J P Morgan Chase & Co (JPM)

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JPMorgan Chase & Co. (JPM)

Q2 2011 Earnings Call

July 14, 2011 9:00 am ET

Executives

Douglas Braunstein - Chief Financial Officer

James Dimon - Chairman, Chief Executive and Member of Operating Committee

Analysts

Jason Goldberg - Barclays Capital

Matthew Burnell - Wells Fargo Securities, LLC

Ron Mandle - GIC

Ed Najarian - ISI Group Inc.

John McDonald - Sanford C. Bernstein & Co., Inc.

Jeffrey Harte - Sandler O'Neill + Partners, L.P.

David Hilder - Susquehanna Financial Group, LLLP

Michael Holton - Merrill Lynch

William Tanona - UBS Investment Bank

James Mitchell - Buckingham Research Group, Inc.

Paul Miller - FBR Capital Markets & Co.

Guy Moszkowski - BofA Merrill Lynch

Betsy Graseck - Morgan Stanley

Moshe Orenbuch - Crédit Suisse AG

Christoph Kotowski - Oppenheimer & Co. Inc.

Gerard Cassidy - RBC Capital Markets, LLC

Meredith Whitney - Meredith Whitney Advisory Group LLC

Glenn Schorr - Nomura Securities Co. Ltd.

Matthew O'Connor - Deutsche Bank AG

Michael Mayo - Credit Agricole Securities (USA) Inc.

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the JPMorgan Chase's Second Quarter 2011 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon; and Chief Financial Officer, Doug Braunstein. Mr. Braunstein, please go ahead.

Douglas Braunstein

Thanks, operator. I'm going to walk you through the earnings presentation. It's available on the website. We'll take questions after walking through the presentation, and please refer to the disclaimer regarding forward-looking statements at the back of the presentation. So with that, let's turn to Page 1.

For the quarter, we generated net income of $5.4 billion, $1.27 a share on $27.4 billion in revenues. We're highlighting several significant items in the quarter. They're included in the numbers for the lines of business throughout the presentation. And I'll walk through them quickly. First, as we've done in previous quarters, we're noting significant loan loss reserve releases. This quarter, we have a $0.15 per share increase in earnings from a reduction in Card Services, allowance for loan losses. We're identifying $0.12 per share increase in earnings from securities gains in the investment portfolio, in Corporate. Third, you'll see a $0.15 per share decrease in earnings related to incremental expected costs of foreclosure-related matters. And I'll talk about that later. And then finally, $0.19 per share decrease in earnings from additional litigation reserves predominantly for mortgage-related matters and that runs through Corporate.

We ended the quarter with significant Tier 1 Common, $121 billion. We continue to maintain strong Basel I and B3 ratios of 10.1% and 7.6% pro forma, respectively. And these capital ratios also incorporate the impact of the repurchase of $3.5 billion worth of JPMorgan shares in the quarter. You'll also see ROE in the quarter was 12%, our return on tangible common equity of 17%. And those 2 numbers are circled on the next page. And then broadly speaking, we did have solid performance across the lines of business, but there were 2 positive trends for credit. First, we are reporting positive loan growth across each of our wholesale businesses. Total loan growth in wholesale, $32 billion year-over-year or 15% and $12.5 billion or 5% increase on the quarter. And then second, we're continuing to show improvement in our consumer credit trends, but I'll talk about all those in specific.

So with that, let me turn to Page 3, which is the Investment Bank. You see circled net income of $2.1 billion, that's on revenues of $7.3 billion. With strong IB fees in the quarter of $1.9 billion, that's up 37% year-on-year. We continue to be ranked #1 in fees, but it still remains a highly competitive marketplace. We demonstrate a particularly strong results in our advisory and equities revenues this quarter. And for those who like to look at the league tables they're in the back on Page 19. With solid market revenues of $5.5 billion, up 20% year-on-year, down 17% quarter-on-quarter from the first quarter, which is seasonally strong. $4.3 billion in revenues in Fixed Income. And this generally represented consistent client growth across all of our businesses in Fixed Income, despite the difficult macroeconomic environment. $1.2 billion in revenues in equities. Very good results, particularly given the volume declines in the cash market and the overall volatility. Prime Services continue to grow this quarter and we launched our international equity prime brokerage platform in Europe. We expect to do the same in Asia in the first quarter of 2012.

Credit costs, you see $180 million reduction in the allowance for loan losses. That's largely related to net repayments. And you see nonaccrual loans declined to $1.7 billion this quarter. And just remember, we do expect credit cost to normalize going forward. Expenses in the quarter of $4.3 billion in the Investment Bank, down 4% year-on-year. And you see comp-to-revenue ratio of 35%. We continue to expect to maintain a 35% to 40% comp-to-revenue range for the full year. And the final note is, you did see modest loan growth in the IB balances, up 3% quarter-on-quarter. Some of that growth is driven by the build-out in our loan book associated with the Global Corporate Bank. And on the international side, revenues grew for the first 6 months of this year, 11% from the first 6 months or first half of last year.

Page 4, Retail Financial Services. This is, as you remember, the consolidated view. I'll just spend a moment here, a little over $580 million in net income in the quarter on $8 billion worth of revenue.

Let's jump into the details on Page 5. So if you go to the top of the page on Page 5, Retail Banking. We have solid performance net income of $1.1 billion. That's on revenues of a little over $4.6 billion, a little under $4.6 billion. Revenues were up 5% year-on-year. That's a function of higher debit card revenue, deposit-related fees, investment sales and offset slightly by lower deposit spreads. Key drivers from the prior page, we had 6% deposit growth. Investment sales revenues were up 10% year-on-year. Business Banking origination is up 31% year-on-year. We built 52 new branches this quarter. And then just a quick note to the right, you see on Durbin. We do anticipate the annualized gross revenue impact for the Retail Banking segment to be $1 billion plus or minus. As you know, the final rules won't be implemented until the 1st of October, so we won't see that impact until the fourth quarter. And we would expect mitigating actions to close a significant amount of that gross impact over time. Bottom of the page, Mortgage Banking, Auto and Other Consumer. Net loss of $450 million on revenues of $2.2 million. Revenues, excluding MSR, of $2.1 billion reflect $34 billion of mortgage loan originations this quarter, wider margins year-over-year, solid performance in Chase Auto in the quarter and then you see lower repurchase losses, $223 million for the quarter. Remember, that's contra-revenue. And I'll just comment on repurchase losses. They are lower than trend line this quarter just for timing-related matters, and we do expect the next 2 quarters to be more in line with our guidance of $1.2 billion for full rate -- for 2011 run rate. You see expenses in this segment of $2.6 billion, and that includes the $1 billion incremental I discussed on Page 1 related to foreclosure-related matters. Other expenses continue to remain elevated as well, and that largely reflects the ongoing high cost associated with the default-related expenses.

Read the rest of this transcript for free on seekingalpha.com