Running head: Financial Analysis Assessment

Financial Analysis Assessment

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Introduction

JPMorgan Chase & Company is a key player in the financial services sector of the United States

of America with its operations ranging from commercial banking, asset management, investment

banking, private equity and financial transaction processing. Its operations are not limited to the

US only as it has worldwide presence but its biggest market operations are in the US. Its history

dates back to 1799 when it first begun its operations in New York City. Over the years the

company has grown in reaps and bounds through mergers and acquisitions that have made it the

biggest bank in Unites States of America, with an asset base of $ 2,415,689 million as at the end

of 2013. JP Morgan Chase has always keep abreast with competition more so the innovations in

the financial services sector, and it is for this reason that it has targeted some of the best

competitors with significant potential for growth for mergers.

Financial analysis of JP MORGAN CHASE & CO.

The financial analysis is an evaluation of the financial statements of a company to explain its

performance based on different aspects such as financial leverage, liquidity, profitability and

turnover. The users of financial information get a clearer picture of the performance through

financial analysis as many are financially illiterate. The users range from current investors,

potential investors, the public, the federal government, suppliers, competitors and financiers

(Friedlob & Schleifer, 2003). While many shareholders are concerned with the profitability of

the company, the other users go beyond profitability to evaluate the financial leverage and

liquidity of the company. Some others are interested in the going concern of the company and

that it what makes such users interested in the financial future of the company. Each of the users

of financial information has their reasons for evaluating the performance. The competitors are

more concerned with the profitability and liquidity of the company for comparison purposes

against their own financial performance for the period. They are mainly concerned with

evaluating their own financial performance against other competitors as well as the industrial

average. As for the potential investors they are interested more with the liquidity and profitability

as theirs is an investment for the future (Friedlob & Schleifer, 2003). If such potential investors

get impressed by the financial performance of the company, they are more likely to chose the

company over its competitors for investment. The financiers and suppliers of the company are

more interested with the financial leverage ratios. This helps them know whether the business

will be able to honor its debt repayments terms and conditions. This is the financial analysis of

JP Morgan Chase and Company.

JPMorgan Chase and Company has grown through mergers to become one of the largest banks

with its high market capitalization of two hundred and four thousand billion four hundred and ten

million US dollars. Its ranks among the three biggest banks in the world; below two of China’s

leading banks. It has shown steady growth over the years, ahead of its competitors by registering

a three year annual change of its operating profit margin by 74.07 percent. Its performance in the

S & P has not been as impressive as it registered a declining performance of only 10.31% against

an S & P index of 15.48%.

Horizontal analysis of the consolidated statement of comprehensive income.

The horizontal analysis compares financial performance of the company in different years by

applying a base year upon which the performance of the other years is evaluated(Gibson, 2012).

It is a simple method of financial analysis and provides the users of financial information with an

easy way of comparing year to year comparison of similar items of the financial statements. It’s

an easy way of evaluating the trend of the individual items of the statements of comprehensive

income and financial position. It does not only evaluate the overall performance of the company

but also ascertains whether the management of the company is achieving its objectives. By

analyzing the individual items of the financial statements it makes it easy for the management to

target individual items which affect the financial statements adversely. Its only limitation is that

it fails to fully disclose the strengths and weaknesses of a company.

Its investment banking fees revenue rose by 9.4% to settle at $6,354 million in 2013. This is

remarkable as it shows the company had more transactions as compared to the previous year.

The principal transaction revenues rose by a wide margin to almost double, at 82.2%. The asset

management commissions revenue also rose but with a smaller margin of 8.9% . Some of the

other revenue items also rose but with smaller margins. The securities gains fell by a wide

margin of 68.4%. This can be attributed to the fall in amount of the securities held by the

company. Most of the expenses fell by small margins, but that is an improvement from the

previous year. The provision for credit losses fell by the biggest margin of 93.4%. The other

expenses rose by a margin of 40.8%. The net income of the company fell by a margin of 15.8%

to close at seventeen thousand, nine hundred and twenty three million US dollars. This is not

healthy for a company of the status of JP Morgan as it could scare away potential investors and if

that trend was to continue then it would be worrying even for the existing shareholders.

Vertical analysis of JP Morgan Chase and Company consolidated statement of income.

The vertical analysis is also called common size method of financial analysis. It uses a base item

of the financial statements and all other items are measured as a percentage of it(Gibson, 2012).

In the statement of comprehensive income, the gross profit figure is used as the base while the

total assets figure of the statement of financial position is used in balance sheet. This method of

analysis measures individual items as a percentage of the base(Gibson, 2012). The investment

banking fees revenue stood at 6.6% of the gross profit in 2013 as compared to the year 2012 in

which it closed at 5.9 % of the gross profit. The principal transactions revenue closed at 10.5% of

the gross profit in the year 2013, having increased considerably as they stood at 5.7% of the

gross profit of the previous year. The securities gains closed at a low percentage of 0.01 which

was a decrease compared to the previous year in which it constituted of 2.2% of the gross profit

in that year. The interest expenses fell considerably from 11.5% of the gross profit of 2012 to

close at 0.1% of the gross profit of 2013. The occupancy expenses constituted of 40.5% of the

gross profit in 2012 as compared to a low percentage of the same, at 3.8% in 2013. The provision

for credit losses fell as a percentage of the gross profit from 3.5% in 2012 to 0.006% in 2013.

.

JP MORGAN CHASE & CO.CONSOLIDATED STATEMENTS OF INCOME

Y ear ended December 31(in millions, except share data) 2013 2012

horizontal analysis

increase/ decrease

Vervvertical analysisysis

Revenue 2012 2013

investment banking fees $6,354 $5,808 109.4 9.4 5.9 6.6

principal transactions 10,141 5536 182.2 82.2 5.7 10.5

lending and deposit-related fees 5945 6,196 95.9 -4.1 6.4 6.2

asset management commissions 15,106 13,868 108.9 8.9 14.3 15.6

securities gains 667 2110 31.6 -68.4 2.2 0.01

mortgage fees and related income 5205 8687 59.9 -40.1 8.9 5.4

card income 6022 5658 106.4 6.4 5.8 6.2

other income 3847 4258 90.3 -9.7 4.4 4

non-interest revenue 53,287 52,121 102.2 2.2 53.7 55.2

interest income 52,996 56,063 94.5 -5.5 57.8 54.9

interest expense 9677 11,153 86.7 -13.3 11.5 0.1

net interest income 43,319 44,910 96.5 -3.5 46.3 44.8

total net revenue 96,606 97,031 99.6 -0.4 100 100

provision for credit losses 225 3,385 6.6 -93.4 3.5 0.006

non interest expense

compensation expense 30,810 30,585 100.7 0.7 31.5 31.9

occupancy expense 3693 3925 94.1 -5.9 40.5 3.8

technology, communications and equipment expense 5425 5224 103.8 3.8 5.4 5.6

professional and outside services 7641 7429 102.9 2.9 7.7 7.9

Marketing 2500 2577 97 -3 2.7 2.6

other expense 19,761 14,032 140.8 40.8 14.5 20.5

amortization of intangibles 637 957 66.6 -33.4 0.01 0.01

total non interest expense 70,467 64,729 108.9 8.9 66.7 72.9

income before income tax expense 25,914 28,917 89.6 -10.4 29.8 26.8

income tax expense 7,991 7,633 104.7 4.7 7.9 8.3

net income $17,923 $21,284 84.2 -15.8 21.9 18.6net income applicable to shareholders $16,593 $19,877 83.5 -16.5 17.2

net income per common share data

basic earnings per share $4.39 $5.22

diluted earnings per share $4.35 $5.20

weighted average basic shares 3782.4 3809.4

weighted average diluted shares 3814.9 3822.2cash dividends declared per common share $1.44 $1.20

The basic earnings per share fell from $5.22 to $4.39 in 2013. The diluted earnings per share

followed the same trend, falling by a 16.3% to close at $4.35 in 2013. The cash dividends per

common share paid out to the shareholders increase by 20% to close at $1.44 in the year 2013.

The analysis of consolidated statement of financial position.

Horizontal analysis

The cash and cash due from banks fell by 26% while the deposits with banks increased to more

than double, by 159.5% margin to close at $ 316,051 million. This is a good sign for the

investors. The mortgage servicing rights increased by 26.3% while other intangible assets

decreased by 27.6% to close at $1618 million. Other assets increased by 8.1% to close at $110,

101 million which also good for the company as this increases its asset base. The deposits

increased by 7.9% to close at $1,287,765 million while the federal funds purchased and

securities loaned/sold under repurchase agreements decreased by 24.5% to settle at $181,163

million. The beneficial interests issued by consolidated variable interest entities decreased by

21.5% margin to close at $49,617 million. The commercial paper and the trading liabilities each

increased by 4.5% to close at $57,848 million and $137,744 million respectively while other

funds increased by a slightly higher margin at 5% to close at $27,994 million. The long-term

debts increased by 7.6% to close at $267,889 million while the accumulated other

comprehensive income decreased by 70.8% to close at $1,199 million. In matters equity, the

preferred stock increased by 23.2% to settle at $11,158 million while the retained earnings for

the year stood at $115,756 million having increased by 11.1%. The result of these increases in

equity was that the total stockholder’s equity increased too but by a smaller margin of 3.5% to

settle at $211,178 million.

CONSOLIDATED BALANCE SHEETDecember 31(in million except share data)

Horizontal analysis

vertical analysis

ASSETS 2013 2012 2012 2013

cash and cash due from banks $39,771 53,723 -26 2.3 1.6deposits with banks 316,051 121,814 159.5 5.2 13.1federal funds and securities purchased under resale agreements 248,116 296,296 -16.3 12.6 10.3

securities borrowed 111,465 119,017 -6.3 5 4.8trading assets 374,664 450,028 -16.7 19.1 15.6securities 354,003 371,152 -4.6 15.7 14.7Loans 738,418 733,796 0.6 31.1 30.6allowances for loans losses -16,264 -21,936 -26 -0.01 -0.01loans, net of allowances for loan losses 722,154 711,860 1.4 30.2 29.9accrued interest and accounts receivable 65,160 60,933 6.9 2.6 2.7premises and equipment 14,891 14,519 2.6 0.01 0.01Goodwill 48,081 48,175 -0.2 2 2mortgages servicing rights 9,614 7,614 26.3 0.003 0.004other intangible assets 1,618 2,235 -27.6 0.01 0.01other assets 110,101 101,775 8.1 4.3 4.6

TOTAL ASSETS 2,415,6892,359,141 2.4 100 100

LIABILITIES

Deposits 1,287,7651,193,593 7.9 50.6 53.3

federal funds purchased and securities loaned/sold under repurchase agreements 181,163 240,103 -24.5 10.2 7.5commercial paper 57,848 55,367 4.5 2.3 2.4other borrowed funds 27,994 26,636 5 1.1 1.2trading liabilities 137,744 131,918 4.5 5.6 5.7accounts payable and other liabilities 194,491 195,240 -0.4 8.3 8.1beneficial interests issued by consolidated variable interest entities 49,617 63,191 -21.5 2.7 2.1long-term debts 267,889 249,024 7.6 10.6 11.1

TOTAL LIABILITIES 2,204,5112,155,072 2.3 91.3 91.3

STOCKHOLDERS EQUITYpreferred stock 11,158 9,058 23.2 0.004 0.005common stock 4,105 4,105 0 0.002 0.002capital surplus 93,828 94,604 -0.8 4 3.9retained earnings 115,756 104,223 11.1 4.4 4.8accumulated other comprehensive income 1,199 4,102 -70.8 0.002 0.005shares held in RSU TRUST AT COST -21 -21 0 0 0treasury stock at cost -14,847 -12,002 23.7 -0.01 -0.01

TOTAL STOCKHOLDER'S EQUITY 211,178 204,069 3.5 8.7 8.7TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 2,415,689

2,359,141 2.4 100 100

JP MORGAN CHASE RATIO ANALYSIS

2013 2012

LIQUIDITY RATIOS

Current ratio 1.82 1.58

cash ratio 0.06 0.08

FINANCIAL LEVERAGE RATIOS

Total debt ratio 0.913 0.913

Debt to equity ratio 4.106 4.402

Equity multiplier 11.439 11.561

Times interest earned 10.98 times 9.7 times

Cash coverage ratio 10.5 times 9.3 times

PROFITABILITY RATIOS

Return on assets(ROA) 0.01 0.01

Return on Equity (ROE) 0.08 0.1

Another name for financial leverage ratios is long-term solvency ratios. These ratios

include the debt to equity ratio, total debt ratio, equity multiplier, cash coverage ratio and times

interest earned ratio. They enable financial analysts to evaluate the ability of a firm to pay

interest on its debts by measuring its indebtedness(Gibson, 2010). The total debt ratio measures

the ratio of total debts to total assets. It remained constant over the two year period. It is less than

one, at 0.913 which is good but not sufficient liquidity would be left for the company if it decides

to pay off all of its debts.

The equity multiplier fell by a small margin from 11.561 to 11.439. Although it fell, it is

still impressive as it means that for every one unit of shareholder’s equity, the firm holds eleven

units in assets. The cash coverage ratio increased by 1.2 times, brought about by the decrease in

interest expenses for the period although the earnings before interest and tax decreased for the

period. The debt to equity ratio fell by a small margin to close at 4.106 which is better for the

company as its total debt fell significantly despite the increase in total equity.

The current ratio increased from 1.58 to 1.82 brought about by the increase in current

assets and a decrease in the current liabilities. The cash ratio fell by a small margin from 0.08 to

settle at 0.06 brought about by a decrease in cash and cash due from banks which went down

from $53,723 million to $39,771 million.

The company became less profitable, registering a lower return on equity in 2013 as

compared to 2012. The return on assets remained constant at 0.01 for both years.

Analysis of cash flow statement.

Although the operating activities for the period endured a lower net income of $17,923

million compared to the previous period of $21,284 million, the net cash provided by operating

activities went up to almost four times to settle at $107,953 million as compared to $25,079

million in the previous year. The deferred tax expense rose significantly from $1,130 million in

2012 to a high of $8,003 million in 2013. The proceeds from sales, securitizations and pay

downs of loans held for sale also increased from $33,202 in 2012 to $73,566 in 2013.

The company invested more, as evidenced by the increase in the net cash used in

investing activities. The deposits with banks increased from $ 36,595 million in 2012 to $

194,363 million in 2013. The proceeds from sales fell from $81,957 million to $ 73,312 million

and a higher decline in proceeds from pay downs and maturities from $112,633 to $89,631 took

place. The financing activities reduced greatly from $87,707 million in 2012 to $28,324 million

in 2013. This was attributable to the increase in dividends paid up to $6,056 million, an increase

in other financing activities to the tune of $1,050 million and a further increase in treasury stock

and warrants repurchased from $1,653 million to $4,789 million. The net decrease in cash and

due from banks reached $13,952 million while the cash and due from banks closed at $39,771

which was a decrease from the previous period of $ 53,723 million. The cash interest paid fell

from $ 11,161 million to $ 9,573 million.

Impact of risks on international trade

The banking industry involves management and control of risks which include narrow

down from systemic risks such as credit risk, liquidity risk and interest risk. There also exists

other risks of international trade such as the transaction risk and translation risk. These risks are

brought about by the uncertainty of the market dynamics of international trade. The World has

been reduced into a global village and the exposure to risk is even more to multinational

corporations of the caliber of JP Morgan Chase & Company.

The exposure ranges from foreign policies and rules to foreign exchange risks and

economic variables such as inflation which may only affect a certain part of the world.

Multinational corporations often find themselves in a fix if they fail to address such issues. The

credit risk becomes bigger as the company is exposed to a wider range of global customers wh

may have malicious intentions evidenced by failure to discharge fully the terms of the contract.

The interest rate risk also has an impact on the financial statements as market prices adjust

accordingly with changes in the interest rates. The foreign exchange risk exposes the company to

adverse fluctuations of the foreign currency in the countries to which its subsidiaries operate.

This risk may cause the value of the company to be worth less when denominated in the currency

of the parent company.

The company may also be faced with reputational risk and operational risk as well as

market liquidity risk. The market liquidity risk arises in an asset market where there is varying

liquidity of the claims being traded. This causes the lenders to adjust their lending rates by

increasing it thus reducing the availability of loans and subsequent income from loans.

Impact of ethical, regulatory and tax considerations.

Like every other industry, if left unregulated, the banking industry is susceptible to

malpractices by scrupulous individuals out on a mission to enrich themselves at the expense of

their customers and shareholders. It is for this reason that the need to bridge information

asymmetry arises. The banks are guided by the Federal government through its Federal Reserve.

It is the regulatory body charged with the mandate of ensuring that all banks conform to the

banking standards and regulations in their service delivery to its citizens. JP Morgan Chase has

found itself on the wrong side of the authorities a number of times in its history. It is with no

doubt that the only way to avoid such reputational risks of litigation is the consideration of the

tax, ethical and regulatory measures. As for the tax consideration the firm has to comply with the

tax collectors through tax consultancy services that ensure the correct amount of tax is paid to the

tax collector. Its financial policy decisions are geared towards avoiding tax issues such as late

payments or an under-calculation of tax.

Its financial policy decisions are meant to enhance ethical behavior within the

organization in a bid to avoid reputational risk. It enables the employees to avoid being greedy

and selfish and instead focus on organizational goals and objectives.

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