JPMorgan Chase & Co. 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. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared primarily with the corresponding 2015 periods. The firm reported approximately $2.5 trillion of assets and $252.4 billion of stockholders’ equity at June 30, 2016.
Financial performance and key metrics
| Metric | 2Q16 | 2Q15 | Change |
|---|---|---|---|
| Total net revenue | $24.4 billion | $23.8 billion | 2% |
| Net interest income | $11.3 billion | $10.7 billion | 6% |
| Noninterest revenue | $13.0 billion | $13.1 billion | (1)% |
| Pre-provision profit | $10.7 billion | $9.3 billion | 15% |
| Provision for credit losses | $1.4 billion | $935 million | 50% |
| Net income | $6.2 billion | $6.3 billion | (1)% |
| Diluted EPS | $1.55 | $1.54 | 1% |
| ROE / ROTCE | 10% / 13% | 11% / 14% | Lower |
| Overhead ratio | 56% | 61% | Improved |
For the six months ended June 30, 2016, net revenue was $47.6 billion, down 1%; net income was $11.7 billion, down 4%; and diluted EPS was $2.89, down 3%. The year-to-date effective tax rate increased to 30.7% from 26.5%, primarily because current-period tax audits generated expense while the prior year benefited from tax audit adjustments.
Net interest income benefited from loan growth and the December 2015 rate increase, partly offset by lower investment securities balances and higher long-term-debt interest expense. Noninterest revenue was affected by lower investment banking fees, asset-management revenue, mortgage servicing revenue and card income, including the effect of renegotiated card co-brand agreements. Higher CIB Markets revenue and a gain on the sale of Visa Europe interests partly offset those pressures.
Balance sheet, credit, capital and liquidity
- Total assets were $2.466 trillion, up 5% from December 31, 2015.
- Loans were $872.8 billion, up 4% from year-end; core loans were $775.8 billion, up 6%.
- Deposits were $1.331 trillion, up 4%; the loans-to-deposits ratio was 66%.
- Long-term debt was $295.6 billion, up 2% from year-end.
- Common stockholders’ equity was $226.4 billion; tangible book value per share was $50.21, up 9% from the prior-year quarter.
- The allowance for credit losses was $15.2 billion, including a $14.2 billion loan-loss allowance and a $960 million allowance for lending-related commitments.
- Net charge-offs were $1.18 billion in the quarter and $2.29 billion year to date. The quarterly net charge-off rate was 0.56%.
- Nonperforming assets were $7.8 billion, versus $7.6 billion a year earlier and $8.0 billion at March 31, 2016.
- Credit pressure was concentrated in Oil & Gas, Natural Gas Pipelines and Metals & Mining. Wholesale criticized exposure increased to $21.0 billion from $14.6 billion at year-end.
- The transitional Basel III Advanced CET1 ratio was 12.0%; the estimated fully phased-in Advanced CET1 ratio was 11.9%. The fully phased-in supplementary leverage ratio was 6.6%.
- High-quality liquid assets were $516 billion, and management stated that the firm complied with the fully phased-in U.S. liquidity coverage ratio. Remaining borrowing capacity at the Federal Home Loan Banks and Federal Reserve discount window was approximately $196 billion.
Cash flow and material changes
For the first six months of 2016, operating activities used $22.9 billion, investing activities used $52.1 billion and financing activities provided $74.2 billion. Cash and due from banks declined by $780 million to $19.7 billion. Operating and investing outflows largely reflected growth in trading assets, client receivables, securities purchased under resale agreements and consumer and wholesale loan originations. Financing inflows primarily reflected higher deposits, repurchase-related funding and long-term borrowings.
Compared with the prior year, the firm generated stronger pre-provision earnings and reduced reported expenses, but higher credit provisions and tax expense weighed on net income. Noninterest expense fell 6% in both the quarter and year-to-date period. The quarter included a net legal benefit of $430 million, compared with $291 million of legal expense in the prior year; this is a significant contributor to the expense decline and is not necessarily recurring.
Effective January 1, 2016, the firm adopted accounting guidance that moved debit valuation adjustments on fair-value-option liabilities to other comprehensive income and changed employee stock-based compensation accounting. The filing states that the adoption had no material impact on consolidated financial statements. The firm also transferred $7.5 billion of securities from available-for-sale to held-to-maturity to reduce AOCI volatility.
Outlook, management commentary and risks
- Assuming no further interest-rate changes, management expected full-year 2016 net interest income to be more than $2 billion above 2015 levels.
- Managed noninterest revenue was expected to be approximately $50 billion, with anticipated declines from lower card, investment banking and asset-management revenue.
- Core loan growth was expected at approximately 10%–15%, with continued consumer-deposit growth and an average balance sheet of approximately $2.45 trillion.
- Net charge-offs were expected to be up to approximately $4.75 billion for 2016, driven by loan growth and higher Oil & Gas losses.
- Adjusted firmwide expense was expected to be approximately $56 billion, excluding firmwide legal expense.
- The Federal Reserve did not object to the firm’s 2016 capital plan. The board authorized up to $10.6 billion of common-equity repurchases from July 1, 2016 through June 30, 2017, subject to management discretion and regulatory and market conditions. The quarterly common dividend was increased to $0.48 per share.
- Regulators determined that the firm’s 2015 resolution plan was not credible or would not facilitate an orderly resolution because of identified deficiencies. If not remediated by October 1, 2016, regulators could impose more stringent capital, leverage or liquidity requirements or restrict growth and activities.
- The June 2016 U.K. vote to leave the European Union introduced legal, regulatory and operating uncertainty for the firm’s European business, although management did not believe the likely scenarios threatened business viability.
- Management identified risks from economic and market conditions, interest rates, credit quality, Oil & Gas exposures, litigation, regulation, capital and liquidity requirements, cybersecurity, operational controls and potential ratings downgrades.
- Aggregate reasonably possible legal losses in excess of established reserves were estimated at up to approximately $3.3 billion, although the filing states that some matters could not be estimated and actual losses could differ materially.
Important facts for investors to verify
- Whether credit deterioration in Oil & Gas, Natural Gas Pipelines, Metals & Mining and newer credit-card vintages remains within the allowance and full-year charge-off outlook.
- The sustainability of expense reductions given the quarter’s $430 million net legal benefit and ongoing technology, marketing and control investments.
- Actual progress and regulatory consequences relating to the deficient resolution plan.
- The effect of Brexit-related legal-entity or operating changes on European costs, capital and liquidity.
- Whether expected net interest income growth, 10%–15% core loan growth and approximately $50 billion of managed noninterest revenue remain achievable.
- The ultimate outcomes of material litigation, including mortgage-related, interchange, benchmark-rate, Washington Mutual and MBS matters, and whether reserves adequately cover reasonably possible losses.
- The potential effect of future credit-loss accounting guidance, which the firm expected to increase allowances when adopted.