JPMorgan Chase & Co. — 2Q19 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, transaction processing, asset management and wealth management. The filing covers the three and six months ended June 30, 2019. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | 2Q19 | 2Q18 | Change |
|---|---|---|---|
| Total net revenue | $28.8 billion | $27.8 billion | +4% |
| Net interest income | $14.4 billion | $13.5 billion | +7% |
| Noninterest revenue | $14.4 billion | $14.3 billion | +1% |
| Pre-provision profit | $12.5 billion | $11.8 billion | +6% |
| Provision for credit losses | $1.1 billion | $1.2 billion | -5% |
| Net income | $9.7 billion | $8.3 billion | +16% |
| Diluted EPS | $2.82 | $2.29 | +23% |
| ROE / ROTCE | 16% / 20% | 14% / 17% | Improved |
For the six months ended June 30, 2019, net revenue was $58.0 billion, net income was $18.8 billion and diluted EPS was $5.46, compared with $55.7 billion, $17.0 billion and $4.66, respectively, in the prior-year period. The effective tax rate was 14.9% in the quarter and 16.6% year to date, benefiting from $768 million and $874 million, respectively, of tax benefits related to the resolution of certain tax audits.
At June 30, 2019, total assets were $2.7 trillion, deposits were $1.5 trillion, loans were $956.9 billion, long-term debt was $288.9 billion and total stockholders’ equity was $263.2 billion. The loans-to-deposits ratio was 63%, compared with 67% at December 31, 2018.
Liquidity and capital remained strong. Average LCR was 113%, with approximately $537.3 billion of HQLA and $59.8 billion of excess HQLA. The standardized CET1 ratio was 12.2%, the Tier 1 capital ratio was 14.0%, the total capital ratio was 15.8% and the SLR was 6.4%.
Cash flow for the first six months included $94.7 billion used in operating activities, $27.4 billion provided by investing activities and $56.5 billion provided by financing activities, resulting in a $10.8 billion net decrease in cash, due from banks and deposits with banks.
Material changes versus the prior comparable period
- Net interest income increased primarily from balance-sheet growth, mix changes and higher rates.
- Consumer & Community Banking net income increased 22% in the quarter, supported by higher card, deposit and mortgage production revenue. Card loans increased 8% year over year, while Home Lending loans declined 9%.
- Corporate & Investment Bank net income declined 8% in the quarter and 14% year to date. Investment banking fees declined 14% in the quarter, while Markets revenue was broadly flat including a gain from the Tradeweb IPO; adjusted Markets revenue declined 6% excluding that gain.
- Commercial Banking net income declined 8% in the quarter, reflecting lower revenue and continued investments in banker coverage and technology.
- Asset & Wealth Management net income declined 5% in the quarter and 10% year to date, while assets under management increased 7% to $2.2 trillion.
- Noninterest expense increased 2% to $16.3 billion, reflecting investments in technology, real estate, marketing and personnel, as well as higher auto-lease depreciation. Lower FDIC charges partially offset these increases.
- Total allowance for credit losses was $14.3 billion, compared with $14.4 billion a year earlier. The allowance-to-retained-loans ratio was 1.39%, versus 1.41%; excluding PCI loans, the ratio was 1.28%, versus 1.22%.
- Nonperforming assets declined to $5.3 billion from $5.8 billion a year earlier, while the firmwide net charge-off rate increased to 0.60% from 0.54%.
Guidance, outlook, risks and unusual items
- Management expected full-year 2019 managed net interest income of approximately $57.5 billion, market dependent; adjusted expense of less than $66 billion; and net charge-offs of approximately $5.5 billion.
- The quarter benefited from significant tax audit benefits and a prior-year comparison affected by a roughly $330 million credit-card rewards-liability adjustment. Other notable items included the Tradeweb IPO gain, MSR valuation adjustments, legacy private-equity valuation losses and lower FDIC expense.
- The Federal Reserve did not object to the 2019 capital plan. Management intended to raise the quarterly common dividend from $0.80 to $0.90 beginning in the third quarter and authorized up to $29.4 billion of common-equity repurchases through June 30, 2020. The filing does not establish that the intended dividend increase had already been declared at June 30.
- Key forward-looking risks include economic and geopolitical conditions, market volatility and liquidity, credit deterioration, interest-rate changes, regulatory and capital requirements, litigation, technology and cybersecurity, operational controls, reputation, competition and changes in tax or accounting rules.
- Brexit preparations continued amid uncertainty regarding contract continuity, market access, regulatory requirements and possible disruption from other market participants. The firm also continued its LIBOR and IBOR transition program.
- The firm estimated reasonably possible legal losses, in excess of established reserves, of $0 to approximately $1.3 billion as of June 30, 2019. Actual outcomes may differ materially, and some matters could not be reasonably estimated.
- The firm expected adoption of the current expected credit loss standard on January 1, 2020, and estimated that the allowance for loans and commitments could increase by approximately $4 billion to $6 billion, primarily due to credit cards. This estimate remained subject to refinement.
Most important facts for investors to verify
- Whether subsequent quarters support the 2019 outlook for net interest income, expenses and charge-offs, particularly after expected Federal Reserve rate cuts.
- The sustainability of card-loan growth and the related increase in credit-card charge-offs and allowance requirements.
- The effect of market conditions on MSR valuations, investment banking fees, Markets revenue and AWM asset flows.
- The final impact of CECL adoption, including the estimated $4 billion to $6 billion allowance increase.
- Progress and costs associated with Brexit and LIBOR transition programs.
- Developments in litigation and regulatory matters, including the exposure beyond recorded reserves.
- Capital distributions, including the planned $0.90 dividend and the authorized $29.4 billion repurchase program, alongside future capital-ratio requirements.