JP Morgan Chase 2012 Annual Report Download - page 56

Management’s discussion and analysis
66 JPMorgan Chase & Co./2012 Annual Report
EXECUTIVE OVERVIEW
This executive overview of the MD&A highlights selected
information and may not contain all of the information that is
important to readers of this Annual Report. For a complete
description of events, trends and uncertainties, as well as the
capital, liquidity, credit, market, and country risks, and the
critical accounting estimates affecting the Firm and its
various lines of business, this Annual Report should be read in
its entirety.
Economic environment
The Eurozone crisis was center stage the beginning of the
year, with social stresses and fears of breakup of the Euro.
However, strong stands by Eurozone states and the
European Central Bank (“ECB”) helped stabilize the
Eurozone later in the year. The ECB’s Outright Monetary
Transactions (“OMT”) program showed its commitment to
provide a safety net for European nations. Eurozone
member states also took crucial steps toward further fiscal
integration by handing over power to the ECB to regulate
the largest banks in the Euro area and by passing more
budgetary authority to the European Union. Despite the
easing of the crisis, the economies of many of the European
Union member countries stalled in 2012.
Asia’s developing economies continued to expand in 2012,
although growth was significantly slower than the previous
year, reducing global inflationary pressures.
In the U.S., the economy grew at a modest pace and the
unemployment rate declined to a four year low of 7.8% by
the end of 2012 as U.S. labor market conditions continued
to improve. The U.S. housing market turned the corner
during 2012 as the sector continued to show signs of
improvement: excess inventories were reduced, prices
began to rise and home affordability improved in most
areas of the country as household incomes stabilized and
mortgage rates declined to historic lows. Homebuilder
confidence improved to the highest level in six years and
housing starts increased to the highest level in four years
during 2012. At the same time, inflation remained below
the Board of Governors of the Federal Reserve System’s (the
“Federal Reserve”) 2% long-run goal.
The Federal Reserve maintained the target range for the
federal funds rate at zero to one quarter percent and tied
the interest rate forecasts to the evolution of the economy,
in particular inflation and unemployment rates.
Additionally, the Federal Reserve announced a new asset
purchase program that would be open-ended and is
intended to speed up the pace of the U.S. economic
recovery and produce sustained improvement in the labor
market.
Financial markets reacted favorably when the U.S. Congress
reached an agreement to resolve the so-called “fiscal cliff”
by passing the American Taxpayer Relief Act of 2012. This
Act made permanent most of the tax cuts initiated in 2001
and 2003 and allowed the tax rate on the top income
bracket, which was increased to $450,000 annually for
joint tax filers, to revert to 39.6% from 35.0%. Spending
and debt ceiling issues were postponed into 2013.
Going into 2013, the U.S. economy is likely to be affected by
the continuing uncertainty about Europe’s financial crisis,
the Federal Reserve’s monetary policy, and the ongoing
fiscal debate over the U.S. debt limit, government spending
and taxes.
Financial performance of JPMorgan Chase
Year ended December 31,
(in millions, except per share
data and ratios) 2012 2011 Change
Selected income statement data
Total net revenue $ 97,031 $ 97,234 — %
Total noninterest expense 64,729 62,911 3
Pre-provision profit 32,302 34,323 (6)
Provision for credit losses 3,385 7,574 (55)
Net income 21,284 18,976 12
Diluted earnings per share 5.20 4.48 16
Return on common equity 11% 11%
Capital ratios
Tier 1 capital 12.6 12.3
Tier 1 common 11.0 10.1
Business overview
JPMorgan Chase reported full-year 2012 record net income
of $21.3 billion, or $5.20 per share, on net revenue of
$97.0 billion. Net income increased by $2.3 billion, or
12%, compared with net income of $19.0 billion, or $4.48
per share, in 2011. ROE for both 2012 and 2011 was 11%.
The increase in net income in 2012 was driven by a lower
provision for credit losses, partially offset by higher
noninterest expense. Net revenue was flat compared with
2011 as lower principal transactions revenue and lower net
interest income were offset by higher mortgage fees and
related income, higher other income, and higher securities
gains. Principal transactions revenue for 2012 included
losses from the synthetic credit portfolio. The increase in
noninterest expense was driven by higher compensation
expense.
The decline in the provision for credit losses reflected a
lower consumer provision as net charge-offs decreased and
the related allowance for credit losses was reduced by $5.5
billion in 2012. The decline in the consumer allowance
reflected improved delinquency trends and reduced
estimated losses in the real estate and credit card loan
portfolios. The wholesale credit environment remained
favorable throughout 2012. Firmwide, net charge-offs were
$9.1 billion for the year, down $3.2 billion, or 26%, from
2011, and nonperforming assets at year-end were $11.7
billion, up $419 million, or 4%. The current year included
the effect of regulatory guidance implemented during
2012, which resulted in the Firm reporting an additional
$3.0 billion of nonperforming loans at December 31, 2012
(see Consumer, excluding credit card on pages 140–148 of
this Annual Report for further information). Before the