JP Morgan Chase 2014 Annual Report Download - page 69

JPMorgan Chase & Co./2014 Annual Report 67
rationalizing its use of vendors, and optimizing its real
estate location strategy.
As the Firm continues to experience an unprecedented
increase in regulation and supervision, it continues to
evolve its financial architecture to respond to this changing
landscape. In 2014, the Firm exceeded the minimum capital
levels required by the current rules and intends to continue
to build capital in response to the higher Global
Systemically Important Bank (“G-SIB”) capital surcharge
proposed by U.S. banking regulators. In addition, the Firm is
adapting its capital assessment framework to review
businesses and client relationships against G-SIB and
applicable capital requirements, and imposing internal
limits on business activities to align or optimize the Firm's
balance sheet and RWA with regulatory requirements in
order to ensure that business activities generate
appropriate levels of shareholder value.
The Firm intends to balance return of capital to
shareholders with achieving higher capital ratios over time.
The Firm expects the capital ratio calculated under the
Basel III Standardized Approach to become its binding
constraint by the end of 2015, or slightly thereafter. The
Firm anticipates reaching Basel III Fully Phased-In Advanced
and Standardized CET1 ratios of approximately 11% by the
end of 2015 and is targeting a Basel III CET1 ratio of
approximately 12% by the end of 2018, assuming a 4.5%
G-SIB capital surcharge. If the Firm's G-SIB capital surcharge
is lower than 4.5%, the Firm will adjust its Basel III CET1
target accordingly.
Likewise, the Firm will be evolving its funding framework to
ensure it meets the current and proposed more stringent
regulatory liquidity rules, including those relating to the
availability of adequate Total Loss Absorbing Capacity
(“TLAC”) at G-SIB organizations. The Firm estimated that it
had, as of December 31, 2014, approximately 15%
minimum TLAC as a percentage of Basel III Advanced Fully
Phased-in RWA, excluding capital buffers currently in effect,
based on its understanding of how the Financial Stability
Board's proposal may be implemented in the U.S. While the
precise composition and calibration of TLAC, as well as the
conformance period, are yet to be defined by U.S. banking
regulators, the Firm expects the requirement will lead to
incremental debt issuance by the Firm and higher funding
costs over the next few years.
The Firm expects it will continue to make appropriate
adjustments to its businesses and operations in the year
ahead in response to ongoing developments in the legal and
regulatory, as well as business and economic, environment
in which it operates. The Firm intends to take a disciplined
approach to growing revenues and controlling expenses in
light of its capital and liquidity constraints. The Firm’s deep
client relationships and its investments in its businesses,
including branch optimization, new card relationships,
expansion into new markets, and hiring additional sales
staff and client advisors, are expected to generate
significant revenue growth over the next several years. At
the same time, the Firm intends to leverage its scale and
improve its operating efficiencies so that it can fund these
growth initiatives, as well as maintain its control and
technology programs, without increasing its expenses. As a
result, the Firm anticipates achieving a managed overhead
ratio of approximately 55% over the next several years,
including the impact of revenue growth.
2015 Business Outlook
JPMorgan Chase’s outlook for the full-year 2015 should be
viewed against the backdrop of the global and U.S.
economies, financial markets activity, the geopolitical
environment, the competitive environment, client activity
levels, and regulatory and legislative developments in the
U.S. and other countries where the Firm does business. Each
of these inter-related factors will affect the performance of
the Firm and its lines of business.
Management expects core loan growth of approximately
10% in 2015. The Firm continues to experience charge-offs
at levels lower than its through-the-cycle expectations; if
favorable credit trends continue, management expects the
Firm’s total net charge offs could remain low, at an amount
modestly over $4 billion in 2015, and expects a reduction
in the consumer allowance for loan losses over the next two
years.
Firmwide adjusted expense in 2015 is expected to be
approximately $57 billion, excluding Firmwide legal
expenses and foreclosure-related matters.
In Consumer & Business Banking within CCB, management
expects continued spread compression in the deposit
margin and a modest decline in net interest income in the
first quarter of 2015. In Mortgage Banking within CCB,
management expects quarterly servicing expense to decline
to below $500 million by the second quarter of 2015 as
default volume continues to decline. In Card Services within
CCB, management expects the revenue rate in 2015 to
remain at the low end of the target range of 12% to 12.5%.
In CIB, Markets revenue in the first quarter of 2015 will be
impacted by the Firm’s business simplification initiatives
completed in 2014, resulting in a decline of approximately
$500 million, or 10%, in Markets revenue and a decline of
approximately $300 million in expense, compared to the
prior year first quarter. Based on strong performance to
date, particularly in January, management currently expects
2015 first quarter Markets revenue to be higher than the
prior year first quarter, even with the negative impact of
business simplification; however, Markets revenue actual
results will depend on performance through the remainder
of the quarter, which can be volatile.
Overall, the Firm expects the impact from its business
simplification initiatives will be a reduction of
approximately $1.6 billion in revenue and a corresponding
reduction of approximately $1.6 billion in expense resulting
in no meaningful impact on the Firm’s 2015 anticipated net
income.