JPMorgan Chase & Co. Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 14, 2022

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Second Quarter 2022 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation.

Operator

Please stand by. At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon and Chief Financial Officer, Jeremy Barnum. Mr. Barnum, please go ahead.

Speaker 1

Thanks, operator. Good morning, everyone. The presentation is available on our website and please refer to the disclaimer in the back. Starting on page 1, the firm reported net income of $8,600,000,000 EPS of $2.76 on revenue of 31,600,000,000 and delivered an ROTCE of 17%. Touching on a few highlights, we had another quarter of strong performance in markets, which generated revenue of nearly $8,000,000,000 Credit is still quite healthy and net charge offs remain historically low.

Speaker 1

And there continue to be positive trends in loan growth across our businesses with average loans up 7% year on year and 2% quarter on quarter. On page 2, we have some more detail. Revenue of $31,600,000,000 was up $235,000,000 or 1% year on year. NII ex markets was up $2,800,000,000 or 26 percent driven by higher rates and balance sheet growth. NIR ex markets was down $3,600,000,000 or 26 percent, largely driven by lower IB fees and higher card acquisition costs.

Speaker 1

And markets revenue was up $1,000,000,000 or 15% year on year. Expenses of 18 at $7,000,000,000 were up $1,100,000,000 or 6% year on year, predominantly on higher investments and structural expenses, partially offset by lower volume and revenue related expenses. And credit costs were $1,100,000,000 which included net charge offs of $657,000,000 and reserve builds of $428,000,000 reflecting loan growth as well as a modest deterioration in the economic outlook. On to balance sheet and capital on page 3. Let's start by talking about our plans for capital management over the coming quarters.

Speaker 1

The new 4% SCB will raise our standardized CET1 requirement to 12% effective in the 4th quarter and the 4% G SIB effective in 1Q 2023 further raises this requirement to 12.5%. At Investor Day, we said that we expected SCB to be higher and made it clear that in the near term, share buybacks would be significantly reduced in order to build capital for the increased requirements. In light of the SCB coming in even higher than expected, we have paused buybacks for the near term. And allows us to rapidly build capital in excess of future requirements with a current target of roughly 12.5% in the 4th quarter. Any access over the regulatory requirements offers us protection against a range of economic scenarios with room to deploy capital in line with our strategic as we continue to execute on our financial results.

Speaker 1

We have a long established track record of balance sheet discipline across the company and this quarter's RWA reduction shows evidence of this discipline. Turning to this quarter's results, you can see that our CET1 ratio of 12.2% is up 30 basis points from the prior quarter. Our RWA was down approximately $44,000,000,000 with growth in franchise lending being more than offset by the combination of active balance sheet management and the normalization of market risk RWA from the Q1. CET1 Capital was slightly down as earnings were offset by distributions and the impact of AOCI drawdowns in our AFS portfolio. Now let's go to our businesses starting with Consumer and Community Banking on page 4.

Speaker 1

Before I review CCB's Let me touch on what we're seeing in our data regarding the health of the U. S. Consumer. Spend is still healthy with with combined debit and credit spend up 15% year on year. We see the impact of inflation and higher non discretionary spend across income segments.

Speaker 1

Notably, the average consumer is spending 35% more year on year on gas and approximately 6% more on recurring bills and other With that as a backdrop, this quarter CCB reported net income of $3,100,000,000 on revenue of $12,600,000,000 which was down 1% on year. In Consumer and Business Banking, revenue was up 9% year on year driven by growth in deposits. Deposits were up 13% year on year and 2% quarter on quarter. And client investment assets were down 7% year on year driven by market performance partially offset by flows. Home lending revenue was down 26% year on year as the rate environment drove both lower production revenue and tighter spreads, partially offset by higher net servicing revenue and mortgage origination volume of $22,000,000,000 was down 45%.

Speaker 1

Moving to card and auto. Revenue was down 6% year on year, reflecting higher acquisition costs on Card outstandings were up 16% and revolving balances were up 9%. And in auto, originations Expenses of $7,700,000,000 were up 9% year on year, driven by higher investments and structural expenses, partially offset by lower volume and revenue related expenses. In terms of actual credit performance this quarter, credit costs were $761,000,000 reflecting net charge offs of $611,000,000 down $121,000,000 year on year driven by card and a reserve build of $150,000,000 in card driven by loan growth. Next, the CIB on Page 5.

Speaker 1

CIB reported net income of $3,700,000,000 on revenue of $11,900,000,000 There There were a number of notable items this quarter, including net markdowns on certain equity investments of approximately 370,000,000 with about $345,000,000 reflected in payments and markdowns on the bridge book of approximately $250,000,000 in IB revenue. Investment Banking revenue of $1,400,000,000 was down 61% year on year or down 53% excluding the bridge book markdowns. IV fees were down 54% versus an all time record quarter last year. We maintained our number one rank with a year to date wallet share of 8 at 0.1%. In advisory, fees were down 28%, reflecting a decline in announced activity, which started in the Q1.

Speaker 1

The volatile market resulted in muted issuance in our underwriting businesses. Underwriting fees were down 50 Conversion of the deal backlog may be challenging if the current headwinds continue. Funding revenue of $410,000,000 was up 79% versus the prior year, driven by gains on mark to market hedges as well as higher loan balances. Moving to markets. Total revenue was $7,800,000,000 up 15% year on year in both fixed income and equities against a strong quarter last year.

Speaker 1

In fixed income, elevated volatility drove both increased client flows and robust trading results in the macro franchise, most notably in currencies and emerging markets. This was partially offset by credit and securitized products in a challenging spread environment. In Equity Markets, we had a strong second quarter and again increased volatility produced a strong performance in derivatives. Credit adjustments and other was a loss of $219,000,000 largely driven by funding spread widening. Payments revenue was $1,500,000,000 up 1% year on year or up 25% excluding the markdowns on equity investments.

Speaker 1

The year on year growth was primarily driven by higher rates. Security Services revenue of $1,200,000,000 was up 6% year on year with growth in fees and higher rates more than offsetting the impact of lower market levels. Expenses of $6,700,000,000 were up 3 Moving to Commercial Banking on Page 6. Commercial Banking reported net income of $1,000,000,000 Revenue of $2,700,000,000 was up 8% year on year, driven by higher deposit margins, partially offset by lower Investment Banking revenue. Gross Investment Banking revenue of $788,000,000 was down 32%, driven by lower debt and equity underwriting activity.

Speaker 1

Expenses of $1,200,000,000 were up 18% year on year, predominantly driven by higher structural and volume and revenue related expenses. Deposits were down 5% quarter on quarter, driven by migration of non operating deposits into higher yielding alternatives, which we expect to continue given the current rate environment. Loans were up 4% sequentially. C and I loans were up 6%, reflecting higher revolver utilization and originations across middle market and corporate client banking. CRE loans were up 3%, driven by strong loan originations on Funding and Commercial Term Lending and Real Estate Banking.

Speaker 1

Finally, credit costs of $209,000,000 were largely driven by loan growth, while net charge offs remain historically low. And then to complete our lines of business, AWM on Page 7. Asset and Wealth Management reported net income of $1,000,000,000 with pretax margin of 31%. For the quarter, revenue of $4,300,000,000 was up 5% year on year, driven by growth in deposits and loans as well as higher margins, partially offset by investment valuation losses versus gains in the prior year. In addition, reductions in management fees linked to this year's market declines have been almost entirely offset by the removal of most money market fund fee waivers.

Speaker 1

Expenses of $2,900,000,000 were up 13% year on year, largely driven by investments in our Private Banking Advisor teams, in technology and asset management as well as higher volume and revenue related expenses. For the quarter, net long term inflows of $6,000,000,000 were driven by for the quarter. AUM of $2,700,000,000,000 and overall client assets of $3,800,000,000,000 down 8% and 6% year on year respectively Loans were up 1% quarter on quarter, while deposits were down 7% sequentially, driven by seasonal client tax payments. Turning to Corporate on Page 8. Corporate reported a net loss of 174,000,000 Revenue was $80,000,000 versus a loss in the prior year.

Speaker 1

NII was $324,000,000 up $1,300,000,000 predominantly due to the impact at higher rates and expenses of $206,000,000 were lower by $309,000,000 year on year. Next, the outlook on page 9. You will recall that at Investor Day, we expected NII ex markets for 2022 to be in excess of 56,000,000,000 We now expect it to be in excess of $58,000,000,000 reflecting Fed Funds reaching 3.5% by year end. We still expect adjusted expense to be approximately $77,000,000,000 and the card net charge off rate to be less than 2% for 2022. So to wrap up, the company's performance was strong again this quarter in what was a complex operating environment.

Speaker 1

As we look forward, We are mindful of the elevated uncertainty in the global economy, but we feel confident that we are prepared and well positioned for a broad range of outcomes. With that operator, please open up the line for Q and A.

Operator

Please standby. And the first question is coming from Steve Chubak from Wolfe Research. Please proceed.

Speaker 2

Hey, good morning, Jeremy. Good morning, Jamie. Wanted to start off with a question on capital targets. I don't believe you provided an update on your firm wide CET1 target of 12.5% to 13%. And given the new higher SCB, Future increases in your GSIB surcharge of 4.5%.

Speaker 2

Your regulatory minimum is slated to increase beyond 13% by 2024, Which is also beyond the horizon reflected on Slide 3. And just given that high regulatory minimum, elevated SEB volatility in recent years, what do you believe is an

Speaker 1

Yes, Steve, good question. So Obviously, you're right in the sense that, we didn't talk about 2024 on the slide. And as you note, we have 2 G SIB bucket increases coming 1 in the Q1 of 2020 3 and the other one in the Q1 of 2024. We had worked all that out on Investor Day and talked about 12.5% to 13% target, which implies sort of a modest buffer to be used flexibly based on what we expected would be some increase in SCB. Obviously, the increase came in a bit higher than expected.

Speaker 1

So for now, we're really focused on 1Q, 2023. Of course, all else equal, you would assume that that 12.5% to 13% for 2024 would be a little bit higher. But there is another round of SEB and that's a long way away. And as you know and as you can see, there's a lot of organic capital generation. So we'll kind of cross that bridge when

Speaker 3

We intend to drive that SEB down by reducing the things that created it.

Speaker 2

Fair enough. And just for my follow-up on the loan growth outlook. Loan growth continues to surprise positively. Certainly, the Jeremy that you conveyed was quite constructive despite the challenging macro backdrop. But with companies deciding higher Inventory levels, declining personal savings rates, growing inflationary pressures, whole list of potential headwinds that could negatively impact loan growth from here.

Speaker 2

I was hoping you could just speak to the outlook for loan growth across some of the different businesses and what do you see as a sustainable run rate of loan growth over the medium term?

Speaker 1

Yes. So we've talked as you know Steve about sort of a mid high single digits loan growth expectation for this And that outlook is more or less still in place. Obviously, we only have half the year left. We continue to see quite robust C and I growth both Higher revolver utilization and new account origination. We're also seeing good growth in CRE.

Speaker 1

And of course, We continue to see very robust card loan growth, which is nice to see. Outlook beyond this year, I'm not going to give now. And obviously, as you know, that's going to be very much a function of the economic environment.

Speaker 3

Yes. The only thing I would like to add is that certain loan growth as discretionary and portfolio based. Think of mortgages and there's a good chance we're going to drive it down substantially.

Speaker 2

Fair enough. Thanks so much for taking my questions.

Speaker 1

Thanks, Steve.

Operator

The next question is coming from Glenn Schorr from Evercore ISI. Please proceed.

Speaker 4

Hi, thanks very much. I wonder if you could just talk to how you balance it all, meaning JP Morgan is always growth minded. You underwrite for returns over the cycle, I get that. But Given some of the potential bad stuff going on in the world that you've noted in some of the articles you've been in and at the conference, is there any point where that rougher outlook has you tightened the underwriting box to build capital and liquidity faster? Or Or do you think you can get there just through what you've laid out today on the buyback pause?

Speaker 1

Yes. No. So I mean, look, I think all of these things are at the same time, right? So first of all, as you can see on page 3, the organic capital generation enables us to build very quickly to get to where we need to be with a nice appropriate buffer on time, if not early. At the same time, as Jamie has noted, Obviously, in this moment, we're going to scrutinize, even more aggressively than we always do, elements of our lending, which are either low returning or have a low client nexus or both.

Speaker 1

We do that all the time anyway, but of course in this moment, we're going to turn to the heat on that a little bit. In terms of underwriting, as you say, we do underwrite through the cycle. I think we feel comfortable with our risk appetite and our credit box. And I don't think we expect any particular change there.

Speaker 3

Yes. And the only thing I would add is that certain obviously risks that we take kind of priced themselves. So if you look at our bridge book, it's smaller than it was because we priced ourselves out of the market and that was a good thing because a lot of people are going to lose a lot of money there and we lost a little. And so we are very conscious of that kind of thing all the time.

Speaker 4

Well, I appreciate that. And did you all consider CECL reserve and increasing the probability to the poor scenario in this quarter and just curious on how you thought about that? Thanks.

Speaker 3

Yes, but we didn't do it. And obviously, what we do in the future quarters will remain to be seen.

Speaker 1

Yes. And Glenn, just remember that we did do that last quarter, So we already introduced a sort of skew to the outlook beyond what's implied by the market to reflect our own slightly more And in a sense arguably we were sort of early on that, so it really wasn't necessary this quarter.

Speaker 4

All right. Thank you both.

Operator

The next question is coming from John MacDonough from Autonomous Research. Please proceed.

Speaker 5

Hi, good morning. Jeremy, I was wondering if you could talk about the deposit trends you're seeing, the differences between commercial deposits, Wealth Management and Retail in terms of flows and repricing pressures?

Speaker 1

Yes. Great question, John. And I think you're right to break it down by the in the quarter. And we're seeing different dynamics there. So on the wholesale side, you do see some lower deposits, some deposit attrition and that is entirely expected and part of the plan in the sense that for our client reasons, we had slightly higher appetite, especially in parts commercial bank for nonoperating deposits, knowing fully that our pricing strategy as rates went up was going to be to not pay up and therefore we expected The attrition from those from that client base.

Speaker 1

And so we're seeing that and that's actually something that we want all else equal, and it's playing out in line with expectations. You do see a little bit of a decline, a little bit of a headwind in Wealth Management. I think that's just seasonal tax payments being a little bit higher than usual. And And on the consumer side, we're really not seeing much at all. So that remains strong.

Speaker 1

We're not seeing Any attrition there and it's early in the cycle to really be observing much one way or the other from a pricing perspective.

Speaker 5

Okay. And then as a follow-up, in terms of the updated NII outlook, you had talked about an exit rate in the Q4 of about 66 It's going to the Investor Day. Just kind of wondering what that looks like and what kind of fading benefit from RateHEX do you have assumed in your outlook?

Speaker 1

Yes. So the $66,000,000 number if you want kind of to put a number in you can use something like $68,000,000 $68,000,000 plus something like that. Obviously, we're annualizing in 1 quarter, so there can always be noise in there. But that seems like a good number to us that's consistent with the increase for the full year. I'm sorry, John, can you repeat your other question?

Speaker 1

2020.

Speaker 6

Just deposit billing. Yes.

Speaker 1

Yes, yes, yes. So in terms of 2023, We had talked at Investor Day about how we saw upside into 2023 from that 4th quarter run rate and that more or less remains There is some upside. Obviously, we're starting from a higher launch point, higher rates and less so after the CPI trend, but there have been moments where there were cuts in Core view of some upside from that 4th quarter run rate into 2023 is still in place.

Speaker 5

Got it. Thank you.

Operator

The next question is coming from Betsy Graseck from Morgan Stanley.

Speaker 7

Hi, good morning.

Speaker 1

Hey, Betsy. How about you?

Speaker 7

Jamie, you mentioned just on the SCB earlier that you intended to reduce it by reducing the things that caused it to rise. Could you give us a sense as to what you saw The results that you got that drove that SCB up because I talked to folks that say it's a black box. So it would be helpful to understand what you See is what the drivers were to that SCB increase?

Speaker 3

Ernie? First of all, it's public. So you can actually go see What drives it? The global market shock and credit losses, stuff like that. And we don't agree with the stress test.

Speaker 3

It's inconsistent. It's not transparent. It's too volatile. It's basically capricious, arbitrary. We do 100 a week.

Speaker 3

This is one and I need to drive capital up and down by 80 basis So we'll work on it. We haven't made definitive decisions. I've already mentioned about we dramatically reduced RWA this quarter. We may do that again next quarter. We're probably going to drive down mortgages and we'll probably drive that other credit too that creates SEB.

Speaker 3

So we're not going to go into It's easy for us to do. You've seen us do it before. We're going to drive out non operating deposits. It creates no risk to us, but as the We're going to manage the balance sheet, get good returns, have great clients and not worried about it. We just want to get there right away.

Speaker 3

Don't want to sit there and dawdleize you. That's the rule. They gave it to us. We're going.

Speaker 7

Got it. And then

Speaker 1

Hey, Betsy, maybe I'll just jump in a little bit on the black box.

Speaker 3

I'll tell you, but it's another very important point for Shail is that number when they That doesn't even remotely the stress loss doesn't even remotely represent what happened under that kind of scenario. And I'm not saying the Fed says it should or shouldn't, but I would tell you we'd make money under that scenario. We wouldn't lose I think they had us losing $44,000,000,000 There's almost no chance that that would be true. And I just and I feel bad for the shareholders because people look at that and say, well, what's going to happen? And by this is good evidence.

Speaker 3

We didn't lose money after Lehman. We didn't lose money in the great what just happened, we didn't lose money, great financial recession. The company's got huge underlying earnings power and consistent revenues in CCB, asset management, custody, payment services and then we have some kind of fairly volatile streams. Now we've got the CECL, which obviously can go up or down quite a bit, but again, that's an accounting entry. And so we feel in very good shape.

Speaker 3

We just have to hold a higher number now and we're going to go there.

Speaker 1

And Betsy, maybe I'll just comment briefly on the Black Box point, because as Jamie noted, the SCB is quite volatile and I think you see that across the industry and it's you have to we feel very good about building quickly enough to meet the higher requirements. But there are pretty big and released as Jamie says, but since the SCB is really a quantity that gets measured to the peak drawdown period and that information does not get released, It winds up being really very hard at any given moment to understand what's actually driving it. And that combination of Suboptimal transparency and high volatility is really our central criticism, I guess, I would say. But nonetheless, you've got a

Operator

capital generation.

Speaker 3

It's got bad effects for the economy because I just We're going to drive down this and drive down this. It's not good for the United States economy. And the mortgage business in particular is bad for lower income mortgages, Which hurts lower income, minorities and stuff like that because we haven't fixed the mortgage business and now we're making it worse. There's no real risk in it. It's not a benefit to JPMorgan, but it hurts this And it's very unfortunate.

Speaker 7

No, I hear you on all that. And the mortgage comment you made earlier was about Shrinking mortgage growth rates or shrinking the balances of mortgages that you have on

Speaker 1

the books?

Speaker 3

Well, no, we'll originate, but the balances in the books will probably come down. Look, we reserve the right to change that, but that's a portfolio decision. And No, if it doesn't make sense to own mortgages, I'm not going to own them.

Speaker 7

Yes. And would you reduce the buffer? I mean in the past, Jamie, you've talked about, hey, as these Required capital ratios increase relative to the risk in your business

Speaker 3

We're going to keep a buffer. I'm not even sure what the SEB means at this point. We're not going to go below any regulatory minimum. And if we have to, we'll just drive down credit more to create what we got to create. It's a terrible way to run a financial system and we owe you more than what we think that buffer should be because we have so much what I think is so much excess capital.

Speaker 3

It just causes huge confusion about where you should be doing your capital. But just keep in mind the one thing, we're earning 70% of tangible equity. We can continue doing that. The company is in great shape. We're going to serve our clients and manage the hell out of the rest of the stuff.

Speaker 3

We still think we have great businesses and stuff like that and that's what we're going to do. Most of this stuff doesn't create any additional risk at all. It just creates capital.

Speaker 7

Thank you.

Operator

The next question is coming from Jim Mechat from Seaport Global Securities. Please proceed.

Speaker 8

Hey, good morning. Maybe just on expenses, if I kind of look at the first half with the slowdown in Investment Banking, I think Your annualized less than $76,000,000,000 but you're still targeting $77,000,000 Is that implication of just higher in the second half or just uncertainty around getting the pipeline completed or not and Just assuming it might get done until we know better.

Speaker 1

Yes, Jim, good question. We've looked at that too. It's definitely more the former than the latter. In other words, $77,000,000 is the number that we see right now and the number that we believe and we can see in our outlook a bunch of factors driving up second half expense headcount probably at a faster pace as we kind of have ramped up our hiring capacity and so on. So, I wouldn't draw any conclusions About lower than 77 based on the first half numbers.

Speaker 8

Okay, great. And then just maybe on credit, it continues to look, I guess, very good, whether it's on the consumer side On commercial side, are you we don't really see it, but are you starting to see any initial cracks in credit or strains in the system?

Speaker 1

Look, I think the short answer to that question is no, certainly not in any of our reported actual results for this The place that everyone Right. Exactly. Right. Exactly. Obviously running still well below normal levels from the pre But if you really want to kind of turn off the magnification on the microscope and look really, really, really closely, If you look at cash buffers in the lower income segments and early delinquency roll rates in those segments, You can maybe see a little bit of an early warning signal to the effect that the burn down of excess cash is a little bit faster there.

Speaker 1

Buffers are still above what they were pre pandemic, but coming down and that absolute numbers for the typical customer are not that high. And you do see those early delinquency buckets still below pre pandemic levels, but getting closer in the lower income segment. So if you wanted to try to look for early warning signals, that's where you would see it. But I think there's Really still a big question about whether that's simply normalization or whether it's actually an early warning sign of deterioration. For us, as you know, our portfolio is really not very exposed to that segment of the market, so not really very significant for us.

Speaker 8

Right. So Prime is still holding up quite well. Thanks.

Speaker 3

Yes. Better.

Operator

The next question is coming from Ken Usdin from Jefferies. Please proceed.

Speaker 3

Yes. Hey, guys. Good morning. Just a follow-up on the points about managing the balance sheet and capital and RWAs. How do you think about Your ability to manage that RWA output and dimensionalizing how, if at all, it might impact Either the net income outcome or the RoTCE outcome as you look forward?

Speaker 3

Just very roughly, we have a tremendous ability to manage it. I can think we do without affecting our RoTC targets and stuff like that. Obviously, it will affect NII a little bit and capital generation a little bit and stuff like that. For all told, if we're going to manage it, we'll

Speaker 6

be fine. Got it. Okay.

Speaker 3

That's a fair point. And then Just second one on cards. Card revenue rate continues to slip even with the NII benefit. Obviously, you've got the denominator increase in there too and Spend versus lend. Can you just help us understand what the dynamics underneath card revenue rate and where you expect it to go from here?

Speaker 3

Thanks.

Speaker 1

Yes, sure. So on current revenue rate, we said that we thought 10% was a reasonable number for the full year and it's running a little bit lower right now. And I think the current level, what was it Michael, 9.6 or something is probably the right number for the full year at this point. And really the difference is view that we would see normalization revolve balances happening towards early beginning of next year. That the starting point of that did get slightly delayed by Omicron by about 6 weeks.

Speaker 1

And so that, all else

Speaker 3

Because I know I'm harping on mortgage a little here, but I just want to explain it. Because if you go to Europe, okay, the capital held against mortgages is like a 5th of what we have to hold here. And we can obviously manage that and standardized risk weighted assets do not represent returns or risk. So there are a lot of ways to manage it. And we don't have there's no securitization market today.

Speaker 3

So our view would change. If there was a securitization market, we might do something different. But by not owning it, buying it, signing it, hedging it, swapping it, there are a million ways to manage it without really affecting a lot of your risk of returns. And so it's unfortunate, because I think this is all kind of a waste of time in terms of serving our client. Our job is To serve clients through thick or thin, good or bad, with what they need, how they need it.

Speaker 3

And now we spend all the time talking about these ridiculous regulatory requirements.

Speaker 1

Right. So yes, and just to finish on card. So slightly lower NII just from the Omicron delay And that slightly better than expected new client acquisition is a driver there. And then there are some subtle kind of funding effects from the higher rate environment

Speaker 6

Okay. Thanks a lot.

Operator

The next question is coming from Mike Mayo from Wells Fargo Securities. Please proceed.

Speaker 6

Hi, good morning. Could you help me reconcile your words with your for actions. After Investor Day, Jamie, we said a hurricane is on the horizon, but today you're holding firm with your $77,000,000,000 expense guidance for 2022. I mean, it's like you're acting like there's sunny skies ahead. You're out buying kayaks, surfboards, wave runners, just before the storm.

Speaker 6

So is it tough times

Speaker 3

or not? Let me first of all, we run the company we've always run the company consistently investing doing stuff through storms. We don't like pull in and pull out and go up and go down and go into markets, out of markets through storms. We manage the company and you've seen us do this consistently since I've been at Bank 1. We invest, we grow, we expand, we manage through the storm and stuff like that.

Speaker 3

And so what I and I mentioned, I don't know if you're on the media call, but there are very good current numbers taking place. Consumers are in good shape. They're spending money. They have more income. Jobs are plentiful.

Speaker 3

They're spending 10% more than last year, almost 30% plus more than pre COVID. Businesses, you talk to them, they're in good shape, they're doing Fine. We've never seen business credit be better ever like in our lifetimes and that's the current environment. The future environment, which is not that furloughed involves Rates going up maybe more than people think because of inflation, maybe stagflation, maybe a soft there might be a soft landing. I'm simply saying there's a range of potential outcomes from a soft landing to a hard landing, driven by how much rates go up, the effect of quantitative tightening, Defective volatile markets and obviously this terrible humanitarian crisis in Ukraine and the war and then the effect that on food and oil and gas and we simply point out those things make the probabilities and possibilities of these events different.

Speaker 3

It's not going to change how we run the company. The economy will be bigger in 10 years. We're going to run the company. We're going to serve more clients. We're going to open our branch.

Speaker 3

We're going to invest into things And what matters through that? We do if you look at what we do, our bridge book is way down. That was managing certain exposures. We're not in Subprime fundamentally, that's managing your exposures. We're quite careful about how we run the risk of the company.

Speaker 3

If there was a reason to cut back on something, we would. But now that we think it's a great business, it's got great growth prospects, it's just going to go through a storm. And In fact, going through a storm, we will that gives us opportunities too. I always remind myself, economy is a lot bigger in 10 years. We're here to serve clients through Dickerson and we will do that.

Speaker 6

So You're clearly running the company for the next 5 to 10 years. If we have a recession in the next 5 to 10 months, how does technology help you manage through that better whether it's credit losses, managing for less credit losses, expenses, more flexibility or revenues maybe gaining market share. What's the benefit of all these technology investments if we have a recession over the next

Speaker 3

I think we gave you some examples at Investor Day, for example, at AI, which we spend a lot of money on, we gave you a couple of examples, but one of them is we spent $100,000,000 building certain risk and fraud So that when we process payments on the consumer side, losses are down $100,000,000 to $200,000,000 volume is way up. That's a huge benefit. I don't think it was to stop doing that because there's a recession. And so plus in a recession certain things get cheaper, Branch is enormously profitable, bank is enormously profitable. We're going to keep on doing those things and we've managed through recessions before.

Speaker 3

We'll manage it again. I'm quite comfortable doing it quite well.

Operator

All right.

Speaker 6

Thank you.

Speaker 1

For stop

Speaker 3

starting on recruiting or training or technology or branch away, That's crazy. We don't do that. We've never done that. We didn't do it in 2008 and 2009. And it put us in quite good stead in terms

Speaker 6

Yes. The only other thing is just market revenues are a lot weaker, right? I mean, the market outlook is worse. And so we know you had a structural spending. So when all else equal, that'd be a little bit less then?

Speaker 3

Yes, that's very performance based too. Again, Mike, the way I look at it a little bit, in 15 years, the global GDP or 20 years, the global GDP, global financial assets, global companies, Companies over $5,000,000,000 we'll all double. That's what we're building for. We're not building for like 18 months.

Speaker 6

Okay. Thank you.

Operator

The next question is coming from Gerard Cassidy from RBC Capital Markets. Please proceed.

Speaker 9

Thank you. Good morning, guys. Jeremy, you touched on the deposit commentary a short while ago. Can you elaborate on QT and the impact that you've seen? Now granted, I know June was not full QT of $95,000,000,000 a month, But can you guys give us a flavor?

Speaker 9

And I think Jamie you mentioned that if I heard it correctly that maybe $300,000,000,000 to $400,000,000,000 of deposits Good outflow over time, I'm assuming due to QT. But can you guys elaborate what you saw in June? Is it The way you think it's going to be and any further outlook for what the deposits could be over the next 12 months due to QT?

Speaker 1

Yes. Hey, Gerard. So as you know, QG just started. So I think it's not the sort of thing where you can say I expect this exact outcome and then sort of track it like that. And so how that flows into the banking system and then to any individual bank across the Wholesale and Consumer segments is kind of a tricky thing.

Speaker 1

So it's early on that. But at a high level and your comments about what Jamie said before are right, the story remains true, which is that depending on how QT interacts with RRP and loan growth in particular, you could see some decline in deposits in the banking And we would see our share of that. But we would expect that to primarily come out of wholesale and primarily come out of the non operating and sort of less valuable portions of our deposit base. While in consumer, while you could in theory have a little bit of a headwind there, we feel pretty good about our ability to keep those levels pretty steady based on the strength of the franchise and the ability to take share.

Speaker 9

Very good. And then as a follow-up, I don't believe you guys disclosed the outstandings in the bridge book, But two questions. And Jimmy, you've been very clear about this for the last 10 years, how you've de risked that balance sheet and you mentioned that already today. Can you just give us some color on how different it is today from 2008, 2009, just so investors know that it is meaningfully different? And second, what caused the write down in the bridge book this quarter?

Speaker 3

So if you go back to 2,007, I think, The whole Street bridge book was $480,000,000,000 I think the whole Street bridge book today is 100 or under 100. 100. It's like 20%. Our percent Of that bridge book has come down substantially just in the last 12 months. And that's really just underwriting loan by loan by loan and you win some, you lose some.

Speaker 3

And if you guys look at high yield spreads and stuff like that, bonds are down 6%, that's what you see. So you have some flex, Flex, and we're big boys, we know that. And there was write downs of a couple of bridge loans. They're not huge. They're just I think they were in the Investment Banking line.

Speaker 3

Yes.

Speaker 1

It's in the IB revenue line and there's a small amount in the Commercial Bank as well. But as you said Jamie As Daniel also mentioned on Investor Day, I think we made conscious choices here to dial back our risk appetite here and accepted some share losses in So we feel good about where we are. We're still open for business, for the right deals at the right risk appetite on the right term, absolutely, but we've been careful.

Speaker 3

Very good. Thank you.

Operator

The next question is coming from Erika Najarian from UBS. Please proceed.

Speaker 10

Hi. Just had a few follow-up questions. The first is on balance sheet management. Jeremy, the illustrative path That you set forth on Slide 3, does that include RWA mitigation? And As we think about the $58,000,000,000 plus in updated NII guide, what kind of deposit growth Does that assume you noted that part of the SCB mitigation is to drive out non operating deposits.

Speaker 10

Just wanted to understand what the assumption was there as well, please?

Speaker 1

Yes. Hey, Erika, sure. So first point, you have to Turn off your magnifying glass, but if you look at footnote 5 on Page 3, you can see that right at the end of there, it says assumes flat RWA in the projection. So and I think within that, who knows what the exact mix will be and you've heard Jamie's comments on that. But you look at the table above, you see that you've got the usual moving parts.

Speaker 1

We've got organic loan growth that we want that's Profitable on its own or part of important relationships that we'd like to see continue to happen. Some of it is little bit passive. We can't really control it. It moves up and down as a function of factors like VAR. And then there's the mitigation piece of it, which we're going to turn up for scrutiny quite intensely, as I said before, on lower returning, lower client nexus or both.

Speaker 1

So across those three bits, We'll see how it goes. But as Jamie said, we feel pretty confident here. In terms of deposits, at this point, Deposit growth is probably less of a driver overall looking forward of the NII outlook. Our deposit outlook remains more or less the same that I said before and that we've talked about at Investor Day, which is we do expect to see some and wholesale. We expect consumer to be relatively stable and we'll see how it goes.

Speaker 10

Got it. And my follow-up question is for Jamie. Jamie, we've heard You're cautioned about the economy and I think there's a bigger debate on how the U. S. Consumer Is going to be impacted in light or in context of a downturn.

Speaker 10

The statistics that Jeremy laid out imply a pretty healthy starting point for the consumer that you bank. And the reserve build for loan growth in card And the less than 2% loss rate in card lead us to believe that your consumer is still okay. As you think about the various scenarios and you think about the realistic range of outcomes, How does the U. S. Consumer perform?

Speaker 10

Because it feels like that's the big wildcard and we've seen the journal term a job full recession. I just wanted to get your thoughts there.

Speaker 4

Yes.

Speaker 3

So first, I just want to point out that on that chart, That's not a forecast what it's going to be at the end of the quarter. So we're going to if you're going to pencil some of your miles, it's 12.5 on December 31st and it will probably be 13 at the end of the Q1. And because obviously we use capital for a whole bunch of different reasons And the consumer, I feel like a broken record. The consumer right now is in great shape. So even if we go into recession, They're entering that recession with less leverage in far better shape than they did in 2008 and 2009 and far better shape than they did even in 2020.

Speaker 3

And jobs are plentiful. Now of course, jobs may disappear. Things happen. So But they're in very good shape and obviously when you have recessions it affects consumer income and consumer credit. Our credit card portfolio is prime.

Speaker 3

I mean, it's exceptional, but again, we're adults in that. We know that if you have recession losses go up, we prepare for all that and we're prepared to take it because we grow the business over We're not going to just immediately run out of it. And so I think it's great that consumers are in good shape. It's excellent that I'd like the fact that wages are going up for people at the low end. I like The fact that jobs are plentiful, I think that's good for the average American and we should applaud that.

Speaker 3

And so they're in good shape right now.

Speaker 10

Thanks, Vlad.

Operator

The next question is coming from Matt Tocanar from Deutsche Bank. Please proceed.

Speaker 1

Matt, I have a question. Yes.

Operator

Yes. The next question is coming from Ebrahim Poonawala from Bank of America Merrill Lynch. Please proceed.

Speaker 11

Good morning. I guess just one for a couple of follow ups, Jeremy. In terms of The markets have gone very quickly from pricing in ton of rate hikes to potentially pricing in rate cuts next year. Just talk to us like how that's informing your ALCO balance sheet management as you think about hedging downside risk from lower rates 12 months to 18 months out, like should we expect you to add duration or do anything synthetic to protect against lower rates?

Speaker 3

We're going to keep that to ourselves.

Speaker 1

Yes. Yes. But I don't know, maybe if you want a little bit of general color about how we're thinking about the I do think yes, okay. I'll keep it brief. The on duration, I think at this level of rates also with very quickly cash yields being roughly not that different from 10 year yields, The question of duration adding or not is just generally less important for us.

Speaker 1

Then the other piece of it is whether there's the opportunity to deploy cash into to non HLA securities broadly into spread product. And obviously, spread product is more attractive right now. But as we've been talking about a lot on this call, The priority right now is to build capital. So, that will be something for later, I would say.

Speaker 6

Thanks. And I should

Speaker 3

just point out, The forward curve has been consistently wrong in my whole lifetime, so we don't necessarily make investments based on the forward curve. And second, we've always told you that we use the portfolio and other things to manage the broad range of outcomes, not just to try to add NII. So if you said add NII next quarter, yes, we could do that. That would be managing the broad outcome of potential outcomes here, Which is to protect the company through all possible outcomes.

Speaker 11

That's helpful. And just one follow-up on credit. I heard your comments on the consumer. If we enter some version of a mild recession, like if you had to pick 1 or 2 areas, Where do you think losses would be driven by? Is it on the commercial side?

Speaker 11

Is it CRE? Like how do you expect that downturn to kind of play out?

Speaker 3

Did you I think at Investor Day you had a chart that showed through the cycle losses. Yes. Yes. So I mean I would just go back to that And we showed what we think through the cycle, losses would be for credit cards, C and I and a bunch of other things. And obviously, through the cycles and average, you can kind of Double that.

Speaker 1

Yes. And that showed exceptionally low losses in wholesale. So I'm not sure whether or not that's a prediction of the future or Yes.

Speaker 3

Thank you.

Operator

And the next question is coming from Max O'Connor from Deutsche Bank. Please proceed.

Speaker 12

Hi. Sorry about that. I somehow got disconnected. Sorry if I missed this, but if we think about provisioning or reserving for a moderate recession, what's the best guess on how much that might be? I think for COVID, it was around $14,000,000,000 ex CECL, but obviously, you alluded to the consumer being better.

Speaker 12

Lot mix has changed. There's lots of puts and takes, but how would you frame kind of total reserve sales

Speaker 1

for a lot of customers?

Speaker 3

Let me frame it very simply for you. In COVID, we got to 15% unemployment within 3 months. And in 2 quarters, we added 15,000,000,000 Which we can easily handle. That is clearly I would put that almost down to the worst case. It will clearly be a lot less than that.

Speaker 3

And you guys can look at the things yourselves. Every 5% is another $500,000,000 or something like that if you change your odds and so.

Speaker 1

Yes. I mean we think the current reserve the current allowance we

Speaker 3

think is conservatively appropriate for

Speaker 1

a range of scenarios. And you know, it's already kind of skewed to the downside and there are probably some other elements of slight conservatism in there. So we'll see how it goes. We feel that it's appropriate and conservative at this point.

Speaker 12

Okay. And then separately, you've got about $14,000,000,000 of losses In OCI, obviously, most of that flows back to capital as the bonds mature. What's kind of some good Rule of thumb in terms of how quickly that comes back if rates stabilize here?

Speaker 1

10 basis points a year of CET1. Yes. All

Speaker 12

right. 10 basis points you said?

Speaker 1

10 basis points of CET1 a year.

Operator

Got it. Okay. Thank you.

Speaker 3

After tax. After tax.

Operator

Yes, after

Speaker 3

tax. 50 5 years.

Speaker 6

It's going

Speaker 3

to bleeds back in over 5 years.

Speaker 1

And it's assumed that weighted average life of 4 or 5 Yes. So the rule the good rule of thumb on constant rates is, about 10 basis points of CET1 accretion a year.

Operator

Thank you. At the moment, there are no further questions in the queue.

Speaker 3

Folks, everybody, thank you very much and we'll be talking to you in a quarter.

Operator

Thank you. Everyone, that concludes your conference call for today. You may now disconnect. Thank you all for joining and enjoy the rest of your day.

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Earnings Conference Call
JPMorgan Chase & Co. Q2 2022
00:00 / 00:00