JP Morgan Chase & Co. (JPM)
Q3 2010 Earnings Call
October 13, 2010 9:00 a.m. ET
Jamie Dimon – Chairman and CEO
Doug Braunstein - Chief Financial Officer
Glenn Shore - Nomura
John McDonald – Sanford Bernstein
Guy Moszkowski – Banc of America/Merrill Lynch
Matt O’Connor – Deutsche Bank
Jeff Harte - Sandler O'Neill
Betsy Graseck – Morgan Stanley
Ed Najarian – ISI Group
Paul Miller - FBR Capital Markets
Moshe Orenbuch – Credit Suisse
Mike Mayo – CLSA
Chris Kotowski – Oppenheimer
Jim Mitchell – Buckingham Research
Matt Burnell – Wells Fargo Securities
Nancy Bush - NAB Research
Carole Berger – Soleil Securities
Previous Statements by JPM
» JPMorgan Chase & Co. Q2 2010 Earnings Call Transcript
» JP Morgan Chase & Co. Q1 2010 Earnings Call Transcript
» JPMorgan Chase & Co. Q4 2009 Earnings Call Transcript
Good morning, ladies and gentlemen. Welcome to the JP Morgan Chase third quarter 2010 earnings call. This call is being recorded. [Operator instructions.] At this time I would like to turn the call over to JP Morgan Chase's chairman and CEO Jamie Dimon and Chief Financial Officer Doug Braunstein. Mr. Braunstein, please go ahead.
Thanks operator. It's Doug Braunstein. I'm going to be taking you through the earnings presentation, which is available on our website. We'll take questions after walking through the presentation. And one final note, there's a slide in the back of the presentation regarding forward-looking statements. Please read it.
With that, let me move to page one. We generated $4.4 billion in net income, $1.01 per share on revenues of $24.3 billion. We're highlighting three items here that relate to significant changes in our reserve positions in the quarter.
First, as you know, we released reserves in the card services, representing $0.22 a share of an increased earnings in the corporate sector. We increased our litigation expense through increasing our reserve, and that reduced earnings by $0.18 and in RFS we booked an increase in our mortgage repurchase reserves. That reduced earnings about $0.15, and that obviously runs through as a counter revenue item.
Broadly, as you look down, we had solid results in our businesses, but I'm going to cover those specifically when we talk about the specific businesses on the following pages. One final note, on page one, tier one, comment at the bottom of the page about a little under $111 billion in the quarter. That's up $3 billion quarter on quarter.
I've covered much of the important information on page two, so let's move to page 3, the investment bank. I've circled net income of $1.3 billion on revenues of $5.4 billion. IBCs in the quarter $1.5 billion. We continue to be ranked number one in fees but markets there remain highly competitive.
The results demonstrate some particular strength in our debt capital markets businesses as well as our Asian investment banking businesses. And you'll see in the back, on page 19, very strong lead table results.
Fixed income revenue was $3.1 billion for the quarter. That's down year on year on lower volumes and tighter spreads. However, if you look quarter on quarter and you exclude the negative impact of DBA, which was $150 million in this quarter, and that DBA reflects the credit spread tightening on our structured notes, versus the benefit of $400 million in second quarter, revenues are actually up modestly quarter on quarter, largely consistent volumes and spreads from our client businesses.
In equity markets, revenues were $1.1 billion, up year on year, and quarter on quarter, very solid client revenues in our global equities business. That was offset by declines in prime services as lower spreads continued to offset actually higher balances we had in the quarter. The quarter results for equities includes DBA impact of a negative $100 million this quarter versus the $200 million benefit we highlighted in Q2
A word on credit. You'll see credit costs were favorable $142 million benefit as we released reserves in the quarter. Net charge-offs, however, are at 25 basis points and that continues to reflect what we've talked about, which is strengthening corporate balance sheets across our client base.
Expenses in the quarter of $3.7 billion, that's down both quarter on quarter and year-over-year. That's largely a function of lower base performance-based comp as well as the impact of the UK bonus tax charges we took in the second quarter and comp-to-revenue was 38% in the quarter for the investment bank.
On page four, let's spend a moment on RFS. At the top of the page you'll see circled net income of $900 million. That's on $7.6 billion worth of revenue. I want to focus in on the three component businesses. Retail banking, which you know is our branch and deposit-taking businesses, had $848 million of net income in the quarter, $4.4 billion worth of revenue.
Revenues are down year-over-year. That's principally driven by the NSFOD fee changes in 2010. They're fully reflected in this quarter versus a 50% impact in second quarter. That reduction was offset by a number of positives in the quarter, including an improved deposit margin as well as we continue to increase our branch footprint, ATM footprint, an increase in the number of checking accounts in the quarter, and a number of other positive production metrics you can see on the next page.
Expenses are up in the quarter slightly. That's largely a function of our continuing investment in our sales force and our distribution business as we continue to add bankers and specialists in the branches.
Mortgage banking and other consumer lending, which is in the middle of the page, which reports our mortgage loan origination or servicing activity. Auto and our other consumer lending businesses earned $200 million in net income for the quarter. $1.9 billion of total revenues, and that really included very strong mortgage banking revenue of $2.5 billion in the quarter.
That's before considering repurchase reserves, which I'll talk about in a moment. That was largely driven by higher mortgage origination, $41 billion in the quarter, up 27% quarter over quarter.
Loan repurchase expense was $1.5 billion in the quarter, and that negatively impacts the revenue line as a counter-revenue item as you recall. We increased reserves in the quarter $1 billion, and that's largely based on the continuation of a high level of requests for loan files from the GSEs as well as repurchase demands.
And as a result of that increase, total reserves are now at $3 billion for this category. In addition, our realized losses for settled claims rose in the quarter as well, and that's largely because we're working on working down our aged claim inventory.
Going forward, we think our realized repurchase losses, what would be the functional equivalent of charge-offs, are going to remain high in 2011, and we've guided you to a $1 billion plus or minus. But eventually, as we work through bad vintages, we would expect those actual costs to come down.
Other expenses in this category are up 21% year-over-year, and that largely reflects higher default related costs. And one other note here, our auto business had very strong earnings. Credit improvement, lower delinquencies, and a continued strength in our used car values all contributed to that.
Finally, at the bottom of the page, real estate portfolios experienced a loss of $148 million in the quarter. Revenues are to principally NII are down 18%, and that's largely consistent with the runoff in our balances quarter on quarter and year-over-year. And credit costs, which I'll spend time on page six, really a function of net charge-offs this quarter, declined to $1.2 billion.