JPMorgan Chase & Co.’s (JPM) CEO Jamie Dimon on Q3 2014 Results – Earnings Call Transcript

JPMorgan Chase & Co. (NYSE:JPM)

Q3 2014 Earnings Conference Call

October 14, 2014 08:30 AM ET


Marianne Lake – CFO

Jamie Dimon – Chairman and CEO


Matt O’Connor – Deutsche Bank

John McDonald – Stanford Bernstein

Glenn Schorr – ISI

Betsy Graseck – Morgan Stanley

Guy Moszkowski – Autonomous

Gerard Cassidy – RBC

Mike Mayo – CLSA

Erika Najarian – Bank of America Merrill Lynch

Brennan Hawken – UBS

Ken Usdin – Jefferies & Company

Steve Chubak – Nomura


Good morning, ladies and gentlemen. Welcome to the JPMorgan Chase’s Third Quarter 2014 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation. Please standby.

At this time, I would like to turn the call over to JPMorgan Chase’s Chairman and CEO, Jamie Dimon; and Chief Financial Officer, Marianne Lake. Ms. Lake, please go ahead.

Marianne Lake – CFO

Thank you, operator. Good morning everyone. I am going to take you through the earnings presentation, which is available on our web site. Please refer to the disclaimer regarding forward-looking statements at the back of the presentation.

Starting on page one, the firm delivered strong underlying performance this quarter with net income of $5.6 billion on strong revenue of over $25 billion, up 5% year-on-year, reflecting growth across most of our businesses, and EPS of $1.36 and the return on tangible common equity of 13% for the quarter. Included in our results with firm-wide legal expense of approximately $1 billion after tax, which relates to a number of matters in large part and estimated amount for FX which was treated as non-deductable tax purposes.

There were also a number of smaller items, most notably a benefit of approximately $400 million of tax discrete items in corporate as well as consumer reserve releases of $200 million pre tax. Excluding these and other non-core items, net income was approximately $5.8 billion reflecting strong core performance.

The quarter was characterized by continued strengths in our leadership positions as well as market share gains across the consumer businesses. Higher levels of market volatility and client volumes than anticipated in CIB and record performance in asset management. Core loan growth for the quarter was strong up 7% year-on-year while maintaining strong discipline across the board and with encouraging trends in consumer. We’ve also continued to make progress against our capital targets with a CET 1 ratio of 10.1% and firm supplementary leverage ratio of 5.5%. All while returning approximately $3 billion as capital to shareholders the quarter, with growth share repurchases of $1.5 billion.

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Turning to page two, adjusted expense that excluding legal was $14.7 billion in the third quarter, down approximately 30 million quarter-on-quarter with an adjusted overhead ratio of 59%. We continued to be focused and diligent on managing expenses, although our third quarter adjusted expense may appear elevated in comparison to our full year target of 58 billion, it was substantially driven by higher market performance versus our earlier expectations. If the positive momentum continues in the fourth quarter, it’s likely that our total adjusted expense will be above $58 billion but obviously on higher revenues.

On credit, despite lower reserve releases firm wide credit costs remained very low driven by reduced net charge-offs. We expect total net charge-offs for 2014 to be less than $5 billion which is below our previous guidance. Also included on this page are the returns generated by each of our businesses this quarter. Of note the commercial bank and asset management achieved 18% and 25% ROEs respectively in line with their previous cycle target. CCB was at 19% and if you back out the impact of legal expense in CIB its ROE would have been around 14%.

Moving on to capital on Page 3. The firm reported a fully phased in advanced CET 1 ratio of 10.1% up from 9.8 last quarter reaching our year-end target of 10% plus. Not on the page but for your information the fully phased in standardized ratio was 10.5%. As you know the final U.S. rules on SLR and LTR were published in September, on SLR there were no notable changes and as I just mentioned the firm’s SLR was 5.5% reaching our target level and we’re at 5.7% for the bank this quarter.

The LTR final U.S. rule had some changes versus the NPR, remember we have been disclosing our LTR compliance relative to the Basel rules. The U.S. final rule is in some ways more punitive but we remain compliant with a more modest buffer.

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Moving on to business performance starting with CCB on Page 4. The combined consumer businesses generated $2.5 billion of net income for the quarter on $11.3 billion of revenue and an ROE of 19%. I’d like to draw your attention to the right hand side of the page; it shows that the long-term investments we’ve been making in the business are paying off. Illustrated by the many leadership positions we hold, we’re particularly proud of our customer satisfaction rankings.

We’re seeing continued strong growth in the underlying business drivers, average deposits were up 35 billion year-on-year, an increase of 8%. Our active mobile customer base was up 22% and credit card sales volume of $120 billion was up 12% on strong new account originations. Across CCB we’ve reduced headcount by over 10,000 this year against our year-end target of 8,000 outlined at Investor Day, and we expect a total reduction of 11,000 or so by year-end.

Finally before I move on as you are aware JPMorgan and certain others in the financial services industry experienced cyber-attacks this quarter. We are taking every step to protect our customers and our firm, but these attacks highlight the need for continued and increased cooperation among businesses and the government to systemically reduce and result cyber threats, we are committed to doing our part. To date we have not observed elevated levels of fraud related to this matter.

Turning to Page 5, consumer and business banking. CBB generated net income of $914 million up 20% year-on-year, business continues to improve its operating leverage with an ROE of 33%, up 6 percentage points versus a year ago, with revenue up 5% and expense relatively flat. Underlying business drivers remain strong, average deposits of 476 billion were up 9% year-on-year and client investment assets were up 16% to a record $208 billion. We continued to see strong deposit growth across regions and markets. In fact for the third consecutive year, we led the FDIC survey with the highest deposit growth among the largest 50 U.S. banks. Overall, we grew our deposit share in 46 of our 50 largest markets nationwide and we remain number one in three of the largest deposit markets.

Moving on to revenue, net interest income was up 4% year-on-year, driven by strong deposit growth offset by continued pressure on margins. And non-interest revenue was up 6%, with investment revenue growth driven by Chase private clients and with the addition of over 700,000 households driving stronger fee income. Expense was relatively flat with efficiency improvement in the business being offset by increased cost of control.

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Finally on business banking originations, the momentum that we’ve seen in recent quarters continued and we believe we’ve outperformed the industry with loan originations for the quarter of $1.6 billion up 27% year-on-year, down quarter-on-quarter seasonally. This reflects a combination of industry trends improving driven by business optimism generally continuing to remain strong and improving banking performance, especially in an expansion market as our targeted strategies mature. We do expect the strong growth to continue through the remainder of the year.

Mortgage banking on page 6. Overall mortgage banking net income was $439 million for the quarter, with an ROE of 10%. As expected, the production environment remains challenging, mortgage production and pretax income ex-repurchase was slightly positive for the quarter, a little better than guidance on better than expected expense performance. Originations of approximately $21 billion were up 26% quarter-on-quarter against the market that we estimate to be up approximately 10%. Therefore we believe we’ve gained share and that share gain has been in high quality jumbo and conventional eligible loans which as you know are the segments we are focusing on.

As a remainder with purchase mix up, the business has become much more seasonal with volume and profitability peaks in the second and third quarters and lows in the first and fourth. Given this, we still expect the fourth quarter results to be a small negative as previously guided.

Finally on production we had a $62 million benefit in the quarter driven by refinements to our repurchase reserves.

On to servicing, net servicing related revenue of 639 million was down 54 million quarter-on-quarter, a gain on the better side of our guidance, due to gains on the sale of Ginnie Mae loans. Looking forward into the fourth quarter, core servicing revenue will continue to decline and we expect less benefit from other revenue sources such as those from Ginnie Mae sales given lower delinquencies and lower loan modification volume.

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