JPMorgan Chase & Co. Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 14, 2023

There are 15 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to JF's First Quarter 2023 Earnings Call. This call is being recorded. To turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon and Chief Financial Officer, Jeremy Barnum. Mr.

Operator

Barnum, please go ahead.

Speaker 1

Thanks, And 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 $12,600,000,000 EPS of $4.10 on revenue of 39,300,000,000 And delivered an ROTCE of 23%. These results included $868,000,000 of net investment securities losses in corporate. Before reviewing our results for the quarter, let's talk about the recent bank failures.

Speaker 1

Jamie has addressed a number of the important Themes in a shareholder letter and a recent televised interview, so I will go straight to the specific impacts on the firm. As you would expect, we saw significant new account opening activity and meaningful deposit and money market fund inflows, Most significantly in the Commercial Bank, Business Banking and AWM. Regarding the deposit inflows, at the firm wide level, Average deposits were down 3% quarter on quarter, while end of period deposits were up 2% quarter

Speaker 2

on

Speaker 1

quarter, implying an intra quarter reversal of the recent outflow trend as a consequence of the March event. We estimate that we have retained approximately $50,000,000,000 of these deposit inflows at quarter end. It's important to note that while the sequential period end deposit increase is higher than we would have otherwise expected, Our current full year NII outlook, which I will address at the end, still assumes modest deposit outflows from here. We expect these outflows to be driven by the same factors as last quarter as well as the expectation that we will not retain all of this quarter's inflows. Now back to the quarter touching on a few highlights.

Speaker 1

We grew our IB fee wallet share. Consumer spending remained solid with combined Debit and credit card spend up 10% year on year and credit continues to normalize, but actual performance remains strong across the company. On Page 2, we have some more detail. Revenue of $39,300,000,000 was up $7,700,000,000 or 25 percent year on year. NII ex Markets was up $9,200,000,000 or 78 percent, driven by higher rates, partially offset by lower deposit balances.

Speaker 1

NIRxMarkets was down $1,100,000,000 or 10%, driven by the securities losses previously mentioned as well as lower IV fees And markets revenue was down $371,000,000 or 4% year on year. Expenses of $20,100,000,000 were up $916,000,000 or 5% year on year, driven by compensation related costs reflecting the annualization of last year's headcount growth and wage inflation. These results include the impact of the higher FDIC assessment I mentioned last quarter, which of course is unrelated to recent events. And credit costs of $2,300,000,000 included net charge offs of $1,100,000,000 predominantly in card. The net reserve build of $1,100,000,000 It was largely driven by deterioration in our weighted average economic outlook.

Speaker 1

Onto balance sheet and capital on page 3. We ended the quarter with a CET1 ratio of 13.8%, up about 60 basis points, which was primarily driven by the benefit of quarter and distributed a total of $1,900,000,000 in net repurchases back to shareholders. Now let's go to our businesses starting with CCB on page 4. Touching quickly on the health of U. S.

Speaker 1

Consumers and small businesses based on our data. Both continue to show resilience and remain on the path to normalization as expected, but we continue to monitor their activity closely. Spend remains solid and we have not observed any notable pullback throughout the quarter. Moving to financial results. CCB reported net income of $5,200,000,000 on revenue of $16,500,000,000 which was up 35% year on year.

Speaker 1

In Banking and Wealth Management, revenue was up 67% year on year, driven by higher NII on higher rates. Average deposits We're down 2% quarter on quarter in line with recent trends. Throughout the quarter, we continued to see customer flows to higher yielding products as you would expect, We're encouraged by what we are capturing in CDs and our wealth management offerings. Client investment assets were down 1% year on year, but up 7 quarter on quarter driven by market performance as well as strong net inflows. In Home Lending, revenue was down 38% year on year, largely driven by lower net interest income from tighter loan spreads and lower production revenue.

Speaker 1

Moving to Card Services and Auto. Revenue was up 14% year on year, largely driven by higher card services NII on higher revolving balances, partially offset by lower auto lease income. Credit card spend was up 13% year on year. Card outstandings were up 21%, driven by strong new account growth and revolve normalization. And in auto, originations were $9,200,000,000 up 10% year on year.

Speaker 1

Expenses of $8,100,000,000 were up 5% year on year reflecting the impact of wage In terms of credit performance this quarter, credit costs were $1,400,000,000 reflecting reserve builds of $300,000,000 in card $50,000,000 in home lending. Net charge offs were $1,100,000,000 up about $500,000,000 year on year In line with expectations as delinquency levels continue to normalize across portfolios. Next, the CIB on page 5. CIB reported net income of $4,400,000,000 on revenue of $13,600,000,000 Investment Banking revenue of $1,600,000,000 Was down 24% year on year. IB fees were down 19%.

Speaker 1

We ranked number 1 with 1st quarter wallet share of 8.7%. In advisory, fees were down 6% compared to a strong Q1 last year. Our underwriting businesses Continued to be affected by market conditions with fees down 34% for debt and 6% for equity. In terms of the outlook, the dynamics remain the same. Our pipeline is relatively robust, but conversion is sensitive to market conditions and the economic outlook.

Speaker 1

We expect the Q2 and the rest of the year to remain challenging. Moving to markets. Total revenue was 8.4 dollars down 4% year on year. Fixed income was flat. Rates was strong during the rally early in the quarter as well as through the elevated volatility in March.

Speaker 1

Credit was up on the back of higher client flows and currencies in emerging markets was down relative to a very strong Q1 in the prior year. Equity Markets was down 12% driven by lower revenues and derivatives relative Strong Q1 in the prior year and lower client activity and cash. Payments revenue was 2,400,000,000 up 26% year on year. Excluding the net impact of equity investments, primarily a gain in the prior year, it was up 55%, The growth driven by higher rates, partially offset by lower deposit balances. Security Services revenue of $1,100,000,000 was up 7 We're up 2% year on year as higher headcount and wage inflation were largely offset by lower revenue related compensation.

Speaker 1

Moving to the Commercial Bank on page 6. Commercial Banking reported net income $1,300,000,000 Revenue of $3,500,000,000 was up 46% year on year driven by higher deposit margins. Payments revenue of $2,000,000,000 was up 98% year on year driven by higher rates and gross Investment Banking revenue of $881,000,000 was up 21% year on year on increased M and A and bond underwriting from large deal activity. Expenses of $1,300,000,000 were up 16% year on year, largely driven by higher compensation expense, including front office hiring Technology Investments as well as higher volume related expense. Average deposits were down 16% year on year and 5% Quarter on quarter, predominantly driven by continued attrition in non operating deposits as well as seasonally lower balances.

Speaker 1

Loans were up 13% year on year and 1% sequentially. C and I loans were up 1% quarter on quarter with somewhat dynamics based on client size. In Middle Market Banking, higher rates and recession concerns have decreased new loan demand and utilization, It is also leading to weakness in CapEx spending. In Corporate Client Banking, utilization rates increased modestly quarter on quarter as capital market conditions led more clients to opt for bank debt. CRE loans were also up 1% sequentially with higher rates Creating headwinds for both originations and prepayments.

Speaker 1

And given the recent focus on commercial real estate, let me remind you that our office sector exposure is less than 10% of our portfolio and is focused in urban dense markets and nearly 2 thirds of our loans are multifamily primarily in supply constrained markets. Finally, credit costs of $417,000,000 included a net reserve build of $379,000,000 predominantly driven by what I mentioned upfront. Then to complete our lines of business, AWM on Page 7. Asset and Wealth Management reported net income of $1,400,000,000 pretax margin of 35%. Revenue of $4,800,000,000 was up 11% year on year, driven by higher deposit margins on lower balances and evaluation gain on our initial investment Triggered by taking full ownership of our asset management joint venture in China, partially offset by the impact of lower year on year, predominantly driven by compensation, reflecting growth in our Private Banking Advisor teams, higher revenue related compensation and The run rate impact of acquisitions.

Speaker 1

For the quarter, net long term inflows were $47,000,000,000 led by fixed income and equities. And then liquidity, we saw net inflows of $93,000,000,000 inclusive of our ongoing deposit migration. AUM of $3,000,000,000,000 was up 2% year on year and overall client assets of $4,300,000,000,000 were up 6%, driven by continued net inflows into liquidity and long term products. And finally, loans were down 1% quarter driven by lower securities based lending, while average deposits were down 5%. Turning to corporate on Page 8.

Speaker 1

Corporate reported net income of $244,000,000 Revenue was $985,000,000 compared net loss of $881,000,000 last year. NII was $1,700,000,000 up $2,300,000,000 year on year due to the impact of higher rates. NIR was a loss of $755,000,000 compared with a loss of 345,000,000 in the prior year and included the net investment securities losses I mentioned earlier. Expenses of 160,000,000 Down $24,000,000 year on year. And credit costs of $370,000,000 were driven by reserve builds on a couple of single name exposures.

Speaker 1

Next, the outlook on Page 9. We now expect 2023 NII and NII ex markets to be approximately $81,000,000,000 This increase in guidance is primarily driven by lower rate paid assumptions across Note that in line with my comments at the outset, recent deposit balance increases are not a meaningful contributor to The upward revision in the NII outlook given that we expect a meaningful portion of the recent inflows to reverse later in the year. I would point out that this outlook still embeds significant reprice lags. We think a more sustainable NII ex Markets run rate in the medium term is well below this quarter's $84,000,000,000 as well as below the $80,000,000,000 that is implied for the rest of the year by our full year guidance. And while we don't know exactly when this This lower run rate will be reached.

Speaker 1

When it happens, we believe it will be around the mid-70s. And of course, as we mentioned last quarter, This NII outlook remains highly sensitive to the uncertainty associated with the timing and the extent of deposit reprice, investment portfolio decisions, The dynamics of QT and RRP, the trajectory of Fed Funds as well as the broader macroeconomic environment, including its impact on loan growth. Separately, it's worth noting that markets NII may start to trend slightly positive towards the end The year as a function of mix and rate effects. Moving to expenses. Our outlook for 2023 continues to be about 81,000,000,000 Importantly, this does not currently include the impact of the pending FDIC special assessment.

Speaker 1

And on credit, we continue to expect the 2023 card net charge off rate to be approximately 2.6%.

Speaker 3

So to

Speaker 1

wrap up, our strong results this quarter once again highlight the earnings power of this diversified franchise. We We have benefited from our fortress principles and commitment to invest, which we will continue to do as we head into an increasingly uncertain environment.

Operator

From the line of Steve Chubak with Wolfe Research is now open.

Speaker 4

Hey, good morning. Good morning, Stuart. Jamie, I was actually hoping to get your perspective on how you see the recent Developments with SVB impacting the regulatory landscape for the big banks. In your letter, you spent a fair amount of time Highlighting the consequences of overly stringent capital requirements, the risk of steering more activities to the less regulated non banks, what are some of the changes that you're Scenario planning for whether it's higher capital, increase in FDIC assessment fees? And along those same lines, how you're thinking about the buyback Given continued strong capital build, but a lot of macro uncertainty at the moment.

Speaker 5

Well, I think you were already kind of We're hoping that everyone just takes a deep breath And looks at what happened and the breadth and depth of regulations already in place. Obviously, when something happens like this, you should adjust, So I think down the road there may be some limitations on held to maturity, maybe more TLAC for certain type side banks and more scrutiny on history exposure, stuff like that. But it doesn't have to be a revamp of the whole system. It's just recalibrating things the right way. I think it should be done knowing what you want the outcome to be.

Speaker 5

The outcome you should want is very strong community and regional banks. And certain actions Taken which are drastic, it could actually make them weaker. So that's all it is. We do expect higher capital from Basel IV effectively And obviously, there's going to be an FDA assessment. That will be what it is.

Speaker 4

And just in terms of appetite for the buyback, just

Speaker 5

We've told you I think we've told you that we're kind of penciling in $12,000,000,000 for this year. Obviously, Capital is more than that, but and we did a little bit of buyback this quarter. We're going to wait and see. We don't mind keeping our powder dry. And you've seen us do that with investment portfolios and we're also willing to do it with capital.

Speaker 4

That's great. I'll hop back in the queue. Thanks so much for taking my questions.

Operator

Thank you. The next question comes from the line of Ken Usdin with Jefferies. You may proceed.

Speaker 6

Hey, thanks. Good morning. Hey, Jeremy, I was just wondering if you can just give us a little bit more detail on those lower funding expectation points that you made. Just in terms of Is it because of like what you can offer the client that might allow you to kind of keep that beta lower and maybe you can just kind of wrap it into what

Speaker 1

So the primary driver really is lower deposit rate paid expectations across both consumer and wholesale, Which as you mentioned is driven by a couple of factors. So the change in the rate environment with cuts coming sooner in the outlook, All else equal does take some pressure off the reprice. And as you said, we're getting a lot of positive feedback from field on our product offerings. The short term CD in particular, is really getting a lot of positive feedback from our folks in the branches. It's been very attractive Yield seeking customers.

Speaker 1

So that's kind of working well. And then on the asset side, we are seeing a little bit higher card revolve, which is helping. And I'll just remind you that at a conference in February, I suggested that we were already starting to feel like some of the uncertainties we As we mentioned when giving the guidance had started all moving in the same direction, and that was one of the things that contributed to the upward revision, like all the uncertainty kind of the same way. But as Jamie has pointed out, like those uncertainties are all still there. We highlight them on the page.

Speaker 1

And As we look forward to this year and into next year in the medium term, we remain very focused on those.

Speaker 6

Yes. And as a follow-up on the point about rate expectations coming now in and potentially getting cut sooner, how do you take a look at what That might mean just for the broader economy. Is that do you think it's more just because inflation is coming down? Do you think it's because the Fed just got to react to an even tougher Economy and still some of those storm clouds that might be out there, just kind of just your general thinking about the other read throughs of what Lower rates quicker will mean for the broader economy?

Speaker 5

Well, I was first of all, I don't quite believe it. The rate curve the Fed has the rate curve, the forward short term rate curve almost 1% higher The market has. So one of the things you got to always prepare for is, it could be anything. We don't know what the rate curve is going to be in the year. And so we're quite cautious in that and quite thoughtful about that.

Speaker 5

Obviously, the short term read is higher recessionary risk, And then inflation coming down. So I think inflation will come down a little bit, but it could easily be stickier than people think and therefore the rate curve will have to go up a little bit.

Speaker 6

Okay. Thank you very much.

Operator

Thank you. The next question comes from the line of John McDonald with Autonomous Research. You may proceed.

Speaker 7

Hi, thanks. Jeremy, wanted to follow-up again on the drivers of the NII revision in the lower rates Paid assumption. You mentioned the Fed cuts coming sooner and positive feedback on the customer offers. What about the March events? Did the bank failures there that happened in March, In your view, do they slow the reprice intensity because folks are moving other than price reasons or they intensify it industry wide because Smaller banks have to reprice to keep their deposits.

Speaker 7

How do those events influence your view of the reprice?

Speaker 1

Yes, John, it's a really

Speaker 2

good question and we've obviously thought about that.

Speaker 1

But as we sit here today, I guess I have two answers to that. One is, it doesn't it's not meaningfully affecting Our current outlook, we don't see it as a major driver. And I think in terms of the larger dynamics that you lay out, it's just a little too early to But from where we are right now, the base case is no real impact.

Speaker 7

Okay. And then I wanted to ask Jamie, There's a narrative out there that the industry could see a credit crunch, banks are going to stop lending, even Jay Powell mentioned that as a risk. Do you see that in terms of anything you look at in terms of lending, that and is that a reaction that makes sense that banks We're retrenching a lot here. Do you worry about that for the economy in terms of credit crunch? Thanks.

Speaker 5

Yes, I wouldn't use the word credit crunch if I were you. Obviously, there's going to be a little bit of tightening and most of that will be around certain real estate things. You've heard it from Real estate investors are ready. So I just look at that as a kind of a thumb on the scale. It just makes the financial conditions a little bit tighter, increases the odds of a That's what that is.

Speaker 5

It's not like a credit crunch.

Operator

Thank you. Our next question comes from Erika Najarian with UBS. You may proceed.

Speaker 8

Hi, good morning. My first question is you mentioned that your reserve build was driven mostly by Worse economic assumptions, I'm wondering if you could update us on what unemployment rate you're assuming in your reserve?

Speaker 1

Yes. So Erica, as you know, we take I'm going to go into a lot of detail here, but we take the outlook from our economists. We run a bunch of different scenarios and we probably weight those. The central case outlook from our research team hasn't actually changed, but we felt that in line with what Jamie just said in terms of a little bit of tightening As a result of the events of March, it made sense to add a little bit of weight to our relative adverse case. So we did that, which changed the weighted average And I think that weighted average peak unemployment that we're using now is something like 5.8%.

Speaker 8

So as we think about all of what you've just told us, so $81,000,000,000 of NII this year and Who knows when medium term is going to happen is mid-70s. The clear strength of the franchise producing 23% ROTCE In a quarter where your CET1 was 13.8% and a reserve that already reflects 5.8% unemployment, As we think about recession and what JPMorgan can earn in a recession, do you think you can hit 17% ROTCE Even in 2024, assuming we do have a recession in 2024 as everybody is expecting, given all these revenue dynamics

Speaker 5

It's a great question. Jeremy answers it.

Speaker 1

Okay. Let's take a crack. Let's see what the boss thinks. I think number 1, we believe, have said and continue to believe that this is fundamentally a 17% of the cycle ROTCE So number 1. Number 2, as Jamie always says, we run this company for all different scenarios and to have it be as resilient as possible Across all different scenarios.

Speaker 1

On the particular question of ROTCE expectations in 2024 contingent on the particular economic outlook, Obviously, it depends a lot on the nature of the recession. I think we feel really good about how the company is positioned for a recession, but we're a bank. A very serious recession is, of course, going to be a headline a headwind for returns, but we think even in a fairly severe recession, we'll deliver Very good returns. Whether that's 17% or not is too much detail for now.

Operator

Thank you. The next question comes from the line of Jim Fleming with Seaport Global Securities. You may proceed.

Speaker 9

Hey, good morning. Maybe just a little bit on the deposit, your thought process there. You've seen some inflows. What's your why do you think they you lose them going forward? And just maybe talk a little bit about the dynamic and pricing.

Speaker 9

Do you feel like Given the inflows, do you see some pricing power for the larger banks?

Speaker 1

Yes. A couple of things there. So First of all, we don't know, right? The deposits just came in. We don't know, we're guessing.

Speaker 1

Number 2, the deposits just came in. So by definition, these are somewhat flighty deposits because they just came into us. So it's prudent and appropriate for us Assume that they won't be particularly stable. Number 3, there's a natural amount of internal migration of deposits to money funds. So you have to overlay that and that's embedded in our assumptions.

Speaker 1

And number 4, it's a competitive market and it's entirely possible that people Temporarily come to us and then over time decide to go elsewhere. So for all of those reasons, we're just Being realistic about the stickiness of the

Speaker 5

If I add, I wouldn't I would say categorically, there's no pricing power that the bigger banks have. Because if you look at the pricing and we look at pricing sheets all the time, every bank is in a slightly different position and every bank is competing In 3 months, 6 months, 9 months savings rates and then you have the online banks, you got treasury bills, you got money market funds. There's no Pricing power for the bank, but obviously we have different franchises, we're all in a slightly different position.

Speaker 9

All fair points. And maybe just a follow-up on John's question on the lending environment. You talked about the industry likely pulling back. Are you changing your underwriting standards in any way? Just trying to think through is there potential for the market share gains given your strength If capital and liquidity or how are you thinking about the loan environment?

Speaker 5

I'd say very modestly, but we look at that all the

Speaker 2

Yes.

Speaker 1

And we always say, right, we underwrite through the cycle. And I think notably, we didn't loosen our underwriting standards when all the numbers looked Crazy good during the pandemic, and we're not going to like overreact now and tighten unreasonably. Some of that correction happens naturally. Credit metrics deteriorate for borrowers, whether in consumer or wholesale, and that might make them leave our pre existing risk appetite, but we're not running around Aggressively tightening standards right now.

Speaker 9

Okay, great. Thanks.

Operator

The next question comes from the line of Gerard

Speaker 10

In your comments about your CET1 ratio, obviously, it came in strong at 13.8%. You've got the G SIP buffers Obviously, going up next year. And we have the stress test coming this summer or in June, the results, which maybe will lead to banks, Including yours having a higher stress capital buffer, where should we think about that CET1 ratio being by the end of the year, do you think?

Speaker 1

Yes. So a few things on there, Gerard. So we have previously said that we were targeting 13.5 In the Q1 of 2024 as a function of assuming an unchanged SCB, the increased G SIB step and operating 50 basis point buffer. So the point that Jamie made a second ago, in light of the environment Basel IV, dry powder, who knows how we'll Tweak that going forward, but that's still our base case assumption. Specifically on the stress test, I'll Contrary to what I've heard some people argue, our ability to predict, the SCB ahead of time from running our own process is actually quite Limited.

Speaker 1

And you'll remember last year that even though we did predict an increase, we were off by almost a factor of 2 in terms of how big it Wind up being and that was a big surprise for the whole industry. So we want to be quite humble about our ability to predict the SCB. But having said that, For right now, we are assuming it will be unchanged. There are some tailwinds in there through the OCI, But we believe there will likely be some offsets in harsher credit shocks in the numbers. So for planning purposes right now, We're assuming flat for SCB and we'll know soon enough what the actual number is.

Speaker 10

Sure. And then just as a follow-up, if I heard you correctly, can you give us a little more color? I think you mentioned in building the loan loss reserve this quarter, you identified some One off credits, I don't know if that's how you said it. There's some larger credits. Were they commercial real estate orientated?

Speaker 10

Were they commercial? Any more color there?

Speaker 1

No, it wasn't commercial real estate. It was just a couple of single name items in the corporate segment.

Speaker 10

Leveraged loan type items or just regular corporate credits?

Speaker 1

Regular corporate credits. I'd rather not get

Speaker 10

Okay. Very

Speaker 1

good. Bill Sherrard, sorry. Thanks. Thank you.

Operator

The next question comes

Speaker 11

I guess maybe one question, Jeremy, you reminded us of the relatively low office exposure for JPM, but obviously you're big players in the CRE Okay. So give us a sense of when you look at the two pressure points on CRE, 1, how much is oversupply and that probably goes beyond office into Apartments, how much of an issue is oversupply in the market as we think about the next few years going into a weakening economy? And How much of risk is higher for longer rates in that if the central banks can't cut rates in the next year or 2, we will see A ton of more pain because of the DeFi wall that's coming up.

Speaker 1

Yes. So Ebrahim, let me sort of respond narrowly in connection with our portfolio and our So, really the large majority of our commercial real estate exposure is multifamily lending in supply constrained markets. And I think it's quite important to recognize the difference between that and sort of higher end, higher price non rent controlled, not supply constrained market. So our space, is really quite different in that respect. And I think that's a big part of the reason Performance has been so good for so long.

Speaker 1

So of course, we watch it very carefully and we don't assume that past performance predicts future results here. But I think our multifamily lending portfolio is quite low risk in the scheme of things.

Speaker 5

Can I just add also Housing is in short supply in America? So it's not massively oversupplied like you saw in 2,008.

Speaker 1

Yes. And then in terms of the office space, as you know, our exposure is quite small. Yes, Jamie has also mentioned all the refi dynamics You mentioned too are something that the office space is processing one way or the other. Our office exposure is quite modest, Very concentrated in Class A buildings and sort of dense urban locations where the return to the office narrative is one of the drivers It's generally in favor of high occupancy. So again, watching it, there are obviously specific things here and there to pay attention to.

Speaker 1

But In the scheme of things for us, not a big issue.

Speaker 12

And just

Speaker 11

as a follow-up, I think the other risk from higher for longer rates, I think is this the ability of the economy, the financial markets to sustain a 5% -plus Fed funds for a long period of time. Like what are the other areas you're watching, if duration mismatch on bank balance sheet being 1, CRE market being 1? Are you worried about non banks that have Grown exponentially over the last decade in terms of risks at the non banks if rates don't get cut. And if you can talk to the transmission mechanism Of that coming back and hitting banks given the leverage that banks provide to the non banks?

Speaker 5

Yes. So this I'd like to answer that. So There is a risk of higher rates for longer and don't just think of just the Fed funds rate, because I think you should for our planning, I'd be thinking more about it could be 6 And don't and then think about the 5.10 year rate, which could be 5. And I think if those things happen, I'm not saying they're going to happen, I just think people should They saw what just happened when rates went up beyond people's expectations.

Speaker 6

You had

Speaker 5

the guilt problem in London. You had some of the banks here. People need to be prepared for the potential of higher rates for longer. If and when that happens, it will undress Problems in the economy for those who are too exposed to floating rates or those who are too exposed to refi risk. Those Moises will be in multiple parts of the economy.

Speaker 5

So now that I say to all of our clients, now would be the time to fix it. Do not put yourself in a position where that risk is excessive for your company, your business, your investment pools, etcetera. That's answer number 1. Number 2 is it will not come back to JPMorgan. Okay.

Speaker 5

While we do provide credit to what you call shadow banks, It is very we think it's very, very secure. It does not mean it won't come back to other credit providers.

Speaker 11

Got it. Very helpful. Thank you.

Operator

The next question comes from the line of Mike Mayo with Wells Fargo

Speaker 3

part of your $7,000,000,000 increased NII guide, are you assuming better loan spreads? And on the topic of loan pricing, Why aren't your credit card yields going higher than where they are today? Thanks.

Speaker 1

Yes, Mike. So on the and so I think, yes, you're referring to my comments that I made in the Commercial Bank about the fact that the larger Corporate segment within the commercial bank that would generally have access to capital markets, but also access to bank lending, The margin is choosing to draw down on revolvers right now rather than access the capital markets. That is not a particularly meaningful driver of the increase in You specifically checked what's happening with card yields.

Speaker 2

I would imagine that they've gone up

Speaker 1

a little bit in line with rates, but I don't know. We can follow-up.

Speaker 3

All right. And then one for you, Jamie. I guess taking the 10,000 foot level, I guess you look at Asset Liability Management or ALM, you could call this nightmare on Elm Street, and you've seen some big problems at banks. And I guess how would you evaluate yourself, I guess, with the $7,000,000,000 higher NII guidance? Probably is good, but to what degree are you willing to Sacrifice JPM shareholder money to help rescue problem banks that did not get their Asset Liability Management, correct.

Speaker 5

There's 2 really different questions. So we've been quite cautious on interest rates for quite a while and how we invest our portfolio, what our The stress test the CCAR stress test as you know had rates going down. I always looked at rates going up and being prepared to whether or not you think it's going to happen. So we've been quite conservative ourselves and we don't mind continuing to do that because I Remind people that having excess capital, you haven't lost it. It's kind of earnings in store.

Speaker 5

You get to deploy it later and maybe at a more opportune time When the time comes and we're not look, we'd like to help the system when it needs help if we can reasonably. And we're not the only ones. You saw a lot of banks do that. And I was proud of them. I was proud of all.

Speaker 5

I think all of us did the right thing, whether ultimately it works Well, you can second guess that when it happens. But the fact is, I think people want to help the system and this whole banking thing was bad for banks. I knew that the second I saw the headline, and then you have Credit Suisse. We want healthy community banks. We want healthy regional banks.

Speaker 5

We want to help them get through this. We have remember, Mike, as you put out, we have the best financial system world's ever seen. That does not mean it won't have problems, Doesn't mean there shouldn't be changes made, but I think it's reasonable for people to help each other in times of need. And we all did that during all of us Did that during COVID. All of us did that.

Speaker 5

If you could, those who could did it during the great financial crisis and I would expect people do that going forward.

Speaker 3

Hey, Jamie, your CEO letter said the banking crisis isn't over. So what do you mean by that? Or was that dated 2 weeks later or talking contagion or what?

Speaker 5

So it's just the number of banks off sides you can count in your hands In terms of like too much interest rate exposure, too much ATM, too much uninsured deposits. And so there may be additional bank deposits, I mean bank failures, something like that, which we don't know. But you're going to see next week regional banks have pretty good numbers. A lot of people are going to have can take actions to Remediate some of the issues they may have going forward. You've already seen things calm down quite a bit, particularly in deposit flows.

Speaker 5

Warren Buffet was on TV talking about that he would bet $1,000,000 I don't know if he saw that, that no depositor will lose money in America. Thanks for building the business, Omman, of course, you know he's a very bright man. So this crisis is not 'eight, it will pass. And the one thing I pointed out is that when I answered question just before about interest rates, people need to be prepared. They shouldn't pray that they don't go up.

Speaker 5

They should prepare for them going up. And if it doesn't happen, serendipity.

Speaker 3

All right. Thank you.

Operator

The next Question comes from the line of Betsy Graseck with Morgan Stanley. You may proceed.

Speaker 12

Hi, good morning.

Speaker 2

Hey, Betsy.

Speaker 12

I do want to unpack the question here on the possibility of higher for longer rates And how that impacts you in your non markets NII?

Speaker 1

Let's see, did we just lose you? I feel like you just dropped.

Speaker 12

Not hear me? Hello?

Speaker 2

Yes. Yes.

Speaker 1

Yes. Yes.

Speaker 12

Okay. So I just wanted to unpack the higher for longer rate possibility as to how it impacts your NII, because your NII guide is assuming the forward curve, if I understand correctly. So in the event that you get that higher for longer, Just how much does that impact the NIIX markets? Because I'm trying to triangulate here about maybe you lose some deposits, but if we have higher for longer, Shouldn't we expect the trajectory goes up from this quarter as opposed to down? Is that that's the question.

Speaker 5

Go ahead, Jeremy. Sure. So Betsy, your question is

Speaker 1

very good. And I would say that as the like if you look at the evolution of our outlook last year, It was pretty clear that we were very asset sensitive certainly in terms of the sort of 1 year forward EAR type measure. You also As you know that our current EAR actually shows a slight negative number, so a tiny bit liability sensitive. And I won't get into all the nuances about why that may or may not be a great J. Rice:] But the point is that the level of rates now is of course very different from what it was last year.

Speaker 1

And at this level of rates, The relationship between our short term and AI evolution and the curve is not always going to be clear in any given moment. It's quite tricky and it can behave in somewhat wonky ways as a function of, again, what I've I alluded to a couple of times on this call the competitive environment for deposits, which is not in fact a sort of mathematically predictable thing as a function of the rate curve. So That's why we're emphasizing all the different drivers of uncertainty in the NII outlook. Yes.

Speaker 5

So I would just add, so next quarter we kind of know already, Two quarters out, we know a little bit less. Three quarters out, we know a little bit less. And in 'twenty four, we know very little. That number, you can imagine, this is a little inside baseball now, the number that we're talking about for 2024 It's not based upon an implied curve. It's based upon us looking at multiple potential scenarios, Leveling them kind of out and saying this is kind of a range.

Speaker 5

And you're absolutely correct, you could have an environment of higher for longer that might be better than that. But remember, higher flow longer comes with a lot of other things attached to it, like maybe recessions, deflation, lower volumes. So I wouldn't look at that as higher flow rate as a positive. It might be a slight positive in that line. It probably would be a negative in other lines.

Speaker 12

Yes, got it. Okay, that's super helpful. I understand how you think through that. And then the follow-up is just on the buybacks. So do I take your comments to mean that you're on pause now?

Speaker 12

And if that's the case, what would be the driver of restarting?

Speaker 5

No, we're not on pause now. We're doing a little bit now. We obviously have a lot of excess capital. We also like to buy our stock when it's cheap, not just when it's available. And we're also peering ahead, look at those little bit of storm clouds, so we're going to be kind of cautious.

Speaker 5

So we're going to make this decision every day. We also don't like to tell the market what we're doing, just so you know.

Speaker 12

Yes. And then can you give us any sense of what Basel IV Endgame means to you and your RWAs? How much should we be baking in for this?

Speaker 1

Yes. Betsy, we really don't have any new information there, right? I mean, I think, clearly, if you go back like The year we were maybe a little bit more optimistic that it might be across all the different levers and all the different pieces of it closer to capital neutral. I think now it feels It's likely to be worse than that. Hopefully, it's not too much worse than that.

Speaker 1

And I would just remind you that there are a lot of different levers. When the NPR comes, that's only going to be part of it. There's going to be other pieces, the holistic review. And it's going to take a lot of time to And we're going to have time to adjust. So we'll know when we know.

Speaker 5

And they were supposed I'll just remind you, they were supposed Be positive there, but how they looked at banks relative to the global economy, which again is smaller. GCFI was supposed to be adjusted for that. So it may vary. We're expecting to go up, but there are a lot of reasons why it shouldn't go up. And JPMorgan, it's not a there's so much capital.

Speaker 5

I mean, so you can't look at JMU and say, well, it's a capital issue. And even the banks, by the way, when you look at it, even though some of the banks are in trouble, I have plenty of capital. The issue wasn't capital. It was other things. And so I'm just hoping regulators are very thoughtful.

Speaker 5

And the other thing is they should, APRE, decide what they want in the bank At this point, because I've made it clear, I can look at the banking system and say that no bank should keep a loan, if possible. That's how much capital is now being required for loans. The loans Based on the ruleset. Yes, because the market is pricing holds the market would take loans at much lower capital ratios than banks are being forced to hold for them. I'm talking about just loans only.

Speaker 5

And that's why you're seeing a lot of capital go to I mean, a lot of credit go to non banks Dramatically by the way, rapidly and dramatically. And so if you're a regulator, if you look at it saying, do I want that? Is that a good thing for the system? If you believe it's a good thing for the system, raise the capital and more credit will go out of the system. That's fine.

Speaker 5

If that's what they want, that's fine. But they should do it with a forethought, Not accidentally.

Speaker 12

I like the NII from loans better than the gain on sale. So I'll prefer The former, not the latter, but thanks. Appreciate it.

Operator

Thank you. The next

Speaker 13

So you Talked about in your letter about regulators avoiding the knee jerk reaction, which you addressed earlier. I'm curious on Your thoughts around how customers have reacted and should react. Now and my point my question is, Consumers can move excess cash balances if they want more insurance. They can do that in a lot of different ways, move it, treasuries, money market, extra accounts, whatever. The issue the question I have for you is on the corporate side.

Speaker 13

Have you seen big changes in how corporate treasurers or CFOs Those are adapting their cash balances and working capital and should they need to. I appreciate your Warren Buffett comments.

Speaker 1

Yes. Glenn, in short, we really haven't seen big changes to speak of. And I do think it's just worth saying, I think you're sort of At this a little bit, when you talk about the behavior of corporates that when we talk about responses to recent events, Through the lens of uninsured deposits, that's obviously very different if you're talking about large balances of Non operating uninsured deposits from financial institutions or de facto financial institutions versus normal large corporate operating Balances, which is of course like core banking business for all of us.

Speaker 5

When we saw it in Commercial Banking, Payments, investment banking and custody, you did see money move the or I would call excess cash has moved out.

Speaker 1

They have options. What I

Speaker 5

would call more like operational cash, I think even if it's small retail, small companies, middle market companies, etcetera, That tends to be fairly sticky because you have your loans there, you have your money there, you're getting more and more competitive in rates. That's why I think you see a lot of regional banks. They've got sticky middle market deposits. If I lent you $30,000,000 and you have $10,000,000 you're probably going to be leaving it at my bank. And they also are more competitive on the rate for that.

Speaker 5

So I think you shouldn't be looking at deposits like 1 class. There's a whole bunch of And analytically, you go through each one and try to figure out what the stickiness is and what the stickiness is and etcetera. And so, but I think they've already As the Fed has raised rates, you've already seen that's the reason we expected outflows both from consumers and corporate customers.

Speaker 13

Interesting. Just a follow-up, the other thing that caught my eye in the letter is you mentioned that you're New capital optimization strategies, including partnerships and securitizations. What's different than what you've already been doing for the last 30 years?

Speaker 5

We've got our smartest people figure out every angle to reduce capital requirements for JPMorgan. That's the difference. And we've been doing it, but there are securitizations, there are partnerships. You've seen a lot of the private equity do the life insurance I expect that we're going to come up with a whole bunch of different things over time and we'll shed certain assets too.

Speaker 13

Thanks, Jamie.

Operator

Our final question comes from the line of Matt O'Connor with Deutsche Bank. You may proceed.

Speaker 14

Good morning. You guys talked about one of the drivers of the higher net interest income guide this year is due to likely higher credit card balances. And I was just wondering if you could flush out what changed there on the outlook, say, versus 3 months ago? And I guess, is it a good or bad thing that those

Speaker 2

balances will be higher than you thought?

Speaker 14

Yes. So the Balances will be higher than you thought.

Speaker 1

Yes. So the story there is kind of the same story we've been talking about for a while. It's just a matter of degree. We had revolving balances obviously drop a lot during the pandemic period and then we talked about having them recover in absolute dollar terms to the same level as we've had pre pandemic, which I think happened last quarter. And then the remaining narrative is just the further normalization of the revolve per Because we also have seen some account growth and that continues to happen.

Speaker 1

And so And yes, we know we also to Mike's question earlier, we're seeing a higher yield there as well. So, and on your question of whether it's Good or bad, obviously, there is a point at which the consumers have too much leverage. We don't see that Yes. So it's normalization.

Speaker 5

That's a good thing for us.

Speaker 14

Okay. And then just separately to squeeze in, you guys took Some security losses again this quarter. And in the past, you've talked about, really just going security by security, looking for kind of Pricing opportunities, is that kind of what drove it again this quarter or is there some kind of broader marching?

Speaker 5

That will be every quarter for rest of our lives. So we find rich and we buy what we think is dear.

Speaker 14

All right. Thank you.

Operator

We have no further questions.

Speaker 5

Excellent. Folks, thank you very much.

Operator

That concludes today's conference. Thank you all for your participation. You may disconnect at this

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Earnings Conference Call
JPMorgan Chase & Co. Q1 2023
00:00 / 00:00