JPMorgan Chase & Co., Q3 2010 Earnings Call, Oct 13, 2010 - NYSE:JPM

NYSE:JPM

Douglas Lee Braunstein, the Former Vice Chairman of JPMorgan Chase & Co., provided a detailed overview of the company’s third quarter 2010 earnings and discussed various segments of the business. Here is a summary of his remarks:

1. Opening Remarks:

   • Thanked the operator and noted that he would be presenting the earnings.
   • Mentioned a slide regarding forward-looking statements, encouraging listeners to read it.

2. Overall Results:

   • Generated $4.4 billion in net income, $1.1 per share, on revenues of $24.3 billion.
   • Highlighted significant changes in reserve positions, including:
     • Release of reserves in Card Services ($0.22 per share).
     • Increase in litigation expense through reserve increase in the Corporate sector ($0.18 per share).
     • Increase in mortgage repurchase reserves ($0.15 per share, impacting revenue).

3. Tier 1 Common:

   • Stood at nearly $111 billion, up $3 billion quarter-on-quarter.

4. Investment Bank:

   • Net income of $1.3 billion on revenues of $5.4 billion.
   • Ranked #1 in IB fees.
   • Debt Capital Markets and Asian Investment Banking businesses performed strongly.
   • Fixed Income revenue of $3.1 billion, down year-on-year due to lower volumes and tighter spreads.
   • Equity markets revenue of $1.1 billion, up year-on-year and quarter-on-quarter.
   • Credit costs were favorable due to reserve releases.
   • Expenses of $3.7 billion, down quarter-on-quarter and year-over-year.
   • Compensation to revenue was 38%.

5. Retail Financial Services (RFS):

   • Net income of $900 million on $7.6 billion in revenue.
   • Retail Banking had $848 million of net income on $4.4 billion of revenue.
   • Revenue down year-over-year due to NSF/OD fee changes.
   • Increased branch footprint and ATM footprint.
   • Mortgage Banking and other Consumer Lending had $200 million of net income on $1.9 billion of revenue.
   • Strong Mortgage Banking revenue of $2.5 billion, driven by higher mortgage originations ($41 billion).
   • Loan repurchase expense of $1.5 billion.
   • Reserves increased by $1 billion to $3 billion.
   • Auto business had strong earnings due to credit improvement and lower delinquencies.
   • Real Estate portfolios experienced a loss of $148 million.

6. Home Lending:

   • Reduction in total Home Lending net charge-offs to $1.2 billion from $1.34 billion.
   • Delinquency trends remained flat.
   • Loss guidance for the quarter remained unchanged at $1.8 billion.
   • Reserves for Home Lending stood at $11.3 billion.
   • WaMu PCI position allowances and existing marks were unchanged.

7. Credit Card Business:

   • Net income of $735 million on revenues of $4.3 billion.
   • Credit costs of $1.6 billion in the quarter, with a $1.5 billion pre-tax reduction in loan loss reserves.
   • Charge-off rate for the Chase portfolio decreased to 8.06%.
   • 30+ day delinquencies declined to 413 bps.
   • Guidance for net charge-off rates to decline 50 bps to 7.5% in Q4.
   • Revenues down due to lower outstandings and the impact of the CARD Act.
   • Sales volume for the Chase portfolio up 8% year-over-year and 2% quarter-on-quarter.
   • Net interest margin up 50 bps quarter-on-quarter.
   • Year-end balances for the Chase portfolio expected to be $123 billion.
   • Receivables expected to bottom out in Q3 2011 and end 2011 around $120 billion.
   • WaMu portfolio expected to decline to $10 billion by the end of 2011.

8. Commercial Bank:

   • Net income of $470 million, up nearly 40% year-over-year.
   • Record revenues of $1.5 billion.
   • Gross Investment Banking fees were a record.
   • Acquired a $3.5 billion Commercial Term Lending portfolio.
   • Liability balances ended the quarter at $138 billion.
   • Loan balances of $98.1 billion, essentially flat excluding the acquisition impact.
   • Middle Market loan balances increased by $900 million quarter-on-quarter.
   • Utilization rates remained in the low 30s.

9. Treasury & Security Services:

   • Net income of $250 million, down slightly from last year and last quarter.
   • Slow rate environment pressured revenues.
   • Expenses up $130 million year-over-year due to investments in the platform.
   • $1 trillion increase in assets under custody quarter-on-quarter.

10. Asset Management:

    • Net income of $420 million.
    • Revenues of $2.2 billion, up year-over-year and quarter-on-quarter.
    • Continued increase in funds flows, including $38 billion in the quarter.
    • Significant increase in mortgage production.

11. Corporate and Private Equity:

    • Strong Private Equity performance, with $344 million net income impact.
    • Corporate net income of $4 million, down significantly quarter-on-quarter and year-over-year.
    • Reduced net interest income, lower security gains, and increased litigation reserve.
    • Litigation reserve included items related to mortgages.

12. Balance Sheet:

    • Tier 1 Capital and Tier 1 Common grew to $139 billion and $111 billion, respectively.
    • RWA total assets up modestly.
    • Tier 1 ratios remained strong.
    • Repurchase activity led to a modest decline in the Tier 1 ratios.
    • Strong balance sheet position with $35 billion in credit reserves and a $272 billion Global liquidity reserve.

13. Outlook:

    • Covered all of the outlook points.

14. Mortgage Affidavit Issue:

    • Identified issues with mortgage foreclosure affidavits.
    • Reviewing 115,000 loan files in the foreclosure process.
    • Will refile affidavits where appropriate and initiate foreclosure sales when suitable.
    • Putting additional processes in place to ensure compliance.
    • The company takes the matter seriously and is devoting substantial resources to address it.

Throughout his remarks, Douglas Lee Braunstein provided detailed insights into each business segment, emphasizing the company's financial performance, strategic initiatives, and outlook. He also addressed the ongoing mortgage affidavit issue and the steps being taken to address it.

**- JPMorgan Chase is close to the 7% Basel III requirement, which includes the buffer. The company is confident in its capital position and believes it can meet Basel III requirements even under adverse conditions.

• The company is not making decisions based on Basel III requirements but is focused on growing the business intelligently. They have plenty of capital to support this growth.

• JPMorgan is not managing capital or risk-weighted assets (RWAs) specifically for Basel III compliance but is preparing to report Basel III numbers to investors once the final rules are known.

• The company is open to M&A if it makes sense, but it is not a necessity. They are also open to buying back stock if the price is right.

• Regarding the mortgage foreclosure issues, JPMorgan is taking the matter seriously and is working to correct any errors. The company hopes to resolve the issue within a few weeks.

• The company expects repurchase losses to continue at about $1 billion annually, with reserves adjusted as needed.

• JPMorgan is hopeful about reinstating the dividend in the first quarter of 2011, but this depends on regulatory clarity and the company's capital position.

• The company is experiencing positive trends in the Commercial Bank, including loan growth and strong deposit balances, indicating that corporate America is in good financial shape.

• JPMorgan is not concerned about the potential competitive disadvantage from differences in market risk calculations between U.S. and European banks, as regulators are working to ensure a level playing field.

• The company is not benefiting from the industry's current challenges and expects sentiment to improve with a growing economy and clearer regulations.**