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 activities. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared primarily with the corresponding 2019 periods. The filing reflects the COVID-19 pandemic, adoption of CECL effective January 1, 2020, and related regulatory capital and liquidity relief.
Financial performance and key metrics
| Metric | 3Q20 | 3Q19 | 9M20 | 9M19 |
|---|---|---|---|---|
| Total net revenue | $29.1 billion | $29.3 billion | $90.3 billion | $87.1 billion |
| Net income | $9.4 billion | $9.1 billion | $17.0 billion | $27.9 billion |
| Diluted EPS | $2.92 | $2.68 | $5.09 | $8.15 |
| Noninterest expense | $16.9 billion | $16.4 billion | $50.6 billion | $49.0 billion |
| Provision for credit losses | $611 million | $1.5 billion | $19.4 billion | $4.2 billion |
| ROE | 15% | 15% | 9% | 15% |
| ROTCE | 19% | 18% | 11% | 19% |
- Third-quarter net revenue was essentially flat year over year. Net interest income declined 9% to $13.0 billion as lower rates and margin compression offset balance-sheet growth; noninterest revenue rose 7% to $16.1 billion.
- Investment banking fees increased 11% in the quarter and 22% year to date. Markets revenue increased 30% in the quarter, including 29% growth in Fixed Income Markets and 32% growth in Equity Markets.
- Noninterest expense increased 3% in the quarter, including $524 million of legal expense and an impairment of a legacy investment. Marketing expense declined 47%.
- Year-to-date provision for credit losses increased 366% to $19.4 billion, primarily reflecting COVID-19-related macroeconomic deterioration and CECL. The allowance for credit losses was $33.8 billion, with an allowance-to-retained-loans ratio of 3.26%, versus 1.42% in the prior year.
- Net charge-offs were $1.2 billion in the quarter and $4.2 billion year to date. Nonperforming assets increased to $11.5 billion from $6.0 billion at September 30, 2019.
- Period-end assets were $3.25 trillion, deposits were $2.00 trillion, loans were $989.7 billion, and long-term debt was $279.2 billion. Deposits increased 28% from year-end 2019, while loans declined 1%.
- Net cash used in operating activities was $51.9 billion and net cash used in investing activities was $198.2 billion for the nine months. Financing activities provided $470.7 billion, principally from higher deposits and secured funding. Cash, due from banks and deposits with banks totaled $487.5 billion at September 30, 2020.
- The overhead ratio was 58% in 3Q20 versus 56% in 3Q19. The loan-to-deposit ratio was 49%, compared with 64% at year-end 2019.
- Capital remained strong: standardized CET1 ratio was 13.1%, advanced CET1 ratio was 13.8%, total standardized capital ratio was 17.3%, and supplementary leverage ratio was 7.0%. The reported SLR benefited from temporary exclusions for U.S. Treasuries and Federal Reserve deposits; excluding that relief, the Firm reported an SLR of 5.8%.
- Average liquidity coverage ratio was 114%, supported by approximately $670 billion of HQLA and approximately $660 billion of unencumbered marketable securities, or approximately $1.3 trillion of stated liquidity sources.
Material changes versus prior comparable periods
- Quarterly net income increased 4% despite flat revenue, primarily because the provision for credit losses declined 60% from the unusually elevated prior-year charge.
- Nine-month net income declined 39%, driven by the substantial increase in credit-loss provisions and lower net interest income.
- CIB was the primary earnings driver: third-quarter net income increased 52% to $4.3 billion and year-to-date net income increased 30% to $11.8 billion. CCB year-to-date net income declined 69% to $3.9 billion, and Commercial Banking year-to-date net income declined 82% to $544 million because of credit provisions.
- Asset & Wealth Management third-quarter net income increased 31% to $877 million, with assets under management up 16% to $2.6 trillion.
- Average firmwide deposits increased 30% year over year to approximately $2.0 trillion, while average loans increased 1% to approximately $991 billion. Consumer card sales volume declined 8% in the quarter.
- The Firm transferred $100.5 billion of investment securities from available-for-sale to held-to-maturity for capital management purposes, including $74.4 billion in the third quarter.
- Common-stock repurchases were suspended beginning in the second quarter and remained prohibited through the fourth quarter under Federal Reserve direction. The quarterly common dividend was $0.90 per share.
Guidance, outlook, risks and unusual items
- Management expected full-year 2020 net interest income of approximately $55 billion and full-year 2021 net interest income of approximately $54 billion, both market dependent. Adjusted 2020 expense was expected to be approximately $66 billion.
- Management’s third-quarter CECL central case assumed U.S. unemployment of 9.5% in fourth-quarter 2020, 8.5% in second-quarter 2021, and 7.3% in fourth-quarter 2021, with U.S. real GDP remaining below year-end 2019 levels through 2021. Significant weighting remained on adverse scenarios.
- COVID-19 remains the principal risk. Credit performance may deteriorate as payment deferrals, government stimulus, and other assistance expire. At September 30, $12.3 billion of consumer loans and approximately $6.3 billion of wholesale loans remained under payment deferral programs.
- Wholesale criticized exposure increased to $37.4 billion from $15.1 billion at year-end 2019, with notable deterioration in Consumer & Retail and Oil & Gas. The filing also identifies risks in real estate, lodging, retail, commercial borrowers, market volatility, interest rates, liquidity, credit ratings, cybersecurity, operational resilience, and model estimates.
- The Firm disclosed an estimated aggregate range of reasonably possible legal losses, in excess of established reserves, from zero to approximately $1.7 billion. The range excludes matters for which a loss estimate could not be made. Third-quarter legal expense was $524 million.
- The Firm continues to prepare for a potential hard Brexit and the transition away from LIBOR and other IBORs. Delays in client migration or employee relocation could affect service continuity to EU clients.
- Unusual items included $473 million of investment securities gains, a $97 million provision related to held-to-maturity securities, an impairment on a legacy investment, legal expenses, and the CECL adoption impact that reduced retained earnings by $2.7 billion at January 1, 2020.
Most important facts for investors to verify
- Whether subsequent COVID-19 developments, expiration of assistance programs, and economic conditions require further allowance increases or produce higher charge-offs and nonperforming assets.
- The sustainability of unusually strong CIB Markets and investment banking revenue as market volatility, client activity, and capital-markets conditions normalize.
- The effect of prolonged low rates and deposit-margin compression on net interest income and the stated 2020–2021 outlook.
- The extent to which regulatory relief, including CECL transition provisions and temporary SLR exclusions, affects reported capital ratios and future capital requirements.
- Potential legal, regulatory, conduct, benchmark-rate, and control-related losses beyond recorded reserves, including the disclosed possible-loss range of up to approximately $1.7 billion.
- Credit quality trends in commercial real estate, Consumer & Retail, Oil & Gas, credit cards, residential real estate, and loans exiting payment deferrals.
- The filing’s non-GAAP measures, including pre-provision profit, ROTCE, TBVPS, managed-basis revenue, and net interest yield excluding CIB Markets, against reported U.S. GAAP results.