The Henry Fund

Henry B. Tippie School of Management Husam Atari [husam-atari@uiowa.edu] JPMorgan Chase & Co. (JPM) September 16, 2016

Financial Services – Diversified Banks Stock Rating Hold

Investment Thesis Target Price $70.00 We recommend a HOLD for JPMorgan Chase & CO. (JPM). On the one hand, JPM has outperformed analyst expectations the past six quarters, should be spurred by a stronger broader economy, and is a dominant player in the commercial and investment banking spaces. On the other, JPM may be riskier than it was before the financial crisis, faces a regulatory environment that will strain its return on equity, and holds a high volume of complex assets/liabilities – both on and off its balance sheet. Thus, while our models indicate JPM is currently undervalued by 6%, we are cautious about the headwinds mentioned.

Drivers: • In each of the past six quarters, JPM has beat consensus EPS estimates by

an average of 12 cents (or 9%) per quarter. • Real national and global GDP should continue to grow at 2% and 3%,

respectively, fostering 4.58% CAGR for JPM’s assets through 2020, higher than its historical 4.34% CAGR.

• The Fed will implement four to six more 25 bps rate hikes through 2020, helping JPM increase its net interest income at a 5.44% five-year CAGR and improve its GAAP-basis net interest margin by 23 bps.

• JPM is the market leader in commercial and investment banking, earning 13.5% of all FDIC-insured bank revenue and 7% of all global investment banking fees.

Risks: • JPM has $515B in complex and difficult to value assets and liabilities, as

well as $940B in off-balance sheet exposures, which could present material financial risk if such items are mispriced and/or underestimated.

• Due to regulations requiring JPM to increase its levels of equity, its return on equity of 8.54% in 2020 will fail to exceed its cost of equity of 8.58%.

• Based on recently released data, JPM may be riskier now than it was before the financial crisis as risk metrics such as its volatility, beta, CDS spread, etc. have all increased.

Henry Fund Formal EDCF $73.32 Henry Fund Simple EDCF $69.66 Henry Fund DDM $69.51 Relative P/B $75.01 Price Data Current Price $65.82 52wk Range $52.50 – 69.03 1yr Target Est. $70.56 Key Statistics Market Cap (B) $237.7 Shares Outstanding (B) 3.61 Institutional Ownership 76.20% Beta 1.26 Dividend Yield 2.92% Est. 5yr Growth 4.45% Price/Earnings (ttm) 11.15 Price/Earnings (FY1) 10.60 Price/Book (mrq) 1.05 Profitability Net Interest Margin FY15 2.14% Return on Assets (ttm) 0.98% Return on Equity (ttm) 9.71%

Henry Fund Earnings Estimates Year 2013 2014 2015 2016E 2017E 2018E EPS $4.39 $5.34 $6.05 $5.93 $6.31 $6.63

growth -15.93% 21.70% 13.41% -2.10% 6.47% 5.00% 12 Month Performance Company Description

JPMorgan Chase & Co. is a Diversified Bank that offers a wide array of includes commercial banking, investment banking, asset management, and derivatives products and services. JPMorgan Chase & Co. is headquartered in New York, NY but its operations span across the globe. It is one of the world’s largest banks, by assets. Tearsheet sources: Yahoo! Finance; FactSet

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Important disclosures appear on the last page of this report.

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EXECUTIVE SUMMARY

We expect the national and global economies strengthen even further in the coming years, which will help JPM’s growth prospects. Specifically, we foresee continued rate hikes, higher consumer confidence, tighter labor markets, and increased residential and commercial real estate development. Consequently, JPM’s five-year story is one of sturdy growth at 4.58%, compounded annually, for assets, 6.50% for loans, and 5.44% for net interest income. These growth assumptions drive our various financial models which produce intrinsic values ranging from $69.51 to $75.01 and, in turn, our $70 target price. Given that JPM currently trades at $65.82, it is undervalued by 6.%.

However, despite this growth story and slight upside, we are only recommending a HOLD because we are concerned about JPM’s risk profile and ability to incur new regulatory costs without sacrificing too much profit. In particular, JPM has a host of complex assets and liabilities on and off its balance sheet which could adversely affect its growth. Also per a variety of metrics, JPM may not have reduced its risk since the financial crisis – despite adhering to a host of new regulations. Moreover, due to even further regulations, JPM’s return on equity is on a trajectory to fall short of its cost of equity by 2020.

Ultimately, an investment in JPM comes with solid growth potential, as well as unique risks. The combination of which suggests it is close to fairly valued at its current price.

COMPANY DESCRIPTION

JPMorgan Chase & Co. (JPM) is a financial conglomerate and bank holding company. JPM operates in 60+ countries, employs over 240,000 people and has approximately 5,366 branches worldwide.i Through Fiscal Year 2015, JPM was the world’s seventh largest bank, as well as the largest bank in the US, in terms of asset size ($2.41T at the end of FY2015).ii JPM achieved this stature through a series of mergers and acquisitions of various banks and financial companies. Two of which are particularly noteworthy. The 2000 merger of J.P. Morgan & Co. and Chase Manhattan Corp., a $31B deal that combined two of the top five largest banks in the US at the time and created the JPM umbrella we know today.iii Additionally, the 2004 acquisition of Bank One, a $58B deal that gave JPM a much

stronger retail and credit card presence and put Jamie Dimon at the helm as CEO, who is still leading JPM today.iv

JPM has four major segments: Consumer and Community Banking (CCB), Corporate and Investment Bank (CIB), Commercial Banking (CB), and Asset Management (AM). JPM also has a Corporate segment, that is a function of its Treasury and Chief Investment Office (CIO).

Because of the overlap among departments and the consolidated nature of JPM’s income statement, we did not breakdown our forecasts by segment. Rather we focused on each line item in the balance sheet and income statement.

How JPM Makes Money

While the business segments highlighted above explain the wide variety of products and services JPM offers, we use different groupings to illustrate how JPM turns such products and services into money. Specifically, five categories that we labeled in the following manner: (1) traditional banking, (2) complex banking, (3) investment banking, (4) AM fees and commissions, and (5) other banking.

Traditional banking consists of operations we view as straightforward and relatively common among banks in general. On the non-interest side, this includes lending and deposit-related fees, mortgage fees and card income. On the interest side, this includes interest income from loans, securities borrowed, federal funds sold, and deposits with other banks. The interest side represents the money JPM earns via borrowing at one rate, through deposits and other debt, and lending at another. The non-interest side represents the fees associated with such dealings, as well as credit card issuances. From 2011-2015, traditional banking averaged 51% of JPM’s gross revenue.

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Complex banking is the money JPM earns from its more esoteric activities, mostly involving derivatives trading. Derivatives are contracts that derive their value from movements in the underlying asset referenced in the contract. Relatedly, JPM’s second and third largest individual sources of gross revenue, behind interest income from loans, are principal transactions and interest income on trading assets.

Principal transactions is a complicated line item that includes realized and unrealized gains/losses on derivatives stemming from market-making services and private equity investments. It also includes gains/losses from risk management transactions such as hedging credit, commodity, and foreign exchange risk. In other words, this line item seems to be the money JPM makes when it facilitates a derivatives trade for a client and/or takes a derivative position for itself to hedge against a certain type of exposure.

Interest income on trading assets represents the interest that JPM earns on a variety of fixed-income and derivative assets that it holds in its trading portfolio. These instruments include a variety of mortgage-backed securities (MBS), purchased loans, corporate debt, as well as a range of credit, foreign exchange, equity, and commodity derivatives receivable. From 2011-2015, principal transactions and interest income on trading assets averaged 9% and 8% of total gross revenue, respectively. Put differently, 17% of JPM’s revenue comes from complex banking.

Investment banking represents the fees JPM makes when it underwrites a debt or equity offering or advises a company on M&A, restructuring, etc. Investment banking has averaged 6% of JPM gross revenue the past five years. AM fees and commissions includes AM fees, administration fees, brokerage commissions, and all other commissions and fees. Mostly simply, AM fees and commissions represents the money JPM collects for managing investor money – about 14% of gross revenue, on average, for the past five years.

Other banking includes other income and interest income on other assets. We also grouped securities gains (losses) and interest income on securities in this category. While investing in certain securities, broadly speaking, is a traditional banking operation, some types of securities JPM earns gains (losses) and/or interest income from are much more complex than those in the typical bank

portfolio. For example, collateralized loan obligations (CLOs), other asset-backed securities (other ABS), and non-US mortgage-backed securities (foreign MBS) currently make up 21% of JPM’s $290M securities portfolio. These are securities that differ greatly from the more standard US treasuries, muni bonds, agency MBS and investment grade corporate debt. However, 37% of JPM’s securities portfolio does consist of such securities. Thus, we did not feel confident labeling JPM’s securities activity as complex either. In short, some of JPM’s AFS and HTM securities were too esoteric for us to consider activities pertaining to them traditional. Yet, other securities were too standard to label related activities complex. Hence, our use of the other category here. Other banking has averaged 12% of gross revenue the past five years.

Source: JPM 10K

Moving forward, we expect the general historical breakdown to remain essentially the same. However, we do expect slightly more of JPM’s total revenue to come from traditional banking. This expectation is based on two factors: (1) as rates normalize, JPM will make more loans and churn more interest income from such loans; (2) continued phase-in of various regulations (i.e., Dodd Frank, Basel III, etc.) will tilt banks toward more conventional income streams.

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Source: Model projections

Income and Profitability

Now that we have examined JPM’s sources of revenue, we turn to how much money JPM actually makes. JPM does not report gross revenue but it can be calculated easily by adding non-interest revenue and total interest income. Gross revenue stood at $101B for FY2015 but has declined from 2011-2015 at a CAGR of -2.23%. This has been driven by a steep drop in total interest income, which represents 52% of gross revenue on average. From 2011-2015, total interest income has fallen from $61B to $51B, or a 16.84% decrease. Given the interest rate environment of the past five years, this is unsurprising. However, as rates being to normalize over the next five years, we expect total interest income to rebound and grow at a 6.58% CAGR through 2020, fueling a 4.37% gross revenue CAGR in that same time frame.

In terms of non-interest revenue, it has remained steady at $50B the past five years, we expect to slightly grow the next five years at a CAGR of 1.90%. The growth will primarily come from principal transactions and AM fees. With principal transactions it is difficult to tie such a complex line item to a particular economic variable. Additionally, historical trends were all over the place, such as a 44% decline in 2012 and an 83% jump in 2013. Thus, we examined the pace principal transactions was on for 2016, based on performance through Q2, and tied our projections to that. Specifically, principal transactions is on pace to grow 5-6% this year relative to 2015. Accordingly, we set a growth rate of 5% through 2020. As for AM fees, while some fee compression is likely to occur due to the competitive environment in the space, such compression will be more than offset by growth in assets under management (AUM). Specifically, we expect the AM fee

ratio (i.e., AM fees/avg. AUM) to decline from an average of 5.55 from 2011-2015 to an average of 5.34 for 2016-2020 and AUM to grow at a 4.57% CAGR. This growth in AUM expectation is based on JPM’s continued investment and expansion of AM, such as its recent business license to operate in China.v

JPM does report net revenue, which is gross revenue netted for interest expense. Within this, net interest income (i.e., total interest income- interest expense), has decreased from $48B to $44B from 2011-2015, or a decline of 8.88%. However, it has remained steady in the $43B to $44B range the past three years. Net interest income has not fallen as rapidly as total interest income because interest expenses have also been effected by the low rate environment. In other words, while interest income has been suppressed, interest expenses have lessened even further, leading to a less steep fall in net interest income relative to total interest income. Given that we expect at least one 25 bps rate hike this year, and another three to five over the next four years, we foresee net interest income increasing at a five-year CAGR of 5.44%.

Interest income from loans is JPM’s biggest source of revenue overall, typically representing 33% of gross revenue. Interest income is the yield JPM earns on loans it has made to consumers and commercial borrowers. We calculate this yield via dividing a given year’s interest income by the average loan volume for that year. But, JPM, as every bank, adjusts its average interest earning assets, accounts for tax distinctions among its securities, and ultimately reports its interest income yields (and NIM, see below) on a managed basis. While we would prefer to calculate, and forecast, such measurements in a manner consistent with JPM, we do not have enough information to do so. In other words, we are unclear on JPM’s methodology in this regard and are inclined to use a strictly GAAP basis for our calculations. Thus, interest income and interest margin related figures we discuss (and forecast) will differ from what JPM reports in its annual filings. All that said, JPM’s interest income yield, as we measure it, has declined each of the past five years, falling to 4.23% in 2015. We expect this trend to turnaround, given the anticipated normalization of rates, and we forecast loan interest income yields in the 4.40% to 4.50% range from 2016-2020.

Net interest margin (NIM) is a key measure of profitability for banks. It measures the spread a bank captures between its borrowing costs and interest revenue. Generally, NIM is

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calculated via dividing net interest income by average interest earning assets. Again, we do this in a GAAP basis and JPM does it on a managed basis. JPM’s interest earning assets include: loans, securities, trading assets, federal funds sold, securities borrowed, deposits with other banks, and other assets. Post-financial crisis monetary policy has squeezed NIM across the bank industry. However, the Fed began normalizing rates in 2015, and we expect this process – albeit gradually and cautiously – to continue at least through 2020. As discussed above, interest rate moves tend to favor the income side, relative to the borrowing side. Accordingly, we expect JPM’s NIM to jump from 1.88% in 2014 and 2015, to 2% this year, and reach as high as 2.11% in 2019.

Source: JPM 10K; model projections

Balance Sheet Part I: Assets

As noted above, JPM has become the largest bank in the US, in terms of assets, via a combination of acquisitions and organic growth. As of 2Q FY2016, JPM stood at $2.47T assets, however management has indicated that they expect to end FY2016 closer to $2.45T.vi From 2011-2015, total assets grew at an average rate of 1.11% but that figure is skewed by an 8.61% drop in 2015. Once adjusted for that outlier, JPM’s assets grew at an average rate of 4.34%. Using management guidance as a starting point, we expect JPM total assets to grow at an average rate of 4.58% from 2016-2020. Thus, we foresee JPM’s total assets to reach $2.94T in 2020.

Source: JPM 10K; model projections

Loans represent JPM’s largest asset, averaging 31% of the total balance sheet the past five years. This line item includes wholesale, consumer, and credit card loans. Trading assets, the portfolio of wide-ranging financial instruments, is the next largest, at 17%. Securities, which includes a combination of traditional and esoteric fixed-income investments, makes up 14% of the balance sheet. Items such as cash, deposits with banks, and federal funds sold represent JPM’s cash and excess reserves that it holds itself, with other banks, and/or with the Federal Reserve. Combined such assets represent about a quarter, or 23% of JPM’s balance sheet. Other includes net PP&E, intangibles, accounts receivable, goodwill and other assets.

Source: JPM 10K

As noted above, we believe more of JPM’s revenue will come from traditional banking moving forward. Accordingly, we project the balance sheet to reflect this shift. More specifically, we expect the percentage of loans to increase by 6.50% and trading assets and securities to decrease by 3%.

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Source: Model projections

This forecast is based on three factors: (1) regulatory costs pertaining to complex assets; (2) recent trends in JPM’s balance sheet; (3) loan growth expectations.

We believe the anticipated rise in regulatory costs for investing in complex assets will cause JPM to trim such holdings. For example, Title VII of Dodd Frank and the European Market Infrastructure Regulation (EMIR), both of which add clearing and reporting requirements to certain over-the-counter (OTC) derivatives trades, are still being implemented.vii In other words, many OTC derivatives that were historically traded bilaterally without an exchange or data repository will now have to be cleared and reported, increasing the costs of such trades. Relatedly, Basel III, which increases capital costs for riskier assets, continues to be phased-in and will contribute to a regulatory environment that disfavors a large portion of complex assets on the balance sheet.

Additionally, recent trends in JPM’s balance sheet further support our future expectations. Trading assets and securities, as percentages of total assets, have dipped from 20% and 16% in 2011 to 15% and 12% in 2015, respectively. Moreover, in 2015 loans jumped to 35% of total assets, relative to 30% the preceding four years. Thus, it seems that the shift toward traditional banking that we are predicting is already underway.

Thirdly, we believe JPM will demonstrate continued loan growth. Starting with 2016, based on performance through 2Q and management guidance, we assume loan growth of 7.5% for the year. From there we expect loans to grow at an average rate of 6.50% through 2020.

Source: JPM 10K; model projections

Our assumptions regarding loan growth are based on a host of economic variables. Such variables are discussed in the Economic Outlook below.

It is also worth noting the credit quality of JPM’s loans. JPM’s credit quality can be examined through two metrics: (1) provision for credit losses (PCL) and (2) allowance for loan losses (ALL). ALL is a balance sheet contra-account that represents reserves JPM keeps for losses arising from bad loans and PCL is an income statement expense that is used to sustain the ALL.viii In other words, each quarter JPM takes a slice of its net income (PCL expense) and adds that money to a sort of rainy day fund for loans that go bad (ALL account).

PCL as a percentage of average gross loans outstanding (PCL ratio), has averaged 0.35% in the more prudent post-financial crisis era of 2011-2015. In 2016, this ratio is expected to jump to 0.75% due to JPM’s oil and gas exposure. JPM’s total oil and gas exposure currently represents only 4.5% of total loans, and this increase in PCL is seemingly driven by only a single name in the oil and gas portfolio.ix On the one hand, it is unclear whether the worst is behind the oil and gas industry. On the other, JPM seems to be managing its exposure to the oil and gas industry carefully. Thus, we projected an average PCL ratio of 0.45% through 2020 – not as low as the 2011-2015 average but not as high as the 2016 spike either.

Similarly, ALL as a percentage of gross loans outstanding (ALL ratio), which built up during the financial crisis has been decreasing ever since. It dropped from 5% in 2009 to 1.62% in 2015. But, again due to oil and gas industry strains, the ALL ratio is on pace to rise to 1.75% for 2016. Beyond that, we expect the ALL ratio to average a slightly higher 1.87% through 2020. This higher figure is due to our

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forecasted PCL ratio, discussed above. In other words, as we expect JPM to record slightly higher PCL expenses, the ALL reserve will increase too.

Balance Sheet Part II: Liabilities and Equity

As a bank, JPM primarily finances its assets through various forms of borrowing. More specifically, deposits, short-term debt (i.e., commercial paper, federal funds purchased, accounts payable, etc.), and long-term debt (i.e., FHLB advances, bonds, etc.). Among these sources, the breakdown, as a percentage of total assets, tends to be 54%, 17%, and 12% respectively. Given the historical stability of JPM’s borrowing composition, we kept essentially the same breakdown for our forecasts.

Since JPM can only invest and lend out what it can bring in, its asset growth must be in line with its funding growth. Accordingly, as deposits represent much of JPM’s funding, we anticipate a 4.76% five-year deposits CAGR. We projected the remaining borrowing sources as a percentage of beginning total liabilities, as there were consistent historical patterns in that regard. For example, long-term debt as a percentage of beginning liabilities has been right around 12% each of the past five years, thus we forecasted it in the 12-13% range going forward.

There is one other liability item that does not represent a funding source: trading liabilities, which tends to represent 6.50% of beginning liabilities. This is essentially the opposite side of the trading assets account discussed above. Given the complexities associated with this account, and the consistency in its historical proportion, we kept it at 7% of beginning liabilities through 2020.

While borrowing, in large part, dictates how much JPM can lend and invest, there is another controlling factor: regulation. As a bank holding company, JPM is governed by the Federal Reserve, and in turn the Basel Accords. While Basel is a set of international guidelines, the Fed has decided to use Basel, along with Dodd-Frank, to establish capital requirements for US banks within its jurisdiction. Capital requirements mean that JPM must finance its assets with a minimum level of equity. Additionally, as a designated Global Systemically Important Financial Institutions (G-SIFI), JPM must use even more equity financing than most banks.

The amount of equity financing necessary hinges on the type of residual claim such equity represents. There are

various categories such as Common Equity Tier 1 (CET1), Tier 1, Tier 2, Total Capital, etc. Each category is the numerator for the various capital ratios JPM is required to meet. The denominator consists of the assets being financed. And the ratio required depends on the asset’s perceived riskiness. Accordingly, JPM must assign a risk-weight to each of its assets, known as RWAs (i.e., CET1 ratio = CET1/RWA). Because RWAs are measured internally, and are not disclosed to the public, we have no way of estimating or projecting JPM’s RWA capital ratios. However, all is not lost in forecasting JPM’s capitalization as there is one Basel capital ratio we can approximate. Specifically, the Tier 1 leverage ratio uses Tier 1 Capital as the numerator and does not have a risk-weighted denominator. Tier 1 Capital can be estimated by adding common stock and preferred stock, then subtracting goodwill and other intangibles. There are other adjustments that are not defined in JPM’s 10K, but such changes are not large enough to prevent us from making a decent estimation. To be considered well-capitalized JPM must maintain a Tier 1 leverage ratio of 6%.x JPM has been above that threshold each of the past five years, and even surpassed 8% in 2015. We expect JPM’s Tier 1 leverage ratio to continue its upward trajectory and approach 9.50% by 2020.

Source: JPM 10K; model projections

This expectation makes sense, as Basel III continues to be phased in JPM will need use higher levels of equity to finance its operations. What this means for JPM’s profitability going forward is less clear. While more equity will undoubtedly provide a nice cushion in case of a financial downturn, it also poses potential investment issues. Specifically, as JPM’s equity base grows, so does its return on equity (ROE) denominator. And if net income, the ROE numerator, does not outpace this growth, then JPM’s ROE will start to decrease and potentially be unable

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to exceed its cost of equity. In fact, by 2020, we forecast an ROE of 8.54% relative to a cost of equity of 8.58%. This is certainly concerning from our perspective and something we must consider in our evaluation of JPM stock.

Balance Sheet Part III: Accounting Labyrinth

JPM records 27% (or $625B) of its assets at fair value. Fair value is the price an asset could fetch in its market at the date of its valuation. There are three levels of fair value: Level One - quoted prices exist for identical assets/liabilities in active markets (i.e., shares traded on a public exchange); Level Two – quoted prices exist for similar assets/liabilities in active markets and model inputs are observable either directly or indirectly; Level Three – one or more inputs are unobservable and significant to the valuation.xi Level Two would involve complex modeling using available and relevant data, and could be considered analogous to an educated guess. Level Three, which, by definition, estimates items that cannot be observed, would involve even more complex modeling with unavailable data, and could be described as an uneducated guess.xii In fact, Level Three assets, even in a stable market, can be off by as much as 15% - and likely much more in a panic market.xiii

As of FY2015, JPM had $180B in Level One assets, $415B in Level Two, and $31B in Level Three.

Source: JPM 10K

However, from 2014 to 2015 $18B in Level Three assets were moved to Level Two due to increases in observability in certain inputs and decreases in significance in other unobservable inputs.xiv In other words, JPM cut its Level Three assets by 40% based on its view of how observable an input was and/or how significant it judged another input to be. If assets can be moved back and forth between

Levels Two and Three so seemingly effortlessly, the line separating educated and uneducated guess becomes blurrier – and the associated value(s) less reliable.

Moreover, JPM records $60B and $9B in Level Two and Level Three liabilities, respectively. However, that is after netting out $890B in derivatives obligations. While netting money owed against offsetting money to be received under derivatives contracts is commonplace under GAAP, and on some level makes economic sense, it does not mean the net exposure is the true exposure. Put differently, if things go haywire – such as several countries leaving the EU, an unexpected sovereign/large corporate default, or large foreign exchange rate swing – then the amount a party owes under a derivatives contract could drastically exceed the net obligation. In short, if everything goes as expected JPM only owes $70B in derivatives payable, but if not, JPM could potentially be on the hook for much more. Scarily, if JPM had to pay out even 25% of its notional derivatives liability, that could be enough to wipe out JPM’s SH equity entirely.

Beyond the uncertainties with fair value and derivatives exposure, as of FY2015 JPM had another $940B in off-balance sheet (OBS) exposure. This would mean that JPM’s true size is closer to $3.3T. Additionally, this would mean JPM is far more levered than the on-balance sheet leverage ratios would suggest. Basel III contemplated this exact scenario, and came up with the supplementary leverage ratio (SLR) to adjust for OBS exposures. The SLR is essentially Tier 1 capital divided by average total assets and OBS exposures. Beginning in 2018, JPM will be required to maintain a 5% SLR. As of FY15, JPM estimates its SLR to be 6.5%, which is above the minimum but still a low figure. It is unlikely that many shareholders would want their equity investment levered upwards of 15x.

Also, JPM excludes obligations under structured notes that are based on the performance of such notes from its total exposures. In other words, based on the current performance of the note, JPM estimates that it does not owe anything. However, it does not discuss what it may owe if that performance changes or turns against JPM. The reason for this could be that JPM views the obligations as relatively small in isolation, but it is plausible that they add up in the aggregate.

Even the brightest person or the most powerful supercomputer cannot perfectly evaluate the intricate web of uncertainty embedded in JPM’s complex

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transactions. At some point, especially when using unobservable inputs, the upper limits of human cognition and computer processing can only stretch so far. Thus, we are unsure how confident we can be in the value of JPM’s assets and what its total exposure to losses truly is – especially in a turbulent market.

COMPANY EARNINGS

Recent Performance

Over the past year, JPM has displayed a strong earnings performance. Specifically, FY2015 EPS, on both a basic and diluted basis, grew by 13.4% relative to FY2014, beating analysts’ estimates of diluted EPS by 2%.xv Moreover, JPM has surpassed analysts’ expectations in each of the past six quarters – most recently posting a 13-cent surprise ($1.55 vs. $1.42) in Q2 of 2016.

Source: FactSet

We should note that JPM’s management does not guide EPS per se, but it does give guidance for net interest income, non-interest revenue, and total assets. Additionally, while FY2015 was strong and the first half of 2016 has exceeded expectations, JPM’s FY2016 EPS is expected to decline on year-over-year (YOY) basis. More specifically, we expect FY2016 basic EPS to be $5.93 relative to $6.05 and analysts foresee diluted EPS declining from $6.00 to $5.63.

Moving forward, we project basic EPS to grow at a 5.2% CAGR from 2016-2020, relative to the 7.7% pace from 2011-2015. While this may seem pessimistic, our net income forecasts are $1B higher than analysts’ estimates for 2016 and 2017. Most of this relatively small difference comes from lower tax expenses and higher net interest income eon our end. In other words, analysts use a slightly higher marginal tax rate than we do and we expect a

moderately friendlier rate environment. Unfortunately, analysts only predict diluted EPS and our model forecasts basic EPS, thus we are unable to make an apples-to-apples comparison here.

Overall, JPM’s earnings the past six quarters have been impressive, and while we all expect a slight dip for 2016, we believe JPM will rebound in 2017 at a solid 5% pace through 2020.

INDUSTRY THEMES

JPM is part of the Financials Sector, and the Diversified Banks sub-industry. Diversified Banks is made up of the six largest US banks and the five largest Canadian banks, by asset size. The US Diversified Banks include JPM, Bank of America, Citigroup, Wells Fargo, US Bancorp, and PNC Financial Services.

Risky Business?

Since the financial crisis, a host of new regulations have been introduced with the intent of making the banking industry safer. The most significant reforms include Dodd-Frank and Basel III, both of which were discussed earlier (see Balance Sheet Part I and Part II, under Company Description). The goal of these regulations is to reduce the riskiness in the industry that exacerbated the financial crisis.

It would seem then, as banks become better capitalized and risky activities increase in cost, that the overall industry is safer relative to the pre-crisis era. However, recent data indicates that this may not be the case. In fact, the opposite may be occurring and banks may be riskier now than before the crisis. Specifically, risk measures including various volatility metrics, credit default swap (CDS) spreads, systemic risk percentage (SRISK), etc. all paint an uneasy picture about the safety of today’s large banks.xvi

Source: Sarin and Summers

Bank Risk - Before and After Financial Crisis Measure Pre-Crisis Avg. Post-Crisis Avg. 2015 Avg.Volatility 24.70 33.07 20.67Bank volatility/market volatility 1.55 1.80 1.71Implied volatility 22.90 30.84 22.96Implied bank volatility/market volatility 1.91 2.13 1.61Option delta 0.036 0.074 0.046Beta 1.18 1.59 1.23CDS spread 31.85 139.04 93.58Preferred stock price 24.91 20.15 20.74SRISK% 5.76 10.44 10.18

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The metrics in the above table pertain to four of the six Diversified Banks: JPM, Wells Fargo, Bank of America, and Citi, as well as two other financial conglomerates: Goldman Sachs and Morgan Stanley. For every measure in the table, other than preferred stock, a higher number means more risk. As for preferred stock, because of its debt-like features, a lower yield and higher price would suggest less risk.xvii Especially in the post-crisis low rate environment, a less risky bank should have more expensive preferred shares than before the crisis. Unfortunately, the opposite has occurred.

Moreover, both historical and implied volatility, even when adjusted for the broader market, are higher since the crisis – although 2015 did show a slight downtick. Given that it was created in 2016, SRISK may jump out as a novel concept. Essentially, it attempts to define risk by the likely size of a firm’s contribution to a system-wide failure.xviii It contains three inputs: (1) real social cost of a crisis per dollar of capital shortage; (2) probability of a crisis; and (3) expected capital shortfall of the firm in such crisis.xix In short, SRISK is the capital a firm would need to survive a financial crisis similar to that of 2008-2009. Thus, it appears that the six banks delineated above, on, need more capital to withstand a crisis today than they did in 2008-2009 – meaning they pose a riskier investment.

The conventional wisdom after the crisis was that investors in bank shares would sacrifice profitability in favor of reduced risk. However, an investment with lower profit and higher risk is much less appealing. In light of this, it will be interesting to see how the industry evolves going forward.

MARKETS AND COMPETITION

As a large conglomerate, JPM competes with a wide range of financial institutions. Most directly, it competes with the other five Diversified Banks in the US mentioned above. JPM also competes with large investment banks such as Goldman Sachs, Morgan Stanley, etc., and European counterparts Barclays, UBS, etc. Lastly, JPM competes with asset managers such as BlackRock and Vanguard.

The six Diversified Banks dominate the $705B US commercial banking market, earning 50% of all FDIC-insured bank revenue.xx JPM alone accounts for 13.5% of such revenue. This indicates a high level of concentration in the banking industry, with JPM leading the way.

Another way to examine the bank industry is through share of deposits. There are currently 6,122 FDIC-insured banks in the US, but the six Diversified Banks hold 41% of all domestic deposits. This further illustrates the concentration in the banking world. And again, JPM ranks quite well here, less than 1% away from the top spot.

Source: Card Hub; FDIC

Given the high level of concentration and the relative commoditization of commercial banking products, banks must compete on price in this space. Accordingly, we project a decrease in JPM’s lending and deposit related fees line item at 1.05% a year through 2020.

The above data all relates to the traditional operations of JPM. To understand its market position within the investment banking realm, we examine fee revenue. This makes sense because investment banking is almost entirely a fee driven business. The investment banking industry is also highly concentrated as the top five firms earned 30% of the $89B in 2015 investment banking fees.xxi These five firms include three Diversified Banks (JPM, Bank of America, Citi) and two investment banks (Goldman Sachs and Morgan Stanley).

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Source: Financial Times; Thomson Reuters

As seems to be the pattern, JPM shows up at the top in this market as well. However, this stream of money is declining for JPM and the industry overall. More specifically, global investment banking revenue fell 6% in 2015 and is down 21% YOY through 2Q 2016. In other words, the pie for an already competitive industry is shrinking, which will lead to further price competition moving forward. Hence, the fee compression we embedded in our model – in particular, we do not expect JPM to reach its 2015 level in investment banking fees again until 2020.

In terms of asset management, this is an area JPM is not at or very near the top. Asset management is a $16T market of firms that manage various pools of capital.xxii It is a service based business model that hinges on fee pricing and performance results. Whereas an investment banker is paid a fee for closing a deal, an asset manager will collect a fee to manage the assets and may also collect additional compensation based on performance.

Source: S&P Capital

As can be seen from the table above, JPM ranks sixth in AUM among asset managers – respectable but certainly there is room for improvement. Also, the story of concentration among financial activities applies here as well: BlackRock, Vanguard, and State Street manage 61% of all the assets in this market. However, while price competition is fierce, firms also try to compete on product differentiation here. In other words, firms attempt to offer superior strategies and unique products at a lower price. For example, new ETFs that use more institutional strategies (i.e., long/short equity) but are available to retail investors. Our expectations regarding JPM’s asset management division have been outlined in earlier sections.

Peer Comparisons

We limited JPM’s peer group as other firms that offer similar products and services along the banking spectrum. For example, asset managers were not included because they are more limited in scope but investment banks such as Goldman Sachs and Morgan Stanley were because they compete with JPM across various areas. Thus, this peer group includes the other five US Diversified Banks – Bank of America (BAC), Citi (C), US Bank (USB), and Wells Fargo (WFC) – along with Goldman Sachs (GS) and Morgan Stanley (MS).

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Source: FactSet; Yahoo! Finance

The above table paints a mixed picture about JPM’s performance relative to its peers. For example, using standard bank profitability measures, ROA, ROE, and NIM, JPM is more profitable than some peers but less profitable than others. Additionally, using PCL and ALL ratios as a benchmark, JPM is a more prudent lender than some of its competitors but less prudent than others. It is noteworthy that JPM is by far the most levered Diversified Bank – 23% more levered than the next closest, BAC. Being the largest bank and the most levered is a combination that is unlikely to appeal to investors and regulators alike due to the risk and regulatory implications discussed previously (see Industry Trends).

The market seems to be telling an interesting Price-to-Book (P/B) story. On the one hand, USB and WFC are trading at decent premiums relative to their book value. On the other, BAC, C, GS, and MS are all trading at discounts relative to their book value. JPM and PNC are right in between and are trading at slightly above book value. For the banks trading at a discount, this indicates that the market is not confident in the prospects of their stocks. It is typically not a good sign when the market values a company’s equity below its book value. Some of this market view may stem from uncertainty regarding these banks’ accounting, apprehension about their ability to generate a ROE that exceeds cost of equity, and discomfort with their post-crisis risk profile. What this means for JPM is unclear – given its P/B ratio, the market seems somewhat secure in JPM’s performance, but not enough to attach a solid premium to its equity value.

ECONOMIC OUTLOOK

Bank performance largely hinges the state of the overall economy. For JPM, with a 75%/25% US/international breakdown for both revenues and assets, the US economy is the most important and the global economy is secondary. Key variables such as interest rates, GDP, consumer confidence, housing, commercial real estate, the labor market, all fuel lending – JPM’s bread and butter. Therefore, this section will focus on such metrics, domestically, with some consideration of global factors.

Rates

The Federal Reserve raised rates for the first time since the financial crisis last December. In our September Economic Outlook, we forecasted another 25 bps rate hike this year and another two to three 25 bps rate hikes through 2018. From there, we could see anywhere from zero to two more 25 bps rate hikes through 2020. These expectations are based on the Fed’s cautious tone, and indications that rate normalization will be a slow and steady process. However, we should note that the Bank of Japan and the European Central Bank continue to ease their monetary policy, with Japan even veering into negative rate territory. Thus, despite our domestic rates rising, there could be a spillover effect from abroad that negatively impacts JPM’s loan yields. Since 90% of JPM’s loan portfolio is domestic we do not expect this to directly impact JPM’s interest income and margins, but the potential for indirect impact is something we will watch closely. Overall though, we expect the future rate environment to be favorable for JPM’s business as discussed throughout the Company Description.

GDP

On the most macro-level, economists expect real US GDP and real global GDP to grow at approximately 2%-2.50% and 3%-3.50%, respectively over the next three years.xxiii We foresee similar growth domestically, as our September Economic Outlook produced a median two-year real US GDP of 2.3%. In other words, the post-crisis status quo of sluggish growth is likely to endure. Such expectations support our case for very gradual and modest rate hikes, and in turn, the moderate increases in JPM’s interest income and margins.

JPM BAC C PNC USB WFC GS MSCurrent Market Cap $238B $158B $135B $44B $73B $229B $67B $60B

FY15 Assets $2.47T $2.14T $1.84T $359B $422B $1.79T $861B $789BFY15 Loans $837B $903B $618B $207B $261B $917B $46B $73B

FY15 PCL (as % of loans) 0.46% 0.33% 1.10% 0.12% 0.43% 0.27% N/A 0.12%FY15 ALL (as % of loans) 1.55% 1.33% 2.10% 1.32% 1.48% 1.26% 0.90% 0.31%

FY15 ROE 9.73% 6.36% 7.90% 9.16% 13.07% 12.13% 7.18% 8.40%FY15 Debt:Equity 2.10x 1.71x 1.66x 1.22x 1.30x 1.54x 3.84x 2.95x

FY15 ROA 0.85% 0.74% 0.95% 1.15% 1.41% 1.31% 0.71% 0.77%FY15 Managed-Basis NIM 2.35% 2.20% 2.93% 2.74% 3.00% 2.95% 0.40% 0.40%

P/B (mrq) 1.05 0.65 0.63 1.05 1.75 1.28 0.94 0.87

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Consumer Confidence

A more confident consumer is a more willing borrower, and thus better for JPM’s business. In August, consumer confidence in the US reached an 11-month high, as the index hit 101.1.xxiv Additionally, global consumer confidence, as measured by Nielsen, is also trending positive.xxv Specifically, it was at 98 for Q2 2016, up two points YOY. We expect these trends to continue as GDP remains positive (see above) and the labor market strengthens even further (see below). Consumer loans and credit cards make up 57% of JPM’s loan portfolio. Thus, we foresee a consumer better positioned to borrow over the next four years, contributing to JPM’s loan growth highlighted in the Company Description.

Labor Market

This summer the US unemployment rate fell below 5% for the first time since before the Great Recession. Our two-year forecast produced a median unemployment rate of 4.8%. In other words, the US labor market has rebounded well from the crisis and we expect that to continue. In fact, the labor market hast tightened so much in the past year or so, that it is starting to flow through to wages and income. In fact, median household income grew 5.2% YOY in 2015, the largest jump since 2007.xxvi This is crucial for consumer confidence, and in turn bank lending, because as people start to earn more money they will be more confident, and more likely to spend and borrow more.

In terms of global unemployment, it stood at 5.8% for 2015, down from 6.2% in 2009.xxvii

xxviii

However, while the rate is expected to stay steady, the number of unemployed people globally is expected to rise, at least through 2017. In short, the global labor market picture is murkier than the US, but since JPM’s loans are so domestically concentrated we expect the optimistic US labor market outlook to outweigh the murky global one.

Real Estate

Commercial and residential real estate loans represent 36% of JPM’s loan portfolio. Accordingly, forecasted US housing starts and US commercial property starts are the main variables for predicting the domestic real estate lending environment for JPM. Housing starts are expected to increase at a three-year CAGR of 9.1% through 2018.xxixAdditionally, commercial real estate establishments are projected to grow at a five-year CAGR

of 1.50% through 2020.xxx There are no analogous forecasts for international real estate, although through 3Q 2015 global direct property investment was up 11% YOY.xxxi This suggests that the international real estate market is also trending up. All of this data indicates a strong real estate lending market, and as such supports our loan growth expectations for JPM.

In sum, solid to strong economic fundamentals will continue through our forecast period. This economic view contributes to our belief that JPM will grow at a reasonable pace. Specifically, our model grows JPM’s assets at a 4.58% CAGR, slightly higher than the historical 4.34%.

VALUATION

JPM currently trades at a market price of $65.82, and our models (all dated 9/2/2016) produce a range of values from $69.51 to $75.01. In considering these models collectively, we assign a $70 price target for JPM, indicating 6% in upside potential. Hence, our HOLD recommendation.

Projections already covered: Our predictions and underlying reasoning for all key balance sheet and income statement items have been explained at length throughout this report, namely in the Company Description and Economic Outlook. Also, any line items not discussed are too minor to warrant attention. Thus, we will not expound on any additional projections here.

Risk premium: The Henry Fund consensus is 5%.

Beta: We used a Beta of 1.26 because this was the median of the weekly Betas over the last 10 years, as calculated by Bloomberg.

CV growth: We believe long-term nominal US GDP will be about 3.50%-4.00% and nominal global GDP about 5.00%-5.50%. Thus, we set JPM’s CV growth rate at 3% since we do not expect it to outgrow the US nor the global economy. Considering US and global nominal GDP is appropriate here because JPM has both domestic and international operations.

Free Cash Flow to Equity and Equity Economic Profit: These models account for the fact that banks make money off both sides of the balance sheet. The formal approach (Formal FCFE), focuses on uses and sources of cash. The simple approach focuses on the total change in assets and liabilities and equity economic profit focuses on the

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relationship between ROE and cost of equity – since both approaches produce the same exact price we refer to them collectively as Simple FCFE/EEP. The Formal FCFE produces a price of $73.32 and the Simple FCFE/EEP produces a price of $69.66. The difference between the two prices appears to be driven by the fact that Formal FCFE adds back the PCL expense, increasing its projected cash flows relative to the Simple FCFE/EEP.

DDM: The DDM produced a price of $69.51, about the same as the Simple FCFE/EEP number and about 5% lower than Formal FCFE. This likely stems from slightly higher Formal FCFE growth projections relative to dividend growth projections. We do expect JPM to increase its dividend payout ratio moving forward. Specifically, the payout ratio has averaged 30% the past three years and we expect it to approach 35% by 2020. Our reasoning is that as JPM becomes better capitalized and generates more cash it will look to distribute it to its shareholders accordingly.

Relative valuation: As a bank, price-to-book (P/B) is the most appropriate relative valuation model here. Relative P/B (BV16) produces a price of $75.01, the highest of all our models. However, this number is skewed a bit high by two outliers. Specifically, Wells Fargo and US Bank have 2016 P/B ratios of 1.40 and 1.80. respectively. This is .40-.80 higher than the next closest P/B ratio. If these two banks are removed from the average, the Relative P/B (BV16) produces a price of $58.98 – quite the difference. Thus, we view $75.01 to be an optimistically tilted price. The peer group used to arrive at the P/B multiple and our interpretation of both industry and JPM P/B was discussed in the Markets and Competition section above.

Model evaluation: We considered all the models in determining our target price. As noted above, the relative valuation was skewed a bit too high at $73, the DDM and Simple FCFE/EEP produced essentially the same price at $70, and the Formal FCFE gives a $73 value. Thus, a reasonable range for JPM’s intrinsic value is likely $69-$74. We steered toward the lower end of that range to arrive at our target price of $70.00. This is because, while we like the outlook of economic fundamentals and JPM’s growth prospects, we are uncomfortable with the volume of Level Two and Three assets/liabilities, the OBS exposure, and JPM’s ROE struggling to exceed its cost of capital.

Sensitivity analysis: We tested the Simple FCFE/EEP price against several variables, including beta, risk premium,

yields, tax rate, growth rates, etc. In the vast majority of scenarios, the target price exceeds the current market price. However, the model does seem to be quite sensitive to JPM’s beta and the risk-free rate. For example, a beta of 1.39 and a risk-free rate of 2.50% changes the price to $59 – about 16% below our target price and 11% below the current market price. Such a scenario is quite plausible since JPM’s 10-year weekly beta was as high as 1.59 and the 30-year UST surpassed 2.50% every day for the first five months of this year. Beta is the bigger driver here the as difference between the highest and lowest numbers tested produces upwards of a $45 range, holding risk-free rate constant. Risk-free rate on the other hand only changes by $23 at most, holding beta constant. This tells us that while our model is fairly robust, JPM’s value is very sensitive to volatility.

Henry Fund vs. other analysts: Our EPS and net income projections relative to analyst estimates was analyzed in the Recent Development sections. The mean one-year target price among analysts is $70.56 – almost exactly the same as our current target price. It is likely that both us and the sell-side analysts are viewing JPM’s story similarly: solid growth prospects but risk concerns too.

REASONS TO SELL

• The $515B in complex Level Two and Three assets and liabilities, and/or the $940 in OBS exposure become a material risk to JPM’s capitalization.

• JPM’s average ROE over the past five years of 9.16% barely surpasses its 8.58% cost of equity, further downward pressure in this regard could make JPM an unattractive investment

• The expected post-crisis trade-off of less profit for less risk, may actually have been less profit for more risk given increases in JPM’s CDS spreads (up 80 bps), implied volatility (up 20%), and beta (up .10). If this trend continues, JPM may be too risky to hold.

• JPM’s current P/B of 1.05 indicates that the market views JPM’s equity as just above its book value, and perhaps a lack of confidence regarding JPM’s prospects.

Ultimately, we are optimistic about the overall economy and its effect on JPM’s business. And while we believe JPM should provide 6% upside, we have concerns about its risk profile and its ability to generate an ROE that exceeds cost of equity. Thus, we recommend a HOLD.

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REFERENCES

i JPMorgan 10K, February 2016 ii Cox, Jeff. Biggest banks in the world list: China dominates, US Fades, CNBC, May 2016, http://www.cnbc.com/2016/05/25/biggest-banks-in-the-world-list-china-dominates-us-fades.html iii Sorkin, Andrew Ross and McGeehan, Patrick. Chase Manhattan to Acquire J.P. Morgan for $30.9 Billion, New York Times, September 2000, http://www.nytimes.com/learning/teachers/featured_articles/20000914thursday.html iv CNN Money, Deals, $58B bank deal set, January 2004, http://money.cnn.com/2004/01/14/news/deals/jpmorgan_bankone/ v Reuters, JPMorgan gets wholly-owned asset management license in China, September 2016, http://www.reuters.com/article/us-jpmorgan-china-idUSKCN11750O vi JPMorgan 10Q, August 2016 vii Cornell University, Dodd-Frank: Title VII at https://www.law.cornell.edu/wex/dodd-frank_title_VII; European Commission, Derivatives/EMIR at http://ec.europa.eu/finance/financial-markets/derivatives/index_en.htm viii Net Advantage, S&P Capital Industry Surveys, Banks, July 2016 ix JPM 10Q, see vi x JPM 10K, see i xi JPM 10K, see i xii Partnoy, Frank and Eisinger, Jesse. What’s Inside America’s Banks?, The Atlantic, February 2013, http://www.theatlantic.com/magazine/archive/2013/01/whats-inside-americas-banks/309196/ xiii Partnoy and Eisinger, see xii xiv JPM 10K, see i xv FactSet, JPM-US, Surprise History, September 2016 xvi Sarin, Natasha and Summers, Lawrence. Have big banks gotten safer?, Brookings, September 2016, https://www.brookings.edu/wp-content/uploads/2016/09/2_sarinsummers.pdf xvii Sarin and Summers, see xx xviii Sarin and Summers, see xx xix Sarin and Summers, see xx xx S&P Capital, see viii xxi Financial Times, Investment Banking League Tables, June 2016, http://markets.ft.com/investmentBanking/tablesAndTrends.asp xxii Net Advantage, S&P Capital Industry Surveys, Capital Markets, March 2016 xxiii FactSet, Economics, US, Estimates, Country Summary, September 2016; Statista, IMF

https://www.statista.com/statistics/273951/growth-of-the-global-gross-domestic-product-gdp/ xxiv Schaller, Charles and King, Wallace. Henry Fund Economic Outlook – September 2016, KnightHawk: The Blog, September 2016, http://www.biz.uiowa.edu/knighthawk/ xxv Nielsen, Q2 2016 Consumer Confidence Report, August 2016, http://www.nielsen.com/us/en/insights/reports/2016/q2-2016-consumer-confidence-report.html xxvi Mutikani, Lucia and Heavey, Susan. U.S. household income posts record surge in 2015, poverty falls, Reuters, September 2016, http://www.reuters.com/article/us-usa-economy-poverty-idUSKCN11J1PP?il=0 xxvii International Labour Organization, World Employment and Social Outlook – Trends 2016, January 2016, http://www.ilo.org/global/research/global-reports/weso/2016/lang--en/index.htm xxviii ILO, see xxxvii xxix FactSet, see xxxiii xxx IBISWorld, US Commercial Real Estate Key Statistics xxxi Rapoza, Kenneth. Why The Best Investment In 2016 Might Be Global Real Estate, Forbes, January 2016, http://www.forbes.com/sites/kenrapoza/2016/01/05/why-the-best-investment-in-2016-might-be-global-real-estate/#37bd82e4109e

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IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

JP Morgan

Revenue Decomposition (in thousands)

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E (CV)

Non‐Interest Revenue 

Underwriting 5,036 4,911 4,640 4,000 4,120 4,244 4,371 4,502

YOY growth  16.68% ‐2.48% ‐5.52% ‐13.79% 3.00% 3.00% 3.00% 3.00%

Advisory 1,318 1,631 2,111 2,000 2,080 2,163 2,250 2,340

YOY growth  ‐11.66% 23.75% 29.43% ‐5.26% 4.00% 4.00% 4.00% 4.00%

Investment banking fees 6,354 6,542 6,751 6,000 6,200 6,407 6,621 6,842

YOY growth  9.40% 2.96% 3.19% ‐11.12% 3.33% 3.34% 3.34% 3.34%

Principal transactions 10,141 10,531 10,408 11,000 11,550 12,128 12,734 13,371

YOY growth  83.18% 3.85% ‐1.17% 5.69% 5.00% 5.00% 5.00% 5.00%

Lending & deposit‐related fees 5,945 5,801 5,694 5,612 5,556 5,500 5,445 5,400

YOY growth  ‐4.05% ‐2.42% ‐1.84% ‐1.44% ‐1.00% ‐1.00% ‐1.00% ‐0.83%

Asset management fees 8,549 9,646 9,755 9,700 10,045 10,335 10,626 11,023

YOY growth  20.39% 12.83% 1.13% ‐0.56% 3.56% 2.89% 2.81% 3.74%

Administration fees 2,101 2,179 2,015 1,800 1,782 1,764 1,747 1,729

YOY growth  ‐1.59% 3.71% ‐7.53% ‐10.67% ‐1.00% ‐1.00% ‐1.00% ‐1.00%

Brokerage commissions 2,321 2,270 2,304 2,100 2,079 2,058 2,038 2,025

YOY growth  ‐0.43% ‐2.20% 1.50% ‐8.85% ‐1.00% ‐1.00% ‐1.00% ‐0.62%

All other commissions & fees 2,135 1,836 1,435 1,400 1,386 1,372 1,358 1,350

YOY growth  ‐7.21% ‐14.00% ‐21.84% ‐2.44% ‐1.00% ‐1.00% ‐1.00% ‐0.62%

Total commissions & fees 4,456 4,106 3,739 3,500 3,465 3,430 3,396 3,375

YOY growth  ‐3.80% ‐7.85% ‐8.94% ‐6.39% ‐1.00% ‐1.00% ‐1.00% ‐0.62%

Asset management, administration & commissions 15,106 15,931 15,509 15,000 15,292 15,530 15,769 16,127

YOY growth  8.93% 5.46% ‐2.65% ‐3.28% 1.95% 1.56% 1.54% 2.27%

Securities gains (losses) 667 77 202 200 200 200 200 200

YOY growth  ‐68.39% ‐88.46% 162.34% ‐0.99% 0.00% 0.00% 0.00% 0.00%

Mortgage fees & related income 5,205 3,563 2,513 2,750 2,846 2,946 3,049 3,156

YOY growth  ‐40.08% ‐31.55% ‐29.47% 9.43% 3.50% 3.50% 3.50% 3.50%

Card income 6,022 6,020 5,924 6,000 5,970 5,940 5,910 5,900

YOY growth  6.43% ‐0.03% ‐1.59% 1.28% ‐0.50% ‐0.50% ‐0.50% ‐0.18%

Other income 3,847 2,106 3,032 4,000 4,000 4,000 4,000 4,000

YOY growth  ‐9.65% ‐45.26% 43.97% 31.93% 0.00% 0.00% 0.00% 0.00%

   Total non‐interest revenue 53,287 50,571 50,033 50,562 51,614 52,651 53,728 54,995

YOY growth  2.24% ‐5.10% ‐1.06% 1.06% 2.08% 2.01% 2.05% 2.36%

Avg. earning assets (US GAAP beg. + ending/2)

Loans (net of allowance for loan losses) 717,007 732,653 783,448 854,044 919,719 988,000 1,050,985 1,107,508

YOY growth  1.85% 2.18% 6.93% 9.01% 7.69% 7.42% 6.37% 5.38%

Securities  362,578 351,004 319,416 286,515 282,312 289,155 299,611 306,667

YOY growth  ‐1.47% ‐3.19% ‐9.00% ‐10.30% ‐1.47% 2.42% 3.62% 2.36%

Trading assets  412,346 386,826 371,414 348,297 360,564 370,726 378,650 390,794

YOY growth  ‐7.75% ‐6.19% ‐3.98% ‐6.22% 3.52% 2.82% 2.14% 3.21%

Federal Funds sold and securities purchased under resale 272,206 231,960 214,189 217,993 228,357 238,867 250,289 261,938

YOY growth  2.41% ‐14.79% ‐7.66% 1.78% 4.75% 4.60% 4.78% 4.65%

Securities borrowed 115,241 110,950 104,578 102,274 105,100 106,862 111,971 117,183

YOY growth  ‐11.85% ‐3.72% ‐5.74% ‐2.20% 2.76% 1.68% 4.78% 4.65%

Deposits with other banks 218,933 400,264 412,246 337,566 339,466 352,015 368,847 386,014

YOY growth  111.43% 82.83% 2.99% ‐18.12% 0.56% 3.70% 4.78% 4.65%Other assets 105,938 106,526 104,261 104,288 105,285 110,130 115,396 120,767

YOY growth  2.90% 0.55% ‐2.13% 0.03% 0.96% 4.60% 4.78% 4.65%Total avg. earning assets 2,204,248 2,320,181 2,309,551 2,250,978 2,340,803 2,455,756 2,575,749 2,690,872

YOY growth  3.88% 5.26% ‐0.46% ‐2.54% 3.99% 4.91% 4.89% 4.47%

Avg. AUM 1,512 1,671 1,734 1,712 1,810 1,914 2,024 2,140

YOY growth  9.49% 10.52% 3.74% ‐1.27% 5.75% 5.75% 5.75% 5.75%

Fee ratio (AM fees/avg. AUM) 5.65 5.77 5.63 5.67 5.55 5.40 5.25 5.15

Interest income yield (US GAAP, unadjusted, interest income/avg. 

earning asset)

Loan yield  4.67% 4.40% 4.23% 4.40% 4.45% 4.48% 4.50% 4.50%

Securities yield  2.15% 2.58% 2.58% 2.80% 2.85% 2.88% 2.90% 2.90%

Trading assets yield  2.04% 1.89% 1.78% 1.90% 1.95% 1.98% 2.00% 2.00%

Federal funds yield  0.27% 0.22% 0.20% 0.40% 0.75% 0.80% 0.90% 0.90%

Securities borrowed yield  ‐0.02% ‐0.07% ‐0.07% 0.00% 0.05% 0.05% 0.05% 0.05%

Deposits with banks yield  0.13% 0.16% 0.16% 0.20% 0.22% 0.25% 0.25% 0.25%

Other assets yield  0.08% 0.09% 0.08% 0.10% 0.12% 0.15% 0.15% 0.15%

Total interest income yield  2.40% 2.22% 2.21% 2.39% 2.51% 2.56% 2.60% 2.61%

Interest income (US GAAP, unadjusted) 

Interest income on loans 33,489 32,218 33,134 37,578 40,927 44,213 47,294 49,838

YOY growth  ‐6.54% ‐3.80% 2.84% 13.41% 8.91% 8.03% 6.97% 5.38%

Interest income on securities 7,812 9,040 8,256 8,022 8,046 8,313 8,689 8,893

YOY growth  ‐1.60% 15.72% ‐8.67% ‐2.83% 0.29% 3.32% 4.52% 2.36%

Interest income on trading assets 8,426 7,312 6,621 6,618 7,031 7,322 7,573 7,816

YOY growth  ‐6.78% ‐13.22% ‐9.45% ‐0.05% 6.25% 4.14% 3.43% 3.21%

Interest income on federal funds sold & securities purchased under 

resale agreements1,940 1,642 1,592 872 1,713 1,911 2,253 2,357

YOY growth  ‐20.56% ‐15.36% ‐3.05% ‐45.23% 96.41% 11.58% 17.88% 4.65%

Interest income on securities borrowed (127) (501) (532) 0 53 53 56 59

YOY growth  4133.33% 294.49% 6.19%

Interest income on deposits with banks 918 1,157 1,250 675 747 880 922 965

YOY growth  65.41% 26.03% 8.04%

Interest income on other assets 538 663 652 104 126 165 173 181

YOY growth  107.72% 23.23% ‐1.66%

   Total interest income 52,996 51,531 50,973 53,869 58,643 62,858 66,960 70,109

YOY growth  ‐5.47% ‐2.76% ‐1.08% 5.68% 8.86% 7.19% 6.53% 4.70%

 Net Interest Income 43,319 43,634 43,510 44,953 48,672 51,498 54,347 56,594

YOY growth  ‐3.54% 0.73% ‐0.28% 3.32% 8.27% 5.80% 5.53% 4.14%

 Provision for credit losses 225 3,139 3,827 6,500 4,009 4,526 4,742 4,963

 Net interest income after provision for credit losses 43,094 40,495 39,683 38,453 44,663 46,972 49,605 51,631

YOY growth  3.78% ‐6.03% ‐2.01% ‐3.10% 16.15% 5.17% 5.61% 4.09%

Total net revenue (total net interest + total non‐interest) 96,606 94,205 93,543 95,515 100,286 104,148 108,075 111,589

YOY growth  ‐0.44% ‐2.49% ‐0.70% 2.11% 4.99% 3.85% 3.77% 3.25%

Margins

Net interest margin (net interest income/avg. earning assets) 1.97% 1.88% 1.88% 2.00% 2.08% 2.10% 2.11% 2.10%

Net interest margin after provision for credit losses 1.96% 1.75% 1.72% 1.71% 1.91% 1.91% 1.93% 1.92%

JP Morgan

Income Statement (in millions)

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E (CV)

Non‐Interest Revenue 

Underwriting 5,036 4,911 4,640 4,000 4,120 4,244 4,371 4,502

Advisory 1,318 1,631 2,111 2,000 2,080 2,163 2,250 2,340

Investment banking fees 6,354 6,542 6,751 6,000 6,200 6,407 6,621 6,842

Principal transactions 10,141 10,531 10,408 11,000 11,550 12,128 12,734 13,371

Lending & deposit‐related fees 5,945 5,801 5,694 5,612 5,556 5,500 5,445 5,400

Asset management fees 8,549 9,646 9,755 9,700 10,045 10,335 10,626 11,023

Administration fees 2,101 2,179 2,015 1,800 1,782 1,764 1,747 1,729

Brokerage commissions 2,321 2,270 2,304 2,100 2,079 2,058 2,038 2,025

All other commissions & fees 2,135 1,836 1,435 1,400 1,386 1,372 1,358 1,350

Total commissions & fees 4,456 4,106 3,739 3,500 3,465 3,430 3,396 3,375

Asset management, administration & commissions 15,106 15,931 15,509 15,000 15,292 15,530 15,769 16,127

Securities gains (losses) 667 77 202 200 200 200 200 200

Mortgage fees & related income 5,205 3,563 2,513 2,750 2,846 2,946 3,049 3,156

Card income 6,022 6,020 5,924 6,000 5,970 5,940 5,910 5,900

Other income 3,847 2,106 3,032 4,000 4,000 4,000 4,000 4,000

   Total non‐interest revenue 53,287 50,571 50,033 50,562 51,614 52,651 53,728 54,995

1.91%

Interest Income

Interest income on loans 33,489 32,218 33,134 37,578 40,927 44,213 47,294 49,838

Interest income on securities 7,812 9,040 8,256 8,022 8,046 8,313 8,689 8,893

Interest income on trading assets 8,426 7,312 6,621 6,618 7,031 7,322 7,573 7,816

Interest income on federal funds sold & securities 

purchased under resale agreements 1,940 1,642 1,592 872 1,713 1,911 2,253 2,357

Interest income on securities borrowed (127) (501) (532) 0 53 53 56 59

Interest income on deposits with banks 918 1,157 1,250 675 747 880 922 965

Interest income on other assets 538 663 652 104 126 165 173 181

   Total interest income 52,996 51,531 50,973 53,869 58,643 62,858 66,960 70,109

106,283 102,102 101,006 104,431 110,257 115,508 120,688 125,105

Interest Expense

Interest expense on interest‐bearing deposits 2,067 1,633 1,252 1,772 1,945 2,238 2,549 2,931

Interest expense on federal funds purchased & securitiess 

sold under agreement repurchase agreements‐                ‐                609 710 847 1,078 1,317 1,427

Interest expense on commercial paper ‐                ‐                110 59 84 101 118 129

Interest expense on short‐term & other liabilities 2,125 1,450 622 615 786 988 1,129 1,230

Interest expense on long‐term debt 5,007 4,409 4,435 5,346 5,834 6,422 6,919 7,178

Interest expense on beneficial interest issued by 

consolidated variable interest entities 478 405 435 415 476 533 581 619

   Total interest expense 9,677 7,897 7,463 8,916 9,971 11,360 12,613 13,515

Net Interest Income 43,319 43,634 43,510 44,953 48,672 51,498 54,347 56,594

‐8.76% 5.399%

Net Revenue  96,606 94,205 93,543 95,515 100,286 104,148 108,075 111,589

3.59%

Provision for Credit Losses 225 3,139 3,827 6,500 4,009 4,526 4,742 4,963

Non‐Interest Expense

Compensation expense 30,810 30,160 29,750 30,800 31,593 32,528 33,491 34,482

Occupancy expense 3,693 3,909 3,768 3,600 3,719 3,681 3,645 3,608

Technology, communications & equipment expense 5,425 5,804 6,193 6,600 6,992 7,411 7,782 8,171

Professional & outside services 7,641 7,705 7,002 6,500 7,000 6,834 6,778 6,871

Marketing expense 2,500 2,550 2,708 2,750 2,805 2,917 3,034 3,155

Other expense 19,761 11,146 9,593 4,700 8,480 8,980 9,480 9,980

Amortization of intangibles 637 ‐                ‐              ‐                ‐               ‐                ‐                ‐                   

   Total non‐interest expense 70,467 61,274 59,014 54,950 60,588 62,352 64,209 66,267

Income (loss) before income tax expense (benefit) 25,914 29,792 30,702 34,065 35,689 37,270 39,123 40,359

Total income tax expense (benefit) 7,991 8,030 6,260 10,400 10,707 11,181 11,737 12,108

% 31% 27% 20% 31% 30% 30% 30% 30%

Net income (loss) 17,923 21,762 24,442 23,665 24,982 26,089 27,386 28,251

Adjustments 

Less: Preferred stock dividends 805 1,125 1,515 1,645 1,700 1,750 1,800 1,800

Dividends & undistributed earnings allocated to 

participating securities 525 544 521 485 450 450 450 450

Net income (loss) applicable to common stock 16,593 20,093 22,406 21,535 22,832 23,889 25,136 26,001

3.02%

Shares Outstanding 

Year end shares outstanding 3,756 3,715 3,663 3,633 3,617 3,605 3,594 3,586

EPS

Net income (loss) per share ‐ basic $4.39 $5.34 $6.05 $5.93 $6.31 $6.63 $6.99 $7.25

YOY Growth ‐15.93% 21.70% 13.41% ‐2.10% 6.48% 5.00% 5.52% 3.68%

Cash dividends declared per common share $1.44 $1.58 $1.72 $1.88 $2.04 $2.20 $2.36 $2.52

YOY Growth 20.00% 9.72% 8.86% 9.30% 8.51% 7.84% 7.27% 6.78%

Total Dividends Paid $5,408.80 $5,869.37 $6,301.18 $6,830.02 $7,379.54 $7,930.00 $8,482.20 $9,036.84

JP Morgan

Balance Sheet (in millions)

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E (CV)

Assets

Cash & due from banks 39,771 27,831 20,490 40,437 35,569 33,674 33,422 41,455

Deposits with banks 316,051 484,477 340,015 335,117 343,816 360,214 377,480 394,549

Federal funds sold & securities purchase under resale 

agreements 248,116 215,803 212,575 223,411 233,304 244,431 256,147 267,729

Securities borrowed 111,465 110,435 98,721 105,826 104,373 109,351 114,592 119,774

Trading assets 374,664 398,988 343,839 352,755 368,374 373,079 384,221 397,367

Securities 354,003 348,004 290,827 282,204 282,420 295,890 303,332 310,002

Total wholesale loans 321,564 330,914 361,015 387,041 418,005 447,265 474,101 497,806Total consumer loans ‐ excluding purchased credit‐

impaired289,063 295,374 344,821 360,039 388,842 416,061 441,024 463,075

Credit card 127,791 131,048 131,463 153,016 165,258 176,826 187,435 196,807

Loans 738,418 757,336 837,299 900,096 972,104 1,040,151 1,102,561 1,157,689

Allowance for loan losses (16,264) (14,185) (13,555) (15,752) (17,012) (19,243) (21,500) (23,733)

Loans, net of allowance for loan losses 722,154 743,151 823,744 884,345 955,092 1,020,909 1,081,061 1,133,956

Accrued interest & accounts receivable 65,160 70,079 46,605 59,968 73,675 77,189 80,889 84,546

Premises & equipment 14,891 15,133 14,362 14,110 14,078 13,937 13,798 13,660

Goodwill 48,081 47,647 47,325 47,150 47,000 47,000 47,000 47,000

Mortgage servicing rights 9,614 7,436 6,608 6,585 6,876 7,204 7,550 7,891

Other intangible assets 1,618 1,192 1,015 915 815 715 615 515

Other assets 110,101 102,950 105,572 103,004 107,565 112,695 118,097 123,437

Total Assets 2,415,689 2,573,126 2,351,698 2,455,827 2,572,956 2,696,287 2,818,204 2,941,881

Liabilities 

U.S. non‐interest bearing deposits 389,863 437,558 392,721 411,375 434,001 457,871 480,764 504,803

U.S. interest‐bearing deposits 626,392 643,350 663,004 692,839 730,945 771,147 809,705 850,190

Non‐U.S. non‐interest bearing deposits 17,611 19,078 18,921 19,110 19,445 19,736 19,983 20,183

Non‐U.S. interest bearing deposits 253,899 263,441 205,069 210,606 217,977 225,606 232,374 239,346

Total deposits 1,287,765 1,363,427 1,279,715 1,333,931 1,402,368 1,474,361 1,542,827 1,614,521

Federal funds purchased & securities loaned or sold under 

repurchase agreements181,163 192,101 152,678 163,070 175,561 183,818 192,579 201,132

Commercial paper 57,848 66,344 15,562 19,989 21,945 22,977 24,072 25,141

Other borrowed funds 27,994 30,222 21,105 21,041 27,431 28,722 30,090 31,427

Trading liabilities 137,744 152,815 126,897 152,549 159,103 166,586 174,525 182,276

Accounts payable & other liabilities 194,491 206,954 177,638 173,590 175,561 183,818 192,579 201,132

Beneficial interest issued by consolidated variable interest 

entities49,617 52,362 41,879 41,030 41,696 43,657 45,738 47,769

FHLB advances 61,876 64,994 71,581 69,436 71,322 74,676 78,235 81,710

Senior debt 170,990 176,874 188,074 189,371 190,923 195,307 198,597 201,132

Subordinated debt 29,578 29,472 25,027 25,250 26,334 27,573 28,887 30,170

Junior subordinated debt 5,445 5,496 3,969 5,260 5,486 5,744 6,018 6,285

Total long‐term debt 267,889 276,836 288,651 289,317 294,065 303,301 311,738 319,297

Total Liabilities  2,204,511 2,341,061 2,104,125 2,194,518 2,297,731 2,407,240 2,514,148 2,622,694

SH Equity

Total preferred stock 11,158 20,063 26,068 26,068 26,068 26,068 26,068 26,068

Common stock and APIC 97,933 97,375 96,605 97,412 98,219 99,026 99,833 100,639

Retained earnings 115,756 130,315 146,420 161,125 176,578 192,537 209,191 226,156

Accumulated other comprehensive income (loss) 1,199 2,189 192 1,725 1,881 1,437 1,485 1,344

Shares held in RSU Trust, at cost (21) (21) (21) (21) (21) (21) (21) (21)

Treasury stock, at cost (14,847) (17,856) (21,691) (25,000) (27,500) (30,000) (32,500) (35,000)

Total stockholders' equity 211,178 232,065 247,573 261,309 275,225 289,047 304,056 319,186

Total liabilities and equity  2,415,689 2,573,126 2,351,698 2,455,827 2,572,956 2,696,287 2,818,204 2,941,881

JP Morgan

Cash Flow Statement (in millions)

Fiscal Years Ending Dec. 31 2013 2014 2015

Operating Activities

   Net income 17,923 21,762 24,442

Provision for credit losses 225 3,139 3,827

Depreciation & amortization 4,669 4,759 4,940

Deferred tax expense (benefit) 8,003 4,210 1,333

Amortization of intangibles 637 ‐ ‐

Investment securities losses (gains) (667) (77) ‐

Stock‐based compensation 2,219 2,190 ‐

Other adjustments ‐ ‐ 1,785

Originations & purchases of loans held‐for‐sale (75,928) (67,525) (48,109)

Proceeds from sales, securitizations & paydowns of loans 

held‐for‐sale 73,566 71,407 49,363

Trading assets 89,110 (24,814) 62,212

Securities borrowed 7,562 1,020 12,165

Accrued interest & accounts receivable (2,340) (3,637) 22,664

Other assets 526 (9,166) (3,701)

Trading liabilities (9,772) 26,818 (28,972)

Accounts payable & other liabilities (5,743) 6,065 (23,361)

Other operating adjustments (2,037) 442 (5,122)

   Net cash flows from operating activities 107,953 36,593 73,466

Investing Activities

Net change in deposits with banks (194,363) (168,426) 144,462

Net change in federal funds sold & securities purchased 

under resale agreements 47,726 30,848 3,190

Proceeds from held‐to‐maturity securities ‐ ‐ ‐

Proceeds from paydowns & maturities held‐to‐maturity 

securities 189 4,169 6,099

Purchase of held‐to‐maturity securities (24,214) (10,345) (6,204)

Proceeds from maturities of available‐for‐sale securities ‐ ‐ ‐

Proceeds from paydowns & maturities available‐for‐sale 

securities 89,631 90,664 76,448

Proceed from sales of available‐for‐sale securities 73,312 38,411 40,444

Purchases of available‐for‐sale securities (130,266) (121,504) (70,804)

Proceeds from sales & securitizations of loans held‐for‐

investment 12,033 20,115 18,604

Other changes in loans, net (23,721) (51,749) (108,962)

Net cash received from/(used in) business acquisitions or 

dispositions (149) 843 ‐

All other investing activities, net (679) 1,338 3,703

   Net cash (used in) provided by investing activities (150,501) (165,636) 106,980

Financing Activities

Net change in deposits 81,476 89,346 (88,678)

Net change in federal funds purchased & securities sold 

under repurchase agreements ‐ ‐ ‐

Net change in federal funds purchased & securities loaned 

or sold under repurchase agreements (58,867) 10,905 (39,415)

Net change in commercial paper & other borrowed funds 2,784 9,242 (57,828)

Net change in beneficial interests issued by consolidated 

variable interest entities (10,433) (834) (5,632)

Proceeds from long‐term borrowings & trust preferred 

securities 83,546 ‐ ‐

Proceeds from long‐term borrowings ‐ 78,515 79,611

Payments of long‐term borrowings & trust preferred 

securities (60,497) ‐ ‐

Payments of long‐term borrowings ‐ (65,275) (67,247)

Excess tax benefits related to stock‐based compensation 137 407 ‐

Proceeds from issuance of preferred stock 3,873 8,847 5,893

Redemption of preferred stock (1,800) ‐ ‐

Treasury stock & warrants repurchased (4,789) (4,760) (5,616)

Dividends paid (6,056) (6,990) (7,873)

All other financing activities, net (1,050) (1,175) (726)

   Net cash provided by (used in) financing activities 28,324 118,228 (187,511)

Effect of exchange rate changes on cash & due from 

banks 272 (1,125) (276)

Net increase (decrease) in cash & due from banks (13,952) (11,940) (7,341)

Cash & due from banks at the beginning of the period 53,723 39,771 27,831

Cash & due from banks at the end of period 39,771 27,831 20,490

Cash interest paid 9,573 8,194 7,220

Cash income taxes paid, net 3,502 1,392 9,243

JP Morgan

Cash Flow Statement (in millions)

Fiscal Years Ending Dec. 31

2016E 2017E 2018E 2019E 2020E (CV)

Operating Activities

   Net income applicable to common stock  21,535 22,832 23,889 25,136 26,001

Change in securities borrowed (7,105) 1,454 (4,978) (5,242) (5,181)

Change in trading assets (8,916) (15,619) (4,705) (11,142) (13,146)

Change in securities 8,623 (216) (13,470) (7,442) (6,670)

Change in accrued interest and accounts receivable  (13,363) (13,707) (3,514) (3,700) (3,658)

Change in premises and equipment  252 32 141 139 138

Change in mortgage servicing rights 23 (292) (328) (345) (341)

Change in other intangibles  100 100 100 100 100

Change in other assets 2,568 (4,561) (5,130) (5,402) (5,340)

Change in trading liabilities  25,652 6,553 7,483 7,939 7,751

Change in accounts payable and other liabilities  (4,048) 1,971 8,257 8,761 8,553

   Net cash provided by operating activities 25,321 (1,452) 7,745 8,802 8,206

Investing Activities

Change in deposits with banks  4,898 (8,699) (16,398) (17,266) (17,068)

Change in federal funds sold and securities purchased under resale (10,836) (9,892) (11,127) (11,716) (11,582)

Change in loans (net of allowance)   (60,601) (70,748) (65,816) (60,152) (52,895)

   Change in goodwill  175 150 0 0 0

Change in federal funds purchased & securities loaned or sold under 

repurchases10,392 12,492 8,257 8,761 8,553

   Net cash (used in) provided by investing activities (55,972) (76,697) (85,085) (80,374) (72,993)

Financing Activities

Change in total deposits  54,216 68,437 71,993 68,466 71,695

Change in commercial paper 4,427 1,956 1,032 1,095 1,069

Change in other borrowed funds  (64) 6,390 1,290 1,369 1,336

Change in beneficial interest issued by consolidated VIEs  (849) 665 1,961 2,081 2,031

Change in long‐term debt 666 4,748 9,235 8,437 7,559

Dividends paid  (6,830) (7,380) (7,930) (8,482) (9,037)

Change in CS and APIC  807 807 807 807 807

Change in AOCI  1,533 156 (444) 48 (141)

Change in treasuty stock, at cost  (3,309) (2,500) (2,500) (2,500) (2,500)

   Net cash provided by (used in) financing activities 50,598 73,281 75,444 71,320 72,820

 Net (decrease) increase in cash and cash equivalents 19,947 (4,868) (1,895) (252) 8,033

 Cash and cash equivalents at beginning of period 20,490 40,437 35,569 33,674 33,422

 Cash and cash equivalents at end of period 40,437 35,569 33,674 33,422 41,455

JP Morgan

Common Size Income Statement (as % of assets)

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E (CV)

Non‐Interest Revenue 

Underwriting 0.21% 0.19% 0.20% 0.16% 0.16% 0.16% 0.16% 0.15%

Advisory 0.05% 0.06% 0.09% 0.08% 0.08% 0.08% 0.08% 0.08%

Investment banking fees 0.26% 0.25% 0.29% 0.24% 0.24% 0.24% 0.23% 0.23%

Principal transactions 0.42% 0.41% 0.44% 0.45% 0.45% 0.45% 0.45% 0.45%

Lending & deposit‐related fees 0.25% 0.23% 0.24% 0.23% 0.22% 0.20% 0.19% 0.18%

Asset management fees 0.35% 0.37% 0.41% 0.39% 0.39% 0.38% 0.38% 0.37%

Administration fees 0.09% 0.08% 0.09% 0.07% 0.07% 0.07% 0.06% 0.06%

Brokerage commissions 0.10% 0.09% 0.10% 0.09% 0.08% 0.08% 0.07% 0.07%

All other commissions & fees 0.09% 0.07% 0.06% 0.06% 0.05% 0.05% 0.05% 0.05%

Total commissions & fees 0.18% 0.16% 0.16% 0.14% 0.13% 0.13% 0.12% 0.11%

Asset management, administration & commissions 0.63% 0.62% 0.66% 0.61% 0.59% 0.58% 0.56% 0.55%

Securities gains (losses) 0.03% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%

Mortgage fees & related income 0.22% 0.14% 0.11% 0.11% 0.11% 0.11% 0.11% 0.11%

Card income 0.25% 0.23% 0.25% 0.24% 0.23% 0.22% 0.21% 0.20%

Other income 0.16% 0.08% 0.13% 0.16% 0.16% 0.15% 0.14% 0.14%

   Total non‐interest revenue 2.21% 1.97% 2.13% 2.06% 2.01% 1.95% 1.91% 1.87%

Interest Income

Interest income on loans 1.39% 1.25% 1.41% 1.53% 1.59% 1.64% 1.68% 1.69%

Interest income on securities 0.32% 0.35% 0.35% 0.33% 0.31% 0.31% 0.31% 0.30%

Interest income on trading assets 0.35% 0.28% 0.28% 0.27% 0.27% 0.27% 0.27% 0.27%

Interest income on federal funds sold & securities 

purchased under resale agreements 0.08% 0.06% 0.07% 0.04% 0.07% 0.07% 0.08% 0.08%

Interest income on securities borrowed ‐0.01% ‐0.02% ‐0.02% 0.00% 0.00% 0.00% 0.00% 0.00%

Interest income on deposits with banks 0.04% 0.04% 0.05% 0.03% 0.03% 0.03% 0.03% 0.03%

Interest income on other assets 0.02% 0.03% 0.03% 0.00% 0.00% 0.01% 0.01% 0.01%

   Total interest income 2.19% 2.00% 2.17% 2.19% 2.28% 2.33% 2.38% 2.38%

Interest Expense

Interest expense on interest‐bearing deposits 0.09% 0.06% 0.05% 0.07% 0.08% 0.08% 0.09% 0.10%

Interest expense on federal funds purchased & securitiess 

sold under agreement repurchase agreements 0.00% 0.00% 0.03% 0.03% 0.03% 0.04% 0.05% 0.05%

Interest expense on commercial paper 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Interest expense on short‐term & other liabilities 0.09% 0.06% 0.03% 0.03% 0.03% 0.04% 0.04% 0.04%

Interest expense on long‐term debt 0.21% 0.17% 0.19% 0.22% 0.23% 0.24% 0.25% 0.24%

Interest expense on beneficial interest issued by 

consolidated variable interest entities 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02%

   Total interest expense 0.40% 0.31% 0.32% 0.36% 0.39% 0.42% 0.45% 0.46%

Net Interest Income 1.79% 1.70% 1.85% 1.83% 1.89% 1.91% 1.93% 1.92%

Net Revenue  4.00% 3.66% 3.98% 3.89% 3.90% 3.86% 3.83% 3.79%

Provision for Credit Losses 0.01% 0.12% 0.16% 0.26% 0.16% 0.17% 0.17% 0.17%

Non‐Interest Expense

Compensation expense 1.28% 1.17% 1.27% 1.25% 1.23% 1.21% 1.19% 1.17%

Occupancy expense 0.15% 0.15% 0.16% 0.15% 0.14% 0.14% 0.13% 0.12%

Technology, communications & equipment expense 0.22% 0.23% 0.26% 0.27% 0.27% 0.27% 0.28% 0.28%

Professional & outside services 0.32% 0.30% 0.30% 0.26% 0.27% 0.25% 0.24% 0.23%

Marketing expense 0.10% 0.10% 0.12% 0.11% 0.11% 0.11% 0.11% 0.11%

Other expense 0.82% 0.43% 0.41% 0.19% 0.33% 0.33% 0.34% 0.34%

Amortization of intangibles 0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

   Total non‐interest expense 2.92% 2.38% 2.51% 2.24% 2.35% 2.31% 2.28% 2.25%

Income Before Taxes

Income before income tax expense ‐ U.S. 0.71% 0.88% 0.99% 1.04% 1.04% 1.04% 1.04% 1.03%

Income before income tax expense ‐ non‐U.S. 0.36% 0.28% 0.32% 0.35% 0.35% 0.35% 0.35% 0.34%

Income (loss) before income tax expense (benefit) 1.07% 1.16% 1.31% 1.39% 1.39% 1.38% 1.39% 1.37%

Total income tax expense (benefit) 0.33% 0.31% 0.27% 0.42% 0.42% 0.41% 0.42% 0.41%

Net income (loss) 0.74% 0.85% 1.04% 0.96% 0.97% 0.97% 0.97% 0.96%

Adjustments 

Less: Preferred stock dividends 0.03% 0.04% 0.06% 0.07% 0.07% 0.06% 0.06% 0.06%

Dividends & undistributed earnings allocated to 

participating securities 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02%

Net income (loss) applicable to common stock 0.69% 0.78% 0.95% 0.88% 0.89% 0.89% 0.89% 0.88%

JP Morgan

Common Size Balance Sheet (as % of assets)

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E (CV)

Assets

Cash & due from banks 1.65% 1.08% 0.87% 1.65% 1.38% 1.25% 1.19% 1.41%

Deposits with banks 13.08% 18.83% 14.46% 13.65% 13.36% 13.36% 13.39% 13.41%

Federal funds sold & securities purchased under 

resale agreements 10.27% 8.39% 9.04% 9.10% 9.07% 9.07% 9.09% 9.10%

Securities borrowed 4.61% 4.29% 4.20% 4.31% 4.06% 4.06% 4.07% 4.07%

Trading assets 15.51% 15.51% 14.62% 14.36% 14.32% 13.84% 13.63% 13.51%

Securities 14.65% 13.52% 12.37% 11.49% 10.98% 10.97% 10.76% 10.54%

Loans 30.57% 29.43% 35.60% 36.65% 37.78% 38.58% 39.12% 39.35%

Allowance for loan losses ‐0.67% ‐0.55% ‐0.58% ‐0.64% ‐0.66% ‐0.71% ‐0.76% ‐0.81%

Loans, net of allowance for loan losses 29.89% 28.88% 35.03% 36.01% 37.12% 37.86% 38.36% 38.55%

Accrued interest & accounts receivable 2.70% 2.72% 1.98% 2.44% 2.86% 2.86% 2.87% 2.87%

Premises & equipment 0.62% 0.59% 0.61% 0.57% 0.55% 0.52% 0.49% 0.46%

Goodwill 1.99% 1.85% 2.01% 1.92% 1.83% 1.74% 1.67% 1.60%

Mortgage servicing rights 0.40% 0.29% 0.28% 0.27% 0.27% 0.27% 0.27% 0.27%

Other intangible assets 0.07% 0.05% 0.04% 0.04% 0.03% 0.03% 0.02% 0.02%

Other assets 4.56% 4.00% 4.49% 4.19% 4.18% 4.18% 4.19% 4.20%

Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities 

U.S. non‐interest bearing deposits 16.14% 17.00% 16.70% 16.75% 16.87% 16.98% 17.06% 17.16%

U.S. interest‐bearing deposits 25.93% 25.00% 28.19% 28.21% 28.41% 28.60% 28.73% 28.90%

Non‐U.S. non‐interest bearing deposits 0.73% 0.74% 0.80% 0.78% 0.76% 0.73% 0.71% 0.69%

Non‐U.S. interest bearing deposits 10.51% 10.24% 8.72% 8.58% 8.47% 8.37% 8.25% 8.14%

Total deposits 53.31% 52.99% 54.42% 54.32% 54.50% 54.68% 54.75% 54.88%

Federal funds purchased & securities loaned or 

sold under repurchase agreements 7.50% 7.47% 6.49% 6.64% 6.82% 6.82% 6.83% 6.84%

Commercial paper 2.39% 2.58% 0.66% 0.81% 0.85% 0.85% 0.85% 0.85%

Other borrowed funds 1.16% 1.17% 0.90% 0.86% 1.07% 1.07% 1.07% 1.07%

Trading liabilities 5.70% 5.94% 5.40% 6.21% 6.18% 6.18% 6.19% 6.20%

Accounts payable & other liabilities 8.05% 8.04% 7.55% 7.07% 6.82% 6.82% 6.83% 6.84%

Beneficial interest issued by consolidated variable 

interest entities 2.05% 2.03% 1.78% 1.67% 1.62% 1.62% 1.62% 1.62%

FHLB advances 2.56% 2.53% 3.04% 2.83% 2.77% 2.77% 2.78% 2.78%

Senior debt 7.08% 6.87% 8.00% 7.71% 7.42% 7.24% 7.05% 6.84%

Subordinated debt 1.22% 1.15% 1.06% 1.03% 1.02% 1.02% 1.03% 1.03%

Junior subordinated debt 0.23% 0.21% 0.17% 0.21% 0.21% 0.21% 0.21% 0.21%

Total long‐term debt 11.09% 10.76% 12.27% 11.78% 11.43% 11.25% 11.06% 10.85%

Total Liabilities  91.26% 90.98% 89.47% 89.36% 89.30% 89.28% 89.21% 89.15%

SH Equity

Total preferred stock 0.46% 0.78% 1.11% 1.06% 1.01% 0.97% 0.92% 0.89%

Common stock and APIC 4.05% 3.78% 4.11% 3.97% 3.82% 3.67% 3.54% 3.42%

Retained earnings 4.79% 5.06% 6.23% 6.56% 6.86% 7.14% 7.42% 7.69%

Accumulated other comprehensive income (loss) 0.05% 0.09% 0.01% 0.07% 0.07% 0.05% 0.05% 0.05%

Shares held in RSU Trust, at cost 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Treasury stock, at cost ‐0.61% ‐0.69% ‐0.92% ‐1.02% ‐1.07% ‐1.11% ‐1.15% ‐1.19%

Total stockholders' equity 8.74% 9.02% 10.53% 10.64% 10.70% 10.72% 10.79% 10.85%

Total liabilities and equity  100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

JP Morgan

Cost of Equity Estimation

Weekly Beta (Bloomberg)  Cost of equity (CAPM) 8.58%

1 yr.  1.31 Risk Free Rate  2.28%

2 yr.  1.19 Beta 1.26

3 yr.  1.21 Market Risk Premium 5.00%

4 yr. 1.21

5 yr. 1.38

10 yr.  1.59 CAPM = RFR + B * MRP

JP Morgan

Value Driver Estimation (in thousands)

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E (CV)

Key assumptions:

ROE (NI/beg. TSE)  8.13% 9.51% 9.65% 8.70% 8.74% 8.68% 8.70% 8.55%

Cost of equity 8.58% 8.58% 8.58% 8.58% 8.58% 8.58% 8.58% 8.58%

Net Income applicable to common stock 16,593 20,093 22,406 21,535 22,832 23,889 25,136 26,001

Beg. SH equity 204,069 211,178 232,065 247,573 261,309 275,225 289,047 304,056

Ending SH equity 211,178 232,065 247,573 261,309 275,225 289,047 304,056 319,186

Beg. Total assets  2,359,141 2,415,689 2,573,126 2,351,698 2,455,827 2,572,956 2,696,287 2,818,204

Ending total assets  2,415,689 2,573,126 2,351,698 2,455,827 2,572,956 2,696,287 2,818,204 2,941,881

Change in total assets 56,548 157,437 (221,428) 104,129 117,129 123,330 121,917 123,677

Beg. Total liabilities  2,155,072 2,204,511 2,341,061 2,104,125 2,194,518 2,297,731 2,407,240 2,514,148

Ending total liabilities  2,204,511 2,341,061 2,104,125 2,194,518 2,297,731 2,407,240 2,514,148 2,622,694

Change in total liabilities  49,439 136,550 (236,936) 90,393 103,213 109,509 106,908 108,547

Simple FCFE (NI ‐ (change in TA) + (change in TL)) 9,484 (794) 6,898 7,799 8,916 10,067 10,128 10,871

Non‐cash items 

Depreciation and amortization 4,669 4,759 4,940 0 0 0 0 0

Provision for credit losses 225 3,139 3,827 6,500 4,009 4,526 4,742 4,963

Cash from operations (NI + non‐cash items)  21,487 27,991 31,173 28,035 26,842 28,415 29,879 30,964

Sources of cash 

Change in deposits  94,172 75,662 (83,712) 54,216 68,437 71,993 68,466 71,695

Change in commercial paper  2,481 8,496 (50,782) 4,427 1,956 1,032 1,095 1,069

Change in external debt 20,223 11,175 2,698 602 11,138 10,525 9,806 8,896

Change in trading liabilities  5,826 15,071 (25,918) 25,652 6,553 7,483 7,939 7,751

Change in fed funds/repo financing (58,940) 10,938 (39,423) 10,392 12,492 8,257 8,761 8,553

Change in accounts payable and other liabilities  (749) 12,463 (29,316) (4,048) 1,971 8,257 8,761 8,553

Total sources of cash  63,013 133,805 (226,453) 91,241 102,548 107,547 104,828 106,515

Uses of cash

New loans  10,294 20,997 80,593 60,601 70,748 65,816 60,152 52,895

Change in cash  (13,952) (11,940) (7,341) 19,947 (4,868) (1,895) (252) 8,033

Change in deposits with banks 194,237 168,426 (144,462) (4,898) 8,699 16,398 17,266 17,068

Change in securities held  (17,149) (5,999) (57,177) (8,623) 216 13,470 7,442 6,670

Change in premises and equipment, net  372 242 (771) (252) (32) (141) (139) (138)

Change in accrued interest receivable   4,227 4,919 (23,474) 13,363 13,707 3,514 3,700 3,658

Change in trading assets (75,364) 24,324 (55,149) 8,916 15,619 4,705 11,142 13,146

Change in mortgage servicing rights 2,000 (2,178) (828) (23) 292 328 345 341

Change in fed funds/repo investments (48,180) (32,313) (3,228) 10,836 9,892 11,127 11,716 11,582

Change in securities borrowed  (7,552) (1,030) (11,714) 7,105 (1,454) 4,978 5,242 5,181

Change in other assets  8,326 (7,151) 2,622 (2,568) 4,561 5,130 5,402 5,340

Total uses of cash 57,259 158,297 (220,929) 104,404 117,379 123,430 122,017 123,777

Formal FCFE (cash from ops. + sources ‐ uses) 27,241 3,499 25,649 14,872 12,010 12,532 12,689 13,703

Equity Economic Profit (Beg. TSE*(ROE ‐ Cost of Equity)) (916) 1,974 2,494 294 412 275 336 (87)

JP Morgan

Equity Discounted Cash Flow (EDCF) and Equity Economic Profit (EEP) Valuation Models

Key Inputs:

Model Date 9/2/2016

     CV Growth 3.00%

     CV ROE 8.54%

     Cost of Equity 8.58%

     Net Income CV 26001

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

Period 1 2 3 4 5

EDCF Model

Formal FCFE  14872 12010 12532 12689 13703

CV 302333

Discounted FCFE  13697 10187 9790 9129 217514

PV of FCFE 260317

PV of ESOP  1689

PV of Equity 258628

Shares outstanding at end of year 3663

Intrinsic value 12/31/2015 $70.60

Price today $73.32

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

Period 1 2 3 4 5

EDCF Model

Simple FCFE 7799 8916 10067 10128 10871

CV 302333

Discounted FCFE  7183 7563 7864 7286 217514

PV of FCFE 247410

PV of ESOP  1689

PV of Equity 245721

Shares outstanding at end of year 3663

Intrinsic value 12/31/2015 $67.07

Price today $69.66

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

Period 1 2 3 4 5

EEP Model 

EEP 294 412 275 336 ‐87

CV ‐1722

Discounted EEP 270 349 215 242 ‐1239

PV of EEP  247410

PV of ESOP  1689

PV of Equity 245721

Shares outstanding at end of year 3663

Intrinsic value 12/31/2015 $67.07

Price today $69.66

JP Morgan

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Model Date: 9/2/2016

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

Period 1 2 3 4 5

EPS 5.93 6.31 6.63 6.99 7.25

Key Assumptions

   CV growth 3.25%

   CV ROE 8.54%

   Cost of Equity 8.58%

Future Cash Flows

     P/E Multiple (CV Year) 11.62

     EPS (CV Year) 7.25

     Future Stock Price 84.28

     Dividends Per Share 1.88 2.04 2.20 2.36 2.52

     Future Cash Flows

     Discounted Cash Flows 1.73 1.73 1.72 1.70 60.64

Intrinsic Value 12/31/2015 $65.78

Price today $69.53

JP Morgan

Relative Valuation Models

As of: 9/2/2016

EPS EPS

Ticker Company USD Market Cap (B) Price 2016E 2017E P/E 16 P/E 17 P/B 16 P/B 17 P/TBV 16 P/TBV 17

BAC Bank of America  163 $16.00 $1.26  1.54 12.70 10.39 0.70 0.60 0.90 0.90

C Citi 138 $47.51 $4.64  5.19 10.24 9.15 0.60 0.60 0.70 0.70

GS Goldman Sachs 69 $169.18 $14.26  16.99 11.86 9.96 0.90 0.90 1.00 0.90

MS Morgan Stanley 61 $31.89 $2.48  2.95 12.86 10.81 0.90 0.80 1.00 0.90

PNC PNC  73 $90.54 $7.11  7.43 12.73 12.19 1.00 1.00 1.30 1.20

USB US Bancorp 76 $44.16 $3.25  3.41 13.59 12.95 1.80 1.70 2.20 2.10WFC Wells Fargo 255 $50.55 $4.03  4.18 12.54 12.09 1.40 1.30 1.70 1.60

Average 5.29           5.96           12.36        11.08        1.04           0.99           1.26               1.19              

JPM  JP Morgan 244 $67.49 $5.93  $6.31  11.4           10.7                     0.94            0.89  1.15               1.07              

Implied Value:

   Relative P/E (EPS16) $73.27

   Relative P/E (EPS17) $69.92

   Relative P/B (BV16) $75.01

   Relative P/B (BV17) $75.00

   Relative P/TBV (TBV16) $73.79

   Relative P/TBV (TBV17) $74.54

JP Morgan

Sensitivity Analysis

Risk Premium Beta

$69.66 4.00% 4.50% 5.00% 5.50% 6.00% $69.66 1 1.13 1.26 1.39 1.52

20.00% $103.92 $90.04 $79.31 $70.77 $63.82 1.75% $105.30 $89.23 $77.30 $68.11 $60.81

Marginal 25.00% $97.43 $84.48 $74.48 $66.51 $60.02 Risk‐Free 2.00% $98.50 $84.24 $73.50 $65.11 $58.39

Tax‐Rate 30.00% $90.94 $78.93 $69.66 $62.25 $56.23 Rate 2.28% $91.83 $79.27 $69.66 $62.04 $55.88

35.00% $84.47 $73.39 $64.82 $58.00 $52.44 2.50% $87.17 $75.74 $66.88 $59.82 $54.06

40.00% $78.00 $67.85 $60.00 $53.75 $48.66 2.75% $82.40 $72.08 $63.98 $57.47 $52.12

CV Growth CV Non‐Interest Rev

$69.66 2.00% 2.50% 3.00% 3.50% 4.00% $69.66 50000 52250 54972 57750 60000

7.50% $67.09 $66.13 $65.01 $63.66 $62.02 60000 $44.60 $48.34 $52.86 $57.47 $61.21

CV ROE 8.00% $68.43 $67.95 $67.38 $66.70 $65.88 CV Interest 65000 $52.90 $56.64 $61.16 $65.77 $69.51

8.54% $69.71 $69.68 $69.66 $69.61 $69.56 Income 70110 $61.39 $65.13 $69.66 $74.26 $77.99

9.00% $70.67 $70.98 $71.34 $71.78 $72.31 75000 $69.51 $73.25 $77.77 $82.38 $86.12

9.50% $71.61 $72.25 $73.01 $73.91 $75.02 80000 $77.81 $81.55 $86.07 $90.68 $94.42

CV Loan Yield CV Non‐Interest Expense

$69.66 3.50% 4.00% 4.50% 5.00% 5.50% $69.66 60000 63000 66267 69000 72000

2.30% $48.20 $57.39 $66.59 $75.79 $84.98 9500 $86.72 $81.74 $76.31 $71.78 $66.79

CV Securities 2.60% $49.73 $58.92 $68.12 $77.31 $86.51 CV Interest 11500 $83.40 $78.42 $72.99 $68.45 $63.47

Yield 2.90% $51.25 $60.45 $69.66 $78.84 $88.04 Expense 13515 $80.05 $75.07 $69.66 $65.11 $60.13

3.20% $52.78 $61.98 $71.17 $80.37 $89.57 15500 $76.76 $71.78 $66.35 $61.81 $56.83

3.50% $54.31 $63.51 $72.70 $81.90 $91.09 17500 $73.44 $68.45 $63.03 $58.49 $53.51

JP MorganKey Management Ratios

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Margins, Spreads and ProfitabilityNet interest margin (net interest income/avg. earning assets) 1.97% 1.88% 1.88% 2.00% 2.08% 2.10% 2.11% 2.10%

Net interest spread ((interest income/ avg earning assets) ‐ (interest expense/avg interest paying liabilities)) 

1.25% 1.34% 1.37% 1.39% 1.43% 1.39% 1.36% 1.34%

Interest income/avg earning assets  2.40% 2.22% 2.21% 2.39% 2.51% 2.56% 2.60% 2.61%Interest expense/avg interest paying liabilities  1.15% 0.88% 0.84% 1.01% 1.08% 1.17% 1.24% 1.27%Interest expense/avg total liabilities  0.44% 0.35% 0.34% 0.41% 0.44% 0.48% 0.51% 0.53%Efficiency (non‐interest expense/(net interest income + non‐interest income))

72.94% 65.04% 63.09% 57.53% 60.42% 59.87% 59.41% 59.39%

Provision for credit losses/avg gross loans outstanding 0.03% 0.42% 0.48% 0.75% 0.43% 0.45% 0.44% 0.44%Avg. ROA (NI/avg assets)  0.70% 0.81% 0.91% 0.90% 0.91% 0.91% 0.91% 0.90%Avg. ROE (NI/avg SH equity) 7.99% 9.07% 9.34% 8.46% 8.51% 8.47% 8.48% 8.34%

9.16%Leverage RatiosBasel [on‐balance sheet only] Leverage Ratio ((SH equity‐Goodwill‐Other Intangibles)/avg total assets)  6.76% 7.35% 8.09% 8.87% 9.04% 9.16% 9.30% 9.43%Non‐deposit debt/total assets 22.14% 21.98% 20.33% 20.09% 20.17% 19.98% 19.82% 19.61%Non‐deposit debt/SH equity 2.24 2.11 2.04 1.95 1.88 1.84 1.79 1.74Total debt to assets (all debt/total assets)  75.45% 74.96% 74.74% 74.41% 74.68% 74.66% 74.56% 74.49%Total debt to equity (all debt/SH equity) 2.54 2.39 2.33 2.21 2.14 2.10 2.05 2.00Liabilities to assets (total liabilities/total assets) 91.26% 90.98% 89.47% 89.36% 89.30% 89.28% 89.21% 89.15%Liabilities to equity (total liabilities/SH equity) 10.44 10.09 8.50 8.40 8.35 8.33 8.27 8.22

B/S Metrics Avg. earning assets/avg. total assets 92.33% 93.02% 93.79% 93.64% 93.10% 93.21% 93.42% 93.43%Total loans/total assets  30.57% 29.43% 35.60% 36.65% 37.78% 38.58% 39.12% 39.35%Assets per deposit (total assets/total deposits) 187.59% 188.72% 183.77% 184.10% 183.47% 182.88% 182.66% 182.21%Loan loss allowance/total loans  2.20% 1.87% 1.62% 1.75% 1.75% 1.85% 1.95% 2.05%Loan growth ((total loan t/total loans t‐1)‐1) 0.63% 2.56% 10.56% 7.50% 8.00% 7.00% 6.00% 5.00%Total asset growth  2.40% 6.52% ‐8.61% 4.43% 4.77% 4.79% 4.52% 4.39%Deposit growth  7.89% 5.88% ‐6.14% 4.24% 5.13% 5.13% 4.64% 4.65%Book value per share (SH equity/shares outstanding)  56.22 62.47 67.58 71.93 76.08 80.19 84.60 89.01Tangible book value per share ((SH equity ‐ goodwill ‐ intangibles)/shares outstanding)

42.99 49.32 54.38 58.70 62.87 66.95 71.35 75.76

Payout Policy RatiosPayout ratio  33% 30% 28% 32% 32% 33% 34% 35%Retention ratio  67% 70% 72% 68% 68% 67% 66% 65%