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pww.comJPMorgan Chase & Co., Q2 2007 Earnings Call, Jul-18-2007 - NYSE:JPM

NYSE:JPM

Michael J. Cavanagh [Executives] 💬

Here is a detailed summary of Michael J. Cavanagh's statements during the JPMorgan Chase & Co. Q2 2007 Earnings Call:

  1. Introduction and Format of the Call:

    • He thanked everyone for joining the call.
    • Mentioned that they would follow the usual format, with a presentation available on the company's website.
    • He would go through the presentation and Jamie Dimon would provide overall comments.

  2. Overview of the Quarter:

    • Reported a strong quarter with $4.2 billion in net income, $1.20 EPS (up 21% YoY), and a 26% return on tangible common equity.
    • Noted strong results in investment banking and private equity, records in asset management and treasury services, and good revenue and margin growth in retail, offset by additions to home equity reserves.

  3. Year-to-Date Performance:

    • Revenues of $38 billion and profits of $9 billion were records.
    • Return on tangible common equity was 28%.
    • EPS for the first half of the year was $2.54, and for the last four quarters combined, $4.53.
    • Underlying revenue growth was 18% organically, adjusted for acquisitions, accounting issues, and divestitures.

  4. Investment Bank Details:

    • Net income of $1.2 billion on $5.8 billion revenue with a 23% ROE.
    • Record investment banking fees of $1.9 billion, up 39% YoY, with record advisory revenues and equity underwriting.
    • Fixed income markets revenue of $2.4 billion, up 15% YoY, driven by strength across most products except commodities.
    • Equity markets revenue of $1.2 billion, up 115% YoY.
    • Higher compensation-to-revenue ratio of 45% in the quarter compared to the previous quarter, bringing the YTD level to 43%.

  5. Retail Banking:

    • Checking accounts up 14%, deposits up 4% excluding the Bank of New York acquisition, and up slightly quarter over quarter to $219 billion.
    • Mortgage loan originations of $44 billion, up 41% YoY.
    • Branch production statistics showing strong performance in investment sales, mortgage loan originations, and credit cards.
    • 30 new branches opened in the quarter, with plans to open 125 to 150 branches for the year.

  6. Retail P&L:

    • Revenues of $4.4 billion, up 15% YoY (13% excluding Bank of New York).
    • Strong revenue growth driven by mortgage originations and higher servicing revenue.
    • Net interest revenue growth in the branch business due to higher deposit balances and a stable deposit margin.
    • Expense growth driven by higher production and investment in the retail distribution system.
    • Improvement in operating margins.
    • Increase in credit cost, which affected profit growth.

  7. Home Equity Reserves:

    • Delinquency trend picking up, with a $91 billion portfolio and net charge-offs increasing from $68 million to $98 million.
    • Added $329 million to the allowance for credit losses, expecting the charge-off rate to increase by around 25 basis points.
    • Tightened underwriting standards, including lowering loan-to-value maximums, reducing reliance on stated income, and raising minimum FICO scores.
    • Expected these changes to eliminate about a third of originations from the broker channel and 70% of the losses.

  8. Subprime Credit Card Reserves:

    • Consistent with expectations, with $20 million in net charge-offs added to reserves last quarter.
    • No news on the subprime front, as the reserve increases made last quarter continue to be considered proper.

  9. Card Services:

    • Net income of $759 million with a 22% ROE, down 13% YoY.
    • Average outstandings of $147 billion, up 7% YoY.
    • Charge volume of $88 billion, up 4% YoY, with a focus on targeted balance transfer marketing.
    • Net interest margin decline due to changes in billing practices.
    • Stable credit quality and good expense management.

  10. Commercial Bank:

    • Net income of $284 million, with higher revenues offset by lower expense growth.
    • Deposits up 16% YoY and loans up 14% YoY.
    • Good expense management with an overhead ratio of 49%.
    • No signs of weakening in the portfolio.

  11. Treasury and Security Services:

    • Record profit of $352 million, up 11% YoY.
    • Pretax margin of 32%.
    • Record revenue of $1.741 billion, up 10% YoY.
    • Seasonally strong with dividend fees and in Europe, with usual patterning from Q2 to Q3.

  12. Asset Management:

    • Record net income of $493 million, up 44% YoY.
    • Pretax margin of 37%.
    • Record revenues of $2.1 billion, up 32%.
    • Assets under management of $1.1 trillion, up 23% YoY, including 38% growth in alternative assets.
    • Net inflows of $101 billion over the past year.

  13. Corporate:

    • Strong quarter in private equity with gains of $1.3 billion.
    • Corporate segment reported a negative $280 million, including $227 million in bond losses.
    • Adjusted for bond losses, the corporate segment reported a loss of $139 million for the quarter and $163 million YTD.
    • Private equity results and corporate results expected to be volatile due to market conditions.

  14. Capital:

    • Strong capital ratio and growing tangible common equity of $67 billion.
    • Lighter quarter on the buyback side with $2 billion repurchased.
    • Emphasized the strength of the balance sheet and liquidity position.

  15. Q&A Session:

    • Answered questions regarding leveraged loans, high yield overhang, accounting treatment of hung bridges, covenant-light loans, securities processing, retail banking ambitions, card business, and credit costs.

This summary captures the key points and details provided by Michael J. Cavanagh during the earnings call.

James Dimon [Executives] 💬

James Dimon provided several comments during the JPMorgan Chase & Co. Q2 2007 earnings call. Below is a detailed list of his statements:

  1. Introduction and Overview:

    • He thanked Michael Cavanagh and expressed satisfaction with the company's performance, noting good margins, real growth in most areas, and better returns on capital.

  2. Comparison with Competitors:

    • He highlighted that when combining the performance of the investment bank, asset management, and private equity, JPMorgan's return on capital is comparable to that of Goldman Sachs, a leading competitor.

  3. New Credit Card CEO:

    • He introduced Gordon Smith as the new CEO of the credit card division, praising his background at American Express and anticipating the value he would bring to the operations.

  4. Consumer Banking Performance:

    • He deferred to Michael Cavanagh's detailed discussion on consumer banking, indicating that he would not repeat the points covered.

  5. Investment Bank Risk:

    • He addressed heightened scrutiny of risks in the investment bank, emphasizing the strong global economy and corporate health.
    • He discussed the sub-prime and CDO trading positions, stating that the company is conservatively positioned and that any potential losses could be offset by gains from hedges.

  6. Wholesale Financing and Loans:

    • He explained the company's approach to financing sub-prime warehouses, CLO loan warehouses, and hedge funds, highlighting conservative underwriting standards and comfortable positions.
    • He mentioned the company's conservative approach to marking to market and managing margins, expressing confidence in the positions held.

  7. Sub-Prime Residuals:

    • He noted that a significant portion of the sub-prime residuals are from Chase Home Finance, which has historically lower loss rates due to better underwriting.

  8. Leverage Loan Market:

    • He commented on the backdrop of a strong economy and the presence of substantial equity in leveraged loan deals, distinguishing them from riskier deals of the past.
    • He acknowledged the freeze in the market for high-yield bridges and leveraged loans but emphasized the company's careful underwriting process.

  9. Bridge Commitments and Equity Bridges:

    • In response to a question, he declined to provide specific numbers regarding bridge commitments but assured that the company feels comfortable with its positions.
    • He criticized equity bridges, describing them as a bad financial policy and expressing hope that they would decline in popularity.
    • He mentioned that the company's private equity positions are under 10% of equity and that the company is selective in its use of equity bridges.

  10. Market Conditions and Renegotiation:

    • He acknowledged the flexibility of some sponsors in renegotiating terms of facilities, while others maintain a stricter stance.
    • He suggested that the market functioning is in everyone's best interest.

  11. Retail Banking Ambitions:

    • In response to a question, he declined to comment on Commerce Bank but reiterated the company's long-term ambitions for its retail banking division, aiming for an overhead ratio of 50 and ROEs of 28-30%.

  12. Card Business:

    • He responded to questions about the card business, noting stable payment rates and a focus on de-emphasizing teasers and balance transfers.
    • He mentioned the expectation of higher charge-offs next year due to anticipated increases in bankruptcy losses.

  13. Private Equity Accounting:

    • He addressed questions about the accounting treatment of private equity, explaining the impact of reclassifying carried interest from net revenue to compensation expense.

  14. Market Changes and Pipeline:

    • He provided insights into the changes in the marketplace and the pipeline for investment banking, noting that the pipeline remains robust but is influenced by market conditions.

  15. Credit Costs in the Investment Bank:

    • He explained the factors leading to the magnitude of reserve building, citing lower covenants and increased leverage.

  16. Closing Comments:

    • He thanked participants for attending the call and expressed anticipation for the next quarter's conversation.

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