JPMorgan Chase & Co

JPMorgan Chase & Co 25 January 2018

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Contents 1. 2. 3. 4. 5. 6. 7. 2 Copyright © PSG

Recommendation Nature of business Financial review Divisional review Capital Company guidance Portfolio guidance

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Recommendation

Recommended exposure up to 5.03%: • • • • • • • •

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Strong franchises with leading positions in several product categories We expect an improvement in the ROE over the medium term Ability to reduce the capital ratio into the target range Return profile should improve owing to the lower corporate tax rate Tax reform changes likely to be positive for US growth Banking sector should also benefit from the second-round effects of clients Increase in economic activity should translate into higher interest rates We believe the share offers value at current levels and recommend an overweight position


Nature of Business

Nature of business JPMorgan Chase is one of the oldest financial institutions in the United States. With a history dating back over 200 years. The company is a leading global financial services firm with assets of $2.6 trillion, operates in more than 60 countries and has over 240,000 employees. It serves millions of consumers, small businesses and many of the world's most prominent corporate, institutional and government clients. In addition, the business is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing and asset management.

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Financial Review

Financial Review: •

Net interest income (NII) increased by 9% to $50.1bn -

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Net interest margin improved to 2.36% from 2.25% in the comparable period Credit costs decreased by 1% to $5.3bn where in Q4 net reserve builds were reported Net charge-off (NCO) rate, excluding PCI loans, increased to 0.62% (2016: 0.57%) Non-interest revenue (NIR), excluding a once-off legal benefit of $645m, reduced 1% to $48.9bn -

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5% increase in average loans to $906bn and higher interest rates On a core-basis, advances were up 9% for the year Q4 reflected strong loan and deposit growth, partially offset by lower NII in the Markets business.

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NIR was contained by investments in Card, lower mortgage banking income and a weaker performance in Markets NIR was contained by investments in Card, lower mortgage banking income and a weaker performance in Markets NIR comprised 51% of net revenue. The results are discussed on a twelve-month basis unless stated otherwise.

Financial Review: •

Operating expenses increased by 4% to $58.5bn -

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3% increase in profit before tax to $35.4bn Adjusted earnings decreased by 9% to $24.6bn Diluted weighted average number of shares reduced by 2% due to share repurchases Adjusted EPS increased by 11% to 688 US cents Diluted EPS only came in at 631 US cents -

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Higher effective tax rate

Maintained reported ROE of 10% ROTCE of 12% (2016: 13%). -

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Higher overhead ratio of 59% (2016: 58%).

Adjusting for tax reform in Q4, ROTCE would have been 13%.

NAV and tangible NAV (TNAV) increased by 5% to 6704 US cents and 4% to 5356 US Cents respectively. Total dividend for the year, up 17% to 112 US cents The results are discussed on a twelve-month basis unless stated otherwise.


Divisions

Divisional Contribution: Divisional Contribution: 2017

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Divisional Contribution: 2016

Corporate & Investment Banking


Commercial Banking

Commercial Banking

Asset & Wealth Management

Asset & Wealth Management



Consumer & Community Banking (Contributed 36% to net income before corporate)

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NII was up 7% to $31.8bn -

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NIR fell 4% to $14.7bn Operating expenses were up 5% to $26.1bn -

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2% increase in average loans to $482bn Average deposits increased by 7% to $660bn Credit charges were up by 21% to $5.3bn The NCO rate in Credit Card increased to 2.95% (2016: 2.63%) Allowance for loan losses over non-performing loans increased to 229% (2016: 194%)

Higher overhead ratio of 56% compared to 55% in 2016

Net income dropped by 3% to $9.4bn ROE remained stable at 19%.

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The results are discussed on a twelve-month basis unless stated otherwise.

Corporate & Investment Bank (CIB) (Contributed 41% to net income before corporate)

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NII contracted by 7% to $10.1bn The NCO rate dropped to 0.07% from 0.15% in 2016 The allowance for loan losses over non-performing loans decreased to 170% (2016: 247%) NIR was stable at $24.4bn Operating expenses remained relatively stable, up 1% to $19.2bn -

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Q4 showed expenses up 8% YoY

The efficiency ratio was higher at 56% (2016: 54%) Net income was flat at $10.8bn Lower ROE of 14% (2016: 16%).

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Corporate & Investment Bank (CIB) (Contributed 41% to net income before corporate)

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Banking -

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Delivered a 14% increase in net revenue to $12.3bn Investment banking net revenue rose by 12% to $6.7bn 15% increase in net revenue from Treasury Services to $4.2bn Lending was up 18% to $1.4bn

Markets and Investor services -

Net revenue deteriorated 9% to $22.2bn Securities services grew by 9% to $3.9bn

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Commercial Banking (Contributed 14% to net income before corporate) •

NII increased by 19% to $6.1bn -

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NIR grew 9% to $2.5bn Operating expenses of $3.3bn were 13% ahead of the prior year -

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Average loans increasing by 10% to $198bn The provision for credit losses was a net benefit of $276m, compared to a loss of $282m in the prior quarter Allowance for credit losses as a percentage of non-performing loans increased to 415% from 255% at the end of the prior year

Overhead ratio remained stable at 39%

Net income increased by 33% to $3.5bn ROE improved to 17% (2016: 16%) -

Q4 reported a particularly strong ROE of 18% supported by a record net income of $957m

*Net revenue by product segments were as follows, lending up 8% to $4.1bn, treasury services up 23% to $3.4bn and investment banking up 3% to $805m 15 Copyright © PSG


Asset & Wealth Management (Contributed 9% to net income before corporate)

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Assets under management increased by 15% to a new record of $2.0tn 6% increase in NIR to $9.5bn NII increased by 11% to $3.4bn -

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Operating expenses came in 10% higher at $9.3bn -

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Increase in average loans of 9% Deposits were 3% weaker Credit impairments increased to $39m from $26m Higher overhead ratio of 72% (2016: 70%)

4% increase in net income to $2.3bn ROE increased from 24% to 25% for the full year -

Q4 saw a strong ROE of 28% supported by record net income $3.4bn

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Capital

Capital • • •

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Common equity tier 1 capital ratio under the Basil III Fully Phased-In capital rules of 12.1% (2016: 12.5%) in a Standardized CET1 ratio 12.7% under the Advanced CET1 ratio The lower CET1 ratio was reflective of tax adjustments and loan growth


Company Guidance

Company Guidance •

Management is forecasting that NII to be slightly lower in the first quarter of 2018 due to: -

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The new accounting recognition rule is expected to increase the full year 2018 revenue and expense by $1.2bn Management further expect the effective tax rate to be in the region of 19% for full year 2018 -

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the Tax Cuts & Jobs Act (“TCJA”) lower gross ups as well as due to normal day count

around 17% in the first quarter

Over the medium term, the effective tax rate should be approximately 20% As a result of the tax reform, management anticipates a 20 to 30 basis points of growth in the US this year and next


Portfolio Guidance

Portfolio Guidance • • •

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We believe the share offers value at current levels Recommend an overweight position Recommended exposure of up to 5.03%

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