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 Management and Corporate. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015, compared primarily with the corresponding 2014 periods. The Firm reported $2.4 trillion of assets and $245.7 billion of stockholders’ equity at quarter-end.
Key financial metrics
| Metric | 3Q15 | 3Q14 | Change | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|---|
| Total net revenue | $22.8 billion | $24.5 billion | (7%) | $70.7 billion | $72.4 billion |
| Net income | $6.8 billion | $5.6 billion | 22% | $19.0 billion | $16.8 billion |
| Diluted EPS | $1.68 | $1.35 | 24% | $4.68 | $4.09 |
| Pre-provision profit | $7.4 billion | $8.7 billion | (15%) | $25.9 billion | $26.5 billion |
| Provision for credit losses | $682 million | $757 million | (10%) | $2.6 billion | $2.3 billion |
| Noninterest expense | $15.4 billion | $15.8 billion | (3%) | $44.8 billion | $45.9 billion |
| Return on common equity | 12% | 10% | 11% | 10% | |
| Overhead ratio | 67% | 65% | 63% | 63% |
Net interest income was $10.9 billion in the quarter, down 2%, while noninterest revenue was $11.9 billion, down 11%. The reported third-quarter effective tax rate was negative 1.1%, compared with 29.7% in the prior-year quarter.
- Period-end loans were $809.5 billion, up 7% from December 31, 2014; core loans were $699.0 billion, up 11%.
- Deposits were $1.273 trillion, down 7% from year-end as the Firm reduced wholesale non-operating deposits; consumer deposits continued to grow.
- Long-term debt was $292.9 billion, up 6% from year-end. Common stockholders’ equity was $219.7 billion.
- Allowance for credit losses was $14.2 billion; nonperforming assets were $7.3 billion, down from $8.0 billion at year-end and $8.4 billion a year earlier.
- Net charge-offs were $963 million in the quarter and $3.0 billion year-to-date; the quarterly net charge-off rate was 0.49%.
- Cash flow for the first nine months included $57.3 billion provided by operating activities, $79.7 billion provided by investing activities and $143.5 billion used in financing activities. Cash and due from banks declined by $6.6 billion.
Material changes versus prior comparable periods
- Revenue declined primarily because of lower CIB Fixed Income Markets revenue, business simplification, lower Mortgage Banking revenue and lower private equity gains. Equity Markets and investment banking fees partially offset the decline.
- Net income increased despite lower revenue, principally because of $2.2 billion of third-quarter tax benefits from the resolution of tax audits and the release of deferred taxes related to certain non-U.S. entity restructurings. Excluding tax benefits, legal expense and specified credit-reserve items, management presented adjusted net income of $5.4 billion, or $1.32 per share.
- CIB quarterly net revenue fell 10% and net income fell 13%; Fixed Income Markets revenue declined 23%, partly offset by a 9% increase in Equity Markets revenue and a 5% increase in investment banking fees.
- Consumer & Community Banking net income increased 4% in the quarter and 5% year-to-date, supported by lower credit costs, despite lower revenue. Mortgage fees declined 48% in the quarter and 28% year-to-date.
- Commercial Banking net income declined 23% in the quarter and 15% year-to-date, reflecting higher credit provisions, lower quarterly revenue and increased spending on controls.
- Asset Management net income declined 19% in the quarter and 11% year-to-date, primarily because of higher infrastructure, control and other noncompensation costs and lower market-sensitive revenue.
- The Firm adopted new accounting guidance for affordable housing investments retrospectively. The adoption changed presentation between other income and income tax expense but had no material impact on net income or EPS.
Guidance, outlook, commentary and risks
Management expected approximately 15% core loan growth in the fourth quarter of 2015. Full-year adjusted expense was expected to be approximately $56.5 billion, excluding firmwide legal expense. Management expected second-half net charge-offs to remain consistent with the first half if credit quality remained stable.
- Fourth-quarter Mortgage Banking noninterest revenue was expected to decline approximately $250 million year-over-year, subject to market conditions.
- Card partnership renegotiations were expected to reduce run-rate noninterest revenue by approximately $200 million per quarter; fourth-quarter Card revenue was expected to be broadly flat year-over-year.
- CIB Markets revenue was expected to decline sequentially because of seasonal trends; Securities Services revenue was expected to be below $950 million at current market levels.
- The Firm reported a transitional Basel III CET1 ratio of 11.5%, fully phased-in CET1 ratio of 11.4% and fully phased-in supplementary leverage ratio of 6.4%. HQLA was $505 billion, and the Firm stated that it was compliant with the fully phased-in U.S. liquidity coverage ratio.
- Key risks include market volatility, lower investment banking or trading activity, interest-rate and spread movements, credit deterioration, Oil & Gas exposure, litigation, regulatory and capital changes, cybersecurity, operational risk, ratings downgrades and the need to meet evolving Basel III, G-SIB and TLAC requirements.
- Wholesale criticized exposure increased to $12.3 billion from $10.1 billion at year-end, driven partly by Oil & Gas downgrades. A 5% decline in housing prices combined with a 1% increase in unemployment was estimated to increase modeled PCI credit losses by approximately $800 million.
- Mortgage Banking goodwill of approximately $2 billion was not impaired, but the business remained at elevated risk of future impairment.
- Legal proceedings had an estimated aggregate range of reasonably possible losses, in excess of established reserves, from zero to approximately $5.0 billion. Third-quarter legal expense was $1.3 billion, and the filing cautioned that actual outcomes may materially exceed current reserves in particular periods.
Most important facts for an investor to verify
- How much of the 22% quarterly net-income increase is attributable to the nonrecurring $2.2 billion tax benefit versus underlying operating performance.
- Whether CIB trading revenue, particularly Fixed Income Markets, stabilizes after business simplification and higher market volatility.
- Credit trends in Oil & Gas, commercial lending and other criticized wholesale exposures, including future allowance and charge-off requirements.
- The sustainability of consumer credit improvements and the adequacy of reserves for residential real estate, PCI loans, HELOC recasts and credit cards.
- The effect of lower HQLA and reduced wholesale deposits on liquidity metrics and funding costs.
- Potential future litigation, regulatory, mortgage repurchase, MBS and benchmark-rate liabilities relative to established reserves.
- Whether Mortgage Banking goodwill and MSR valuations remain supportable under higher rates, weaker mortgage volumes or lower home prices.
- The effect of capital-rule changes, including the G-SIB surcharge, the future Collins Floor, TLAC requirements and regulatory approval of internal models, on dividends and repurchases.