JPMorgan Chase & Co. — Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. reported results for the three months ended March 31, 2012. The global financial-services firm operates through Investment Banking, Retail Financial Services, Card Services & Auto, Commercial Banking, Treasury & Securities Services, Asset Management and Corporate/Private Equity. The interim financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | 1Q12 | 1Q11 | Change |
|---|---|---|---|
| Total net revenue | $26.7 billion | $25.2 billion | 6% |
| Noninterest expense | $18.3 billion | $16.0 billion | 15% |
| Pre-provision profit | $8.4 billion | $9.2 billion | (9%) |
| Provision for credit losses | $726 million | $1.2 billion | (38%) |
| Income before tax | $7.6 billion | $8.1 billion | (5%) |
| Net income | $5.4 billion | $5.6 billion | (3%) |
| Diluted EPS | $1.31 | $1.28 | 2% |
| ROE | 12% | 13% | Down 1 point |
| Effective tax rate | 29.6% | 31.1% | Down 1.5 points |
Net interest income was $11.7 billion, down 2%, while noninterest revenue increased 13% to $15.0 billion. Mortgage fees and related income rose to $2.0 billion from a prior-year loss of $487 million. Principal transactions revenue declined 29% to $3.4 billion, including a $907 million debit valuation adjustment loss.
Net cash provided by operating activities was $4.3 billion, compared with $6.0 billion of cash used in operating activities in 1Q11. Investing activities used $45.4 billion, primarily because of higher deposits with banks and purchases of available-for-sale securities. Financing activities provided $35.4 billion. Cash and due from banks ended at $55.4 billion.
At March 31, 2012, total assets were $2.32 trillion, loans were $721.0 billion, deposits were $1.13 trillion, long-term debt was $255.8 billion and total stockholders’ equity was $189.7 billion. The deposits-to-loans ratio was 157%. Management characterized liquidity as strong; the Global Liquidity Reserve was approximately $432 billion.
Capital remained well above regulatory minimums: Basel I Tier 1 capital was 12.6%, total capital was 15.6%, Tier 1 leverage was 7.1% and Tier 1 common capital was 10.4%. Management estimated the Basel III Tier 1 common ratio at approximately 8.2%.
Material changes versus the prior comparable period
- Net income declined modestly despite higher revenue, primarily because noninterest expense increased $2.4 billion.
- Litigation expense increased to $2.7 billion from $1.1 billion, including approximately $2.5 billion of additional mortgage-related litigation reserves.
- Credit performance improved: net charge-offs fell to $2.4 billion from $3.7 billion, and the net charge-off rate declined to 1.35% from 2.22%.
- The allowance for credit losses declined to $26.6 billion from $30.4 billion at March 31, 2011, including reductions of approximately $1.0 billion in consumer real estate reserves and $750 million in credit-card reserves.
- Retail Financial Services returned to profitability, reporting $1.8 billion of net income versus a $399 million prior-year loss, mainly because of stronger mortgage results and lower credit costs.
- Investment Bank net income fell 29% to $1.7 billion, reflecting lower investment-banking fees and the $907 million DVA loss.
- Card Services & Auto net income declined 23% to $1.2 billion because the prior-year period benefited from a larger reserve release.
- Commercial Banking, Treasury & Securities Services and Asset Management reported net income changes of plus 8%, plus 11% and minus 17%, respectively.
- Assets under supervision reached a record $2.0 trillion, while assets under custody reached a record $17.9 trillion.
Guidance, outlook, commentary and unusual items
- Management expected low interest rates and spread compression to reduce 2012 Consumer & Business Banking net income by approximately $400 million, with the Durbin Amendment expected to reduce annualized net income by approximately $600 million.
- Mortgage repurchase losses were expected to be approximately $350 million per quarter during 2012, with elevated foreclosure and servicing costs continuing. Management stated that first-quarter mortgage margins were not sustainable.
- Management expected the residential real estate portfolio to decline approximately 10% to 15% during 2012, reducing net interest income by approximately $500 million but potentially releasing approximately $1 billion of capital annually over time.
- Corporate quarterly net income, excluding Private Equity results and litigation expense, was estimated at an approximately $800 million loss for 2Q12.
- After March 31, 2012, the Chief Investment Office experienced significant mark-to-market losses in its synthetic credit portfolio. Management said the portfolio was riskier, more volatile and less effective as an economic hedge than previously believed, creating potential for greater future earnings volatility.
- The first-quarter results included a $1.1 billion pretax benefit from the Washington Mutual bankruptcy settlement, a $2.5 billion litigation-reserve expense and a $1.8 billion pretax benefit from reductions in consumer loan-loss allowances.
- The Board increased the quarterly common dividend from $0.25 to $0.30 per share and authorized a new $15 billion common-equity repurchase program, including up to $12 billion for 2012.
- The global mortgage settlement required approximately $1.1 billion of cash payments, $500 million of refinancing relief and $3.7 billion of consumer relief, together with enhanced servicing standards. The filing states that prior-period results reflected estimated settlement costs and that the expected incremental financial impact was not material.
Principal risks and contingencies
- Mortgage-related litigation, repurchase demands, foreclosure matters and servicing obligations remain significant. The recorded mortgage repurchase liability was $3.5 billion, with reasonably possible additional losses estimated at up to approximately $2 billion.
- The aggregate range of reasonably possible litigation losses in excess of established reserves was estimated at $0 to approximately $4.2 billion. Actual losses could exceed this range.
- Residential real estate exposure remains sensitive to unemployment, home prices, foreclosure timelines, loan modifications, high loan-to-value ratios and payment recasts on option ARMs.
- Goodwill allocated to consumer lending businesses remained at elevated risk of impairment; no impairment was recorded at March 31, 2012.
- Moody’s had placed the Firm’s long-term ratings under review for possible downgrade. A downgrade could increase funding costs, collateral requirements and liquidity needs.
- Regulatory change, including Basel II.5, Basel III, Dodd-Frank implementation and heightened mortgage-servicing supervision, could affect capital, liquidity, pricing and business operations.
- Off-balance-sheet exposures included $997.5 billion of lending-related commitments, $194.6 billion of securities-lending indemnifications and $72.8 billion of derivatives qualifying as guarantees.
Important facts for investors to verify
- Whether subsequent CIO synthetic-credit-portfolio losses materially changed second-quarter and full-year earnings, capital or risk disclosures.
- Actual litigation, mortgage repurchase and global-settlement cash payments compared with recorded reserves and stated exposure ranges.
- The sustainability of mortgage production margins and the pace of residential real estate portfolio runoff.
- Future allowance releases versus underlying charge-offs, delinquency trends and the effect of the new junior-lien nonaccrual reporting guidance.
- Progress toward the stated Basel III capital ratio and the effect of Basel II.5, Basel III and other regulatory rules.
- Use of the $15 billion repurchase authorization and the effect of dividends and buybacks on common equity and capital ratios.
- Changes in credit ratings, wholesale funding costs, collateral requirements and the $432 billion Global Liquidity Reserve.