20080717-Citi-JP Morgan Chase & Co (JPM)

2Q08 Early Read
 2Q Results Stronger Than Expected — JPM reported $0.54 vs our estimate of
$0.30 and consensus of $0.44. Upside vs our numbers was across 5 of 6
businesses driven mostly by better than expected credit quality (as pace of
credit quality deterioration slowed) and reserve build, very strong quarter for
fixed income capital markets and some one timers in the Corporate line (such
as $0.15 from Mastercard gain and higher than expected venture capital
gains).
 Investment Bank — Roughly $0.07 of upside related to much stronger than
expected fixed income capital markets. There was $12.8 billion in high risk
exposure reductions in 2Q ($33 bil total high risk exposure as of June 30).
 Retail Financial Services — Roughly $0.05 of upside in this business line due
primarily to better than expected credit trends in HELOC (2.16% net chargeoffs
in 2Q vs 1.89% in 1Q), mortgage and auto. Top line trends were mostly in
line, and mortgage banking results improved, in line with expectations.
 Card – Slightly better than expected due to lower than expected reserve build
(JPM added $300 mil in 2Q). Net interest margin came in a bit weaker than
expected (7.9% vs 8.3% in 1Q) due to prime/libor spread. Charge-offs of 5.0%
and 2009 outlook in line with prior guidance.
 Other businesses – Commercial bank slightly better (due to improved credit),
TSS a bit weaker, and Wealth Mgmt due to better than expected top line.
 Corporate – Remainder of upside in this business line largely due to $0.12 due
to Mastercard gain, $0.03 due to higher private equity gains, and the
remainder due to less one time charges.
 Capital — Tier 1 ratio of 9.1%. Note that this includes about 100 bp of capital
relief related to BSC acquisition.
 The Stock – Overall, results are much better than expected, and stock should
be strong today.