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 Chinas
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. Its

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

horizonta
l analysis

Revenue

Vervvertical
increase/ analysis
decrease ysis
201
2

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

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

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
net income applicable to
shareholders

$17,923

$21,284

84.2

-15.8

21.9

18.6

$16,593

$19,877

83.5

-16.5

0.006

non interest expense

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

cash dividends declared per common
share

3814.9

3822.2

$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

17.2

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 stockholders equity increased too but by a smaller margin of 3.5% to
settle at $211,178 million.

ASSETS

cash and cash due from banks

deposits with banks
federal funds and securities
purchased under resale agreements

CONSOLIDATED
BALANCE SHEET
December 31(in million
except share data)
2013
2012

Horizonta
l analysis

vertical
analysis
2012

2013

$39,771
316,051

53,723
121,814

-26
159.5

2.3
5.2

1.6
13.1

248,116

296,296

-16.3

12.6

10.3

securities borrowed
trading assets
securities
Loans
allowances for loans losses
loans, net of allowances for loan
losses
accrued interest and accounts
receivable
premises and equipment
Goodwill
mortgages servicing rights
other intangible assets
other assets

111,465
374,664
354,003
738,418
-16,264

119,017
450,028
371,152
733,796
-21,936

-6.3
-16.7
-4.6
0.6
-26

5
19.1
15.7
31.1
-0.01

4.8
15.6
14.7
30.6
-0.01

722,154

711,860

1.4

30.2

29.9

65,160
14,891
48,081
9,614
1,618
110,101

6.9
2.6
-0.2
26.3
-27.6
8.1

2.6
0.01
2
0.003
0.01
4.3

2.7
0.01
2
0.004
0.01
4.6

TOTAL ASSETS

2,415,689

60,933
14,519
48,175
7,614
2,235
101,775
2,359,14
1

2.4

100

100

Deposits
federal funds purchased and
securities loaned/sold under
repurchase agreements
commercial paper
other borrowed funds
trading liabilities
accounts payable and other liabilities
beneficial interests issued by
consolidated variable interest entities
long-term debts

1,287,765

1,193,59
3

7.9

50.6

53.3

181,163
57,848
27,994
137,744
194,491

240,103
55,367
26,636
131,918
195,240

-24.5
4.5
5
4.5
-0.4

10.2
2.3
1.1
5.6
8.3

7.5
2.4
1.2
5.7
8.1

49,617
267,889

-21.5
7.6

2.7
10.6

2.1
11.1

TOTAL LIABILITIES

2,204,511

63,191
249,024
2,155,07
2

2.3

91.3

91.3

11,158
4,105
93,828
115,756

9,058
4,105
94,604
104,223

23.2
0
-0.8
11.1

0.004
0.002
4
4.4

0.005
0.002
3.9
4.8

1,199

4,102

-70.8

0.002

0.005

-21
-14,847

-21
-12,002

0
23.7

0
-0.01

0
-0.01

LIABILITIES

STOCKHOLDERS EQUITY
preferred stock
common stock
capital surplus
retained earnings
accumulated other comprehensive
income
shares held in RSU TRUST AT
COST
treasury stock at cost

TOTAL STOCKHOLDER'S
EQUITY
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY

211,178
2,415,689

204,069
2,359,14
1

3.5

8.7

8.7

2.4

100

100

JP MORGAN CHASE RATIO ANALYSIS

2013
2012
LIQUIDITY RATIOS
Current ratio
cash ratio
FINANCIAL LEVERAGE
RATIOS
Total debt ratio
Debt to equity ratio
Equity multiplier
Times interest earned
Cash coverage ratio
PROFITABILITY
RATIOS
Return on assets(ROA)
Return on Equity (ROE)

1.82
0.06

1.58
0.08

0.913
4.106
11.439

0.913
4.402
11.561

10.98 times
10.5 times

9.7 times
9.3 times

0.01
0.08

0.01
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 shareholders 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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