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JPMorgan Chase & Co JPM
Q1 2010 Earnings Call Transcript

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Transcript Call Date 04/14/2010

Operator: Good morning, ladies and gentlemen, and welcome to the JPMorgan Chase’s First Quarter 2010 Earnings Call. This call is being recorded. Your lines 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, Mike Cavanagh.

Mr. Cavanagh, please go ahead.

Michael J. Cavanagh - Finance: Thanks, operator. Good morning, everybody. It’s Mike. We’re going to do the usual here. So I’m going to refer to a presentation that’s available on our website. So please get that in front of you if you don’t already have it, and we’ll go through that and then take some Q&A at the end. I’ll just remind people to look at the slide in the back that makes the comments about forward-looking statements. And so with that, let me just get going on page one and just describe the high level trends in the numbers. So, overall, $3.3 billion in net income for the Company. Our earnings per share is $0.74 on a strong revenue number at $28 billion.

You see this little table here that shows you what I’ll call some large significant items. I’m not going to go through them here, because I’ll cover all of them when I hit the relevant business where they appear. I’ll just say it’s in two broad buckets as you can see from here. One, it’s the adjustments to levels of loan loss or credit costs, loan loss reserves related to credit across Investment Bank, retail, and cards, that’s where you’ll hear those. And then a couple of items of significance in our corporate segment, both investment portfolio gains as well as some litigation reserves we put up there. So we’ll cover that when we get to corporate.

So the theme, (though) our very strong investment banking results are in strong fixed income markets revenue and continued strength in the investment banking fee side, consumer credit trends you’re going to hear are all starting to look very good on the delinquency side and we’ll cover that further in the businesses. Other businesses performing strongly as a general matter and the balance sheet and capital position, obviously, as you’ll see, continuing to be quite strong.

So I’m going to skip slide two. You can just look at that. It gives you the sort of GAAP picture what the numbers look like that I just referred to versus prior periods. So let’s start with the businesses and do that with the Investment Bank on page three. So here you see the Investment Bank had net income of $2.5 billion, the circled number there over on the left, on revenues of $8.3 billion. That’s an ROE of 25% on the $40 billion of allocated capital we have in the Investment Bank that we’ve just increased at the beginning of the year. So going through some of the components, I already made the comment about how our investment banking fee number is a number-one share on a year-to-date basis, $1.4 billion of revenues in the quarter on strong bond underwriting versus prior quarters. You’ll see a page in the appendix, (I dropped that) gives you a sense for where we are across the various capital raising areas, but continue to feel very good about the Investment Bank corporate finance side of things and the prospects for the rest of the year looking ahead and taking look at the pipeline.

On the fixed income and equity market side, I would just say, very strong results and generally speaking across all areas, in $5.5 billion of revenues in Fixed Income Markets and $1.5 billion in Equity Markets. And so that gets you really to the overall revenues that we have, $8.3 billion. So the next item that really drives the Investment Bank P&L is credit costs. So here you see we had a release, an actual benefit, a net benefit in credit costs as reserve takedowns exceeded chargeoffs. Chargeoffs themselves were offset by reserves, because as you know in this business we downgrade and put up reserves in advance of chargeoff event. So there’s for those amount of actual chargeoffs in the quarter, they were already reserves covering the P&L, so it’s just a line swing there. So the net release really just comes from the fact that we had loan sales that were done inside our marks net of reserves, and therefore had excess reserves after we sold those loans, and the same with some loan paydowns that happened as you continue to see the trend in end-of-period loans dramatically changing versus prior periods as large corporates have substantial access to the capital markets.

So the next point there I would just say allowance for loan losses at $2.6 billion after the change in reserves against loans is about 5%, would be about 7% or so, had we not consolidated the conduits as part of the FAS 166, 167 stuff. So the issue there, moving on then to NPLs, I’ll just point out NPL is down from $3.5 billion to $2.7 billion. The last point I’ll make in the Investment Bank is just on the expense side, $4.8 billion of expenses in the quarter. Two drivers there; 35% comps-to-revenue ratio. That is just an outcome of the real underlying detailed analysis we do on risk-adjusted returns in the business by area comes out to that number. In a strong quarter with $8.3 billion worth of revenue, you’d expect to be at the lower end of the range that we talked about last quarter of 35% to 40%, but that number will bounce around based upon the underlying methodology, and obviously it’s a first quarter accrual that’ll get trued up and we’ll be competitive and do what we need to do over the course of the full year. The other item is some increased litigation reserves including for some mortgage-related items in the Investment Bank as well. So that’s it for the Investment Bank.

Retail Financial Services, moving on to slide four. Here I am not going to go through all these drivers. You can look at them for yourself. They generally trend consistent with what we’ve seen before. Good growth in the Retail Banking side but what I do want to point out, we sent on an 8-K last week to just give you the new segmentation after Charlie’s Investor Day Presentation telling you how we’re going to do, attempt to get a better, cleaner view of what the mortgage banking origination side and auto and student lending, consumer lending businesses would look like without the noise of the real estate portfolios, which are obviously being suffering and will continue to. So that’s really what we’ve done in the middle box is separate out, and you’ll see it on the next profit and loss page, the same dynamic. At the bottom, real estate portfolios is the totality of the home equity lending business on balance sheet as well as the mortgage balances whether it’s Chase originated, WaMu originated then those are the dynamics rolling through there. What you see in the middle is the mortgage origination side, production revenue, MSR risk management, warehouse, and so forth as well as the auto business primarily is the big one away from mortgage.

So moving on to the next page, which just tells you what happened on the P&L for the quarter in Retail Banking. You see net income was a $131 million loss, up on the upper left there. And again, it’s a tale of two cities. So taking piece-by-piece, you see about $900 million worth of our profits in Retail Banking, up a little bit year over year, down a little bit quarter over quarter, couple less days on net interest income versus last quarter is the decline there. And then behaviors as well as some of our changes in the number of items bringing down quarter over quarter some of the NSF/OD fees in this quarter versus the fourth quarter.

Moving on to Mortgage Banking, the only thing I’ll really point out is in the revenues side when you look at the big comparison versus a year ago, I’ll just remind you that we made about $1 billion, which was an extraordinary positive on MSR risk management a year ago, was slightly positive this year, and that’s the big swing factor in revenues year-over-year. We continue to have embedded in those revenue numbers elevated levels of repurchase (counter) revenues there stable with what we had in the past couple of quarters about $400 million worth or so of repurchase reserve expense.

Finally on the Real Estate side, you see the bottom line a $1.3 billion loss net of the continued high level of credit costs, but as well a $1.3 billion – $1.2 billion adjustment to loan loss reserves for the WaMu credit-impaired portfolio. So let me drill into credit trends here for home lending on page six. So I’ll point you now to just – there is a page, page 15 in our Appendix, which shows you the delinquency trends across all the major portfolios on the consumer side including these portfolios and credit cards and what you will see in all of those is improvements in early bucket delinquencies. So we do see that. We’ll talk about it more when we get to Credit Cards. So that backdrop is favorable for where we may go from here. But in the quarter itself you’ll see if you’re looking at the left of the page, balances continue to come down versus prior year in these portfolios. We are not originating at these kind of levels, obviously, as we’ve talked before. So balances continue to come down.

Chargeoffs stabilizing a little lower than what it was last quarter and given what I just said about the early bucket delinquency trends improving somewhat, we are hopeful that we may see some improvement in these numbers, such that we don’t achieve the prior outlook, which continues to be printed on the right side of the page. We’re not yet ready to lower those numbers, but we’ll just say that that’s what we said before. We’re seeing some positive trends and hopefully in another couple of months we can report some improvements on actual trajectory of chargeoffs on the back of the improved delinquency trends, just not ready to do that yet.

When it comes down at the bottom right to just the WaMu credit-impaired portfolios, as you know we have to do life of loan reserving here and so all I would say here is we’re not seeing the pace of improvements in the WaMu portfolios, particularly on the prime side, whether it's prime mortgage or prime option ARM that we’re seeing in the rest of the Chase portfolios on average, due to concentrations in lower FICO scores and geographies. And that slower pace of improvements when you roll it through lifetime loss expectations and some of the other inputs yields a true up of the lifetime loss expectations that we have to reserve for that, so that's a $1.2 billion reserve addition in aggregate for WaMu credit-impaired.

So moving on to Credit Card on slide seven, you see net income of $300 million loss. The big story is credit. Let me talk about chargeoffs first. So you’ll see on the Chase over on the left side down towards the bottom, you see the 10.54% net chargeoff ratio; that’s excluding WaMu, which is the way we talk about it. As you know, we had a benefit due to a payment holiday done early last year, which is about a 60 basis-point negative impact versus the same benefit last quarter. So on a normalized basis, right around the 10% or plus or minus charge-off ratio. I’ll say it now because it comes on the outlook page that we see that normalized 10 percentish type of chargeoff ratio in the next quarter trending more towards 9.5% plus or minus. And if these delinquency trends that you’ll see in the back of Appendix continue, hopefully we'll get improvements further from there in the second half of the year. So on the back of all of that, we’ve had a lowering of our loan loss allowance by $1 billion in the Credit Card business on the back of everything I just described.

In terms of the rest of the P&L, you see revenues affected by the decline in outstandings, which is a large part driven by seasonal effects versus last quarter as well as rundown of WaMu portfolios and sales volumes are seasonally down versus last quarter as well affecting revenues. Otherwise, feel good about the underlying health of the business and the progress we’re making there. And so that is the main drivers of what’s going on in credit card for the loss this quarter.

Moving on now to Commercial Banking, slide eight, so Commercial Bank made about $400 million worth of revenue, not really a lot different about the story here than what we’ve talked about before, so let me cover it briskly here. But I’d say one thing to point out is continued slower pace of but continued reduction in level of loans and leases, $97 billion in the quarter, down from a $100 billion last quarter. So while our businesses (feel to us to be) adjusted and poised to grow when they get orders in and have need to do it, they aren’t yet at that point. We’re seeing that more in small business. I didn’t cover that one on the retail page, but we did see some pickup in small business demand and lending. There are about $2 billion of originations in the quarter. That’s in retail. Here you’re yet to see that effect, but we’re hopeful that that could be coming shortly.

On the other side of the revenue effect of the balance sheet, you see liability balances, cash, deposits that are left with us, up from a year ago at a $133 billion and up a little bit from last quarter at $122 billion. So that, together with continued good performance on the fee side in revenues, Treasury Services products and investment banking fees, which continue to be strong, get you to about flattish revenue quarter over quarter and year over year.

Credit side, improvement from last quarter with the credit cost in total of $214 million, largely 75% of the credit cost coming from real estate related portfolios, which as you know, were underweighted in on a relative basis. And so, nonetheless, we end the quarter with north of 3% allowance to loan loss reserves against the 96 basis-point chargeoff rate in the quarter.

Treasury & Securities Services on slide nine. Again, I’ll just point to, we’ll start with net income, $279 million, up a little bit from last quarter, but just covering the revenue side. So you see in Worldwide Securities Services, the Securities side, we’re still seeing the negative impact of some declining deposit balances as well as continued narrow and somewhat more narrowing spreads on securities lending in the quarter, and FX revenues we get off of that business not fully offset by the benefit of higher assets under custody at $15.3 trillion in the quarter. So the same dynamics continuing to grind sideways on revenues in that business.

And then, on the Treasury & Securities Services side, $882 million of revenues, you see the average liability balances beginning to stabilize, $250 billion last quarter and $248 billion this quarter, down from a year ago on the back of flight to quality moving against us after the peaks we saw in late 2008, early 2009. That’s flowing through on tighter deposit spreads to the revenue effect there, and that’s really what explains the P&L in Treasury & Securities Services.

The last business, Asset Management on page 10, about $400 million in net income, up a lot year over year, down touch from last quarter, $2.1 billion worth of revenues on $1.2 trillion in assets under management. I’d say just to remember that versus a year-ago revenues up given the effect of higher assets under management there on higher market levels. And versus last quarter the decline is really just driven by the absence of performance fees, which are billed largely as a seasonal event in the fourth quarter. So health of the business looks good here. We have seen some decline in flows as client activity is putting money back to work out of liquidity products primarily, but away from that we’ve actually seen growth in assets under management and flows in products away from liquidity products, which we think is a good sign of health of the business.

Lastly, corporate in P&L impact terms, you see total corporate we had a little bit of private equity gains, revenues of $136 million, which translates into $55 million worth of net income, and then in corporate, which is everything else, we have $173 million of profits. So I’ll just hit on the three items that you see described on the right in the bullets. So, again, we had another quarter where we had strong gains. We don’t usually count on gains or guide for gains, but we had gains of $1 billion related to repositioning the corporate investment portfolio and some trading activity that happens there. So that’s $1 billion positive. Just to call out and understand, that’s a significant item to the positive. We may still have another quarter – we can always have quarters that have some effect on that line. We may have that again in the second quarter, may be not to this magnitude as we continue to focus on how we want the investment portfolio positioned.

The second point is that we continue to benefit, though, running a large investment portfolio, the net interest income coming off the investment portfolio continues to run at a higher level than what I would call normalized, and those two effects, so the reason why on the outlook slide this number for corporate I have us guiding you lower on that as we get towards the end of the year to a number more like $300 million plus or minus.

One other noisy item in the quarter, not going to get into a lot of details on it, but if you think about – when you see we added $2.3 billion to litigation reserves in corporate for the firm largely related to mortgage-related matters, so think about that as we have repurchase reserves that we’ve talked about related to the GSEs as an ongoing expense that we’ve been reserving for. This relates to the broader question of all other ideas for claims against us from private investors and others related to whether it’s a good portion of WaMu related. We just put a lot of energy. We’re not unique in having exposures here. We’ve talked about these potential exposures before. We just put a lot of energy into coming up with an estimate to put a marker down in our results. And so that’s all on that item.

Capital on slide 12, you see we had 11.5% Tier 1 capital ratio and 9.1% Tier 1 common. To just remind people, you see the bullet below that table that we did adopt FAS 166, 167 bringing variable interest entities on balance sheet. The real effect was about $88 billion worth of GAAP assets, very little risk-weighted assets or de minimis risk-weighted assets as we largely had that covered in our risk weightings before, but one real material effect was the fact that through our actual GAAP equity, we had to put up loan loss reserves for the credit card receivables that came on balance sheet. So that was about $7 billion of reserves pre-tax, about $4.5 billion decline that just went to the equity account negatively impacting capital, but nonetheless, you see the ratios are very strong and we end the quarter with $39 billion worth of total credit reserves ratio of nearly 6%.

So finally on the outlook slide, I think I’ve really covered this. Let me just pick through everything that you see on the retail slide is as it was before. As I said, we’re not necessarily reaffirming this guidance. Hopefully, it could be better, but we’re not ready to change these numbers. We do see delinquency trends looking positive, but we have to wait for that to really pull through and more to come in future quarters. Card Services side, I’ve covered all this. Again, no real changes from what we said before, but for the lowering of the chargeoff estimate on the Chase portfolio to down from what we experienced this quarter by about 50 basis points looking into the second quarter with the likelihood of some improvement from there in the second half of the year.

Corporate, I already talked about the $300 million plus or minus number that you could expect to see as we get towards the back end of the year. I’ll just remind people that to the extent that there is a bonus tax imposed in the U.K., we expect that to be second quarter accounting event, and so with that, that is the quarter and that is our outlook. I’ll just remind you, we’ve got a couple of slides here after this that I won’t go through that just cover a few of the items I referred to earlier.

So with that, we can just open it up to questions, Operator.

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