Business context and reporting period
JPMorgan Chase & Co. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The global financial services firm reported $2.5 trillion of assets and $254.3 billion of stockholders’ equity at quarter-end. Its principal businesses are Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset Management and Corporate.
Financial performance and condition
| Metric | 3Q16 | 3Q15 | 9M16 | 9M15 |
|---|---|---|---|---|
| Total net revenue | $24.7 billion | $22.8 billion | $72.3 billion | $70.7 billion |
| Net interest income | $11.6 billion | $10.9 billion | $34.3 billion | $32.3 billion |
| Noninterest revenue | $13.1 billion | $11.9 billion | $38.0 billion | $38.4 billion |
| Noninterest expense | $14.5 billion | $15.4 billion | $41.9 billion | $44.8 billion |
| Pre-provision profit | $10.2 billion | $7.4 billion | $30.4 billion | $25.9 billion |
| Provision for credit losses | $1.3 billion | $0.7 billion | $4.5 billion | $2.6 billion |
| Net income | $6.3 billion | $6.8 billion | $18.0 billion | $19.0 billion |
| Diluted EPS | $1.58 | $1.68 | $4.48 | $4.68 |
- Reported ROE was 10% in the quarter and year to date; ROTCE was 13% for both periods. The overhead ratio was 59% in the quarter and 58% year to date.
- Average interest-earning assets were $2.1 trillion in the quarter, with a managed net interest yield of 2.24%. Net interest income increased primarily from loan growth and the net impact of higher rates.
- Loans were $888.1 billion, core loans were $795.1 billion, and deposits were $1.376 trillion at September 30, 2016. The loans-to-deposits ratio was 65%.
- Long-term debt was $309.4 billion, up from $288.7 billion at December 31, 2015. Total assets increased 7% from year-end to $2.521 trillion.
- The allowance for credit losses was $15.3 billion. Nonperforming assets were $7.8 billion and the firmwide net charge-off rate was 0.51% in the quarter and 0.53% for the first nine months.
- Liquidity remained strong: HQLA was $539 billion, including $351 billion of eligible cash and $188 billion of eligible securities. Management stated that the Firm was compliant with the fully phased-in U.S. LCR.
- Transitional Basel III CET1 was 12.0% under the Collins Floor; fully phased-in Advanced CET1 was estimated at 11.9%. The fully phased-in supplementary leverage ratio was 6.6%.
- Nine-month cash flow was negative from operating activities of $18.7 billion and investing activities of $112.1 billion, offset by $131.7 billion from financing activities. Cash and due from banks increased $0.9 billion to $21.4 billion.
Material changes versus comparable periods
- Third-quarter revenue rose 8%, driven by a 6% increase in net interest income and a 10% increase in noninterest revenue. Principal transactions revenue increased 46%, investment banking fees increased 16%, and mortgage fees increased 33%; card income declined 17%.
- Year-to-date revenue increased 2%, as higher net interest income and other income offset lower asset management, investment banking and card revenue.
- Noninterest expense declined 6% in both the quarter and nine-month period, primarily because of lower legal expense. Technology and marketing spending increased, while compensation expense rose 5% in the quarter and was approximately flat year to date.
- Net income declined 8% in the quarter and 5% year to date despite higher pre-provision profit. The principal driver was higher income tax expense: the prior-year periods included approximately $2.2 billion of third-quarter and $2.7 billion of year-to-date tax benefits related to tax audit resolutions and deferred-tax releases.
- Credit costs increased materially. The consumer provision reflected a roughly $225 million quarterly allowance build, primarily from credit-card and auto loan growth. Wholesale credit quality was affected by downgrades in Oil & Gas, Natural Gas Pipelines and Metals & Mining, although the third-quarter wholesale provision was a benefit.
- CIB delivered the strongest quarterly operating improvement: net revenue increased 16%, net income increased 99%, and noninterest expense declined 20%, led by strong Fixed Income Markets and lower legal expense. CCB net income declined 16%, while Commercial Banking and Asset Management net income increased 50% and 17%, respectively.
Guidance, outlook, commentary and risks
- Management expected fourth-quarter 2016 managed net interest income to be modestly higher than in the third quarter, supported by continued loan growth.
- Management expected fourth-quarter managed noninterest revenue to decline because of lower Markets revenue, seasonally lower mortgage revenue and higher Card origination costs. Card, Commerce Solutions & Auto revenue was expected to decline approximately $200 million sequentially, partly because of Sapphire Reserve acquisition costs.
- Average core loans were expected to increase approximately 15% for full-year 2016, at the high end of the prior range. Full-year net charge-offs were expected to be up to approximately $4.75 billion, and adjusted expense was expected to be approximately $56 billion excluding firmwide legal expense.
- Key risks include market volatility, interest rates, consumer and wholesale credit deterioration, particularly in energy and related industries, liquidity and funding conditions, credit-rating downgrades, cybersecurity and operational risks, regulatory requirements, litigation, conduct and sales-practice inquiries, and Brexit-related changes to the U.K. and European operating model.
- The Federal Reserve and FDIC were reviewing the Firm’s 2016 Resolution Submission. If deficiencies were not considered remediated, the agencies could impose more stringent capital or liquidity requirements or restrictions on growth, activities or operations.
- The Firm disclosed an estimated range of reasonably possible legal losses, in excess of established reserves, of $0 to approximately $3.1 billion. Actual outcomes may differ significantly, and some matters could not be estimated.
- The filing adopted new accounting guidance in 2016, including presentation of DVA changes in OCI and employee share-based payment amendments. The Firm expects the future credit-loss standard to increase allowances, but the amount remained under evaluation.
Important facts for investors to verify
- Whether loan growth, especially in credit cards and auto, produces the expected returns after higher origination costs and rising loss rates.
- Whether credit deterioration in Oil & Gas, Natural Gas Pipelines and Metals & Mining remains contained and whether the allowance is adequate under weaker economic or commodity-price scenarios.
- The sustainability of strong CIB Markets revenue after the unusually favorable third-quarter trading environment.
- The effect of tax normalization on reported earnings compared with the unusually favorable 2015 tax benefits.
- Progress on the Resolution Submission and any resulting capital, liquidity, growth or operational restrictions.
- Changes in material litigation, mortgage-servicing obligations, regulatory investigations and the $3.1 billion disclosed reasonably possible loss range.
- Execution of the $10.6 billion common-equity repurchase authorization and the impact of repurchases and dividends on capital ratios.
- The eventual impact of the expected credit-loss accounting standard, including the allowance increase and transition adjustment at adoption.