This summary is based on the second quarter fiscal 2008 earnings call conducted by JPMorgan Chase & Co. (JPM) on July 17, 2008.
Management:
Chief Financial Officer: Michael J. Cavanagh
Chairman of the Board, President, Chief Executive Officer: James Dimon
Key Investors Issues
- EPS were 54 cents a share compared to $1.20 a share last year.
- Net income fell 53% to $2 billion compared to $4.23 billion a year ago.
- Revenue slipped to $18.40 billion from $18.91 billion previous year.
Second Quarter Highlights
The company reported net income of $2 billion, compared with net income of $4.2 billion in the second quarter of 2007.
Earnings per share of 54 cents were down 55%, compared with earnings per share of $1.20 in the second quarter of 2007. Current-quarter results include the effect of merger-related items amounting to a net loss of $540 million (after-tax) related to the acquisition of The Bear Stearns Companies Inc., which closed on May 30, 2008. Excluding these items, net income would have been $2.5 billion.
Investment Bank net income was $394 million, a decrease from net income of $1.2 billion in the prior year.
The lower results reflected increased noninterest expense, a decline in net revenue and a higher provision for credit losses, partially offset by the benefit of reduced deferred tax liabilities.
- Net revenue was $5.5 billion, a decrease of $328 million, or 6%, from the prior year. Investment banking fees were $1.7 billion, down 9% from the prior year.
- Advisory fees of $370 million were down 34% from the prior year, reflecting reduced levels of activity.
- Debt underwriting fees of $823 million were down 1%, driven by a decline in loan syndication fees reflecting market conditions offset by higher bond underwriting fees.
- Equity underwriting fees were $542 million, up 6% from the prior year.
- Fixed Income Markets revenue was $2.3 billion, down $98 million, or 4%, from the prior year, driven largely by net markdowns of $696 million on leveraged lending funded and unfunded commitments, as well as mortgage-related net markdowns of $405 million. These marks were partially offset by strong performance in rates, currencies, emerging markets, and credit trading, as well as gains of $165 million from the widening of the firm’s credit spread on certain structured liabilities.
- Equity Markets revenue was $1.1 billion, down $170 million, or 14% from the prior year, driven by weak trading results offset partially by strong client revenue and a gain of $149 million from the widening of the firm’s credit spread on certain structured liabilities.
- Credit Portfolio revenue was $309 million, up $105 million, or 51% from the prior year, reflecting increased net interest income on higher loan balances.
- The provision for credit losses was $398 million, compared with $164 million in the prior year. The current-quarter provision reflects a weakening credit environment.
- Net recoveries were $8 million, compared with net recoveries of $16 million in the prior year. The allowance for loan losses to total loans retained was 3.19% for the current quarter, an increase from 1.76% in the prior year.
- Average loans retained were $76.2 billion, an increase of $17.2 billion, or 29%, from the prior year, largely driven by growth in acquisition finance activity, including leveraged lending, and a facility extended to Bear Stearns. Average fair value and held-for-sale loans were $20.4 billion, up $5.6 billion, or 38%, from the prior year.
- Noninterest expense was $4.7 billion, an increase of $880 million, or 23%, from the prior year, largely driven by higher compensation expense and the Bear Stearns acquisition.
- Return on Equity was 7% on $23.3 billion of average allocated capital; end of period allocated capital was $26 billion.
Retail Financial Services net income was $606 million, a decrease of $179 million, or 23%, from the prior year, as increase in the provision for credit losses in Regional Banking was offset largely by revenue growth in all businesses.
- Net revenue was $5 billion, an increase of $658 million, or 15%, from the prior year.
- Net interest income was $3 billion, up $382 million, or 14%, due to higher loan balances, wider deposit spreads and higher deposit balances.
- Noninterest revenue was $2 billion, up $276 million, or 16%, driven by higher net mortgage servicing revenue, higher mortgage production revenue and increased deposit-related fees.
- The provision for credit losses was $1.3 billion, as housing price declines have continued to result in increases in estimated losses, particularly for high loan-to-value home equity and mortgage loans.
- Home equity net charge-offs were $511 million (2.16% net charge-off rate), compared with $98 million (0.44% net charge-off rate) in the prior year.
- Subprime mortgage net charge-offs were $192 million (4.98% net charge-off rate), compared with $26 million (1.21% net charge-off rate) in the prior year.
- Prime mortgage net charge-offs (including net charge-offs reflected in the Corporate segment) were $104 million (0.91% net charge-off rate), compared with $4 million (0.05% net charge-off rate) in the prior year. The current-quarter provision includes an increase in the allowance for loan losses of $430 million due to increases in estimated losses in the subprime and prime mortgage portfolios. An additional provision for prime mortgage loans of $170 million has been reflected in the Corporate segment.
- Noninterest expense was $2.7 billion, an increase of $186 million, or 7%, from the prior year, reflecting higher mortgage production and servicing expense, and investment in the retail distribution network.
- Regional Banking net income was $354 million, down $275 million, or 44%, from the prior year. Net revenue was $3.6 billion, up $320 million, or 10%, benefiting from higher loan balances, wider deposit spreads, higher deposit-related fees and higher deposit balances. The provision for credit losses was $1.2 billion, compared with $494 million in the prior year. The provision reflected weakness in the home equity and mortgage portfolios. Noninterest expense was $1.8 billion, up $29 million, or 2%, from the prior year, due to investment in the retail distribution network.
- Checking accounts totaled 11.3 million, up 980,000, or 9%.
- Average total deposits grew to $213.9 billion, up $6.6 billion, or 3%.
- Average home equity loans were $95.1 billion, up $5.9 billion, or 7%. Home equity originations were $5.3 billion, down $9.3 billion, or 64%.
