JPMorgan Chase & Co. — 2Q15 Form 10-Q 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 activities. The filing covers the quarter and six months ended June 30, 2015. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | 2Q15 | 2Q14 | Change |
|---|---|---|---|
| Total net revenue | $23.8 billion | $24.7 billion | (4%) |
| Net income | $6.3 billion | $6.0 billion | 5% |
| Diluted EPS | $1.54 | $1.46 | 5% |
| Noninterest expense | $14.5 billion | $15.4 billion | (6%) |
| Provision for credit losses | $935 million | $692 million | 35% |
| ROE | 11% | 11% | Flat |
| Overhead ratio | 61% | 63% | Improved |
For the six months, net revenue was $47.9 billion, essentially flat year over year; net income was $12.2 billion, up 8%; diluted EPS was $2.99, up 9%; noninterest expense declined 2%; and the provision for credit losses increased 23% to $1.9 billion.
- Net interest income was $10.7 billion in 2Q15, down 1%, while noninterest revenue was $13.1 billion, down 5%. The net interest yield on interest-earning assets declined to 2.09% from 2.19%.
- Mortgage fees and related income fell 39% to $783 million, primarily due to lower servicing revenue, lower repurchase benefits and the absence of a prior-year $220 million MSR model-assumption benefit.
- Investment banking fees increased 5% to $1.8 billion in the quarter and 14% to $3.6 billion year to date.
- Firmwide loans were $791.2 billion, up 4% from December 31, 2014; core loans were $674.8 billion, up 7%. Deposits were $1.287 trillion, down 6% from year-end as wholesale non-operating deposits declined.
- Long-term debt was $286.7 billion, up 4% from year-end. Common stockholders’ equity was $216.3 billion and total stockholders’ equity was $241.2 billion.
- Operating cash flow for the first six months was $32.2 billion; investing activities provided $77.5 billion; financing activities used $113.4 billion. Cash and due from banks declined $3.7 billion to $24.1 billion.
- Net charge-offs were $1.0 billion in the quarter and $2.1 billion year to date. Nonperforming assets were $7.6 billion, down from $9.0 billion a year earlier. The allowance for credit losses was $14.5 billion, with allowance coverage of retained loans excluding residential real estate PCI loans at 1.45%.
- High-quality liquid assets were $532 billion. The firm reported a Basel III Advanced Transitional CET1 ratio of 11.2%, Tier 1 capital ratio of 12.8%, total capital ratio of 14.4% and Tier 1 leverage ratio of 8.0%. Estimated fully phased-in CET1 was $168.9 billion, or 11.0%; the supplementary leverage ratio was 6.0%.
Material changes versus prior comparable periods
- Profitability improved despite lower revenue because business simplification, lower legal expense in the quarter and lower professional-services expense reduced costs.
- Credit costs increased, principally from wholesale downgrades, including exposures in the Oil & Gas portfolio. Consumer credit performance improved, with lower consumer charge-offs and lower consumer nonperforming assets.
- Corporate & Investment Bank net income rose 10% in the quarter and 15% year to date, supported by lower expense and stronger investment banking and equity markets revenue, partly offset by weaker Fixed Income Markets revenue.
- Commercial Banking net income declined 22% in the quarter and 12% year to date because of higher credit provisions and higher control-related expense, despite modest revenue growth.
- Asset Management net income declined 21% in the quarter and 7% year to date as expense growth exceeded revenue growth. Assets under management increased 4% to $1.8 trillion.
- 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, risks and unusual items
- Management expected core loan growth of approximately 10% in the second half of 2015 and second-half net charge-offs consistent with the first half if credit trends remained stable.
- 2015 adjusted firmwide expense was expected to be approximately $57 billion, excluding firmwide legal expense. Mortgage Banking noninterest revenue was expected to decline approximately $1 billion from 2014.
- Management expected Card revenue growth to remain at the low end of the 12% to 12.5% target range and the full-year Card net charge-off rate to be slightly below 2.5%.
- Markets revenue in 3Q15 was expected to decline approximately 9% year over year because of business simplification. Asset Management expected its 2015 pretax margin and ROE to be at the low end of stated through-the-cycle targets.
- Mortgage Banking goodwill of approximately $2 billion remained at elevated risk of impairment; no impairment was recorded at June 30, 2015.
- Wholesale criticized exposure increased to $11.6 billion from $10.1 billion at year-end, driven by select downgrades including Oil & Gas. Management identified sensitivity to oil prices, economic conditions, home prices, unemployment and internal credit ratings.
- Legal proceedings remained material. The estimated aggregate range of reasonably possible losses in excess of established reserves was $0 to approximately $5.5 billion, although some matters could not be estimated. The firm recorded legal expense of $291 million in 2Q15 and $978 million year to date.
- Other risks include regulatory and capital changes, credit-rating downgrades, market volatility, liquidity stress, litigation, cybersecurity, operational failures and potential changes in accounting estimates. The firm expected cybersecurity spending in 2015 and 2016 to be nearly double its 2014 level.
- The Board increased the quarterly common dividend from $0.40 to $0.44 per share, effective with the July 31, 2015 payment. The firm repurchased $3.1 billion of common equity during the first six months under a $6.4 billion authorization covering April 2015 through June 2016.
Most important facts for investors to verify
- Whether revenue pressure in Mortgage Banking and Fixed Income Markets persists and whether cost reductions can offset it.
- Oil & Gas and other wholesale credit migration, provision trends and changes in criticized or nonaccrual exposures.
- Actual second-half loan growth, charge-offs and Card credit performance versus management’s outlook.
- Mortgage Banking goodwill impairment risk and the sensitivity of MSR valuations to prepayment speeds, interest rates and servicing costs.
- Progress and ultimate cost of legal, regulatory, mortgage-servicing, benchmark-rate, MBS and consumer-debt matters.
- Capital-ratio progression as Basel III, G-SIB surcharge and TLAC requirements are phased in, including the effect of dividends, buybacks and preferred-stock issuance.
- Liquidity effects of reduced wholesale deposits, discontinuation of the customer-sweep program and any credit-rating downgrade.
- Reconciliation of reported U.S. GAAP results with management’s non-GAAP managed-basis, fully phased-in capital and tangible-equity measures.