L5 Financial statements and fundamental analysis
Download to R the financial statements of Microsoft 2018, show the code
Download the necessary packages and retrieve the annual report of Microsoft 2018
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library(edgar)
library(XBRL)
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library(finreportr)
library(XBRL)
# set up the authority to Edgar
options(HTTPUserAgent = "kw137465@student.sgh.waw.pl")
# Get financial
AnnualReports(0000789019, foreign = FALSE) ## filing.name filing.date accession.no
## 1 10-K 2024-07-30 0000950170-24-087843
## 2 10-K 2023-07-27 0000950170-23-035122
## 3 10-K 2022-07-28 0001564590-22-026876
## 4 10-K 2021-07-29 0001564590-21-039151
## 5 10-K 2020-07-30 0001564590-20-034944
## 6 10-K 2019-08-01 0001564590-19-027952
## 7 10-K 2018-08-03 0001564590-18-019062
## 8 10-K 2017-08-02 0001564590-17-014900
## 9 10-K 2016-07-28 0001193125-16-662209
## 10 10-K 2015-07-31 0001193125-15-272806
## 11 10-K 2014-07-31 0001193125-14-289961
## 12 10-K 2013-07-30 0001193125-13-310206
## 13 10-K 2012-07-26 0001193125-12-316848
## 14 10-K 2011-07-28 0001193125-11-200680
## 15 10-K 2010-07-30 0001193125-10-171791
## 16 10-K 2009-07-30 0001193125-09-158735
## 17 10-K 2008-07-31 0001193125-08-162768
## 18 10-K 2007-08-03 0001193125-07-170817
## 19 10-K 2006-08-25 0001193125-06-180008
## 20 10-K 2005-08-26 0001193125-05-174825
## 21 10-K 2004-09-01 0001193125-04-150689
## 22 10-K 2003-09-05 0001193125-03-045632
## 23 10-K 2002-09-06 0001032210-02-001351
## 24 10-K 2001-09-18 0001032210-01-501099
## 25 10-K 2000-09-28 0001032210-00-001961
## 26 10-K 1999-09-28 0001032210-99-001375
## 27 10-K 1998-09-25 0001032210-98-001067
## 28 10-K 1997-09-29 0001017062-97-001764
## 29 10-K 1996-09-27 0000891020-96-001130
## 30 10-K 1995-09-25 0000891020-95-000433
## 31 10-K 1994-09-27 0000891020-94-000175Commercial bank operations
We have selected JPMorgan Chase & Co. as our commercial bank and derived our analysis from the 10-k annual report of JPM 2023 from EDGAR to answer the following questions:
L5.1 Identify the types of deposits that the commercial bank uses to obtain most of its funds.
The types of deposits that JPM uses to obtain most of its funds is time deposits.
L5.2 Identify the main uses of funds by the bank. c. Summarize any statements made by the commercial bank in its annual report about how recent or potential regulations will affect its performance.
The main uses of funds include securities investment and loans.
The Volcker Rule, which restricts banks from engaging in proprietary
trading is an important regulation affecting JPMorgan’s investment
banking and trading activities. JPMorgan has taken steps to ensure
compliance with the rule, which can impact its proprietary trading
activities and reduce the amount of capital it can deploy in certain
trading strategies. The rule has led to increased compliance costs and
operational adjustments, as JPMorgan must ensure that it does not engage
in prohibited activities.
L5.3 Does it appear that the bank is attempting to enter the securities industry by offering securities services? If so, explain how.
Yes. JPMorgan Chase has a substantial presence in securities trading. It engages in market-making, proprietary trading, and investment management in various equity, fixed-income, derivatives, and foreign exchange markets. Moreover, JPMorgan’s Investment Bank division underwrites a wide variety of debt and equity securities. This includes initial public offerings, debt offerings and syndicated loans. Additionally, JPMorgan offers investment management services through its Asset & Wealth Management division. By managing funds and portfolios, JPMorgan actively invests in securities on behalf of its clients, offering access to equity and fixed income markets. This involves creating and managing securities portfolios, which directly ties JPMorgan to the securities industry.
L5.4 Does it appear that the bank is attempting to enter the insurance industry by offering insurance services? If so, explain how.
Yes. JPMorgan Chase offers insurance solutions to its high-net-worth individuals and institutional clients through its Private Banking and Wealth Management divisions. While the bank doesn’t directly underwrite insurance policies, it works with third-party insurers to provide a range of life, disability, and long-term care insurance products. Also, JPMorgan’s Commercial Banking division offers insurance brokerage services to business clients. This includes risk management solutions and the placement of insurance coverage with third-party insurers. By acting as a broker and intermediary between clients and insurance carriers, JPMorgan is involved in the distribution of insurance products.
Commercial bank management
L5.5 Assess the bank’s balance sheet as well as any comments in its annual report about the gap between its rate-sensitive assets and its rate-sensitive liabilities. Does it appear that the bank has a positive gap or a negative gap?
The bank rate-sensitive assets are deposits with banks, federal funds sold and securities purchased under resale agreements, securities borrowed, trading assets, available-for-sale securities, held-to-maturity securities, investment securities, and loans. They add up to $4,056,670. The bank rate-sensitive liabilities are interest-bearing deposits, federal funds purchased, short-term borrowings, trading liabilities, beneficial interests issued by consolidated VIEs and long-term debt. They add up to $3,257,208 Since the bank has rate-sensitive assets greater than its rate-sensitive liabilities, it results in a positive gap of $799,462. This means that the bank has more rate-sensitive assets than liabilities in the short-term. When interest rates rise, the income from the bank’s assets increases faster than the cost of its liabilities. This situation benefits the bank in a rising interest rate environment.
L5.6 Determine the bank’s interest income as a percentage of its total assets.
JPM interest income as a percentage of its total assets = 170,588 / 3,875,393 = 4.40%
L5.7 Determine the bank’s interest expenses as a percentage of its total assets.
JPM interest expenses as a percentage of its total assets = 81,321 / 3,875,393 = 2.10%
L5.8 Determine the bank’s net interest margin.
JPM net interest margin = net interest income / average interest-earning assets The earning assets in JPM are Deposits with Banks, Federal Funds Sold and Securities Purchased under Resale Agreements, Securities Borrowed, Trading Assets, Available-for-Sale Securities, Held-to-Maturity Securities, Investment Securities and Loans. Beginning earning assets = 3,872,542 Ending earning assets = 4,056,670 JPM net interest margin = ( 170,588 - 81,321 ) / (3,872,542 + 4,056,670)/2 x 100 = 2.25%
L5.9 Determine the bank’s noninterest income as a percentage of its total assets. Determine the bank’s noninterest expenses (do not include the addition to loan loss reserves here) as a percentage of its total assets.
JPM non-interest income as a percentage of its total assets = 68,837 / 3,875,393 x 100 = 1.78% JPM non-interest expenses as a percentage of its total assets = (87,172 - 22,420) / 3,875,393 x 100 = 1.67%
L5.10 Determine the bank’s addition to loan loss reserves as a percentage of its total assets.
JPM addition to loan loss reserves as a percentage of its total assets = 22,420 / 3,875,393 x 100 = 0.58%
L5.11 Determine the bank’s return on assets.
JPM return on assets = 49,552 / 3,875,393 = 0.0128
L5.12 Determine the bank’s return on equity.
JPM return on equity = 49,552 / 327,878 = 0.151
L5.13 Identify the bank’s income statement items described previously that would be affected if interest rates rise in the next year, and explain how they would be affected.
Rate-sensitive assets such as loans, trading assets, available-for-sale securities, and securities purchased under resale agreements will generate higher income when interest rates rise. Rate-sensitive liabilities such as interest-bearing deposits, federal funds purchased, short-term borrowings, and long-term debt will also become more expensive as interest rates increase. Since the bank’s rate-sensitive assets are greater than its rate-sensitive liabilities, a rise in interest rates will cause the interest income from these assets to increase faster than the interest expense on its liabilities. Hence, this leads to a net positive effect on the bank’s profitability.
L5.14 Identify the bank’s income statement items described previously that would be affected if U.S. economic conditions deteriorate, and explain how they would be affected
Rate-sensitive assets such as loans, securities, and trading assets could see a reduction in interest income as economic conditions worsen. Rate-sensitive liabilities such as interest-bearing deposits, federal funds purchased, and short-term borrowings could see a decrease in interest expense if the Federal Reserve lowers interest rates in response to a slowing economy. The income from rate-sensitive assets might decrease more than the reduction in interest expense from liabilities, leading to a decline in the bank’s profitability.
Mutual funds
We have selected Fidelity Contrafund as our mutual fund and derived our analysis from the 2024 prospectus of Fidelity Contrafund from EDGAR to answer the following questions:
L5.15 What is the investment objective of this mutual fund? Do you consider this mutual fund to have low risk, moderate risk, or high risk?
The Fidelity Contrafund is a U.S. large-cap growth mutual fund. According to its prospectus, its investment objective is to seek capital appreciation by investing primarily in growth stocks of large companies. The fund invests in companies that are expected to have above-average earnings growth, particularly those that are undervalued relative to their growth potential. We consider this mutual fund to be of moderate risk. This fund does not invest in highly speculative stocks or extremely volatile assets, but it is still subject to fluctuations that can come with investing in growth stocks, especially during periods of market volatility.
L5.16 What was the return on the mutual fund last year? What was the average annual return over the last three years?
According to the prospectus, its return in 2023 was 39.47%. Its average annual return over the last 3 years is 17.84%.
L5.17 What is a key economic factor that influences the return on this mutual fund? (That is, are the fund’s returns highly influenced by U.S. stock market conditions? By U.S. interest rates? By foreign stock market conditions? By foreign interest rates?)
The fund is highly influenced by the U.S. stock market conditions. Since it focuses on investing in large-cap U.S. companies, U.S. stock market conditions have a significant impact on the fund’s performance. A growing US economy generally leads to higher corporate profits, which boosts the stock prices of companies in which the fund invests.
L5.18 Must any fees be paid when buying or selling this mutual fund?
Yes. When buying this mutual fund, a management fee (which fluctuates based on the fund’s performance relative to a securities market index) 0f 0.39% is paid.
L5.19 What was the expense ratio for this mutual fund over the last year? Does this ratio seem high to you?
The expense ratio is 0.39%. This ratio is low to us. In the mutual fund industry, the average expense ratio for an actively managed equity fund is typically around 0.60% to 1.00%. As such, a 0.39% ratio is below average for a mutual fund fund.
Securities firms
We have selected JPMorgan Chase & Co. as our securities firm and derived our analysis from the 10-k annual report of JPM 2023 from EDGAR to answer the following questions:
L5.20 What are the main types of business conducted by the securities firm?
JPMorgan operates through three main business segments - Investment Banking, Global Markets and Asset Management. The Investment Banking division is part of J.P. Morgan and focuses on helping clients raise capital, manage risk, and execute strategic transactions. The Global Markets division serves institutional investors, hedge funds, governments, and other large entities by providing access to capital markets and facilitating transactions. The Asset Management division focuses on helping clients achieve their investment goals by managing diversified portfolios across various asset classes.
L5.21 Summarize any statements made by the securities firm in its annual report about how it may be affected by existing or potential regulations.
According to the 2023 annual report, JPMorgan’s regulatory capital requirements are set by the Federal Reserve for the firm as a consolidated financial holding company and by the OCC for its principal subsidiary, JPMorgan Chase Bank, N.A. These requirements follow the Basel III framework, which establishes minimum capital ratios and overall capital adequacy standards for large U.S. banks. JPMorgan uses two approaches to calculate its Risk-Weighted Assets (RWA): the Standardized and Advanced approaches, with capital adequacy assessed based on the lower of the two. The firm must maintain minimum levels of CET1 capital, Tier 1 capital, Total capital, Tier 1 leverage, and the Supplementary Leverage Ratio (SLR). Failure to meet these capital requirements could lead to regulatory action by the Federal Reserve.
L5.22 Describe the recent performance of the securities firm, and explain why the performance has been favorable or unfavorable.
In 2023, JPMogran experienced strong earnings growth. JPMorgan saw continued growth in both net interest income and non-interest income, benefiting from a favorable interest rate environment in the first half of the year, which helped boost revenues from lending and investment activities. The Federal Reserve’s interest rate hikes during 2023 positively impacted JPMorgan’s net interest income, especially in its consumer banking and corporate lending businesses. As interest rates increased, the bank earned more on loans and deposits, boosting profitability. Also, JPMorgan’s capital position remained solid with a strong CET1 ratio, which provided a cushion against economic uncertainties. The firm’s proactive risk management strategy helped it navigate potential market disruptions effectively.