01—Abstract
Summary
Summary of the 10-K filed February 20, 2014. Cited figures are marked; the original filing is the authoritative source.
JPMorgan Chase closed 2013 as the largest U.S. bank by assets ($2.4 trilliona) with $211.2 billion of stockholders' equity, but reported a 16% drop in net income to $17.9 billion ($4.35 diluted EPS) from $21.3 billion in 2012.
Net revenue was roughly flat at $96.6 billionb, while noninterest expense rose 9% to $70.5 billion, driven mainly by $11.1 billion of firmwide legal expense. Return on common equity fell to 9% from 11%. Credit quality was the main positive.
The provision for credit losses fell 93% to $225 millionc, helped by a $5.6 billion reduction in the allowance for credit losses as home prices and delinquencies improved. Net charge-offs fell 36% to $5.8 billion, and nonperforming assets declined 18% to $9.7 billion. Capital remained strong, with a Basel I Tier 1 common ratio of 10.7% and an estimated Basel III Advanced Tier 1 common ratio of 9.5% on a fully phased-in basis.
The filing's central investor concern is regulatory and legal exposure. The firm entered multiple Consent Orders, a Deferred Prosecution Agreement tied to Madoff, and a $9 billiond RMBS settlement, and it says regulatory scrutiny will continue.
Management expects 2014 adjusted expense below $59 billion, excluding legal costs, and continued spread compression in cards. The S&P outlook on the parent was revised to negative, and Moody's downgraded the holding company in November 2013.
02—Key points
Key Highlights
- Net income fell 16% to $17.9 billion ($4.35 diluted EPS), and ROE declined to 9% from 11%.
- Total net revenue held roughly flat at $96.6 billion, while noninterest expense rose 9% to $70.5 billion, mostly from $11.1 billion of legal expense.
- Provision for credit losses dropped 93% to $225 million after a $5.6 billion allowance release, reflecting improved home prices and delinquency trends.
- Net charge-offs fell 36% to $5.8 billion, and nonperforming assets declined 18% to $9.7 billion.
- Capital is strong: Basel I Tier 1 common ratio of 10.7% and an estimated 9.5% under Basel III Advanced on a fully phased-in basis; dividend raised to $0.38 quarterly and $8.6 billion of buyback capacity remains.
- Regulatory and litigation overhang persists, including multiple Consent Orders, a January 2014 Deferred Prosecution Agreement, and a $9 billion RMBS settlement, with S&P's parent outlook at negative and a Moody's downgrade in November 2013.
- Management guides to 2014 adjusted expense below $59 billion excluding legal and foreclosure-related costs, with continued card spread compression and a stable net interest margin.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 20, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $97.37B$97.03B | +0.3% |
| Interest Expense | $9.35B$11.04B | −15.3% |
| Net Income | $17.89B$21.28B | −16.0% |
| EPS (Basic) | $4.38$5.22 | −16.1% |
| EPS (Diluted) | $4.34$5.20 | −16.5% |
| Shares Outstanding (Basic) | 3.78B3.81B | −0.7% |
| Shares Outstanding (Diluted) | 3.81B3.82B | −0.2% |
05—Questions
Frequently Asked Questions
Why did JPMorgan's net income decline in 2013 despite lower credit losses?
Net income fell $3.3 billion to $17.9 billion because noninterest expense rose $5.7 billion, mainly from $11.1 billion of firmwide legal expense compared with $5.0 billion in 2012. The lower provision for credit losses, which fell by $3.2 billion, only partly offset that increase.
How strong is JPMorgan's capital position?
At year-end 2013 the Basel I Tier 1 capital ratio was 11.9% and total capital was 14.4%. The Basel I Tier 1 common ratio was 10.7%, and the estimated Basel III Advanced Tier 1 common ratio on a fully phased-in basis was 9.5%, with a 10%+ target by end-2014. The firm also repurchased $4.8 billion of stock in 2013 and kept $8.6 billion of authorization remaining.
What are the main legal and regulatory risks investors should watch?
The filing lists numerous Consent Orders and settlements, including the RMBS settlement, the Madoff-related Deferred Prosecution Agreement, and the FHA settlement. Ongoing investigations cover CDS, foreign exchange, LIBOR, and mortgage servicing. Management estimates reasonably possible losses above reserves of $0 to about $5.0 billion, and regulators are expected to keep using formal enforcement actions.
Is JPMorgan's credit quality still improving?
Yes, on most measures. The net charge-off rate fell to 0.81% from 1.26%, the allowance for loan losses covered 2.25% of retained loans (down from 3.02%), and wholesale nonaccrual loans fell 39%. Remaining pressure points include elevated late-stage residential real estate delinquencies and elongated foreclosure timelines.
What does the 2014 outlook look like?
Management expects net interest margin to be relatively stable, adjusted firmwide expense below $59 billion excluding legal and foreclosure costs, and continued spread compression in card. Mortgage production pretax income is expected to be modestly negative in Q1 2014 as higher rates hurt refinancing. Treasury and CIO net interest income is expected to reach break-even in the second half of 2014.
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