JPMorgan Chase & Co. — Form 10-Q Summary
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 Management and Corporate. This unaudited Form 10-Q covers the three months ended March 31, 2015, with comparisons to the three months ended March 31, 2014 and, for balance-sheet items, December 31, 2014.
Key financial metrics
| Metric | 1Q15 | 1Q14 | Change |
|---|---|---|---|
| Total net revenue | $24.066 billion | $23.215 billion | Up 4% |
| Net interest income | $10.677 billion | $10.667 billion | Flat |
| Noninterest revenue | $13.389 billion | $12.548 billion | Up 7% |
| Noninterest expense | $14.883 billion | $14.636 billion | Up 2% |
| Pre-provision profit | $9.183 billion | $8.579 billion | Up 7% |
| Provision for credit losses | $959 million | $850 million | Up 13% |
| Net income | $5.914 billion | $5.269 billion | Up 12% |
| Diluted EPS | $1.45 | $1.28 | Up 13% |
| Effective tax rate | 28.1% | 31.8% | Down 3.7 points |
The reported overhead ratio was 62%, compared with 63% in the prior-year quarter. Return on common equity was 11%, compared with 10%, and return on tangible common equity was 14%, compared with 13%. Net interest yield on interest-earning assets declined to 2.07% from 2.20%, reflecting lower loan yields and spread compression.
- Investment banking fees increased 26% to $1.794 billion, while principal transactions revenue increased 10% to $3.655 billion.
- Mortgage fees and related income increased 37% to $705 million, primarily because mortgage servicing rights risk-management losses were $68 million versus $400 million in 1Q14.
- Firmwide legal expense was $687 million, compared with an immaterial amount in the prior-year quarter, contributing materially to higher noninterest expense.
- Net charge-offs declined to $1.052 billion from $1.269 billion; the net charge-off rate declined to 0.57% from 0.71%.
Balance sheet, debt and liquidity
| Balance-sheet item | March 31, 2015 | December 31, 2014 |
|---|---|---|
| Total assets | $2.577 trillion | $2.573 trillion |
| Loans | $764.2 billion | $757.3 billion |
| Deposits | $1.368 trillion | $1.363 trillion |
| Long-term debt | $280.6 billion | $276.8 billion |
| Stockholders’ equity | $235.9 billion | $231.7 billion |
Loans increased 1% from year-end, while deposits increased modestly. The loans-to-deposits ratio remained 56%. Cash and cash equivalents reported as cash and due from banks declined by $5.0 billion during the quarter to $22.8 billion at period-end, but the Firm maintained substantial liquidity, including estimated high-quality liquid assets of $614 billion, up from $600 billion at year-end. Management stated that operating cash flows, available cash and borrowing capacity were sufficient for operating liquidity needs.
Long-term debt included approximately $209.5 billion of unsecured long-term debt. The Firm issued $21.0 billion of long-term unsecured funding during the quarter and had $15.8 billion of maturities and redemptions. It also reported a fully phased-in supplementary leverage ratio of 5.7%, estimated at 6.0% for JPMorgan Chase Bank, N.A.
Cash flow and capital
- Operating activities provided $14.879 billion, compared with $14.667 billion in 1Q14.
- Investing activities used $24.150 billion, compared with $68.410 billion in 1Q14, primarily reflecting deposits with banks and loan growth.
- Financing activities provided $4.337 billion, compared with $40.318 billion in 1Q14.
- Net cash and due from banks decreased by $5.010 billion.
- Basel III Advanced Transitional CET1, Tier 1 and total capital ratios were 10.7%, 12.1% and 13.7%, respectively; the Tier 1 leverage ratio was 7.5%.
- Estimated Basel III Advanced Fully Phased-In CET1 capital was $167.2 billion, with a 10.6% CET1 ratio.
The Federal Reserve did not object to the Firm’s 2015 capital plan. The Board authorized up to $6.4 billion of common-equity repurchases from April 1, 2015 through June 30, 2016. The Firm repurchased 32.5 million shares for $1.9 billion during 1Q15 and announced an intended increase in the quarterly common dividend to $0.44 per share beginning in the second quarter.
Material changes versus prior comparable periods
- Revenue growth was led by investment banking, Markets activity, mortgage-related income and higher noninterest revenue; net interest income was essentially unchanged.
- Corporate & Investment Bank net income increased 19% to $2.537 billion, supported by stronger investment banking and Markets revenue.
- Consumer & Community Banking net income increased 12% to $2.219 billion, driven by higher revenue and lower expenses.
- Commercial Banking net income was broadly stable at $598 million, while period-end loans increased 11% year over year.
- Asset Management net income increased 11% to $502 million; assets under management increased 7% to $1.759 trillion.
- Nonperforming assets declined to $7.714 billion from $9.473 billion a year earlier, and the allowance for credit losses declined to $14.658 billion from $16.485 billion.
- The Firm adopted new accounting guidance for affordable-housing investments retrospectively. The adoption reduced retained earnings by $321 million as of January 1, 2014, but did not materially affect prior-period net income or EPS.
Guidance, outlook, risks and unusual items
Management expected core loan growth of approximately 10% in 2015 and projected full-year net charge-offs of slightly more than $4 billion if favorable credit trends continued. Adjusted 2015 expense, excluding firmwide legal expense, was expected to be approximately $57 billion. Business simplification initiatives were expected to reduce both revenue and expense by approximately $1.6 billion, with no meaningful anticipated impact on 2015 net income.
Management expected Mortgage Banking noninterest revenue to decline by approximately $1 billion in 2015, and anticipated second-quarter CIB Markets revenue to be approximately $300 million lower year over year because of business simplification. The Firm also planned to reduce non-operating deposits by up to $100 billion by year-end 2015, which management did not expect to materially affect liquidity.
Key risks include market volatility, interest-rate and foreign-exchange movements, credit deterioration, oil and gas exposure, regulatory and legislative changes, litigation, cybersecurity, funding or rating downgrades, model and valuation uncertainty, and execution of business simplification and control initiatives. The Firm reported an aggregate range of reasonably possible legal losses, in excess of established reserves, from zero to approximately $5.5 billion. It also disclosed that Mortgage Banking goodwill of approximately $2 billion remained at elevated risk of future impairment.
Facts investors should verify
- Whether legal expense and the disclosed $0–$5.5 billion range of reasonably possible losses change materially in subsequent filings.
- Progress toward the $6.4 billion repurchase authorization and the planned $0.44 quarterly dividend.
- Actual 2015 loan growth, charge-offs and any release or build in consumer loan-loss allowances.
- Trends in mortgage servicing rights, mortgage servicing revenue and the elevated Mortgage Banking goodwill impairment risk.
- Capital ratios under the binding Basel III Standardized approach, including the effect of the proposed G-SIB surcharge and future regulatory rules.
- Exposure to oil and gas, market volatility, ratings downgrades, off-balance-sheet commitments and derivative collateral requirements.
- Subsequent developments in major litigation, mortgage-related claims, regulatory investigations and cybersecurity matters.