JPMORGAN CHASE & CO quarterly report, Q2 FY2022

JPMorgan Chase & Co. — 2Q22 Form 10-Q Summary

Business context and reporting period

JPMorgan Chase & Co. is a global financial services firm with operations in consumer banking, investment banking, commercial banking, payments, asset management and wealth management. The filing covers the three and six months ended June 30, 2022. The financial statements are unaudited and prepared under U.S. GAAP.

The Firm reported $3.8 trillion of assets, $286.1 billion of stockholders’ equity and 278,494 employees at June 30, 2022. Reportable businesses are Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset & Wealth Management and Corporate.

Key financial metrics

Metric	2Q22	2Q21	Change
Total net revenue	$30.7 billion	$30.5 billion	+1%
Net interest income	$15.1 billion	$12.7 billion	+19%
Noninterest revenue	$15.6 billion	$17.7 billion	-12%
Noninterest expense	$18.7 billion	$17.7 billion	+6%
Pre-provision profit	$12.0 billion	$12.8 billion	-7%
Provision for credit losses	$1.1 billion	$(2.3) billion benefit	Not meaningful
Net income	$8.6 billion	$11.9 billion	-28%
Diluted EPS	$2.76	$3.78	-27%
ROE / ROTCE	13% / 17%	18% / 23%	Lower
Overhead ratio	61%	58%	Higher

For the six months ended June 30, 2022, net revenue was $61.4 billion, down 2%; net income was $16.9 billion, down 35%; and diluted EPS was $5.39, down 35%.

• Net interest income excluding Markets increased 26% in the quarter to $13.7 billion, driven by higher rates and balance-sheet growth.
• Markets revenue increased 15% to $7.8 billion, supported by strong Fixed Income and Equity Markets performance amid volatile markets.
• Investment banking fees fell 54% to $1.6 billion as market volatility reduced debt and equity issuance and advisory activity.
• Noninterest expense rose because of technology, marketing, compensation and other structural investments; marketing expense increased 41% in the quarter.
• The effective tax rate was 20.4% in the quarter and 19.1% for the first six months, benefiting from tax audit settlements and changes in the mix of income and expenses.

Balance sheet, liquidity, capital and cash flow

• Total assets were $3.84 trillion, up 3% from December 31, 2021. Loans were $1.10 trillion, up 2%, while deposits were $2.47 trillion, broadly flat.
• Average loans increased 7% year over year and average deposits increased 9% in the quarter. Deposits declined during the quarter in certain Commercial Banking and Consumer & Community Banking categories as clients migrated balances to higher-yielding alternatives or increased spending.
• Long-term debt was $288.2 billion, down 4% from year-end. The loans-to-deposits ratio was 45%.
• Cash and cash equivalents, defined as cash and due from banks plus deposits with banks, were $669.3 billion at June 30, 2022, down $71.6 billion from year-end.
• Six-month cash flow from operating activities was $24.1 billion, compared with $(30.3) billion in the prior-year period. Investing activities used $125.8 billion, while financing activities provided $49.0 billion.
• Average Firm LCR was 110%, and average JPMorgan Chase Bank, N.A. LCR was 169%. Management stated that funding capacity was sufficient for on- and off-balance-sheet obligations. Available borrowing capacity at the Federal Home Loan Banks and Federal Reserve discount window was approximately $308 billion.
• Standardized CET1 capital was $207.4 billion, with a CET1 ratio of 12.2%; the Advanced CET1 ratio was 12.9%. The SLR was 5.3%. The Firm and its principal bank subsidiary met applicable capital requirements.
• Accumulated other comprehensive loss increased to $14.4 billion, primarily because of higher-rate effects on the available-for-sale securities portfolio and cash-flow hedges.

Credit quality and segment performance

• Total allowance for credit losses was $20.0 billion, up $1.3 billion from December 31, 2021. The increase reflected loan growth, more adverse macroeconomic scenarios, inflation, monetary-policy changes, geopolitical risks and Russia-related downgrades.
• Net charge-offs were $657 million in the quarter, down from $734 million, and the net charge-off rate was 0.25%, compared with 0.31%. Nonperforming assets were $7.8 billion, down from $9.8 billion at June 30, 2021.
• Credit card loans increased 17% year over year to $165.5 billion. The Card net charge-off rate was 1.47%, compared with 2.24% in the prior-year quarter. Card 30-plus-day and 90-plus-day delinquency rates were 1.05% and 0.51%, respectively.
• Consumer & Community Banking net income declined 45% to $3.1 billion. Revenue declined 1%, with higher net interest income offset by weaker card and mortgage revenue.
• Corporate & Investment Bank net income declined 26% to $3.7 billion. Markets revenue increased, but Investment Banking revenue declined 61% and Credit Adjustments & Other was a $218 million loss.
• Commercial Banking net income declined 30% to $994 million despite 8% revenue growth, primarily because of higher expenses and credit-loss provision.
• Asset & Wealth Management net income declined 13% to $1.0 billion. Revenue increased 5%, but expenses increased 13%. Assets under management were $2.7 trillion, down 8% year over year because of lower market levels.

Material changes versus prior comparable periods

• The earnings mix shifted toward net interest income and Markets revenue, while investment banking, mortgage production, card income and certain investment-related revenue declined.
• The prior-year periods benefited from substantial allowance releases; 2Q22 included a $1.1 billion provision, producing a significant year-over-year earnings headwind.
• Higher rates increased net interest income but also produced substantial unrealized losses in accumulated other comprehensive income and reduced the value of certain securities.
• The Firm transferred $73.2 billion of securities from available-for-sale to held-to-maturity for capital management purposes. The securities had $4.6 billion of pretax unrealized losses at the transfer date.
• Common-stock repurchases were reduced to $622 million in the quarter and $3.1 billion year to date. Management temporarily suspended repurchases because of the expected increase in the Stress Capital Buffer and the GSIB surcharge.
• The Firm adopted the Standardized Approach for Counterparty Credit Risk on January 1, 2022, increasing Standardized risk-weighted assets by approximately $40 billion and reducing the CET1 ratio by approximately 30 basis points.

Guidance, outlook, risks and unusual items

• For full-year 2022, management expected net interest income excluding Markets to exceed $58 billion, market dependent; adjusted expense to be approximately $77 billion; and the Card net charge-off rate to remain below 2%.
• Management’s current target for the Standardized CET1 ratio was 12.5% by the end of fourth-quarter 2022. The indicative Stress Capital Buffer was 4.0%, implying a future Standardized CET1 requirement of 12.0% effective October 1, 2022, subject to the Federal Reserve’s final determination.
• The war in Ukraine created risks from market volatility, inflation, sanctions, cyberattacks and credit deterioration. Management stated that direct Russia and Russia-associated exposure was not material to the Firm’s financial condition or results, while reporting approximately $600 million of Russia country exposure under its internal framework.
• The allowance for credit losses remains sensitive to macroeconomic assumptions. Management’s relative adverse scenario would increase modeled losses by approximately $600 million for residential real estate, $2.0 billion for credit cards and $3.0 billion for wholesale loans and commitments, excluding other qualitative adjustments.
• The Firm’s interest-rate sensitivity changed materially as rates rose. A hypothetical 100-basis-point parallel rate increase was estimated to reduce U.S.-dollar earnings over the following 12 months by $1.4 billion; the analysis is a sensitivity, not a forecast.
• LIBOR transition remains ongoing; principal U.S. dollar LIBOR tenors were scheduled to cease publication on June 30, 2023.
• Legal proceedings remained significant. The Firm estimated aggregate reasonably possible losses in excess of established reserves from zero to approximately $1.2 billion, although some matters could not be estimated. Actual outcomes may vary significantly.
• Other unusual items included $337 million of markdowns on held-for-sale bridge-financing positions, a $218 million quarterly loss in CIB Credit Adjustments & Other, net losses on certain equity investments, and significant fair-value movements in derivatives, long-term debt and mortgage servicing rights.

Most important facts for an investor to verify

• Whether higher interest rates continue to expand net interest income faster than deposit repricing, funding costs and market-related losses increase.
• The trajectory of credit-card spending, delinquencies, net charge-offs and the Card allowance as pandemic-related consumer benefits fade.
• Whether the $20.0 billion allowance for credit losses adequately reflects inflation, recession, real-estate, geopolitical and Russia-related risks.
• The final Stress Capital Buffer and GSIB surcharge, their effect on the 12.5% CET1 target, and the timing of resumed share repurchases.
• Investment-banking fee recovery, Markets revenue sustainability and the potential for further bridge-financing or credit valuation markdowns.
• Unrealized losses in the AFS and HTM securities portfolios, AOCI volatility and the consequences of additional interest-rate movements.
• Legal, regulatory, sanctions, cybersecurity and LIBOR-transition developments, including exposures not captured in the stated legal-loss range.
• The assumptions underlying non-GAAP measures such as adjusted expense, managed-basis revenue, ROTCE and net interest income excluding Markets.