established reserves at up to approximately $1.7 billion, although the filing states that certain matters cannot be estimated and actual losses could differ materially.
- The Firm planned to adopt the leases standard on January 1, 2019 and the current expected credit-loss standard on January 1, 2020. Management expected the latter to increase the allowance for credit losses, but the amount remained under evaluation.
Important facts for investors to verify
- Separate reported U.S. GAAP results from managed, fully taxable-equivalent and other non-GAAP measures.
- Assess the sustainability of earnings excluding the $505 million fair-value gain, tax-reform benefit and other unusual items.
- Monitor Card charge-offs, delinquency trends, allowance coverage and the effect of the 2020 expected-credit-loss adoption.
- Review capital distributions, remaining repurchase authorization, the submitted 2018 capital plan and regulatory capital requirements.
- Evaluate liquidity sources, HQLA, LCR, deposit stability, secured funding and sensitivity to ratings downgrades.
- Review litigation contingencies, off-balance-sheet commitments, guarantees, securitization exposures and potential mortgage repurchase obligations.