JPMORGAN CHASE & CO annual report, FY2015

JPMorgan Chase & Co. 2015 Form 10-K Summary

Business context and reporting period

JPMorgan Chase & Co. is a global financial services firm with Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset Management and Corporate businesses. The filing covers the fiscal year ended December 31, 2015; fourth-quarter information is included in the annual report but this is not a quarterly filing. At year-end, the Firm reported $2.4 trillion of assets, $247.6 billion of total stockholders’ equity, 5,413 U.S. branches and 234,598 employees.

Key financial metrics

Metric	2015	2014	Change
Total net revenue	$93.5 billion	$95.1 billion	Down 2%
Net income	$24.4 billion	$21.7 billion	Up 12%
Diluted EPS	$6.00	$5.29	Up 13%
Pre-provision profit	$34.5 billion	$33.8 billion	Up 2%
Provision for credit losses	$3.8 billion	$3.1 billion	Up 22%
Noninterest expense	$59.0 billion	$61.3 billion	Down 4%
Effective tax rate	20.4%	29.2%	Lower
ROE	11%	10%	Higher
Overhead ratio	63%	64%	Improved

Net interest income was $43.5 billion, essentially flat year over year, while the fully taxable-equivalent net interest yield declined four basis points to 2.14%. Average interest-earning assets were $2.1 trillion. The $2.9 billion reduction in tax expense primarily reflected tax audit resolutions and the release of U.S. deferred taxes associated with restructuring certain non-U.S. entities, making the lower tax rate a significant contributor to earnings growth.

Operating cash flow was $73.5 billion, compared with $36.6 billion in 2014. Investing activities provided $107.0 billion, primarily from lower deposits with banks and investment-security activity. Financing activities used $187.5 billion, mainly because of lower deposits, reduced commercial paper and repurchase financing, common-stock repurchases and dividends. Cash and due from banks declined $7.3 billion to $20.5 billion.

Balance sheet, capital, debt and liquidity

• Total assets declined 9% to $2.352 trillion, primarily reflecting lower deposits with banks, trading assets, securities and derivative balances.
• Loans increased 11% to $837.3 billion, including strong growth in consumer and commercial real estate lending. Core loans increased 16% to $732.1 billion.
• Deposits declined 6% to $1.280 trillion, primarily because the Firm reduced wholesale non-operating deposits; consumer deposits increased.
• Long-term debt increased 4% to $288.7 billion. Unsecured long-term debt was $211.8 billion.
• CET1 capital ratios were 12.0% under Basel III Standardized Transitional rules and 11.8% under Advanced Transitional rules, compared with 11.2% and 10.2%, respectively, in 2014. The fully phased-in Advanced CET1 ratio was estimated at 11.6%.
• The fully phased-in supplementary leverage ratio was 6.5%; JPMorgan Chase Bank, N.A. was estimated at 6.6%.
• High-quality liquid assets were $496 billion, down from $600 billion, while management stated that the Firm remained compliant with the fully phased-in U.S. liquidity coverage ratio and with the NSFR based on its understanding of the applicable Basel rule.
• The Firm repurchased $5.6 billion of common stock, or 89.8 million shares, and had $2.7 billion remaining under its $6.4 billion authorization. Common dividends declared were $1.72 per share.

Material changes versus the prior comparable period

• Net income and EPS reached records despite lower revenue, supported by lower expenses and a substantially lower effective tax rate.
• Business simplification reduced CIB revenue but also lowered CIB expenses and risk. The Firm stated that the initiative was substantially complete.
• Corporate and Investment Bank net income increased 17% to $8.1 billion, despite a 3% revenue decline, as expenses fell 8% and taxes declined.
• Consumer & Community Banking net income increased 7% to $9.8 billion, while revenue declined 1%; lower expenses and credit provisions offset mortgage and spread pressure.
• Commercial Banking net income declined 17% to $2.2 billion because of higher credit provisions related to Oil & Gas and higher control-related expenses.
• Asset Management net income declined 10% to $1.9 billion as higher expenses more than offset slightly higher revenue. Client assets declined 2% to $2.35 trillion and assets under management declined 1% to $1.72 trillion.
• The provision for credit losses rose because of wholesale downgrades, particularly in Oil & Gas. Consumer credit performance improved, with net charge-offs declining to $4.1 billion and nonperforming assets declining to $7.0 billion.

Guidance, outlook and management commentary

• For 2016, management expected first-quarter net interest income and margin to be relatively flat versus the fourth quarter of 2015.
• Assuming no further rate changes, 2016 net interest income was expected to be approximately $2 billion higher than 2015, reflecting the December 2015 Federal Reserve rate increase and loan growth.
• Management expected core loan growth of approximately 10%–15%, continued retail deposit growth and a balance sheet of approximately $2.45 trillion.
• Managed noninterest revenue was expected to be approximately $50 billion, pressured by lower Card revenue from renegotiated co-brand agreements and lower Mortgage Banking revenue.
• 2016 net charge-offs were expected to be up to approximately $4.75 billion. Management indicated that first-quarter reserves could increase by approximately $500 million for Oil & Gas and $100 million for Metals & Mining based on changed oil-price expectations.
• Adjusted 2016 expenses were expected to be approximately $56 billion, excluding firmwide legal expense. Management intended to reinvest savings in technology, marketing and growth initiatives.
• Management expected the Basel III Standardized CET1 ratio to become the binding capital constraint, with a longer-term target range of 11%–12.5% and a minimum target of 11%.
• Management expected first-quarter 2016 Investment Banking revenue to be approximately 25% below the prior-year quarter and Markets revenue to be approximately 20% lower year over year, reflecting difficult market conditions.

Risks, contingencies and unusual items

• Regulatory change remains a major risk, including the Volcker Rule, Basel III, GSIB surcharges, TLAC, liquidity requirements, resolution planning and potentially conflicting U.S. and international rules.
• The proposed U.S. TLAC rules could require substantial new eligible long-term debt issuance and increase funding costs. The final impact was not yet clear.
• Oil & Gas and Metals & Mining exposures were under pressure from commodity-price declines. Wholesale criticized exposure increased to $14.6 billion from $10.1 billion, primarily because of Oil & Gas downgrades.
• Legal expense was $3.0 billion in 2015. The Firm disclosed an aggregate range of reasonably possible legal losses, in excess of reserves, from zero to approximately $3.6 billion, excluding matters for which a loss estimate could not be made.
• Material matters included FX, LIBOR and benchmark investigations, mortgage-backed securities and repurchase litigation, Washington Mutual-related litigation, the General Motors loan litigation, proprietary-products investigations and referral-hiring investigations. The filing states that actual losses could significantly exceed reserves in individual periods.
• JPMorgan Chase agreed in May 2015 to plead guilty to a federal antitrust violation related to foreign-exchange activities. In December 2015, settlements involving proprietary-product disclosures required approximately $307 million of penalties, disgorgement and interest.
• Cybersecurity remains a significant operational risk. Cybersecurity spending increased from approximately $250 million in 2014 to $500 million in 2015 and was expected to exceed $600 million in 2016.
• Management and PwC concluded that internal control over financial reporting was effective as of December 31, 2015, with no material weaknesses identified.

Most important facts for investors to verify

• Whether 2016 revenue and expense guidance was achieved, particularly the expected decline in Markets, Investment Banking and Mortgage Banking revenue.
• The trajectory of Oil & Gas, Metals & Mining and broader wholesale credit losses, criticized exposure and reserve levels.
• The effect of final TLAC, GSIB, capital and liquidity rules on required debt issuance, funding costs and capital distributions.
• Whether the unusually low 20.4% effective tax rate was nonrecurring and how future tax audit resolutions affect earnings.
• Developments in the disclosed legal proceedings, including the $3.6 billion reasonably possible loss range and matters without estimable losses.
• Changes in deposits, HQLA, LCR, leverage, CET1 capital and the Firm’s ability to continue dividends and share repurchases.
• Mortgage servicing-rights valuation sensitivity, residential real estate payment-recast risk and the performance of purchased credit-impaired loans.