This summary is based on the first quarter fiscal 2008 earnings call conducted by JP Morgan Chase & Co. (JPM) on April 16, 2008.
Management:
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Chairman of the Board, President, Chief Executive Officer: James Dimon
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Chief Financial Officer: Michael J. Cavanagh
Key Investors Issues
- Earnings dropped 49% to $2.4 billion or 68 cents a share.
- Managed net revenue was $17.9 billion, down $1.8 billion, or 9%, from the prior year.
- The firm announced the planned acquisition of The Bear Stearns Companies Inc., pursuant to a merger agreement dated March 16, 2008.
First Quarter Highlights
Earnings amounted to $2.4 billion or 68 cents a share, down 49% from $4.8 billion or $1.34 a share in the prior year inclusive of the $2.6 billion in markdowns in the investment bank as well as the strengthening of credit reserves by $2.5 billion.
- The decrease in earnings was driven by a higher provision for credit losses and lower managed net revenue offset partially by a decrease in non-interest expense.
- Earnings helped build and strengthen capital, with Tier 1 capital actually increasing to $90 billion or a ratio of 8.3%.
- Managed net revenue was $17.9 billion, down $1.8 billion, or 9%, from the prior year.
- Non interest revenue of $8.5 billion was down $3.7 billion, or 31%, due to lower principal transactions revenue, which reflected markdowns on prime and Alt-A mortgages and markdowns on leveraged lending funded and unfunded commitments.
In addition, lower levels of private equity gains and investment banking fees contributed to the decline in noninterest revenue.
- The decline was offset partially by proceeds from the sale of Visa shares in its initial public offering, and an increase in asset management, and commissions revenue, reflecting growth in assets under custody and higher brokerage commissions.
- Net interest income was $9.4 billion, up $1.9 billion, or 25%, due to higher trading-related net interest income, wider spreads on higher balances of consumer loans and higher deposit balances.
- These benefits were offset partially by spread compression on deposit products.
The managed provision for credit losses was $5.1 billion, up $3.5 billion from 2007.
- The wholesale provision for credit losses was $747 million, from $77 million in 2007, reflecting increases in the allowance for credit losses, related to the transfer of funded and unfunded leveraged lending commitment.
- Wholesale net charge-offs were $92 million, compared with net recoveries of $6 million, resulting in net charge-off and recovery rates of 0.18% and 0.02%, respectively.
- Total consumer-managed provision for credit losses was $4.4 billion, compared with $1.5 billion in the prior year, reflecting increases in the allowance for credit losses largely related to home equity and subprime mortgage loans and higher net charge-offs.
Consumer-managed net charge-offs were $2.5 billion, compared with $1.5 billion, resulting in a managed net charge-off rate of 2.68% and 1.81%, respectively.
- The firm had total nonperforming assets of $5.4 billion, up from the prior-year level of $2.4 billion.
- Non interest expense was $8.9 billion, down $1.7 billion, or 16%, from 2007, with the decline driven by lower performance-based compensation and a net reduction in litigation expense.
Update on Bear Stearns:
- The firm announced the planned acquisition of The Bear Stearns Companies Inc., pursuant to a merger agreement dated March 16, 2008.
- The agreement calls for each share of Bear Stearns common stock to be exchanged for 0.21753 shares of JP Morgan Chase common stock and the transaction is expected to close by June 30, 2008.
- Capital ratios are expected to remain strong after the Bear Stearns deal and the firm plans to reduce the Bear balance sheet in an orderly way.
JP Morgan has also gotten some regulatory relief for the Bear Stearns assets that it will be bringing on as it calculates regulatory ratios for the next several quarters.
- The firm has consolidated all the risk positions into one risk format.
- Management still think that this could be a very good thing for shareholders and that it can capture $1 billion or more of profit as it consolidates Bear Stearns in.
Business Highlights:
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Investment Bank realised a loss of $87 million, a decline from net income of $1.5 billion in 2007 reflecting a decline in net revenue and a higher provision for credit losses offset partially by lower noninterest expense.
- Net revenue was $3.0 billion, a decline of $3.2 billion, or 52%, from 2007 as investment banking fees were $1.2 billion, down 30%, reflecting lower debt and equity underwriting fees.
- Debt underwriting fees of $364 million declined 58%, reflecting lower bond underwriting and loan syndication fees, which were negatively affected by market conditions.
