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 & Wealth Management and Corporate. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, compared primarily with the corresponding 2016 periods. The Firm reported $2.6 trillion of assets and $258.4 billion of stockholders’ equity at quarter-end.
Key financial metrics
| Metric | 3Q17 | 3Q16 | 9M17 | 9M16 |
|---|---|---|---|---|
| Total net revenue | $25.3 billion | $24.7 billion | $75.5 billion | $72.3 billion |
| Net interest income | $12.8 billion | $11.6 billion | $37.1 billion | $34.3 billion |
| Noninterest expense | $14.3 billion | $14.5 billion | $43.8 billion | $41.9 billion |
| Pre-provision profit | $11.0 billion | $10.2 billion | $31.6 billion | $30.4 billion |
| Provision for credit losses | $1.5 billion | $1.3 billion | $4.0 billion | $4.5 billion |
| Net income | $6.7 billion | $6.3 billion | $20.2 billion | $18.0 billion |
| Diluted EPS | $1.76 | $1.58 | $5.22 | $4.48 |
| Effective tax rate | 29.6% | 29.7% | 26.9% | 30.4% |
Reported net margin was approximately 26.6% in 3Q17 and 26.8% for the first nine months. The overhead ratio was 57% in 3Q17 and 58% year to date. ROE was 11% in both the quarter and nine-month period; ROTCE was 13% and 14%, respectively.
- Period-end loans were $913.8 billion, core loans were $843.4 billion and deposits were $1.439 trillion. Average core loans increased 7% year over year.
- Long-term debt was $288.6 billion, down 2% from December 31, 2016; unsecured long-term debt was approximately $221.7 billion.
- The allowance for credit losses was $14.6 billion, or 1.49% of retained loans; excluding PCI loans, loan-loss coverage was 1.29%. Nonperforming assets were $6.2 billion, down from $7.8 billion a year earlier.
- Net charge-offs were $1.3 billion in 3Q17 and $4.1 billion for the first nine months, with rates of 0.56% and 0.62%, respectively. The nine-month rate would have been 0.55% excluding the $467 million student-loan portfolio transfer charge-offs.
- Average HQLA was $568.3 billion and average LCR was 120%, producing $93.1 billion of net excess HQLA. The Firm also reported approximately $234 billion of unencumbered marketable securities and $273 billion of available borrowing capacity.
- Basel III transitional CET1, Tier 1 and total capital ratios were 12.6%, 14.3% and 16.1%, respectively. Fully phased-in CET1 ratios were 12.5% under Standardized and 12.9% under Advanced; fully phased-in SLR was 6.6%.
- Nine-month cash flow was negative: operating activities used $16.0 billion, investing activities used $22.3 billion, and financing activities provided $36.4 billion, resulting in a $1.9 billion decrease in cash and due from banks.
Material changes versus prior comparable periods
- 3Q17 net income increased 7%, revenue increased 3%, pre-provision profit increased 8%, and diluted EPS increased 11% year over year. For nine months, net income increased 12% and diluted EPS increased 17%.
- Net interest income rose 10% in the quarter and 8% year to date, primarily from higher rates and loan growth. Noninterest revenue declined 4% in the quarter, mainly because Markets revenue was lower, but increased 1% year to date.
- Corporate & Investment Bank quarterly revenue declined 9% and net income declined 13%, driven by a 27% decline in Fixed Income Markets revenue and lower volatility. Commercial Banking net income increased 13%, while Asset & Wealth Management net income increased 21%.
- Consumer & Community Banking quarterly net income increased 16%, but nine-month net income declined 8% because of higher credit provisions, higher expenses and the absence of prior-year gains. Card net charge-offs and the allowance increased as newer account vintages seasoned.
- Deposits increased 5% from year-end and loans increased 2%. Commercial paper increased 107% from year-end as funding shifted from repurchase agreements; long-term debt declined 2%.
- The Firm repurchased $10.6 billion of common stock during the first nine months and declared $1.56 per common share of dividends. The common equity repurchase authorization was $19.4 billion through June 30, 2018.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2017 net interest income to increase approximately $4 billion from 2016, adjusted expenses to be approximately $58 billion excluding Firmwide legal expense, net charge-offs of approximately $5 billion excluding the student-loan transfer, and average core-loan growth of approximately 8%.
- Management expected fourth-quarter CCSA revenue to be approximately flat with 3Q17, Markets revenue to be lower than the strong prior-year quarter, and Commercial Banking expense to be approximately flat. Card’s 2017 average net charge-off rate was expected to remain below 3%.
- The student loan portfolio was transferred to held-for-sale in the first quarter and substantially sold in the second quarter. The transfer produced a $467 million charge-off and a $218 million increase in the provision for credit losses; the subsequent sale was not material to consolidated financial statements.
- Corporate recorded a $645 million legal settlement benefit in the second quarter related to Washington Mutual matters. Natural disasters in the second half of 2017 did not materially affect 3Q17 results.
- Legal proceedings remained significant. The estimated aggregate range of reasonably possible legal losses in excess of recorded reserves was $0 to approximately $1.8 billion, excluding matters for which an estimate could not be made. Management stated that current proceedings were not expected to materially affect consolidated financial condition, but individual-period results or reputation could be materially affected.
- Key risks include market volatility and low trading activity, credit-card and other consumer-loss normalization, interest-rate and funding changes, rating downgrades, regulatory and capital requirements, litigation, model and valuation uncertainty, cybersecurity and operational events, geopolitical and economic conditions, and natural disasters.
- Future accounting changes, particularly the current expected credit loss standard effective January 1, 2020, are expected to increase the allowance for credit losses; the amount was not yet determined. The Firm expected to adopt revenue-recognition and financial-instrument standards in the first quarter of 2018.
Investor verification checklist
- Verify the sustainability of net interest income growth as rates, deposit costs and loan spreads change.
- Monitor Card and Auto charge-offs, delinquency trends, allowance coverage and the effect of portfolio seasoning.
- Assess CIB Markets performance under different volatility and market-liquidity conditions.
- Reconcile reported U.S. GAAP results with managed-basis and other non-GAAP measures, including ROTCE, TBVPS and core loans.
- Review liquidity and capital buffers, funding mix, rating-sensitive collateral requirements and future TLAC obligations.
- Track legal proceedings, including MBS, benchmark-rate, interchange, Petters and other matters, against reserves and the disclosed $1.8 billion reasonably possible loss range.
- Evaluate the eventual impact and implementation timing of the expected credit loss standard and other accounting changes.