JPMorgan Chase Bank is a federal licensed Commercial Bank with substantial capital, assets, and investments. By the end of the financial year 2011, the bank reported total assets of $ 121,748,570 which included a loan portfolio of $97,622,733, total deposits of $48,797,419 and equity capital worth $116,354,460 (FFIEC 1). The net operating income as of 31 December 2011 was worth $3,947,252 which depicts a 38.32% increase as compared to the operating income by the end of 2010.
Despite these significant figures, the bank operates in a competitive, uncertain market and hence the need to assess the financial condition of the bank to identify the specific risks the institution is facing. This assessment is frequently done by the Federal and State regulators on-site and the outcomes are published in annual reports. The rating that is applied on the banks by regulators is the Uniform Financial Institution Rating scheme which encompasses six groups of performance with the acronym CAMELS. The letters refer to specific groups of performance and an assessment of these categories provides a clear understanding of the financial state of a Commercial Bank.
The purpose of examining a bank is to look for and try to make sure that the banks have enough capital to maintain their operations. In particular, the regulation of capital adequacy offers protection to both the depositors and the entire economy, since the failure of a large financial institution has widespread parallel consequences. These parallel consequences have adverse repercussions that the whole financial structure can suffer from, generally known as systematic risk.
Capital adequacy comprises several definite components which signal the bank’s capacity to uphold its capital proportionate with the nature and degree of all kinds of risks and the capacity of management to recognize, evaluate, monitor and manage these risks. The determination of capital adequacy is through key performance ratios computed with a basis on the composition and amount of specific balance sheet entries and elements of the net income of the bank. Two types of capital namely Tier I and Tier II are employed in the calculation. Tier I capital takes up losses without a financial institution necessarily ceasing operations.
Tier II may also take up losses in the occurrence of a near or termination of an institution and hence offers protection to depositors to some extent. According to Koch and MacDonald, the regulatory agency requires the banks to maintain a Tier I capital ratio of at least 6 percent, a total capital ratio of 8 percent and a leverage ratio of 3 to 4 percent (52). Below are the reported capital adequacy capital ratios of JPMorgan Chase Bank (FFIEC 1; JPMC 1).
|Tier I Capital Ratio||Total Capital Ratio||Tier I Leverage Ratio|
|31 Dec 2011||9.44%||13.04%||5.05%|
|31 Dec 2010||9.42%||13.45%||5.71%|
|31 Dec 2009||11.14%||14.84%||6.57%|
Considering the reported figures, it is clear that the Tier I capital ratio for financial years 2009, 2010, and 2011 has decreased from 11.14% to 9.42% to 9.44%. However, the minimum tier capital ratio required by the regulation agency is 6% indicating that JPMorgan Chase Bank has sufficient capital to cover all assets. From the reports, the total capital ratio in the years 2009, 2010 and 2011 is 14.84%, 13.45% and 13.04% respectively. This indicates that the capital is sufficient to cover the bank’s Risk-Weighted Assets as the minimum ratio required is 8%. Moreover, the Tier leverage ratio for the years 2009, 2010 and 2011 was 6.57%, 5.71% and 5.05% respectively. This means that JPMorgan Chase Bank has greater capital than liabilities and therefore the debt riskiness is quite low.
Asset quality as a component of CAMELS analysis reveals the level of credit risk about the loan and investment collection, as well as the off-balance-sheet accounts (Koch and MacDonald 114). This component is particularly important because the risk of loan losses is considered the sole greatest risk. In addition, the loan usually comprises a large part of the assets in most financial institutions. There is always a risk of a performing bank being liquidated as a result of loan charges off. The asset quality analysis largely involves a substantial emphasis on loan quality.
In examining asset quality, evaluators consider the existing and potential risk exposure, fundamentally in the loan portfolio of the institution, though they will evaluate the investment assets among others. Just like many other CAMELS components, an emphasis is put on the capacity of the management to identify and manage the risk associated with the portfolio. The fact that a bank has just a few negative assets does not mean that the asset quality is satisfactory, but only if the financial managers can manage the potential credit risks adequately. The analysis of asset quality demands more than the calculation of past credits and adverse classification ratio.
In evaluating and calculating the inclination in felonious loans, off-the-record assets and credit concentrations, it is also imperative to account for the ability of the management to control and guarantee credits in a careful and sound approach.
JPMorgan Chase Bank has begun to increase the amount of commercial and decreased individual loans. From financial year 2010 to 2011 the bank increased the commercial loans from $5,992,756 to $6,328,681as well as decreasing individual loans from $108,556,779 to $96,819,542 (FFIEC 1). In addition, the bank has decreased its total investments from $2,243,695 to $1,352,814 between the years 2010 and 2011.
These reductions indicate an improvement in credit risk management especially those related to loan and investment portfolios. However, the amount of loan is still large if not to mention the outstanding loan balances and other off-balance sheet items that are considered as non-performing assets. Therefore, the bank should monitor the growth rate of their assets to maintain it on the negative, especially under the current market conditions.
Apparently, any successful bank must embrace the concept of management with both hands as success highly depends on the decision-making skills and integrity of the managing team. The top managers have many obligations and are in due course the ones who decide on the strategies and initiatives the banks will follow. The managers also have the important responsibility of controlling risks through the different means available. The process of managing risks does not involve just the calculation of figures, but also other aspects related to management skills such as timely decision making. Indeed, the size of JPMorgan Chase Bank alone demands an intelligent and focused person.
The present Chairman and CEO of JPMorgan Chase Bank are Jamie Dimon. Before he became the president and CEO, he had been the COO and president since the merger of the bank with Banc One Corporation (Simon et al. 13). Even at Banc One, Dimon had been the president and CEO for more than four years. He holds an MBA from Harvard Business School after taking an undergraduate degree at Tufts University. Due to his great reputation in management, Dimon holds more than four other senior responsibilities within an academic environment and in the financial systems.
Michael Cavanagh has been the CFO since JPMorgan Chase Bank merged with Middle Market Banking (Simon et al. 13). He has ample management skills gained after working as a CAO of Commercial Banking and head of strategy and planning at Banc One Corporation. Barry Zubrow is the Chief Risk Officer since 2007 after holding a variety of managerial positions at several institutions including The Goldman Sachs Group.
In addition to these significant people in the management, JPMorgan Chase Bank has many other key people who steer the firm’s management and decision-making process. The major constituent of their overall strategy is to offer better-quality client service than other players in the banking business, strong investment performance, superior revenue growth, international revenue growth, and successful additional acquisitions (JPMC 16-37). At present, JPMorgan Chase Bank is restructuring its loan and investment portfolio to accommodate the improving fixed income market (JPMC 14). This will have a significant impact on the present portfolio. In addition to the recent mergers with US firms, the bank is determined to increase its acquisition strategy in the international markets.
Firm earnings refer to the amount of and trend in earnings as well as other factors that might influence the quality or sustainability of earnings. Between the years 2010 and 2011, JPMorgan Chase Bank’s earnings dropped substantially. The total income within this period decreased from $15,323,454 to $12,133,834 which reflected a drop of 3.32% (FFIEC 1). As indicated in the income statement, the main source of income acquired is from the banking services provided by the firm. The major services offered include asset management, loan issuance services, asset servicing, treasury security services, and clearing services.
The entire firm has seen a drop in revenue and fee income in the fiscal year 2011 as compared to FY 2010. As depicted in the summarized ratios of the firm, the net revenue has dropped by 3.32% probably due to a decrease in interest income associated with assets and wealth management, loan insurance, and securities lending (FFIEC 1). The most notable drop in revenue came from loan issuance that led to a drop of $3,192,209. It can then be concluded that JPMorgan Chase Bank has generally experienced significant losses in revenue over the last financial year. Such trends cause a question mark in the capacity to sustain the bank earnings and it is a matter of responding to the dropping revenues to ensure future sustenance.
Liquidity refers to the adequacy of the bank’s present and potential sources of insolvency and funds management practices (Koch and MacDonald 114). JPMorgan Chase Bank is capable of maintaining its liquidity levels by managing its assets and liabilities. Since the market conditions are changing constantly, JPMorgan Chase Bank utilizes diversification of current liabilities as a way of maintaining the elasticity of the funding sources. The firm employs derivative products such as financial futures and interest rate changes, which improves liquidity by making it possible to issue liabilities with a lower degree of exposure to risks associated with interest rates (JPMC 191).
Liquidity is again the consequence of a firm maintaining a collection of assets that can be sold easily as well as the maintenance of unfunded loan assurances. This ultimately reduces any expected funding requirement. For JPMorgan Chase Bank, the unrealized losses in the firm’s asset portfolio have indicated no negative effect on the liquidity. As of the end of 2011, the bank had about $50,143,642 of available funds.
This figure has slightly increased from $41,930,369 reported at the end of the financial year 2010 (FFIEC 1). It is apparent that the liquid cash also increased slightly during the period and probably resulted in higher cash balances which were principally deposits. Therefore, this increase in assets, funds, and assets ratio indicates the capacity of the bank to sustain a stable liquidity rating.
Sensitivity to market risk
Sensitivity to market risk reflects the extent to which swaps in interest rates, currency values and equity prices affect earnings (Grier 64). The swaps have an effect on the value of assets and liabilities and above all on fixed income bonds. This CAMELS component considers the capacity of the management to recognize, evaluate, monitor and manage the risks associated with price. The fundamental contributor to market risk is the interest rate which originates from loan issuance and deposit accumulation. Since interest rates will keep on fluctuating, profit will rise or fall with the swaps in the interest rates.
As depicted in the reports, the net interest income of JPMorgan Chase Bank has decreased from $14,336,141 in 2010 to $11,512,972 in 2011 indicating a 19.7% fall. This means that the sensitivity to market risk of the bank is quite low. The increase in interest rates experienced due to the improving economy has led to an increase in their interest income.
With JPMorgan Chase Bank experiencing low sensitivity to the market, there are no potential market risks that can influence its operations. However, with the present unpredictable market and economic conditions, the firm should keep an eye on the changes in interest rates. The uncertainty of some factors such as the liquidity of the world’s financial markets, the degree of instability of interest rates, currency prices, equity prices and investor attitude all affect JPMorgan Chase Bank. The current practice of issuing bonds as the bigger part of financing is making the bank vulnerable to market risks. The confidence lies in that the bank is not highly sensitive to market risks and the management can easily prepare for a negative circumstance by ensuring that the movements of market factors do not make significant impacts on its performance.
The financial performance analysis through the CAMELS framework indicates that JPMorgan Chase Bank has financial stability and potential to grow, yet the financial state cannot be considered perfect. The adequate rations, as well as other figures, have been maintained, with some few that emerge as excellent. The key issues faced by the firm relate to delinquent loans and toxic assets which make the bank vulnerable to risks. However, the firm cannot become insolvent as indicated by its ability to maintain strong capital adequacy and liquidity states. Moreover, the management driven by key figures in the top management can manage the risk aspects clearly and soundly.
Federal Financial Institution Examination Council. Chase Bank USA, National Association. 2011. Web.
Grier, Waymond. Credit analysis of financial institutions. London, UK: Euromoney Books, 2007. Print.
JPMORGAN CHASE & CO. 2010, 2010 Annual Report. Web.
Koch, Timothy, and S. MacDonald. Bank Management. Florence, KY: Cengage Learning, 2009. Print.
Simon, Alex, Bernadine Sanchez, Gaurav Lalvani, Jesus Hernandez, Laura Dominguez, Martin Nee and Marquez Sampson 2009, Uniform Bank Performance Report. Web.