JPMorgan Chase & Co. — 1Q16 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. is a global financial services firm operating through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset Management and Corporate. The filing covers the unaudited three months ended March 31, 2016, compared primarily with the three months ended March 31, 2015. The Firm reported approximately $2.4 trillion of assets and $250.2 billion of stockholders’ equity at quarter-end.
Financial performance and position
| Metric | 1Q16 | 1Q15 | Change |
|---|---|---|---|
| Total net revenue | $23.239 billion | $24.066 billion | Down 3% |
| Net interest income | $11.380 billion | $10.677 billion | Up 7% |
| Noninterest revenue | $11.859 billion | $13.389 billion | Down 11% |
| Noninterest expense | $13.837 billion | $14.883 billion | Down 7% |
| Pre-provision profit | $9.402 billion | $9.183 billion | Up 2% |
| Provision for credit losses | $1.824 billion | $959 million | Up 90% |
| Net income | $5.520 billion | $5.914 billion | Down 7% |
| Diluted EPS | $1.35 | $1.45 | Down 7% |
| Effective tax rate | 27.2% | 28.1% | Lower |
| Return on common equity | 9% | 11% | Lower |
Net interest yield on average interest-earning assets was 2.30%, compared with 2.07% in the prior-year quarter. Average core loans increased 17% year over year, while CCB average loans increased 25%. The Firm’s overhead ratio improved to 60% from 62%.
At March 31, 2016, total assets were $2.424 trillion, loans were $847.3 billion, deposits were $1.322 trillion and long-term debt was $290.8 billion. Stockholders’ equity was $250.2 billion, common stockholders’ equity was $224.1 billion and tangible book value per share was $48.96.
Liquidity and capital remained strong. HQLA totaled $505 billion, the Firm was compliant with the fully phased-in U.S. liquidity coverage ratio, and the loans-to-deposits ratio was 64%. The Basel III transitional Advanced CET1 ratio was 11.9%, the Tier 1 capital ratio was 13.5% and the total capital ratio was 15.1%. The estimated fully phased-in supplementary leverage ratio was 6.6%.
Cash and due from banks decreased by $2.3 billion during the quarter. Operating activities used $21.4 billion, investing activities used $34.6 billion and financing activities provided $53.6 billion. Financing cash inflows were primarily driven by higher deposits. Management stated that available cash, operating cash flows and secured and unsecured funding capacity were sufficient for operating liquidity needs.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower Fixed Income Markets and investment banking revenue in CIB and lower asset management fees. Principal transactions revenue fell 27% and investment banking fees fell 26%.
- Net interest income increased 7%, reflecting loan growth and higher rates on deposits with banks, partly offset by lower investment securities balances.
- Expenses declined 7%, mainly because of lower legal expense and performance-based compensation. Legal expense was not material in 1Q16 versus $687 million in 1Q15.
- The provision for credit losses increased to $1.824 billion from $959 million. Wholesale provision expense rose to $773 million from $28 million, primarily because of downgrades in Oil & Gas and Natural Gas Pipelines and Metals & Mining.
- Nonperforming assets increased to $8.0 billion from $7.7 billion year over year and $7.0 billion at December 31, 2015. Net charge-offs were $1.110 billion, with a 0.53% net charge-off rate.
- CCB net income increased 12% to $2.490 billion, supported by loan and deposit growth and lower expenses. CIB net income fell 22% to $1.979 billion, while Commercial Banking net income fell 17% to $496 million. Asset Management net income increased 17% to $587 million.
- Firmwide deposits increased 3% from year-end 2015, and total loans increased 1%. CCB deposits grew 10% year over year; active mobile customers grew 19% to approximately 23.8 million.
- The Firm repurchased $1.696 billion of common stock and declared a $0.44 common dividend per share, compared with $0.40 in 1Q15.
Guidance, outlook, commentary, risks and unusual items
Management expected 2016 net interest income to be more than $2 billion higher than 2015, assuming no changes in interest rates. It projected managed noninterest revenue of approximately $50 billion, core loan growth of approximately 10%–15%, an average balance sheet of approximately $2.45 trillion and adjusted expenses of approximately $56 billion excluding firmwide legal expense.
Management expected total 2016 net charge-offs of up to approximately $4.75 billion, including higher Oil & Gas charge-offs. It expected Mortgage Banking net charge-offs of approximately $60 million per quarter and a 2016 Card net charge-off rate of approximately 2.50%. CIB Securities Services revenue was expected to be approximately $875 million per quarter for the remainder of 2016, subject to market conditions.
Key risks include market volatility, widening credit spreads, economic and geopolitical conditions, credit deterioration in Oil & Gas and Metals & Mining, interest-rate changes, regulatory and capital requirements, litigation, cybersecurity, funding and ratings risk, and the potential effects of changes in accounting estimates. The Firm reported a $0 to approximately $3.5 billion range of reasonably possible legal losses in excess of established reserves, although the range excludes matters for which a loss estimate could not be made.
Regulators determined that the Firm’s 2015 resolution plan was not credible or would not facilitate an orderly resolution because of identified deficiencies. If not remediated by October 1, 2016, regulators could impose more stringent capital, leverage or liquidity requirements and restrictions on growth or activities. The Firm also continued to operate under a Federal Reserve mortgage-servicing consent order.
The quarter included adoption of accounting guidance concerning debit valuation adjustments and employee stock-based payments, with no material overall impact on the consolidated financial statements. DVA on fair-value-option liabilities was presented in other comprehensive income beginning in 2016. The Asset Management segment also recorded a gain on the sale of an asset; excluding the gain, quarterly Asset Management revenue would have been approximately $150 million lower.
Important facts for investors to verify
- Whether wholesale credit losses, criticized exposures and nonperforming loans continue to rise, particularly in Oil & Gas, Natural Gas Pipelines and Metals & Mining.
- Whether the projected 2016 loan growth, net interest income increase and expense targets are achieved under changing rate and market conditions.
- The sustainability of CIB revenue and margins following the 1Q16 decline in markets and investment banking activity.
- The adequacy of the $15.0 billion allowance for credit losses and sensitivity to adverse housing, unemployment, credit-card and wholesale credit assumptions.
- Progress toward resolving the deficiencies in the 2015 resolution plan and the effect of future Basel III, TLAC, liquidity and other regulatory requirements.
- Developments in material litigation and investigations, including mortgage-related, benchmark-rate, foreign-exchange, MBS, Washington Mutual and other proceedings.
- Liquidity exposure from off-balance-sheet commitments, guarantees, securitizations, VIEs and potential ratings-triggered collateral requirements.
- Reconciliation and comparability of reported GAAP results with management’s managed-basis and other non-GAAP measures.