JPMorgan Chase & Co. — Form 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 & Wealth Management and Corporate segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2023. Results include the May 1, 2023 acquisition of certain assets and liabilities of First Republic Bank from the FDIC.
Key financial metrics
| Metric | 2Q23 | 2Q22 | Change |
|---|---|---|---|
| Total net revenue | $41.3 billion | $30.7 billion | 34% |
| Net interest income | $21.8 billion | $15.1 billion | 44% |
| Noninterest revenue | $19.5 billion | $15.6 billion | 25% |
| Noninterest expense | $20.8 billion | $18.7 billion | 11% |
| Pre-provision profit | $20.5 billion | $12.0 billion | 71% |
| Provision for credit losses | $2.9 billion | $1.1 billion | 163% |
| Net income | $14.5 billion | $8.6 billion | 67% |
| Diluted EPS | $4.75 | $2.76 | 72% |
| Effective tax rate | 17.7% | 20.4% | Down 270 bps |
| Overhead ratio | 50% | 61% | Improved |
For the six months ended June 30, 2023, total net revenue was $79.7 billion, up 30%; net income was $27.1 billion, up 60%; and diluted EPS was $8.85, up 64%. Six-month pre-provision profit was $38.7 billion, up 65%.
- Profitability: 2Q23 ROE was 20% and ROTCE was 25%, compared with 13% and 17%, respectively, in 2Q22.
- Balance sheet: Total assets were $3.87 trillion, loans were $1.30 trillion, deposits were $2.40 trillion, long-term debt was $364.1 billion and total stockholders’ equity was $312.5 billion at June 30, 2023.
- Liquidity: Average firmwide LCR was 112%; period-end HQLA was approximately $791.5 billion. Management reported approximately $620 billion of unencumbered marketable securities and approximately $1.4 trillion of combined liquidity sources.
- Capital: CET1 capital was $235.8 billion and the Standardized CET1 ratio was 13.8%; Tier 1 leverage was 6.9% and SLR was 5.8%.
- Credit: Allowance for credit losses was approximately $24.3 billion, nonperforming assets were $7.8 billion and the firmwide net charge-off rate was 0.47% in 2Q23, compared with 0.25% in 2Q22.
- Cash flow: Cash used in operating activities was $92.4 billion for the first six months of 2023, compared with $24.1 billion of cash provided in the prior-year period. Investing activities provided $5.6 billion and financing activities provided $14.6 billion. Cash and due from banks plus deposits with banks ended at $495.1 billion.
Material changes versus the prior comparable period
- Net interest income increased primarily because of higher interest rates and, to a lesser extent, First Republic; this was partly offset by lower Markets net interest income and lower average deposits.
- Noninterest revenue benefited from First Republic, higher Markets revenue and the absence of prior-year losses on certain Payments equity investments. Investment securities losses increased to $900 million from $153 million, largely due to Treasury and CIO portfolio repositioning.
- Net income included an estimated $2.7 billion bargain purchase gain from First Republic. The acquisition also produced $599 million of related expense and a $1.2 billion allowance addition for acquired loans and lending-related commitments.
- Average deposits declined 6% year over year to approximately $2.4 trillion, reflecting migration to higher-yielding investments, deposit attrition in wholesale businesses and customer spending, partly offset by First Republic deposits.
- Loans increased 14% from December 31, 2022 to $1.30 trillion, including approximately $150 billion of acquired First Republic loans. Period-end deposits increased 3% from year-end.
- Credit costs rose as Card Services charge-offs normalized toward pre-pandemic levels and wholesale reserves increased, including provisions related to office real estate and client-specific downgrades.
- Segment net income increased year over year in CCB to $5.3 billion, CIB to $4.1 billion, Commercial Banking to $1.2 billion, AWM to $1.2 billion and Corporate to $2.6 billion from a prior-year loss.
Guidance, outlook, risks and unusual items
- Management expected full-year 2023 net interest income, including NII excluding Markets, of approximately $87 billion, market dependent; adjusted expense of approximately $84.5 billion, excluding any FDIC special assessment; and a Card Services net charge-off rate of approximately 2.6%.
- The FDIC had proposed a special assessment related to recent bank resolutions. If finalized as proposed, JPMorgan expected approximately $3 billion of pretax expense in the quarter of finalization, expected in the second half of 2023.
- First Republic accounting remains subject to final settlement with the FDIC and finalization of acquisition-date fair values. The bargain purchase gain and other acquisition-related amounts may change.
- Management continued to integrate First Republic operations and stated that segment classifications and allocations, including deposits, may change in future periods.
- Key risks include deposit attrition and funding costs, higher interest rates, consumer credit normalization, commercial real estate and other wholesale credit deterioration, market volatility, regulatory capital changes, litigation, operational and cyber risks, geopolitical conditions and acquisition integration.
- Proposed Basel III finalization and GSIB surcharge changes could materially affect future capital requirements. The Federal Reserve announced a 2.9% stress capital buffer for the fourth quarter of 2023, reducing the applicable Standardized CET1 requirement to 11.4% from 12.5%.
- The firm reported aggregate reasonably possible legal losses, in excess of established reserves, ranging from zero to approximately $1.3 billion at June 30, 2023. Actual losses could differ materially, and some matters could not be estimated.
- The remaining principal tenors of U.S. dollar LIBOR ceased publication on June 30, 2023. The firm converted predominantly all cleared derivatives to SOFR and continued remediation of remaining legacy contracts.
- The quarterly common dividend was $1.00 per share; the Board announced its intent to increase it to $1.05 per share beginning in the third quarter of 2023, subject to quarterly Board approval. The firm repurchased $5.2 billion of common stock during the first six months.
Most important facts for investors to verify
- Reconcile reported earnings excluding the $2.7 billion First Republic bargain purchase gain and assess the sustainability of elevated net interest income.
- Review the final FDIC settlement, acquisition fair-value adjustments, shared-loss agreements and integration costs for First Republic.
- Monitor Card Services delinquencies, charge-offs and the stated approximately 2.6% full-year net charge-off outlook.
- Assess wholesale credit trends, particularly criticized exposures, commercial real estate, office real estate and allowance coverage.
- Track average deposits, deposit pricing, liquidity coverage and reliance on secured and long-term funding.
- Evaluate the effect of proposed Basel III and GSIB surcharge rules on required capital, distributions and returns.
- Review the potential FDIC special assessment of approximately $3 billion pretax and other legal, regulatory and contingent liabilities.