JPMorgan Chase & Co. 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, with fourth-quarter data included. JPMorgan Chase is a global financial services firm operating through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset & Wealth Management, and Corporate. At year-end, the Firm reported $2.6 trillion of assets, $256.5 billion of stockholders’ equity, 5,036 branches, and 256,105 employees.
Financial performance and condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total net revenue | $109.0 billion | $100.7 billion | 8% |
| Net interest income | $55.1 billion | $50.1 billion | 10% |
| Noninterest revenue | $54.0 billion | $50.6 billion | 7% |
| Noninterest expense | $63.4 billion | $59.5 billion | 7% |
| Provision for credit losses | $4.9 billion | $5.3 billion | (8%) |
| Net income | $32.5 billion | $24.4 billion | 33% |
| Diluted EPS | $9.00 | $6.31 | 43% |
| ROE | 13% | 10% | Up 3 points |
| ROTCE | 17% | 12% | Up 5 points |
| Overhead ratio | 58% | 59% | Improved |
Fourth quarter: Net revenue was $26.1 billion, net income was $7.1 billion, and diluted EPS was $1.98. Compared with fourth-quarter 2017, net revenue increased from $24.5 billion and net income increased from $4.2 billion, although the prior-year quarter included a $2.4 billion reduction in net income from the Tax Cuts and Jobs Act.
Balance sheet and credit: Loans increased 6% to $984.6 billion, core loans increased 8% to $931.9 billion, deposits increased 2% to $1.47 trillion, and long-term debt declined 1% to $282.0 billion. The allowance for credit losses was $14.5 billion, nonperforming assets declined to $5.2 billion from $6.4 billion, and the net charge-off rate improved to 0.52% from 0.60%. Credit card net charge-offs rose to 3.10% from 2.95%, consistent with seasoning of newer vintages.
Cash flow and liquidity: Operating activities provided $14.2 billion of cash, investing activities used $198.0 billion, and financing activities provided $34.2 billion. Cash and due from banks plus deposits with banks declined by $152.5 billion, primarily reflecting deployment of excess cash into resale agreements, trading assets, and investment securities. Average fourth-quarter LCR was 113%, with $529.3 billion of average HQLA and $61.6 billion of net excess HQLA. Additional liquidity included approximately $226 billion of unencumbered marketable securities and $276 billion of available borrowing capacity.
Capital: The Standardized CET1 ratio was 12.0%, Tier 1 capital ratio was 13.7%, total capital ratio was 15.5%, Tier 1 leverage ratio was 8.1%, and fully phased-in SLR was 6.4%. The Firm exceeded applicable regulatory minimums and reported $380.5 billion of eligible external TLAC, above the $351.6 billion minimum requirement.
Material changes versus the prior comparable period
- Revenue growth was driven by higher interest rates, loan growth, Card margin expansion, stronger CIB Markets activity, higher Treasury Services revenue, auto lease income, and higher asset-management fees.
- Expense growth reflected investments in technology, marketing, real estate, bankers and advisors, higher headcount, auto lease depreciation, and volume-related transaction costs.
- CCB net income increased 58% to $14.9 billion; CIB net income increased 9% to $11.8 billion; Commercial Banking net income increased 20% to $4.2 billion; and AWM net income increased 22% to $2.9 billion.
- CIB Markets benefited from stronger Equity Markets revenue, while Fixed Income Markets declined in part because of challenging fourth-quarter market conditions and compressed financing margins.
- AWM assets under management declined 2% to $2.0 trillion and total client assets declined 2% to $2.7 trillion, primarily due to lower market levels, partly offset by net inflows.
- The Firm repurchased 181.5 million common shares for $20.0 billion and declared common dividends of $2.72 per share, compared with $2.12 in 2017. Approximately $10.4 billion remained authorized for repurchases at year-end.
- Adoption of new accounting standards increased reported revenue and expense through gross presentation without affecting net income; recognition and measurement changes produced a $505 million fair-value gain in the first quarter.
Guidance, outlook, risks and unusual items
2019 outlook: Management expected full-year managed net interest income above $58 billion, adjusted expense below $66 billion, and net charge-offs below $5.5 billion. First-quarter 2019 net interest income was expected to be approximately flat versus fourth-quarter 2018, adjusted expense up mid-single digits year over year, and Markets revenue lower by high-teens percentage points on a reported basis, subject to market conditions.
- Brexit: The Firm was restructuring European legal entities, staffing, technology, and client agreements to address the expected U.K. departure from the EU. A no-deal outcome could increase operating costs, fragment the operating model, and disrupt market access and contractual continuity.
- LIBOR transition: The Firm established a transition program because LIBOR may be discontinued or materially changed after 2021. The Firm identified potential risks to contracts, models, hedge accounting, lending, derivatives, and market liquidity.
- Regulatory and legal exposure: The Firm remained subject to consent orders concerning anti-money laundering, the Chief Investment Office investigation, foreign exchange trading, and referral hiring practices. Aggregate reasonably possible legal losses in excess of established reserves were estimated at up to approximately $1.5 billion, excluding matters for which an estimate could not be made.
- Operational and cyber risk: The filing emphasizes continuing exposure to cyberattacks, system failures, vendor disruptions, fraud, conduct failures, data privacy issues, and regulatory or reputational consequences.
- Accounting and credit risk: The Firm expected adoption of CECL in 2020 to increase the allowance for loans and commitments by approximately $4 billion to $6 billion, primarily driven by credit cards, subject to further refinement.
- Unusual items: Results included the TCJA effect, a $505 million accounting-adoption fair-value gain, a $330 million adjustment to the credit-card rewards liability, losses on legacy private-equity investments, a $174 million loss on liquidation of a legal entity, and prior-year legal and tax-related items.
Important facts for investors to verify
- Reconcile reported U.S. GAAP results with managed-basis and fully taxable-equivalent measures used in segment reporting.
- Assess the sustainability of net interest income growth as deposit costs rise and interest-rate conditions change.
- Monitor credit-card delinquencies, charge-offs, allowance adequacy, and the anticipated CECL impact.
- Review capital distributions against CET1, SLR, TLAC, CCAR, and regulatory dividend or repurchase constraints.
- Evaluate liquidity after the significant shift from deposits with banks into securities financing, trading assets, and investment securities.
- Review legal proceedings, consent orders, unresolved FX and benchmark investigations, and the estimated loss range beyond recorded reserves.
- Track Brexit execution, LIBOR replacement, cybersecurity incidents, operational controls, and third-party risk management.
- Consider the effect of market levels and client flows on CIB Markets revenue, AWM fees, assets under management, and mortgage servicing rights.