01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
JPMorgan Chase & Co. ended fiscal 2007 with record net income of $15.4 billiona ($4.38 diluted EPS) on record total net revenue of $71.4 billion, up 15% year over year.
Return on common equity held at 13%, and the Firm ended the year with $1.56 trillionb in assets, $123.2 billion in stockholders' equity, and a Tier 1 capital ratio of 8.4%. Growth was broad-based: investment banking fees, asset management revenue, and Treasury & Securities Services and Asset Management posted records, while the Investment Bank's trading results were hit by roughly $2.7 billion of subprime and leveraged-loan markdowns. The filing's central investor concern is credit.
The provision for credit losses more than doubled to $6.9 billionc, driven by home equity, subprime mortgage, and credit card losses as U.S. housing prices declined. Management guided to a lower level of growth in 2008 and substantially higher consumer credit costs, with home equity losses potentially doubling from the first-quarter level of about $450 million by the fourth quarter and card net charge-off rates rising toward 5% by year-end 2008. The $10.1 billion total allowance for credit losses reflects this deterioration.
For shareholders, the Firm returned about $13.4 billiond through dividends and buybacks (168 million shares repurchased for $8.2 billion, with $6.2 billion of authorization remaining) and kept dividends at $0.38 per quarter. The 10-K also flags significant legal exposure, most notably the $2.2 billion pretax Enron securities class-action settlement and numerous IPO allocation, NCFE, and interchange cases, though management believes these should not have a material adverse effect on consolidated financial condition beyond current reserves.
02—Key points
Key Highlights
- Record net income of $15.4 billion and diluted EPS of $4.38, up 8% from $4.04 in 2006 (up 13% from continuing operations).
- Record total net revenue of $71.4 billion, up 15%, led by record advisory and equity underwriting fees, record asset management fees, and higher net interest income.
- Provision for credit losses rose to $6.9 billion from $3.3 billion, reflecting home equity, subprime mortgage, and credit card losses; the total allowance for credit losses increased $2.3 billion to $10.1 billion.
- Investment Bank net income fell 15% to $3.1 billion due to about $2.7 billion of subprime CDO and leveraged-loan markdowns, partly offset by record investment banking fees and equity markets revenue.
- Strong capital and shareholder returns: Tier 1 capital ratio of 8.4%, book value per share of $36.59, dividend of $1.48 per share for the year, and $8.2 billion of share repurchases.
- Merger integration completed with $3.0 billion of targeted expense savings fully realized; the Bank of New York branch acquisition added 339 branches to the retail network.
- 2008 outlook calls for slower growth and higher credit costs across all businesses, with an explicit warning that consumer losses could rise substantially.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
| Revenue | $71.37B |
| Interest Expense | $44.98B |
| Net Income | $15.37B |
| EPS (Basic) | $4.38 |
| EPS (Diluted) | $4.33 |
| Shares Outstanding (Basic) | 3.40B |
| Shares Outstanding (Diluted) | 3.44B |
05—Questions
Frequently Asked Questions
How did JPMorgan Chase perform financially in 2007?
The Firm reported record net income of $15.4 billion, or $4.38 per diluted share, and record total net revenue of $71.4 billion, a 15% increase. Return on common equity was 13%, and the overhead ratio improved to 58% from 63%. Results were supported by strong investment banking fees, asset management growth, and higher net interest income, partly offset by sharply higher credit provisions and trading markdowns.
What are the main credit risks investors should watch?
The main risks are consumer credit losses in the $94.8 billion home equity portfolio and the $15.5 billion retained subprime mortgage portfolio, as well as rising credit card net charge-offs. Management expects home equity losses to potentially double from about $450 million in the first quarter of 2008 by year-end and card net charge-off rates to approach 5% of managed loans by the end of 2008. The Investment Bank also holds $26.4 billion of leveraged loans and unfunded commitments held for sale, which may face further markdowns.
How much did the Investment Bank lose from subprime and leveraged lending exposures?
The Investment Bank recorded markdowns of $1.4 billion (net of hedges) on subprime positions, including subprime CDOs, and $1.3 billion (net of fees) on leveraged lending funded loans and unfunded commitments. Despite these charges, the segment still delivered $3.1 billion of net income, and management noted $2.7 billion of remaining subprime-related exposure at year-end that could be affected further in 2008.
What is the status of the major legal matters the Firm faces?
The Newby v. Enron class action settlement of $2.2 billion pretax has received final court approval, with a plan of allocation hearing scheduled for February 29, 2008. Other significant matters include IPO allocation antitrust and securities litigation (where the Supreme Court reversed the antitrust reinstatement and the securities class certification was vacated), NCFE-related actions, the interchange litigation, and an SEC investigation tied to NCFE. Management believes the outcomes should not have a material adverse effect on consolidated financial condition beyond current reserves, but acknowledges that ultimate losses could exceed reserves.
How is the Firm returning capital to shareholders?
In 2007 the Firm repurchased 168 million shares for $8.2 billion at an average price of $48.60 and paid $5.2 billion in common dividends declared, or $1.48 per share. The Board approved a new $10.0 billion repurchase authorization in April 2007, of which $6.2 billion remained at year-end. The Firm targets a dividend payout ratio of roughly 30% to 40% of net income over time, and the 2007 payout ratio was 34%.
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