01—Abstract
Summary
Summary of the 10-K filed March 2, 2009. Cited figures are marked; the original filing is the authoritative source.
JPMorgan Chase's 2008 annual report reflects a sharply weaker year driven by the financial crisis, with net income falling to $5.6 billiona ($1.37 diluted EPS) from $15.4 billion in 2007 and return on common equity dropping to 4%.
Total net revenue declined 6% to $67.3 billionb, weighed down by over $10 billion of markdowns on mortgage-related positions and leveraged lending in the Investment Bank, along with a $13.7 billion increase in the allowance for credit losses. The provision for credit losses roughly tripled to $21.0 billion, reflecting deterioration in home equity, mortgage and credit card portfolios as well as a weakening wholesale credit environment. The year was also transformative for the franchise.
The Bear Stearns merger (May 30, 2008) and the acquisition of Washington Mutual's banking operations (September 25, 2008) expanded the balance sheet to $2.2 trillionc in assets and created the nation's third-largest branch network. The Firm took $25 billion of Series K preferred stock and a warrant under the Treasury's Capital Purchase Program, and issued $11.5 billion of common equity. Capital remained strong, with a Tier 1 capital ratio of 10.9% and a Tier 1 leverage ratio of 6.9%, and the Firm characterized its liquidity as strong.
For investors, the key negative development is the February 23, 2009 cut in the quarterly common dividend from $0.38 to $0.05d per share, which management said will retain about $5.0 billion of common equity annually. Management guided to continued credit deterioration in consumer portfolios and elevated wholesale charge-offs in 2009, and it disclosed material ongoing litigation, including Bear Stearns, Enron, IPO allocation, mortgage-backed securities and auction-rate securities matters. The filing also notes that S&P and Moody's downgraded the Firm's senior debt one notch in December 2008 and January 2009, respectively.
02—Key points
Key Highlights
- Net income fell 64% to $5.6 billion ($1.37 diluted EPS) from $15.4 billion ($4.38) in 2007; ROE declined to 4% from 13%, including a $1.9 billion extraordinary gain from the Washington Mutual acquisition.
- Total net revenue declined 6% to $67.3 billion, with principal transactions swinging to a loss of $10.7 billion, driven by over $10 billion of markdowns on mortgage-related exposures and leveraged lending.
- The provision for credit losses rose to $21.0 billion from $6.9 billion, and the allowance for credit losses increased $13.7 billion to $23.8 billion; nonperforming assets reached $12.7 billion versus $3.9 billion a year earlier.
- Balance sheet grew to $2.2 trillion in total assets after the Bear Stearns merger and Washington Mutual acquisition, with deposits of $1.0 trillion and stockholders' equity of $166.9 billion.
- Capital position remained above well-capitalized thresholds, with a Tier 1 capital ratio of 10.9% and total capital ratio of 14.8%, supported by the $25.0 billion Capital Purchase Program investment and $11.5 billion common stock issuance.
- Quarterly common dividend was cut to $0.05 per share from $0.38, a move management said would retain roughly $5.0 billion of common equity per year; the 2008 payout ratio was 114%.
- Management expects continued deterioration in home equity, mortgage and credit card credit trends in 2009, and the Firm faces extensive litigation tied to Bear Stearns, Enron, IPO allocations, mortgage-backed securities and auction-rate securities.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed March 2, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $67.25B$71.37B | −5.8% |
| Interest Expense | $34.24B$44.98B | −23.9% |
| Net Income | $5.61B$15.37B | −63.5% |
| EPS (Basic) | $1.35$4.38 | −69.2% |
| EPS (Diluted) | $1.35$4.33 | −68.8% |
| Shares Outstanding (Basic) | 3.50B3.40B | +2.9% |
| Shares Outstanding (Diluted) | 3.52B3.44B | +2.2% |
05—Questions
Frequently Asked Questions
Why did JPMorgan Chase's earnings fall so sharply in 2008?
Earnings were pressured by three main factors: a sharp rise in the provision for credit losses to $21.0 billion as housing and consumer credit deteriorated, more than $10 billion in trading markdowns on mortgage-related positions and leveraged loans that produced a $10.7 billion principal transactions loss, and higher noninterest expense of $43.5 billion tied to the Bear Stearns and Washington Mutual transactions. Partly offsetting these were higher net interest income of $38.8 billion, a $1.9 billion extraordinary gain on the Washington Mutual acquisition, and a $1.5 billion gain on the sale of Visa shares.
Why did the Firm cut its dividend, and what does it mean for shareholders?
On February 23, 2009, the Board reduced the quarterly common dividend from $0.38 to $0.05 per share, effective with the April 30, 2009 payment. Management said the change retains about $5.0 billion of common equity per year to help the balance sheet withstand a further economic decline, and it expects to hold the dividend at this level for the time being, returning to a more normalized payout once conditions stabilize. The 2008 dividend payout ratio on reported net income was 114%, so the cut reflects the reduced earnings base.
How did the Bear Stearns and Washington Mutual acquisitions change the company?
The Bear Stearns merger, completed May 30, 2008, added a leading prime brokerage platform, strengthened equities and asset management, and expanded energy trading; the purchase price was about $1.5 billion. The Washington Mutual banking acquisition, completed September 25, 2008 for $1.9 billion, added roughly 2,244 retail branches, a large credit card business and significant mortgage and commercial real estate loans, creating the nation's third-largest branch network. Both transactions brought substantial credit exposure and goodwill-related and purchase accounting effects that are visible in 2008 results.
Is JPMorgan Chase's capital and liquidity position adequate?
Management characterized the Firm's capital and liquidity as strong at year-end 2008. The Tier 1 capital ratio was 10.9% (up from 8.4%), the total capital ratio was 14.8%, and the Tier 1 leverage ratio was 6.9%, all well above regulatory well-capitalized levels. Liquidity was supported by $1.0 trillion of deposits, $42.6 billion of long-term debt issuance in 2008 (including $20.8 billion guaranteed by the FDIC under the TLG Program), and parent company funding above minimum thresholds. The company also noted that rating downgrades by S&P and Moody's in December 2008 and January 2009 did not have a material impact on funding costs.
What are the most significant legal and credit risks disclosed?
On the credit side, management expects further deterioration in home equity, prime and subprime mortgage, and credit card portfolios, with quarterly home equity net charge-offs potentially reaching $1.0 to $1.4 billion and card net charge-off rates approaching 7% in early 2009. Wholesale exposures could generate $2.0 billion or more of credit costs and markdowns in Q1 2009 from leveraged lending and mortgage exposures. On the legal side, the Firm faces numerous matters, including Bear Stearns shareholder and ESOP litigation, municipal derivatives antitrust and SEC investigations, Enron-related suits, IPO allocation claims, mortgage-backed securities lawsuits, auction-rate securities actions, and interchange fee litigation. Management believes none should have a material adverse effect on consolidated financial condition, but acknowledges outcomes could exceed existing reserves.
06—Continue