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JPMorgan Chase & Co. (JPM)

Q4 2011 Earnings Call

January 13, 2012 9:00 am ET


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

Douglas L. Braunstein - Chief Financial Officer


Ron Mandle

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Jason M. Goldberg - Barclays Capital, Research Division

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Richard X. Bove - Rochdale Securities LLC, Research Division

James F. Mitchell - Buckingham Research Group, Inc.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Andrew Marquardt - Evercore Partners Inc., Research Division

Matthew D. O'Connor - Deutsche Bank AG, Research Division

Richard Ramsden - Goldman Sachs Group Inc., Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Edward R. Najarian - ISI Group Inc., Research Division

Brennan Hawken - UBS Investment Bank, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Betsy Graseck - Morgan Stanley, Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Guy Moszkowski - BofA Merrill Lynch, Research Division



Please stand by, we are about to begin.

Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Fourth 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 L. Braunstein

Thanks, operator. I'm going to take you through the earnings presentation. It's available on our website. We'll take questions after we walk through the presentation, and remember the disclaimer in the back of the presentation.

So if you turn to Page 1. For the quarter, we generated a net income of $3.7 billion, $0.90 per share on revenues of $22.2 billion. Return on tangible common equity for the quarter was 11%. For the full year, we generated record net income of $19 billion, that's up 9% over last year. $4.48 per share which was also a record per share on revenues of a little under $100 billion. Return on tangible common equity for the year was approximately 15%.

There's a few significant items in the quarter, we highlight them upfront. I'm going to discuss each of them in the businesses. So if you see, we ended the quarter on a Tier 1 common basis of $123 billion, strong Basel I, Basel III ratios of 10% and 7.9%, respectively. And for the full year, we increased our Basel III ratio by approximately 90 basis points and that's after the repurchase of $9 billion of our stock this year. As we noted last quarter, we continued to see year-on-year loan growth across many of the businesses. Total loan balances across the company were up $31 billion year-on-year. And if you exclude the impact of the $30 billion in runoff in our Home Lending portfolio, predominantly WaMu related, the year-over-year growth of $60 billion would be a run rate of 9% year-over-year. And just to highlight some of the specifics, small business loans were up 52%, market loans up 17%, trade finance loans up 73%. We also saw card outstanding growth this quarter and solid mortgage originations. Deposit growth also continued in the quarter, liability balances ended the year at $1.1 trillion. That's up $200 billion or 21% year-on-year.

I've covered much of the data on Page 2 and 3, so if you turn right into the Investment Bank on Page 4. You see circled net income of $720 million, that's on revenue of $4.4 billion. We highlighted on Page 1, the first significant item impacted the IB results this quarter. That's a $570 million DVA loss on a pretax basis and that reduced our reported EPS for the quarter by $0.09 a share, and that's largely the result of the firm's tightening credit spreads this quarter. We've consistently said we don't consider these gains or losses to be part of the underlying operating performance of the business, but when it's material to the results, we're going to identify that number as a significant item. If you exclude DVA, revenue for the IB in the quarter was $4.9 billion, that's up 10% quarter-on-quarter. It's still down 21% year-on-year. Net income, x DVA, was $1.1 billion this quarter. So if you go into the particulars, IB fees of $1.1 billion this quarter are down almost 40% year-on-year, up modestly quarter-on-quarter, primarily driven by the low industry-wide volumes that we talked about last quarter. We did maintain our #1 ranking for Global IB Fees this year and we also generated record loan syndication fees we share which again part of that loan story we talked about. You can find the league table results in the back in the appendix on Page 20.

Fixed Income Markets. Revenues of $2.6 billion (sic) [$2.5 billion) x DVA. That's down 9% year-on-year, 6% quarter-on-quarter. We continued to see solid client revenue across most of our products in Fixed Income. Equity Markets revenue was $0.8 billion. That's x DVA, down 26% year-on-year, 23% quarter-on-quarter. That's primarily been driven by lower market volume. And I would add, we had some consistent results again this quarter in our prime services business so the volume impact was largely in our cash and our derivatives business.

We recognized negative revenues of $31 million in the Credit Portfolio, largely driven by the DVA losses and that's offset by the NII and fees in retained loans, and then we had a small net CVA gain this quarter. Credit cost in the quarter, $272 million, that largely reflected some main specific charge-offs. And then on the expense side, you see $3 billion in expenses, down a little under 30% year-on-year, that's driven by lower comp and lower non-comp expenses. The comp-to-revenue ratio for the year we reported was 34%. If you exclude DVA, the revenue was 36% and that's largely at the lower end of our prior guidance of 35% to 40% for the year.

So with that, I'm going to actually skip Page 5 as well and drill down to specifics of CBB on Page 6. You see circled net income of $800 million, that's down 16% year-on-year; revenues of $4.3 billion. Revenues are down $365 million quarter-on-quarter. That largely reflects the impact of Durbin this quarter. Year-on-year, revenues are down 2% and that was an increase in deposit-related fees that partially offset the impact of Durbin this quarter. We continue to see very positive growth in a number of the fundamental measures we keep track of for the business year-on-year. Total deposits were up $25 billion; 216 branch builds during the course of 2011; 246 CPC, Chase Private Client branches opened this year; and we added 3,800 new sales staff, bankers, salesmen, mortgage brokers during the course of the year. Expenses up 6% year-on-year primarily driven by that investment spend I just talked about. Also, I want to remind you the impact of both the rate environment and the regulatory environment on 2012 earnings. We expect spread compression likely to have a negative impact on earnings next year of about $400 million, plus or minus, as deposit margins are going to continue to decline in 2012. And on the Durbin Amendment, we've said it will reduce earnings by $600 million plus or minus on an annualized basis in the course of 2012.

If you move to Page 7, Mortgage Production and Servicing. Loss for the business of $260 million this quarter and that compares to net income of $330 million in the prior year. Production-related revenues, that's at the top of the page and if you exclude repurchases, was $1.1 billion, that's down 20% year-on-year. Originations of $39 billion are down 24% year-on-year, but up actually slightly quarter-on-quarter and we experienced some lower margin in that business. I'd also add, activity this quarter was largely driven by refinancing. Repurchase losses in the quarter, you see was $390 million, that's slightly higher in the quarter based on acceleration of the timing of certain claims with the agencies. We do continue to expect, for next year, $350 million plus or minus per quarter in repurchase losses and that's largely in line with our prior guidance. And I'll remind everyone, our total repurchase reserves remain at $3.6 billion, $3.2 billion in this division.

Servicing-related revenue, in the middle of the page, of $1.1 billion is down 9% year-on-year and that's largely a decline in our service portfolio and that was partially offset by a reduction in the amortization of the MSR asset. Servicing expense, you see in the middle, $925 million in the quarter. It remains very elevated as a function of default costs which represent about 75% of that total number and we would expect that number to remain high certainly through the first half of 2012. We did record an MSR risk management loss of a little under $400 million this quarter, $377 million. The results really are a combination of reduction of the MSR asset of $830 million, that's based on valuation adjustments and rate and that was offset by a $460 million gain from hedging the asset. And for those interested in the MSR, I'd point you to a detail in the financial supplement in the footnotes.

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