JPMorgan Chase & Co. 2Q13 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The global financial-services firm operates through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset Management and Corporate/Private Equity. Assets were $2.4 trillion and stockholders’ equity was $209.2 billion at quarter-end.
Financial performance and key metrics
| Metric | 2Q13 | 2Q12 | Change |
|---|---|---|---|
| Total net revenue | $25.2 billion | $22.2 billion | +14% |
| Net income | $6.5 billion | $5.0 billion | +31% |
| Diluted EPS | $1.60 | $1.21 | +32% |
| Pre-provision profit | $9.3 billion | $7.2 billion | +30% |
| Provision for credit losses | $47 million | $214 million | -78% |
| Noninterest expense | $15.9 billion | $15.0 billion | +6% |
| Return on common equity | 13% | 11% | +2 points |
For the six months ended June 30, 2013, net revenue was $50.3 billion, net income was $13.0 billion, diluted EPS was $3.19, and noninterest expense was $31.3 billion. Compared with the prior-year period, net revenue increased 4%, net income increased 32%, and expenses decreased 6%.
- Noninterest revenue increased 31% in the quarter, led by principal transactions, investment banking fees, and asset-management revenue.
- Net interest income declined 4% in the quarter and 5% year to date. The managed net interest yield on interest-earning assets was 2.20% in the quarter, down from 2.47%.
- Credit performance improved: net charge-offs were $1.4 billion in the quarter and $3.1 billion year to date, with rates of 0.78% and 0.88%, respectively.
- Nonperforming assets were $10.9 billion at June 30, down from $11.7 billion at December 31, 2012.
- The allowance for credit losses declined to $20.1 billion from $22.6 billion at year-end, primarily from improved consumer delinquency trends and home prices.
- Total assets increased 3% from year-end to $2.44 trillion. Loans declined 1% to $725.6 billion, while deposits increased 1% to $1.20 trillion and long-term debt increased 7% to $266.2 billion.
- Operating cash flow for the first six months was $88.5 billion, compared with $46.2 billion in the prior-year period. Investing activities used $142.2 billion, primarily from increased deposits with banks; financing activities provided $30.1 billion.
- Liquidity was described as strong. Estimated high-quality liquid assets were approximately $454 billion, with an additional $278 billion of unencumbered marketable securities. The deposits-to-loans ratio was 166%.
- Basel I Tier 1 common capital was $147.0 billion and the Tier 1 common ratio was 10.4%. Management estimated a Basel III Tier 1 common ratio of approximately 9.3%.
Material changes versus comparable periods
- Quarterly earnings benefited from the absence of $4.4 billion of prior-year losses on the CIO synthetic credit portfolio. Year-to-date principal transactions revenue also benefited from the absence of $5.8 billion of such losses.
- Investment banking fees rose 37% in the quarter and 20% year to date, driven by higher debt and equity underwriting.
- Mortgage fees and related income declined 20% in the quarter and 23% year to date, reflecting lower production revenue, tighter margins and lower mortgage-servicing revenue.
- Consumer & Community Banking net income declined 6% in the quarter and 9% year to date, primarily because of lower mortgage and deposit-related revenue.
- Corporate & Investment Bank net income increased 19% in the quarter and 24% year to date. Asset Management net income increased 28% and 27%, respectively.
- Commercial Banking net income declined 8% in the quarter and 4% year to date as higher expenses and provisions offset modest revenue growth.
- Corporate/Private Equity reported a $552 million quarterly loss versus a $1.8 billion loss in the prior year, mainly reflecting the absence of the prior-year CIO synthetic-credit losses.
- Litigation expense was $678 million in the quarter, compared with $323 million in the prior year; year-to-date litigation expense was approximately $1.0 billion versus $3.0 billion.
- Other comprehensive income declined $3.4 billion in the quarter, largely because of lower fair values of available-for-sale securities.
Guidance, outlook, risks and unusual items
- Management expected third-quarter net interest income to increase modestly from the second quarter and net interest margin to remain relatively stable during the second half of 2013.
- Higher mortgage rates could reduce the U.S. mortgage-origination market by an estimated 30% to 40% in the second half of 2013 versus the first half, pressuring refinancing volumes, margins and Mortgage Production profitability.
- Management expected continued elevated mortgage servicing, default, foreclosure and mortgage-repurchase costs, although it believed the $2.5 billion mortgage-repurchase liability was sufficient for probable GSE-related losses. The filing estimated reasonably possible losses above the reserve at up to approximately $0.7 billion.
- Management expected Treasury and CIO could incur quarterly losses of approximately $300 million for the remainder of 2013, subject to yield-curve movements and portfolio-positioning decisions.
- The Firm recorded approximately $600 million of additional litigation reserves in the quarter. The aggregate range of reasonably possible legal losses in excess of established reserves was estimated at $0 to approximately $6.8 billion.
- Regulatory and supervisory scrutiny remained elevated, including Consent Orders involving mortgage servicing, BSA/AML, risk management, model governance and trading controls. The Federal Reserve requested an additional capital plan addressing weaknesses in the Firm’s CCAR capital-planning processes and could require changes to capital distributions.
- The Firm was subject to significant regulatory and litigation matters involving mortgage-backed securities, mortgage repurchases, LIBOR, credit-default swaps, interchange, Madoff, Lehman, MF Global, mortgage servicing and consumer collections practices.
- Subsequent events included plans to pursue strategic alternatives for the physical commodities businesses, a July 2013 $1.5 billion preferred-stock issuance and the announced redemption of Series J preferred stock.
- The Board increased the quarterly common dividend from $0.30 to $0.38 per share and authorized up to $6 billion of common-equity repurchases through March 2014, subject to regulatory and capital considerations.
Most important facts for investors to verify
- Whether credit-loss benefits and allowance reductions remain sustainable as housing, employment and consumer delinquencies evolve.
- The effect of higher interest rates on mortgage production, mortgage-servicing rights, securities valuations, net interest income and accumulated other comprehensive income.
- Actual litigation, regulatory, mortgage-repurchase and servicing costs relative to the reserves and estimated ranges disclosed.
- Progress toward Basel III capital objectives and compliance with proposed supplementary leverage-ratio requirements.
- The effect of capital-plan reviews on dividends and share repurchases.
- Whether Treasury and CIO losses, DVA gains and the absence of prior-year synthetic-credit losses distort comparisons with recurring operating performance.
- Future exposure from off-balance-sheet commitments, guarantees, derivatives, securitizations and consolidated or nonconsolidated variable-interest entities.