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.

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.

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.

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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.

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.

As a result, we do expect fourth quarter servicing revenue to be $600 million or slightly lower. Servicing expense increased approximately $25 million quarter-on-quarter, due to investments in control and operational improvements. You will note that this represents a delay in achieving our target of $500 million for the fourth quarter. However, we are doing what’s necessary to improve our controls and operational processes and we expect servicing expense to continue to decline through 2015 at its lower pace.

MSR risk management was a modest gain of 76 million reflecting regular model updates. On real estate portfolios, we added approximately $6.8 billion of high quality loans to our portfolio this quarter up from $5 billion in the second quarter.

Loan quality remains very strong. We’ve recorded net charge-offs of $81 million and reserve releases of $100 million in the non-credit impaired portfolio, reflecting improvements in home prices as well as delinquencies.

Lastly on mortgage, headcount was down approximately 6,000 year-to-date, meeting our target for the year outlined at Investor Day and we are on track to reduce it by an incremental 1,000 or so by year end.

Turning to page seven, Cards, Merchant Services & Auto. Net income of 1.1 billion, down 10% year-on-year but up 4% excluding reserve releases with an ROE of 23%, reflecting very strong spend as well as balanced growth of $3 billion year-over-year continuing the momentum we saw last quarter as growth in our core business is now outpacing the runoff portfolio.

Overall, we saw strong and stable revenue of $4.6 billion, flat year-on-year. Loan growth as well as strong sales volume was offset by spread compression and higher amortization of customer acquisition cost. Expenses up 4% year-on-year, predominantly driven by higher (floor) [ph] expense related to Home Depot and higher auto lease depreciation.

In Card, sales growth of 12% led the industry for the 26th consecutive quarter. This industry outperformance is being driven by the value proposition of our core Chase branded and partner products and the investments we are making in customer acquisition, ultimate rewards, marketing and customer service. These investments are driving strong new account originations, up 29%, and the performance of these new accounts, 2013 and 2014 vintages, is exceeding our expectation.

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In Merchant Services, volume was up 15% year-on-year driven by continued strong sales performance. But transaction growth was up 6% year-on-year, lagging sales growth, driven by merchant mix and aggregation trends.

In Auto, new vehicle sales continued to grow year-over-year with the third quarter up 8%. We’ve seen the 12th consecutive quarter of loan and lease growth despite a very competitive market, and credit losses continued to be stable and low with the Auto pipeline remaining healthy, consistent with the recovery in the auto market.

Moving on to credit, the environment remains benign. We continue to see improvements in card early delinquencies, and the card net charge off rate was 252 basis points, an all-time low. This quarter, we released $100 million of auto and student lending reserves with no releases in card.

During September, a new step forward in the evolution of payments was announced, Apple Pay. We are excited to be a key player in a solution that offers improved security and the streamline customer experience. At the same time, we are continuing to develop other innovative payment solutions.

Moving on to page eight and the Corporate & Investment Bank. CIB reported net income of $1.5 billion on revenue of $8.8 billion and an ROE of 10% or 14% if you adjust the legal expense. In banking, total revenue was $2.7 billion, down 6% year-over-year. IB fees were 1.5 billion, up 2%, with revenue growth in advisory and equity underwriting fees on strong market activity being offset by lower debt underwriting fees.

We maintained our number one ranking in Global IB fees for Dealogic with particular strength in ECM in Europe and IPOs globally and we remain a go-to-bank for large deals and related financing. The IB pipeline is strong with an environment supportive of M&A and a strong equity underwriting market. Treasury services revenue was $1 billion in line with our guidance and lending revenue was down approximately $200 million year-on-year, primarily driven by mark to market losses of over $100 million in this quarter versus modest gains in the prior year on securities received from restructuring.

Let’s spend a moment on markets revenue, the green shoot and the potential upside to our performance that we’ve being seeing in early September did in fact materialize and our reported markets revenues were up 1% year-on-year, despite a strong third quarter last year, a quarter in which we significantly outperformed.

In fixed income, in currencies in emerging markets, a strong quarter and a particularly strong September with pick-up in both volumes and volatility as currency markets benefited from divergence across global monetary policies, an average quarter for commodities and credit and an improving quarter for rates.

In equities we saw quite strong performance for third quarter in line with last year’s. Cash was very strong in EMEA on the back of a strong primary market and equity derivatives results were lower versus a record last year, offset by an uptick in prime services revenue on higher balances and continued growth.

Of note customers are taking notice of the progress we’ve been making in building out our electronic trading platform and we’re seeing strong growth in electronic trading volumes up 50% year-on-year in Europe and nearly 20% in the U.S.

Moving on to the outlook for the fourth quarter. We are pleased to have completed the sales of our physical commodities business and detailed portfolio, which were major parts of our business simplification agenda and with limited impacts on ROE overtime. However these sales will present revenue headwinds in the fourth quarter and based upon their contributions to last year’s results these will drive an approximately 8% revenue decline year-over-year or approximately $300 million. So outside of the year-over-year decline driven by business exits, we are cautiously optimistic that momentum may carry over. However October so far has been mixed, likely on the back of a changing market sentiment around the prospects of global growth and inflation.

Security services revenue of 1.1 billion was up 8% year-on-year primarily driven by high NII on higher deposits down quarter-on-quarter 5% on seasonality. Assets under custody were $21.2 trillion up 8% year-on-year. Credit adjustments and other are positive $240 million is driven primarily by DVA and FDA as a result of credit spread widening and refinements to certain assumptions.

Moving on to expense, total expense was up 21% year-on-year with a comp to revenue ratio of 32% for the quarter and year-to-date. Non-comp expense was up 21% year-on-year primarily driven by legal expense but down 2% quarter-on-quarter as increased legal expenses were more than offset by lower cost of business simplification and other expenses. Just quickly on CIB loans, the headline 5% decline for loans is driven by lower client overdraft and trades underlying that traditional credit portfolio and other HFI finance were up by over 10%.

Moving on to Page 9 and commercial banking. The quarter saw a net income of $649 million on revenue of 1.7 billion with a strong ROE of 18%. Revenue was down 3% from the prior year and 2% sequentially reflecting yields compression in our lending book as well as business simplification partially offset by higher loan and deposit balances. Expense of $668 million was in line with guidance and relatively flat year-on-year and quarter-on-quarter despite ongoing investments in control. Loan balances increased 1.6 billion in the quarter driven by continued strong performance in our commercial real-estate businesses.

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CRE loans increased 13% year-on-year and 3% quarter-on-quarter both in excess of the industry and our CRE book have now grown to 14 consecutive quarters. C&I loans were relatively flat from the prior quarter broadly in line with industry trends. Of note deposits increased to $5 billion in the quarter mostly in middle market and corporate client banking, this is reflective of our clients still managing with very high levels of liquidity.

Having said that, utilization rates were up slightly for the quarter and pipelines continued to move incrementally higher across the board. Outside of lending we continued to make good progress in building our core franchise. This quarter growth investment banking revenue was approximately $500 million up 12% from last year and on a year to date basis the commercial bank has generated $1.4 billion of investment banking revenues for the firm, up 22%.

Card and merchant services revenue increased 7% from the prior year and finally since this time last year we’ve added approximately 500 new clients in targeted industries. Overall credit performance remains strong with net charge-offs of only one basis point marking the 7th consecutive quarter with net charge-offs in the single-digit or very low or recoveries.

As we think about the coming quarter we do expect current trends to continue, we would like to remind you of the one-time proceeds of approximately $100 million that we received in the fourth quarter of last year from a lending related workout.

Moving on to Page 10, asset management, an excellent quarter in asset management with record net income of $572 million up 20% year-on-year and 4% quarter-on-quarter with a 25% ROE and a 31% pre-tax margin in line with our through-the-cycle targets.

For the full year, we expect these ratios to be below our through-the-cycle targets. You will see that we changed from reporting our revenue by client segment to reporting revenue by line of business to be consistent with how we manage the business. So we are introducing sub line of business results for revenues in global investment management and global wealth management.

Overall, revenue was $3 billion was up 9% year-on-year reflecting an increase in management fees driven by long-term net inflows including $16 billion this quarter. This marks the 22nd consecutive quarter of long-term inflows driving AUM of $1.7 trillion up 11% year-on-year. While we continue to see strengths in our multi-asset and fixed income flows, equity flows were flat this quarter. Asset management expense of 2.1 billion was up 4% from a year ago and up modestly 1% versus last quarter.

In banking, we reported strong performance in both lending and deposits. Record loan balances up 16% year-on-year and 3% quarter-on-quarter with growth coming from both our U.S. and our international markets and a solid pipeline for demand for the remainder of the year. Deposits were also a record up 9% year-on-year and 2% quarter-on-quarter.

Lastly as reported, client assets of 2.3 trillion were up 4% year-on-year and down 5% quarter-on-quarter. However as part of business simplification, we closed the sale of the RPS business during this quarter, recognizing a small gain reflected in GIM. Excluding the impact of the RPS sale, client assets would have been up 10% year-on-year and flat quarter-on-quarter.

Moving on to page 11 on corporate and private equity. Private equity reported $71 million of net income driven by net valuation gains including a small net gain related to the portfolio sale in OEP which we announced in the quarter, predominantly offset by related expenses. Year-to-date the portfolio balance is down by approximately $2.5 billion and with this sale we expect it to be down by about $4 billion by year end. Treasury and CIO reported a small net loss of $30 million with NII slightly positive in the quarter. And other corporate net income at $357 million included in this result were tax related benefits of approximately $400 million as I previously mentioned as well as approximately $500 million pre-tax of legal expense with the remainder of the firm-wide legal expense principally in the IB. At the firm level our tax rate for the quarter was 28% broadly in line with a normalized tax rate of 30% plus or minus. Non-deductible legal expenses in CIB were offset by tax benefits here and other corporate.

Before moving onto our outlook page, Firm NII was up approximately $320 million quarter-on-quarter, driven by lower interest expense in CIB and core NII was up approximately $110 million.

Moving onto page 12, you can see on the page our current outlook which I’ve already addressed throughout the presentation.

So wrapping up, a strong result for the third quarter despite legal expense of $1 billion after tax. This reflects the strength of each of our franchises and the benefits of the diversified business model. We have made substantial progress against our control and regulatory agenda as well as business simplification albeit with more work to do and we have successfully executed against our 2014 target for capital leverage and liquidity. As I’ve shown you today, the investments we are making in our businesses are fueling growth and underpinning strong earnings now and in the future and we remain focused on serving our customers and safeguarding their assets and our company.

With that operator, please open up the lines for Q&A.

Question-and-Answer Session

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