JPMORGAN CHASE & CO quarterly report, Q2 FY2014

JPMorgan Chase & Co. 2014 Q2 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 Management and Corporate/Private Equity businesses. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, with comparisons to the same 2013 periods; the balance-sheet comparison is primarily with December 31, 2013.

As of June 30, 2014, the Firm reported approximately $2.5 trillion of assets, $227.3 billion of stockholders’ equity and 245,192 employees.

Key financial metrics

Metric	2Q14	2Q13	Change
Total net revenue	$24.454 billion	$25.211 billion	Down 3%
Net interest income	$10.798 billion	$10.704 billion	Up 1%
Noninterest revenue	$13.656 billion	$14.507 billion	Down 6%
Noninterest expense	$15.431 billion	$15.866 billion	Down 3%
Provision for credit losses	$692 million	$47 million	Higher
Net income	$5.985 billion	$6.496 billion	Down 8%
Diluted EPS	$1.46	$1.60	Down 9%
ROE	11%	13%	Down 2 points
Overhead ratio	63%	63%	Flat

For the six months ended June 30, 2014, net revenue was $47.447 billion, net income was $11.259 billion and diluted EPS was $2.74, down 6%, 14% and 14%, respectively, from the comparable 2013 period. The effective tax rate was 28.2% in the second quarter and 28.9% year to date.

Period-end loans were $746.983 billion, deposits were $1.3198 trillion, long-term debt was $269.929 billion and total stockholders’ equity was $227.314 billion. The loans-to-deposits ratio was 57%.

Six-month cash flows were $10.296 billion provided by operating activities, $97.938 billion used in investing activities and $75.436 billion provided by financing activities, resulting in a $12.248 billion decrease in cash and due from banks. Management stated that operating liquidity was adequately supported by cash balances and borrowing capacity.

Material changes versus prior comparable periods

Lower revenue primarily reflected a 23% decline in principal transactions revenue, a 29% decline in mortgage fees and related income, and substantially lower securities gains. Asset management fees and other income increased.
Net interest income increased modestly in the quarter, but declined 1% year to date as lower loan yields and lower average trading assets offset higher securities yields and loan growth.
The provision for credit losses increased to $692 million from $47 million. Consumer provisions rose materially because allowance releases were much smaller than in 2013, although net charge-offs declined.
Net charge-offs were $1.158 billion in the quarter and $2.427 billion year to date, compared with $1.403 billion and $3.128 billion, respectively, in 2013. The Firm’s net charge-off rate was 0.64% in the quarter and 0.68% year to date.
Nonperforming assets declined to $9.017 billion from $9.706 billion at December 31, 2013, and $11.041 billion at June 30, 2013. The allowance for credit losses declined to $15.974 billion from $20.137 billion a year earlier.
Consumer & Community Banking net income declined 21% to $2.443 billion, driven by lower mortgage revenue and higher credit provisions. Mortgage origination volume fell 66% year over year in the quarter.
Corporate & Investment Bank net income declined 31% to $1.963 billion, primarily due to lower Markets revenue and higher noncompensation expense. Excluding the prior-year DVA gain, net income declined 25%.
Commercial Banking net income rose 6% to $658 million, supported by lower credit provisions, while Asset Management net income rose 10% to $552 million on higher client assets and market levels.
Corporate/Private Equity reported net income of $369 million versus a $552 million loss in the prior-year quarter, including lower legal expense and an after-tax tax benefit of more than $200 million.

Capital, liquidity and funding

Basel III Advanced Transitional CET1 capital was $160.086 billion and the CET1 ratio was 9.8%; Tier 1 and total capital ratios were 11.1% and 12.5%, respectively. The Tier 1 leverage ratio was 7.6%.
Estimated Basel III Advanced Fully Phased-In CET1 capital was $160.599 billion, with a 9.8% CET1 ratio. The estimated supplementary leverage ratio was 5.4%.
High-quality liquid assets were approximately $576 billion, including $348 billion of eligible cash and $228 billion of eligible securities. Management considered the liquidity position strong and stated that funding capacity was sufficient for on- and off-balance-sheet obligations.
The Firm issued $7.3 billion of noncumulative preferred stock during the first six months and had $269.9 billion of long-term debt at period-end.

Guidance, outlook and management commentary

Management expected approximately $58 billion, plus or minus, of adjusted firmwide expense for full-year 2014, excluding legal and foreclosure-related matters; final expense would depend partly on performance-based compensation.
Consumer & Community Banking expense excluding Mortgage Banking was expected to increase approximately 1% for 2014 versus 2013.
Mortgage Production was expected to generate a small negative pretax result in the third quarter, while Mortgage Servicing revenue was expected to be approximately $600 million, plus or minus.
Markets revenue was expected to reflect the prevailing environment and normal seasonal trends. Securities Services revenue was expected to decline approximately $100 million in the third quarter due to seasonality, and Treasury Services revenue was expected to remain approximately $1 billion.
Asset Management expected third-quarter expense to increase modestly and full-year pretax margin and ROE to be below second-quarter levels because of continued investment in infrastructure, controls and selected hiring.
The Board increased the common dividend from $0.38 to $0.40 per share, effective with the July 31, 2014 payment. The Firm continued to target a long-term payout ratio of approximately 30% of normalized earnings.

Risks, contingencies and unusual items

Legal proceedings remained significant. Management estimated reasonably possible legal losses in excess of established reserves at up to approximately $4.6 billion, although some matters could not yet be estimated. Legal expense was $669 million in the quarter and $707 million year to date.
Major litigation and investigations included mortgage-backed securities and repurchase matters, LIBOR and other benchmark rates, foreign exchange, credit default swaps, Madoff-related matters, mortgage servicing, consumer debt collection and Washington Mutual-related claims. A proposed $4.5 billion settlement covering certain JPMC and Bear Stearns mortgage-backed securities trusts was subject to trustee acceptance and possible judicial approval after quarter-end.
Mortgage Banking and goodwill remained sensitive to mortgage rates, origination volumes, home prices, foreclosure costs and regulatory developments. No goodwill impairment was recorded, but Mortgage Banking was identified as having elevated impairment risk.
Credit-loss estimates remain sensitive to housing prices, unemployment, credit-card loss rates and wholesale internal ratings. Management disclosed illustrative modeled sensitivities of approximately $1.0 billion for certain PCI-loan assumptions, $150 million for residential real estate, $600 million for credit-card losses and $2.0 billion for a one-notch downgrade of wholesale ratings.
The Firm identified cybersecurity, operational, regulatory, geopolitical, market-volatility, credit-rating and funding risks as material forward-looking considerations. Russia exposure was $4.6 billion, and management was monitoring sanctions and potential market contagion.
The Firm agreed to sell certain physical commodities operations to Mercuria; the after-tax impact was not expected to be material, subject to regulatory approvals and an expected closing before year-end 2014.
Jamie Dimon disclosed on July 1, 2014 that he had been diagnosed with throat cancer; the filing stated that the prognosis was excellent and that he intended to remain actively involved in the business.

Most important facts for investors to verify

Whether the higher consumer credit provision and reduced allowance releases persist, particularly in credit cards and residential real estate.
Mortgage origination volumes, Mortgage Servicing Rights valuations and the sensitivity of Mortgage Banking earnings to interest rates and prepayments.
Markets revenue trends, including fixed-income volatility, client activity and the effect of DVA/FVA and other valuation adjustments.
Progress toward the $58 billion adjusted-expense outlook and the cost and effectiveness of control and business-simplification initiatives.
Changes in Basel III capital ratios, the supplementary leverage ratio, liquidity buffers and regulatory capital requirements.
Developments in legal proceedings, including the estimated $0 to $4.6 billion range of reasonably possible losses above reserves and mortgage-backed securities settlements.
Actual cash generation and funding needs, including movements in deposits, repurchase financing, long-term debt and off-balance-sheet commitments.