Section I: Management Presentation
Please standby. We are about to begin. Good morning ladies and gentlemen. Welcome to JPMorgan Chase’s third quarter 2013 earnings call. This call is being recorded. Your line will be muted for the duration of this 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, JPMorgan Chase & Co
Thank you. Good morning everyone. I’m going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer regarding forward-looking statements at the back of the presentation.
The firm made a net loss of $380 million for the third quarter, on the back of very significant litigation expenses. So I want to take you first to page two. We’ve added this page for this quarter only, as we want to be as transparent with you as we can be and give you as complete a picture as possible of our litigation reserves and the current perspective on the evolution of our reasonably possible range of losses to litigation. And as you know, as transparent as we would like to be, we are necessarily constrained in what we can actually say.
Having said that, on page two, I’ll start by saying that we appreciate that the litigation expense of $9.2 billion is much more significant than you’ve been expecting. It’s much more significant than we expected until very recently. The reality is that over the last few weeks, the environment has become highly charged and very volatile. Things have been very fluid, and the situation escalated to the point where we’re facing very large premiums and penalties, the level of which has gone far beyond what we reasonably expected. However, those are the facts we’re dealing with today in our reserving actions this quarter and are trying as far as possible to put these issues behind us.
So let me quickly take you through the table on the top of page two, which is a roll-forward of our reserves. We started 2010 with $3 billion in reserves, added around $28 billion through the third quarter, including the actions this period, and have settled a little less than $8 billion across matters, which leave us with $23 billion approximately of ending reserves, which relate to a broad range of matters and includes a significant reserve for mortgage-related matters, including both securities and repurchase litigation exposure. Remember, our GSE repurchase reserves of over $2 billion are separate from this.
The balance at quarter end reflects the $9.2 billion we’re expensing this quarter. This expense also covers a range of matters, including but not limited to mortgage-backed securities. And the impact from their income you can see is high, as it’s being affected by a portion of the expense estimated to relate to enforcement penalties, which would not be tax deductible.
Again, these estimates relate to a number of cases, including among other things, mortgage, as well as the recently announced CIO settlements. We do expect litigation expenses to normalize over time to much lower levels, but they may be somewhat lumpy quarter over quarter.
Finally, on this page we’ve included a table which shows a revised range of reasonably possible losses. And those are losses that would be in addition to our reserves, and remember, it’s pre-tax. It’s very important to emphasize that when estimating this range, it’s difficult, and there are significant inherent uncertainties and judgments required.
As you can see, this was estimated at $6.8 billion last quarter, and while the range has gone down versus last quarter, it’s only gone down modestly in comparison to reserve adds. Think of it simply as if the estimate of what was reasonably possible back in the second quarter reflected our best assessment of the environment we were in and our best judgment at that time. But as I said, we didn’t — even a few weeks ago — reasonably expect things to have escalated to where they are now. So we have therefore revised our range to better reflect the reality of this current environment, with a range of up to $5.7 billion.
Now before we go back to page one, just a final comment, as we said in the press release, the board and senior management continues to seek fair and reasonable settlement with the government on mortgage-related issues, but at this time, we are unable to report on any specifics.
So just flipping back to page one and just to finish off the front page, the other significant item we’ve highlighted on the page is the combined $1.6 billion of loan loss reserve releases for the consumer businesses. And if you add the two significant items in the table, which we don’t consider to be core to our earnings, they total a loss of $6.2 billion and $1.59 of EPS in the negative. If you adjust our results for these two non-core items, we would have earned $5.8 billion and an EPS of $1.42 with a return on tangible common equity of 15%. And that’s not to discount the items, but rather to show the strength of our underlying performance.
The businesses showed double-digit growth in key drivers, as well as market share gains in consumer and CIB, in banking and market. For the second consecutive year, we led the nation in deposit growth, up 10%. Credit card sales volumes were up 11%, and we maintained our number one IDC ranking with 130 basis points increase in market share and asset management saw $19 billion of long-term net inflows, the 18th consecutive quarter.
So turning with that to page four, and the details of our balance sheet and capital. First, after allowing for dividends and repurchases, our capital declined in the quarter by approximately $2 billion. As a result, our Basel III Tier 1 common ratio remained flat at 9.3% quarter over quarter with the decline in capital being offset by lower risk-weighted assets, primarily driven by legacy portfolio run-off. We’re targeting 9.5% by the end of this year, and still aiming to run at about a 50 to 100 basis point buffer above this level over time. And our 2014 CCAR submission will take both these targets into consideration as well as maintaining the flexibility to increase dividends and to repurchase shares. And just to note, our Basel III ratio under the advanced approach is currently lower than under the standardized approach.
An update then on leverage. The firm-wide supplementary leverage ratio under U.S. rules remains at 4.7% this quarter, and similarly the bank leverage ratio remains at 4.3%. And as you know, comment letters were provided recently relating to both the U.S. NPR as well as Basel proposals, which included requests for revised treatment for certain assets and exposures. And we don’t know what the outcome of the final rules will be, but it’s possible there will be some things that improve those numbers.