JPMorgan Chase & Co., Q4 2008 Earnings Call, Jan-15-2009 - NYSE:JPM

NYSE:JPM

Michael Cavanagh, the Chief Financial Officer of JPMorgan Chase & Co., provided extensive commentary during the Q4 2008 earnings call. Below is a detailed summary of his statements:

Opening Remarks

• Appreciated the attendees' patience for the early morning call.
• Noted that the results were ready and they wanted to release them promptly.

Overview of Results

• Full-year 2008 profits were $5.6 billion or $1.37 per share.
• Profits were driven down by higher credit costs of $22 billion.
• Highlighted the strong pre-provision profits of $30 billion, reflecting robust revenues of $73 billion and expenses of $43 billion.
• Emphasized the importance of reviewing the non-GAAP financial measures and the accompanying slides for detailed calculations.

Significant Items Affecting Results

• Loan Loss Reserves Increase: $4 billion pre-tax ($2.5 billion after-tax) to reach total reserves of $24 billion from $10 billion a year ago.
• Leveraged Loans and Mortgage Exposures Markdowns: $2.9 billion pre-tax net markdowns in the investment bank.
• Merger-Related Items: Gain related to refinements in the purchase accounting estimates for WaMu, resulting in a $1.1 billion after-tax gain.
• MSR Risk Management Results: $1.4 billion pre-tax ($900 million after-tax) due to managing the change in value of the MSR asset.
• Private Equity Write-Downs: $1.1 billion pre-tax in the corporate segment.
• Paymentech Gain on Sale: $600 million after-tax gain from the sale, as disclosed in the 10-Q.

Investment Bank Performance

• Net loss of $2.4 billion for the quarter.
• Leverage lending and mortgage-related markdowns, credit costs, and spread tightening on structured liabilities significantly impacted the results.
• Investment banking fees were $1.4 billion, down 17% year-over-year, but the firm maintained a leading market position.
• Fixed income markets had negative revenue of $1.7 billion, but excluding DVA leverage loan marks and mortgage marks, revenue was positive at $1.6 billion.
• Equity markets had negative revenues of $94 million, but excluding the impact of spread tightening, revenue was positive at $260 million.
• Credit costs were $765 million, with $700 million added to loan loss reserves.
• Expenses decreased by 9%, with a 63% compensation to revenue ratio for the year.

Retail Banking and Consumer Lending

• Retail banking had a profit of $1.04 billion, up 85%, with total revenue of $4.5 billion.
• Consumer lending had a net income loss of $416 million, including $3.3 billion in higher credit costs and $1.6 billion in additions to reserves.
• Noted the stabilization of WaMu deposits and strong branch production statistics.
• Origination activities were down due to tighter underwriting standards.

Card Services

• Loss of $371 million, driven by $4 billion in pre-tax credit costs, including a $1.1 billion addition to loan loss reserves.
• Charge-off rate was 5.29% in the fourth quarter, in line with previous outlooks.
• Loss rate for 2009 expected to begin at 7% and progress to 8%.

Commercial Bank

• Record quarterly net income of $480 million on record revenue of $1.5 billion.
• Loan growth of 11% and liability balances up 17%.
• Credit costs of $190 million, with signs of weakening credit statistics.

Treasury and Securities Services

• Record profits of $533 million, up 26% year-over-year.
• Record revenue of $2.2 billion, up 17%.
• Liability balances up 34%.

Asset Management

• Quarterly profits of $255 million, down 52% year-over-year.
• Assets under management down 5% with $211 billion in market-related declines.
• Continued strong inflows, totaling $61 billion for the quarter.

Corporate/Private Equity

• $1.1 billion in private equity losses, translating into a $700 million after-tax loss.
• Corporate segment had slightly over $1 billion in profit, including the Paymentech gain.
• Merger-related items included an extraordinary gain on WaMu and Bear Stearns-related expenses.

Capital Management

• Maintained a strong Tier 1 capital position of $136 billion, up from $89 billion a year ago.
• Tier 1 capital ratio of 10.8%, up from 8.4% a year ago.
• Mentioned the potential impact of off-balance sheet accounting rule changes (FAS 140 and FIN 46R).

Closing Remarks

• Noted the strong capital position and the ability to manage credit reserves effectively.

• Mentioned the ongoing management of off-balance sheet items in light of potential accounting rule changes.

James Dimon provided the following comments during the JPMorgan Chase & Co. Q4 2008 Earnings Call:

1. Investment Bank Results and Bear Stearns Impact:

   • He highlighted the exceptional results on the client side in the investment bank, mentioning market share gains in investment banking and trading.
   • He addressed questions about the impact of Bear Stearns, stating that JPMorgan still expects to achieve $1 billion in earnings from Bear Stearns by late 2009, primarily from prime brokerage, energy, and commodities.
   • He acknowledged that it is difficult to separate the impact of inherited positions from JPMorgan's own responsibilities, noting that taking on Bear Stearns led to an increase in risk assets and associated losses.

2. WaMu Integration and Retail Business:

   • He expressed excitement about the integration of WaMu and its potential contributions to JPMorgan, mentioning the ability to build small business, private banking, asset management, and middle-market capabilities on top of the retail platform.
   • He indicated plans to consolidate all WaMu systems by the end of the year, which will enable the company to grow the business more comfortably.
   • He mentioned the planned change of the WaMu brand in California at the end of March.

3. Mortgage Business:

   • He noted that JPMorgan remains committed to the mortgage business and aims to improve its quality, citing the closure of the remaining broker business, primarily focused on prime loans, as a strategic decision.

4. Credit Card Business:

   • He acknowledged the anticipated increase in credit card losses due to rising unemployment but stated that the actual losses have not yet materialized.
   • He mentioned upcoming comments on the CARD Act (Credit Card Accountability Responsibility and Disclosure Act) and how it might affect the business, suggesting that it could reduce profits and credit availability but that the company could adjust over time.

5. Commercial Bank Performance:

   • He praised the commercial bank for achieving record results, but he anticipates increases in credit losses due to the economic environment's strain on middle markets.

6. Treasury and Security Services:

   • He commended the treasury and security services for strong performance without encountering significant issues.

7. Asset Management:

   • He recognized the decline in asset management results due to lower assets under management but highlighted the business's growth in terms of bankers and net inflows.

8. Balance Sheet Strength:

   • He affirmed the company's strong capital position, mentioning an increase in the investment portfolio from $116 billion to over $160 billion as a discretionary measure to invest excess liquidity.

9. Community Engagement:

   • He discussed JPMorgan's "Way Forward" campaign, aimed at highlighting the company's efforts to support clients, small businesses, and the broader community.
   • He mentioned JPMorgan's leadership in mortgage modifications and plans to provide more information on this initiative.

10. Lending Activity:

    • He reported that JPMorgan extended over $100 billion in new credit during the quarter, emphasizing the company's commitment to lending despite the challenging environment.
    • He mentioned specific examples of lending activity, including issuing four million new credit cards and participating in a $1.4 billion bond issue for Illinois.
    • He noted that JPMorgan is active in the interbank market, providing loans to other banks.

11. TARP Funding Usage:

    • He addressed questions about the use of TARP (Troubled Asset Relief Program) funding, stating that while it is difficult to separate TARP funds from regular lending activities, JPMorgan is committed to using the funds to support the U.S. economy and finance needs.

12. Investment Bank Strategy:

    • He indicated that JPMorgan hopes to gain market share in the investment bank, especially in client trading and investment banking services like ECM (Equity Capital Markets), DCM (Debt Capital Markets), and M&A.

13. Expense Management and Restructuring:

    • He commented on the investment bank's expense management, noting that while the bank has been resized, it is important not to overreact and to maintain a focus on serving clients.
    • He mentioned that the headcount in the investment bank is likely to be similar to what it was before the Bear Stearns acquisition.

14. Acquisition and Divestiture Appetite:

    • He stated that JPMorgan is not actively seeking acquisitions, given its focus on integrating Bear Stearns and WaMu.
    • He indicated that there are no planned divestitures at the moment.

15. Loan Modification Legislation:

    • He discussed the potential impact of loan modification legislation, including the possibility of principal reductions, suggesting that it could have a chilling effect on consumer lending and increase bankruptcies.

    • He emphasized the importance of affordability and cash flow for borrowers over principal reduction and the need for proper underwriting in loan modifications.