JPMorgan Chase & Co. Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 14, 2023

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Second Quarter 2023 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go to the live presentation.

Operator

Please standby. 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. 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 $14,500,000,000 EPS of $4.75 on revenue of 42,400,000,000 and delivered an ROTCE of 25%. These results included the First Republic bargain purchase gain of $2,700,000,000 a credit reserve build for the First Republic lending portfolio of $1,200,000,000 as well as $900,000,000 of net investment Touching on a few highlights.

Speaker 1

CCB client investment assets were up 18% year on year. We had a record long term inflows in AWM, and we ranked number 1 in IBP wallet share. Before giving you more detail on the financials, Let me give you a brief update on the status of the First Republic integration on Page 2. The settlement process of the FDIC is on schedule, The number of key milestones being recently completed. Systems integration is also proceeding apace and we are targeting being substantially complete by mid-twenty First Republic employees have formally joined us as of July 2, and we're pleased to have had very high acceptance rates on our offers.

Speaker 1

And although it's still early days, as we get the sales force back in the market, we are happy to see that client retention is strong with about $6,000,000,000 of net deposit inflows since the acquisition. Now turning back to this quarter's results on Page 3. You'll see that in various parts of the presentation, We have specifically called out the impact of First Republic where relevant. To make things easier, I'm going to start by discussing the overall impact of First Republic on this quarter's Then for the rest of the presentation, I will generally exclude the impact of First Republic in order to improve comparability with prior periods. With that in mind, this quarter First Republic contributed $4,000,000,000 of revenue, dollars 599,000,000 of expense and $2,400,000,000 of net income.

Speaker 1

As noted on the first page, this includes $2,700,000,000 of bargain purchase gain, which is reflected in NIR in the corporate segment as well as $1,200,000,000 of allowance billed. And remember, The deal happened on May 1, so the First Republic numbers only represent 2 months of results. You'll see in the line of business results We are showing 1st Republic revenue and allowance in CCB, CV and AWM. And for the purposes of this quarter's results, All of the deposits are in CCV and substantially all of the expenses are in corporate. As the integration continues, Some of those items will get allocated across the segments.

Speaker 1

Now turning back to firm wide results excluding First Republic. Revenue of $38,400,000,000 was up $6,700,000,000 or 21% year on year. NII ex Markets was up $7,800,000,000 50 7 percent driven by higher rates. And IRX markets was down $293,000,000 Largely driven by the net investment securities losses I mentioned earlier, partially offset by a number of less notable items, primarily in the prior year. And markets revenue was down $772,000,000 or 10% year on year.

Speaker 1

Expenses of $20,200,000,000 were up 1.5 And credit costs of $1,700,000,000 included net charge offs of $1,400,000,000 predominantly in card. The net reserve build included $389,000,000 build in the commercial bank, a $200,000,000 building card and a $243,000,000 release and corporate, all of which I will cover in more detail later. Onto balance sheet and capital on Page 4. We ended the quarter with a CET1 ratio of 13.8%, flat versus the prior quarter, as the benefit of net income less distributions was offset by the impact of First Republic. And as you can see in the two charts on the page, we've given you some information about the impact of the transaction Both RWA and CET1 ratio.

Speaker 1

And as you know, we completed CCAR a couple of weeks ago. Our new indicative SCB is 2.9% versus our current requirements of 4% And it goes into effect in 4Q 2023. The new SCB also reflects the Board's intention to increase the dividend to $1.05 per share in the 3rd quarter. On liquidity, our bank LCR for the 2nd Quarter ended at 129 percent, in line with what we anticipated at Investor Day. About half of the reduction is associated with the First Republic transaction.

Speaker 1

And while we're on the balance sheet, as we previewed in the 10 And while we're on the balance sheet, as we previewed in the 10 ks, we will be updating our earnings at risk model To incorporate the impact of deposit repricing lags. So when we release this quarter's 10 Q, you will see the up 100 basis point parallel shift will be about positive $2,500,000,000 whereas in the absence of the change, it would have been about negative 1,500,000,000 Now let's go to our businesses starting with CCP on Page 5. Both U. S. Consumers and small businesses remain resilient and we haven't observed any meaningful changes to the trends in our data we discussed at Investor Day.

Speaker 1

Turning now to the financial results, which I will speak to excluding the impact of First Republic or CCB, CV and AWM. CCB reported net income of $5,000,000,000 on revenue of $16,400,000,000 was up 31% year on year. In Banking and Wealth Management, revenue was up 59% year on year, driven by higher NII on higher rates. End of period deposits were down 4% quarter on quarter as customers continue to spend down their cash buffers, including for seasonal tax payments and seek higher yielding products. High investment assets were up 18% year on year, driven by market driven by seasonality, although still down 54% year on year.

Speaker 1

Moving to card services and auto. Revenue was up 5%, largely driven by higher card services NII on higher revolving balances, partially offset by lower auto lease income. Card outstanding were up 18% year on year, which was the result of revolved normalization and strong new account growth. And in auto, originations were up $12,000,000,000 up 71% year on year as competitors pulled back and inventories continued to slowly recover. Expenses of $8,300,000,000 were up 8% year on year, driven by compensation predominantly due to wage inflation and In terms of credit performance this quarter, credit costs were $1,500,000,000 reflecting reserve bills of $203,000,000 driven by loan growth and card services.

Speaker 1

Net charge offs were $1,300,000,000 up $640,000,000 year on year, predominantly driven by card, As 30 day plus delinquencies have returned to pre pandemic levels in line with our expectations. Next, the CIB on Page 6. CIB reported net income of $4,100,000,000 on revenue of 12,500,000,000 Investment Banking revenue of $1,500,000,000 was up 11% year on year or down 7% excluding bridge book markdowns in the prior year. IB fees were down 6% year on year and we ranked number 1 with year to date wallet share of 8.4%. In advisory, fees were down 19%.

Speaker 1

Underwriting fees were down 6% for debt and up 30% for equity with more positive momentum in the last In terms of the second half outlook, we have seen encouraging signs of activity in capital markets and July should be a good indicator for the remainder of year. However, year to date announced M and A is down significantly, which will be a headwind. Moving to markets. Total revenue was $7,000,000,000 down 10% year on year. Fixed income was down 3%.

Speaker 1

As expected, The macro franchise substantially normalized from last year's elevated levels of volatility and client flows. This was largely offset by improved performance in the Securitized Products Group and Credit. Equity markets was down 20% Against a very strong prior year quarter, particularly in derivatives. Payments revenue was $2,500,000,000 up 61% year on year. Excluding equity investments, it was up 32%, predominantly driven by higher rates, partially offset by lower deposit balances.

Speaker 1

Securities Services revenue of $1,200,000,000 was up 6% year on year, driven by higher rates, partially offset by lower fees. Expenses of $6,900,000,000 were up 1% year on year, driven by higher non compensation expense as Well as wage inflation and headcount growth, largely offset by lower revenue related compensation. Moving to the Commercial Bank on Page 7. Commercial Banking reported net income of $1,500,000,000 Revenue of $3,800,000,000 was up 42% year on year, driven by higher deposit margins. Payments revenue $2,200,000,000 was up 79% year on year, driven by higher rates.

Speaker 1

Gross Investment Banking and Markets revenue $767,000,000 was down 3% year on year, primarily driven by fewer large M and A deals. Expenses of $1,300,000,000 were up 12% year on year, predominantly driven by higher compensation expense, including front office hiring and technology investments as well as higher volume related expense. Average deposits were up 3% quarter on quarter, driven by inflows related to new client acquisition, partially offset by continued attrition in non operating deposits. Loans were up 2% quarter

Speaker 2

on quarter.

Speaker 1

C and I loans were up 2%, reflecting stabilization and new loan demand and revolver utilization in the current economic environment as well as pockets of growth in areas where we are investing. CRE loans were also up 1%, reflecting funding on prior year originations for construction loans in real estate banking as well as increased affordable housing activity. Finally, credit costs were 489,000,000 Net charge offs were $100,000,000 including $82,000,000 in the office real estate portfolio and the net reserve build of $389,000,000 was driven by updates to certain assumptions related to the office real estate market as well as net downgrade activity in middle market banking. Then to complete our lines of business AWM on Page 8. Asset and Wealth Management reported net income of 1 point Global Shares and JPMorgan Asset Management in China, both of which closed within the last year.

Speaker 1

For the quarter, record net long term inflows were $61,000,000,000 positive across all channels, regions and asset classes, led by fixed income and equities. And in liquidity, we saw net inflows of 60,000,000,000 AUM of $3,200,000,000,000 was up 16% year on year and overall client assets of $4,600,000,000,000 were up 20% year on year, driven by continued net inflows, higher market levels and the impact of the acquisition of Global Shares. And finally, Loans were down 1% quarter on quarter, driven by lower securities based lending and deposits were down 6%. Turning to corporate on Page 9. As I noted upfront, we are reporting the First Republic Bargain purchase gain Substantially all of the expenses in corporate.

Speaker 1

Excluding those items, corporate reported net income of 339,000,000 Revenue was $985,000,000 up $905,000,000 compared to last year. NII was $1,800,000,000 up $1,400,000,000 year on year due to the impact of higher rates. NIR was a net loss of $782,000,000 and included the net investment securities losses I mentioned upfront. Expenses of $590,000,000 were up $384,000,000 year on year, largely driven by higher legal expense. And credit costs were a net benefit of $243,000,000 reflecting a reserve release of the deposit placed with First Republic in the first quarter Next, the outlook on Page 10.

Speaker 1

We now expect 2023 NII and NII ex markets to be approximately 87,000,000,000 The increase driven by higher rates coupled with slower deposit reprice than previously assumed across both consumer and wholesale. And I should take the opportunity to remind you once again that significant sources of uncertainty remain and we do expect Our expense outlook for 2023 remains approximately $84,500,000,000 and on credit, we On operating results this quarter. As we look forward, we remain focused on the significant uncertainties relating to the economic outlook, Competition for deposits and the impact on capital from the pending finalization of the Basel III rules. Nonetheless, despite the likely headwinds ahead, With that operator, please open the line for Q and A.

Operator

Please stand by. The first question is coming from the line of Jim Mitchell from Seaport Global Securities. You may proceed.

Speaker 3

Thanks. Good morning. Hey, Jeremy, you talked about NII guidance up. Clearly, Fed Funds futures are up. So it makes some sense.

Speaker 3

But maybe I guess first, could you kind of discuss, I guess comment on deposit behavior broadly around betas and mix And what you're seeing there so far seems to be coming in a little better expected? And then secondly and probably more importantly, Can you help us think about the implications of higher for longer rates on the outlook for NII next year and beyond, I guess the intermediate term outlook that you guys have talked about?

Speaker 1

Yes, sure. Thanks, Jim. So, yes, so when we talk about the drivers of the upper Revision, as I said, it's higher rates coupled with lower deposit reprice, hard to untangle the 2 drivers. And specifically, I think when you look at Sumar, the combination of the passage of time and the positive feedback we're getting The feel on the CD offerings in particular has meant that it's quite a stable environment from that perspective. And similarly, In wholesale, we're just seeing slower internal migrations.

Speaker 1

You asked about mix. I think that Obviously, we're seeing the CPE mix increase, and we would continue to expect we would continue to we would expect that to continue to take place probably even past The peak of the rate cycle into next year, as we continue to capture money in motion. But as you say, the most important point is The fact that, as I said earlier, we don't consider this level of NII generation to be Sustainable and we talked previously about a sort of medium term run rate in the mid-70s. That was before First Republic and I'd argue that maybe that number should be a little higher, but whatever it is, it's a lot lower than the current number. We don't know when that's going to happen.

Speaker 1

We're not going to predict the exact moment. That's going to be a function of competitive dynamics in the marketplace, But we want to be clear that we do expect it at some point.

Speaker 3

Okay. But I guess just one follow-up on that. Just if we don't get Rate hike rate cuts, sorry, till middle of next year or later. Does that sort of give some confidence to the outlook for next year? Or are you still worried About significant reprice.

Speaker 1

I wouldn't necessarily assume that the evolution from the current run rate into that mid-seventeen number is That sensitive to the rate outlook in particular, when we put that number out there, we looked at a range of different types of rate environments and the reprice that we think would It was really meant to capture more of a what we consider to be a through the cycle sustainable number. So I wouldn't think of it as being particularly rate

Speaker 3

Okay, great. Thanks.

Operator

Next, we'll go to the line of Erika Najarian from UBS. You may proceed. Hi, good morning. Jeremy, I'm just laughing to myself because I said to you at Investor Day, Do you have any more NII rabbits to pull out of the hat? And I guess you do.

Operator

So I guess I want to ask a broader question really here and maybe Jamie, I'd like to get your thoughts. So you earned 23% ROTCE on 13.8 percent CET1. And we hear you loud and clear that your more normalized NII generation It's not $87,000,000,000 Not being said and fully taking into account the potential Haircut from Basel III Endgame, is it possible that your natural ROTCE It is maybe above that 17% through the cycle rate, when rates aren't Because when you first introduced that ROTCE target, we were in a different role from a rate scenario And everybody's talking about even if the Fed cuts, the natural sort of bottom in Fed funds is not going to be 0. So any input on that would be great.

Speaker 1

Yes. Thanks, Erica. I mean, it's a good question. There's a lot in there, obviously. I guess I would start by saying that when we've talked about the 17% So, Cygal Razzi, even though we may have introduced that in a moment where we brought the lower to rebound, it was always premised on a sort of And at some level that remains true today.

Speaker 1

Furthermore, you didn't ask this explicitly, but In the context of the proposed Basel III Endgame, one relevant question might be, if you have a lot more capital in the denominator, what happens to that target? So I think, as I said in my prepared remarks, we feel very confident about the company's ability to produce excellent returns in the cycle. There's a lot of moving parts right now on that. Some of them could be good, some of them could be bad. Now really on the Capital One, the one thing to point out is that The straight up math of simply diluting down the RoTC by expanding the denominator misses the possibility of reprice, Repricing of products and services, which of course goes back to our point that these capital increases do have impacts on the real economy.

Speaker 1

So we're not suggesting that we can price our way out of it, but we obviously need to get the right returns on products and services. And Where we have pricing power, we will adjust to the higher capital. So a lot of moving parts in there, but I think the important point is that Through a range of scenarios, we feel good about our ability to deliver good results, and we'll see how the mix of all the various factors plays out, especially after we see Yes, the Basel III proposal and it goes through the common period.

Speaker 4

And then Eric, I'll just say one thing. First, we have a mix of businesses that earn from like 0% RoTC to 100. We have some which are very capital intensive. So we look at kind of all of them. And I think 17% is a good number and a good target.

Speaker 4

The other thing we're over earning on is credit. We've been over earning credit for a substantial amount of time now, we're quite conscious about it. We know that's A tick up just as it normalizes be considerably more than it is now. Like, we would consider credit card normalized to be close to 3.5%.

Operator

And so my follow-up question there, maybe Jeremy, could you remind us what unemployment rate is embedded in your ACL Next, we'll go to the line of John McDonald from Autonomous Research. You may proceed.

Speaker 5

Hi, good morning. Jeremy wanted to ask about capital in the wake of the bar speech. We don't have the details yet, but just kind of want to ask about options That you have and strategies for mitigation both on RWA and potentially on the G SIB front as well as you contemplate what you heard recently.

Speaker 1

Yes. Thanks, John. So obviously, we're thinking about that a lot. On the other hand, as much as there have been a lot of very detailed rumors out there They might need you to start to try to do some planning. It does seem like this time it's real and we are actually We're going to get a foothold some time this month or something.

Speaker 1

So soon enough, we'll get to see something actually on paper and we can stop kind of the guesswork. Having said that, indulging in a little bit of guesswork, it does seem like the biggest single driver of the increase People are talking about including Chair Powell's 20% number or Vice Chair's Bar. Vice Chair Bar is 2% of RWA, which winds up being Roughly the same. Is just the way operational risk is getting introduced into the standardized pillar. And that is a little bit of a straight up across the board tax on everything.

Speaker 1

It's kind of hard to optimize your way out of that. With the exception, obviously, of So there are details. There's a lot of the FRTB stuff. We can get way into the weeds there within the markets We do have a good track record of adjusting and optimizing. But this time around, it may be a more fundamental set of questions Around business mix as opposed to the ability to sort of optimize in a very technical way.

Speaker 5

Okay, that's helpful. And with a number of years for this to phase in and you generating capital at a high level, even if the ROTC TC comes down a bit. How should we think about your pace of building capital for these new changes versus Doing your everyday course of investing and buybacks and things like that over the next couple of years.

Speaker 1

Yes. I mean, I guess, I'm sort of tempted give you our standard capital hierarchy here, I mean, we're not going to say investments, right? That won't come as a surprise to you. Generally We're always going to try to comply with new requirements early. So when we know the requirements and when we have visibility, Obviously, given how much organic capital we're generating right now, whatever the answer winds up being, it will be pretty easy to comply, But that's not the same as saying that there won't be consequences to returns or to pricing.

Speaker 1

And if for whatever reason, Thanks, Arne. As we're anticipating, I don't see us sacrificing investments that we see as strategically critical in order Comply with higher capital requirements ahead of the formal timing or whatever. Okay.

Speaker 5

And there's some room for buybacks?

Speaker 1

Unlikely, obviously. That would be an unlikely.

Speaker 5

Okay. Thank you.

Speaker 1

Sorry, Sean, go ahead. Did you have a follow-up?

Speaker 5

Yes. No, just do buybacks play a role in the next couple of years Strategically, does it episodically buyback?

Speaker 1

I mean, capital hierarchy again, right? In the end, while we have nothing else to do with Money will do buybacks. And we've talked about the $12,000,000,000 for this year. Obviously, a lot of new moving parts there, although All else equal, given what we've done so far, that's still probably a reasonable number for the full year. But yes, that's always going to be at the end of the list, but Yes.

Speaker 5

Got it. Okay. Thank you.

Operator

Next, we'll go to the line of Ken Usdin from Jefferies. You may proceed.

Speaker 6

Thanks. Good morning. I just wanted to ask a little bit about how you're feeling about the trade off Between like the commercial economy and what might come through in terms of future loan growth versus the kind of green shoots that people are talking about in the investment Pipeline and just how it feels in terms of like reopening of markets and the trade up between getting some more of those fees in and versus what's happening on the loan demand side? Thanks.

Speaker 1

Sure. Good question, Ken. So I think in terms of Investment Banking and Markets, yes, some That is better than expected. Last month, while I talk about green shoots, especially in capital markets generally, still definitely some headwinds in M and A, lower announced activity, some regulatory headwinds there. So we'll see.

Speaker 1

I think it's a little too early to call a trend there based on recent results, but we'll see. In terms of the broader economy and loan growth expectations, Generally, we do still expect reasonably robust card loan growth, but away from that For a variety of different reasons and different products, whether it be mortgage or C and I after revolver normalization, And especially if we see a little bit of a cooling off of the economy, I would expect loan demand to be relatively modest there. So we're not really expecting Meaningful growth away from card. But of course, we're there for the right deals, Right products, right terms, we lend through the cycle. So I see that as more of a demand driven narrative, which will be a function of Economy rather than any tightening on our side.

Speaker 6

That makes sense. And as a follow-up to that, on the consumer side, you mentioned that Consumers continues to spend albeit a little more slowly and you mentioned that consumers are also using their excess deposits a little bit more as well. You just elaborate a little bit more on just your feeling about the state of the consumer? And is that card growth continue to be driven by people needing to revolve as opposed Wanting to have more in their deposits, just kind of what the trade off on that side too?

Speaker 1

Yes, I mean to us, I think we still see this as a normalization, not deterioration story when we talk about So I would definitely say there's a wanting rather than needing, at least for our portfolio at this point. And Yes. I think that consumer continues to surprise on the upside here.

Speaker 5

Got it. Okay. Thank you.

Operator

Next, we'll go to the line of Gerard Cassidy from RBC Capital Markets. Please go ahead.

Speaker 7

Good morning, Jeremy. Good morning, Jamie. Jeremy, can you give us your view on how you're measuring the treasury functions and the asset liability of your balance sheet As we go forward versus the way you guys were positioning and managing it a year ago in view of the fact that it looks like maybe we're approaching the terminal rate on Fed funds rates?

Speaker 1

Yes. Dror, I would say honestly not much changed there actually. We've been pretty consistently concerned about the risk Higher rates, of course, we always try to position things to produce reasonable outcomes across a broad range of scenarios. But at the margin, We've been biased towards higher rates and that may be a little less true at these levels than it was before, although a lot of that is just a consequence of Pause the comeback study playing out in the modeling. But in any case, all else equal, I think we are going to continue to focus on making sure we're fine in a higher rate scenario, while staying balanced across a range of scenarios.

Speaker 1

So not really a lot of change in our positioning and that's obviously including the fact that we took on First Republic, which even net of some of the liabilities had a long structural interest rate position. We did not actually I get longer as part of the deal. And so as a result, we took actions to ensure that net net, we are still about the same as we were last quarter.

Speaker 7

Very good. And then as a follow-up, you mentioned in giving us the read through on the commercial banking Segment of the business that you had some reserve building tied to some office real estate and also some downgrades in the middle market area. Can you go a little deeper? What are you guys seeing in this area of both commercial real estate, but also the C and I loans, what's happening in that segment as well?

Speaker 1

Yes. So I would caution you from drawing too broad a conclusion from this. I mean, I think that when we talk about office, for example, Our portfolio, as you know, is quite small and our exposure to sort of so called urban dense office is even smaller. The vast majority So as a result, like our sample size of observed valuations on office properties is Quite small, but we'd like to be sort of ahead of the cycle. And based on everything that we saw this quarter, it just Felt reasonable to build a little bit there, to get to what felt like a comfortable coverage ratio.

Speaker 1

Across the rest of the yes, on the middle market We saw downgrades in excess of upgrades, but I don't see that as sort of necessarily indicative of anything Terribly significant and the broader read across.

Speaker 7

Thanks.

Operator

Next, we'll go to the line of Steve Chubak from Wolfe Research. Please go ahead.

Speaker 1

Steve, are you there?

Operator

It looks like his line dropped. So next we'll go to the line of Ebrahim Poonawala from Bank of America. You may proceed.

Speaker 8

Good morning. I guess just first question following up on the outlook for the economy, like we've all been worried about the recession for a year There's a debate about the lagged effects of the Fed rate hike cycle. When you think about, Jeremy, I think you mentioned you had an unemployment outlook Relatively similar today versus a quarter ago. How worried should we be in terms of the credit cycle 6 to 12 months from now? Or are you leaning towards concluding that maybe U.

Speaker 8

S. Businesses, consumers have absorbed the rate cycle a lot better than we expected a year ago?

Speaker 1

Yes. So I'm sure Jamie has some views here. But in my view, I would just caution against jumping to Too many super positive conclusions based on a couple of recent prints. And I think generally, our point is less about I'm trying to predict a particular outcome and more about trying to make sure that we don't get too much euphoria that over concentrates people on one particular prediction when So obviously, people are talking a lot about the potential for soft lending right now, No lending, immaculate disinflation or whatever. And Whether our own views on that have changed meaningfully, I don't know.

Speaker 1

But the broader point is that we continue to be Quite focused on Jamie's prior comments that loss rates still have time to have room to normalize even Post pandemics, so we're probably over earning on credit a little bit. Obviously, we've talked about the expectation that the NII is going to come down quite a bit. So, even forgetting about whether you got some surprisingly negative outcomes on the economy from what we stand Today, even in the central case, you just need to recognize that there should be some significant normalization.

Speaker 4

Yes. And I would just add that the 5.8% is not our prediction. That is the average of the unemployment There are multiple scenarios that we have to use, which are hypothetical for CECL. If you have the prediction that we all are coming with something different and we don't know the outcome, We're trying to be really clear here. The consumer is in good shape.

Speaker 4

They're spending down their excess cash. That's all tailwinds. Even if we go into recession, they're going with rather good condition, low borrowings and good house price value still, But the headwinds are substantial and somewhat unprecedented. This war in Ukraine, oil gas, plant care tightening, Unprecedented fiscal needs of governments, QT, which we've never experienced before. And I just think people should take a deep breath in that.

Speaker 4

And We don't know those things could put us in a soft landing, a mild recession or a hard recession. And obviously, we shall hope for the best.

Speaker 8

Got it. And just a follow-up on the upcoming Basel reforms, two questions. You've talked about the impact of the U. S. Economy, like others have said the same.

Speaker 8

At this point, is that falling on deaf ears? And secondly, maybe Jeremy, if you can touch upon just structural changes that you expect to make in the Capital Markets

Speaker 1

Yes. So on your first point, I mean, I think you can just read Vice Turbauer's speech, right? He addressed that point fairly directly. He clearly doesn't agree as is right. So we'll see what happens.

Speaker 1

We continue to feel that all else equal, higher capital requirements definitely are going to increase the cost of credit, which On FRCB, it's really very nuanced. It's probably like detail for this call, to be honest. But just to give you like one immaterial and insignificant but useful example, One product under FRTB is yield curve spread options. And if the FRTB proposal goes through as currently written, that product As currently written, that product just becomes not viable. So obviously, if we need to stop doing that product, no one really cares.

Speaker 1

But it's just one example of the way sometimes when you're really disciplined about allocating capital thoroughly all the way down to Products are responding accordingly. You can wind up having to change your business mix. There are obviously more significant products that matter much more for the real economy like mortgage, where the layering on of the operational risk and the way it's And proposed, especially if some of the other beneficial elements of the proposal don't come through, You're once again making the product even harder to offer to homeowners. So we'll see what happens.

Speaker 4

I would just add to that, so the product even if your product doesn't make money, you might do it for clients who are great clients. You're going to manage by product, By client and by effectively business mix and those adjustments, roughly loans don't make sense to put your balance sheet as a whole, Almost any loan. And we that's it's just people have to recognize that and some interest in management roles and various complications here and Thank you.

Operator

Next, we'll go to the line of Mike Mayo from Wells Fargo Securities. You may proceed.

Speaker 2

Hi. I had another question on Vice Chair Bar's speech from this week. To the extent the capital ratios do go up 20% for you and perhaps others, to what degree would you think about changing your business model in terms of remixing Where you do business, repricing or simply removing activities that you used to do, it's kind of ironic or maybe it's not ironic that Apollo hits an all time stock price high, the same week as the speech. So does that how much business leaves JPMorgan or the industry if capital ratios do go up As much as potentially proposed.

Speaker 4

Yes, Mike. Before Jeremy answered your question, I thought that this is great news The hedge funds, private equity, private credit, Apollo, Blackstone and there's dancing the trees.

Speaker 1

Exactly. And I was going to say Mike, yes to everything. So meaning repricing, yes, definitely. To the extent that we have pricing power The higher capital requirements mean that we're not generating the right returns for shareholders. We will try to reprice and we'll see how that sticks and how that flows into the economy and how that affects And if the repricing is not successful, then in some cases, we will have to remix and that means getting out of Products and services.

Speaker 1

And as Jamie points out, that probably means that those products and services leave the regulated perimeter and go into Elsewhere, and that's fine. As Jamie points out, those people are clients, and I think that point was addressed also in Vice Chair of our speech. So but traditionally, having risky activities leave the regulated perimeter has had some negative consequences. So these are all important things

Speaker 2

All right. And separate question. I appreciate the Investor Day gives a little bit more color on The degree that your investments may or may not pan out, we are still all watching that closely. Having said that, You just increased revenue guidance by $10,000,000,000 for NII between this quarter and the first quarter Without changing expense guidance by even $1 aren't you tempted to spend a little bit more? Why not Ben Moore, if you're gaining share, and I'm not saying you should.

Speaker 2

I'm just wondering like aren't you tempted to do so? You have $10,000,000,000 more revenues. You're not spending $1 more of expenses, like why not?

Speaker 1

Mike, let me get this right. You're actually complaining that our expenses aren't high enough, is that right?

Speaker 2

Wait, just to be clear, it's just a flip side of the question I asked for 2 years going back

Speaker 1

Now in all seriousness, we've always been pretty clear, right, that our spending is through the cycle Based on through the cycle investment, through the cycle spending, based on our through the cycle view of the earnings generating power of Company and the goal to produce the right of return. So broadly speaking, NII tends to flow Straight through to the bottom line, both when it's going up and by the way, when it's going down too. And we've been through those moments, as you all remember. So Whether or not there are opportunities to deploy some more dollars into marketing and stuff like that, we have actually I don't see that being a meaningful item this year, which is part of why we have not revised The expense guidance so far, but this is about investing through the cycle and being honest and disciplined about Which revenue items carry expense loading and which of them don't?

Speaker 2

And then last quick follow-up.

Speaker 4

I think we're kind of running as fast as we can. So you actually sat down the risk we have credit compliance, audit marketing, bankers, recruiters, trainers, the same, This is it. We're full effort right now and we want to make sure we get things right and get things thoughtful and careful. So it's not just the money, it's the people and how many things do you change all at once and add to all at once?

Speaker 2

And then one quick follow-up to that. Your efficiency ratio this quarter is the lowest we've seen in A long, long time. And I guess you're saying don't extrapolate this efficiency ratio because NII will come down at some point. But when you just simply look at You benchmark yourself against the low cost providers. Where do you think you're there now and where can you still go because this quarter, you're getting closer.

Speaker 2

Yes.

Speaker 1

I mean, you said it yourself, right? You definitely can extrapolate the current numbers. I think more broadly, on benchmarking ourselves to low cost providers, it sort of speaks to an area that you've been interested in for a long time, which is all of the investment that we're doing in technology to improve Generally, scalability and get more of our cost base to be variable versus fixed in terms of how we respond to volumes, That's a big part of the reason that we're doing the investments that we're doing in modernization and cloud and AI and all the type of stuff that we've talked about a lot. So I think we feel really good about our efficiency as a company, but there definitely is room for improvement.

Speaker 2

All right. Thank you.

Operator

Next, we'll go to the line of Steven Chubak from Wolfe Research. You may proceed.

Speaker 9

Thanks for taking the question and apologies for the technical issues earlier. I wanted to ask on the Just with signs that recent liquidity drawdown has come predominantly out of RRP versus industry deposits, Just wanted to get your thoughts on what expectations you have for deposit growth in the second half, both for you and even the broader industry, especially as treasury issuance really begins to ramp in earnest?

Speaker 1

Yes. Good question, Steve. So let me say a couple of things about this. So obviously, Our deposit numbers have bounced around a little bit as a function of some of the turmoil that we saw in regional banks as well as obviously the I'll like transaction, but now if you look at our kind of end of period deposits this quarter and you project forward, Our core view is that we would expect a sort of modest downward trend to reassert itself from this higher starting point, Broadly as a function of QT playing through the system, but noting that we do have some hope for offsets by taking shares, to give a couple of examples In consumer, we've got some of our branch expansion markets seasoning and so there are share over increase there. And in wholesale, we've obviously invested a lot in products and services.

Speaker 1

And so we think we have compelling offerings that are helping us win mandates and so there are potentially some share offsets there. But broadly, we our core view remains modest Deposit declines across the franchise. Within that, you know the same thing we've noted that as we got The debt ceiling and the TGA build has come into effect and you've seen a lot of bill issuance. Big question in the market about whether that was $500,000,000 and they're at $550,000,000 or something, so they're almost done. More of it than some people feared has

Speaker 4

come out

Speaker 1

of RFP. So as you say, I think that's a relatively good sign and highlight. So the system works better when you've got ample Supply of short dated collateral on the front end of the yield curve. So that whole RRP TGA bank reserve dynamic is going to continue to be significant, but it is good to see RFP coming down.

Speaker 9

Helpful color. And just a follow-up on card income. Revenues were muted in the quarter. I was hoping you could unpack just the sources of pressure, maybe more specifically, how much of the drag is associated with SaaS 91 versus some other factors?

Speaker 1

Yes. So actually that card income number, Steve, is a little bit of One off thing. So we had a reward liability adjustment this quarter, kind of a technical thing. So that's just a temporary headwind. And also The sequential comparison is also getting hurt by a small positive one off item in the prior period.

Speaker 1

So and obviously, I know you guys look at it by card income as

Speaker 3

sort of a thing that we

Speaker 1

look at that much ourselves.

Speaker 9

Can you size the reward liability impact?

Speaker 1

Why don't you get Michael to give that to you? It's not that

Operator

Next, we'll go to the line of Glenn Schorr from Evercore ISI. You may proceed.

Speaker 10

Thank you. Just want to follow-up on this pricing power conversation, because you've been consistent over time that you have a limited ability to Same. Pricing power due to competitive landscape. But I guess my question is, if not now, when? Meaning a lot has changed on the institutional The European Bank side, the regional bank side, and I would think that there'd be certain businesses that you have a greater Ability and willingness to push price on?

Speaker 10

And then maybe you could tie that to your comments in the press release on What are the material what are the real world consequences for markets and end users that you're referring to when talking about material Regulatory changes. Thanks a lot.

Speaker 1

Sure. So look, on pricing power, you're right. It really depends on the product and it Depends on the competitive landscape across different banks. And so it's very granular. It's very product specific.

Speaker 1

And in some cases, we'll have more pricing power than in other cases. I think the overall point that we're trying to make in connection with The puzzle through Endgame is just that, like We think the capital increases are excessive. It puts pressure on returns all else equal. That obviously puts pressure on us To increase price where we can, that is generally a bad thing for the real economy. And how all of that plays out in detail Across different products and services remains to be seen, importantly, since we don't actually have the proposal yet.

Speaker 1

So we need those details. I'm sorry, Glenn, I forgot the second half of your question. What was it?

Speaker 10

Actually, I think you hit on it. So I'll just do a follow-up on a related. So the notion of private credit doing large traditional Investment grade lending activity is maybe part of the competitive landscape that limits the ability to push price. In Jamie's letter, you talked about the downside or my question is what's the downside if more of the mortgage credit asset backed

Speaker 1

I mean, I guess it depends on what you mean by downside, but I just think Societally speaking, I think we've seen in recent history that when home Funding is happening outside the regulated perimeter and things get bad, when you have economic downturns, It produces bad outcomes for individuals and homeowners and society as a whole. So I mean, Jamie has written about this extensively. Beyond that, financially, we've talked about how mortgage lending, I mean, the profitability swings, obviously, it's But it's a thin margin business, it's challenging. And when you increase the capital requirements, it makes it even harder. So that This becomes one of the areas where you're in that tension between remixing versus pricing power that we talked about a second ago.

Speaker 1

And it might in fact mean that we do less, less credit available for homeowners and More regulatory risk as the activity moves outside the perimeter.

Speaker 10

Appreciate that, Jeremy.

Operator

Next, we'll go to the line of Betsy Graseck from Morgan Stanley. You may proceed.

Speaker 11

Hi, good morning. I just wanted to unpack a little bit more the drivers of the change you outlined that's Coming in the 10 Q, Jeremy, regarding the asset sensitivity going from liability sensitive to asset sensitive, at least that's the way I read it. I just wanted to understand what the drivers of that is?

Speaker 1

Yes, sure. No problem, Betsy. I mean, as you know, that's always been a challenging number. It's meant as a risk management measure of sorts, although it's also somewhat limited in that respect. And it has been an uneven usefulness in So to be able to predict our NII trajectory when rates change.

Speaker 1

But As we've looked at that and tried to improve it and spoken to all of you through this latest rate hiking cycle, we've come to the conclusion that it would improve the usefulness of The disclosure, if we included in the modeling the effect of deposit repricing lags, and so we've done that and that just has the effect that I It increases the EAR number by about $4,000,000,000 from minus $1,500,000,000 which is roughly what it was last quarter and what it would have been this quarter without the So something more like 2.5.

Speaker 4

But in the So then

Speaker 1

All the usual caveats apply, right? I mean, It's never the answer is going to always for any given change in rates, the change in our NII is always going to be One reason or another different from what that disclosure shows, but we do our best in the year.

Speaker 11

Okay. And so is it fair for me to think about that change as a mark to market to where we are today? And when I think about your Forward guide here, longer term, you're saying, look, deposit betas are accelerating. So as I go through The 10 Qs over the next 4 or 5 quarters, I should expect that that 2.5 should come down because deposit betas You're anticipating are going to be accelerating from here? I'm just trying to put those two things together.

Speaker 1

Yes, it's a good question. It's quite a technical issue. So I think in the past, the way this number was constructed was to assume through the cycle betas on all the deposits. And so your notion that like the And so your notion that like the number would include deposit beta acceleration would not have been the case Because it would have been using essentially terminal deposit betas for the based on the forward curve and then based on a 100% shock to the forward The nuance that we've introduced now is to recognize that given the shock, the reprice that the beta predicts will not be And so you got sort of just mathematical consequences of that. But I think translating that into a statement about our Expectation for beta for the next 12 months relative to our NII guide might be a bridge too far.

Speaker 1

I'm not sure you can actually call it.

Speaker 11

Right. But you were saying earlier deposit betas you do anticipate are going to be accelerating from here and that's part of the Outlook for NII longer term to normalize in

Speaker 2

the mid-70s, is that right?

Speaker 1

Yes. But let me add to that. Go ahead, Jamie.

Speaker 4

Yes. I mean, basically, yes, as you have the next round is going to be the beta growth from 30 to 40 to 50 and whatever the product is, yes, that's the lag. The 2.5 will go down over time as that actually happens if rates actually go up. The rates don't actually go up, the 2.5 maybe exactly 2.5 again.

Speaker 1

And what I was going to say, Betsy, is just that the projection of the $87,000,000 coming down to a significantly Lower number contains both the element of internal migration, as well as the potential, which is by no means guaranteed, Product level reprice and furthermore then obviously the dynamics are a little bit different in the different business segments as you move from large corporate wholesale to Consumer.

Speaker 11

Okay. All right. Thank you. Appreciate

Speaker 5

it. Yes.

Operator

Next, we'll go to the line of Matt O'Connor from Deutsche Bank. You may proceed.

Speaker 12

Good morning. So I'm in your camp that eventually consumers will want more deposit rate Sensitivity here, but I guess what would make you change your rates meaningfully? So the top two banks have about 50% Consumer market share, loan to deposit ratios are low, your outlook for loan growth and I think others is fairly sluggish, at least outside Hard. I guess that it's common sense and that's what we've seen historically, but there really is this kind of big divergence among big banks Everybody else where the big banks just don't need to pay that much for deposits for a slew of reasons. So what would make you change that?

Speaker 1

Yes. In the end, Matt, it's just feedback from the field. It's competition and feedback from the field. We

Speaker 4

I think every bank is in a different position about what they need. And so you have a whole range of outcomes. But remember, we do this also by city. You have different competition in Arizona, Phoenix than you have in Chicago, Illinois. And we do have high interest rate products.

Speaker 4

So it's a combination of all those things. I wouldn't call it a big bank or small bank and you're going to see whenever we report who kind of paid up all the more things and who didn't and things like that. So Look, guys, I would take it as a given. I think it's a mistake. There is very little pricing power in most of our business and betas are going to go up.

Speaker 4

You take it as a given. There is no circumstance that we've ever seen in the history of banking where rates didn't get to a certain point That you had to have competing products and rates go through migration or direct rates or move into CDs or money market funds, We're going to have to compete for that. You already see it in parts of our business and not in other parts. Okay. And I'll

Speaker 1

let I 100% It's really just about primary bank relationships. That's the core of the strategy.

Speaker 12

Yes. I mean, again, I 100% agree, but we've never seen kind of loans deposit ratios for banks like yours this low. So You could just let deposits run off at a modest amount for quite some time to make the decision not to pay up. I'm noticing that's the trade off that eventually you'll

Speaker 4

That's a little more complicated because that was a lot of that loan to valuation is lower because of regulatory stuff, LCR, capital ratio, etcetera.

Speaker 12

Got it. Okay. All right. Thank you. Thanks.

Operator

And for our final question, we'll go to Charles Peabody from Portales Partners. You may proceed.

Speaker 10

Good morning. Jeremy, on Page 4 of your presentation, you show some liquidity metrics. And There has been a meaningful deterioration or I shouldn't say deterioration, depletion of some of that with excess liquidity, Obviously, for First Republic primarily. So my question is how quickly do you want to rebuild that liquidity? Because as I look out towards 2024, there's probably a half dozen variables that are going to make liquidity a premium event to have excess liquidity.

Speaker 10

So that's my first question is, what's your plans for replenishing that liquidity?

Speaker 1

Yes, Charles. So I know we talked about this a little bit at Investor Day, right? So as I said in my prepared remarks, yes, we think about half of change in the bank LCR number is a consequence of First Republic and the rest of it is just the expected Decrease in system wide deposits falling through into our HQLA balances and the bank So that's all entirely as expected. And therefore, I think that the replenishing notion is not correct. In fact, obviously, we still have ample, ample liquidity.

Speaker 1

Now if you want to project trends forward, that's a different story, but That's sort of the business of banking will adjust accordingly in terms of our asset and liability mix across different products And to ensure compliance ratios and Man Fortress balance sheet principles as you would

Speaker 4

expect from us. And I just said that, just look at the top of the page in the press release, dollars 1,400,000,000,000 of cash and borrowable securities. Even if we get down to no excess, we're going to have like I've got the exact number, dollars 1,200,000,000,000 I think we have excess liquidity And the liquidity ratio is slightly different. I think there's plenty of liquidity system, and of course we do multiple things to change this overnight if we want to do.

Speaker 10

So sort of wrapped into that as a follow-up, if you take your 87,000,000,000 Forecast for NII this year and that implies at least 1 quarter of maybe $22,000,000,000 of NII. When you take your eventual forecast of mid $70,000,000,000 of NII at some point in the future, that would imply at least 1 quarter of 18,000,000,000 NII, so that's about an 18% drop. And if you hold the balance sheet steady, you're talking about A 30 basis point drop in your margin, your NIM to get to that from $22,000,000,000 to 18,000,000,000 I mean, what is driving is it really the deposit or are you thinking in terms of interest reversal Those credit deteriorates or is it rebuilding of liquidity? I'm just trying to get a better sense of what the big impact is.

Speaker 1

Yes. Hey, Charlie. I would think about that as being really entirely A deposit story. It's just not that complicated, right? I think we did this, I think it was either in the Q4 or in the Q1, but we put a little chart on a page, Just in very simple terms, it shows like what the dollar consequences are of whatever, like 10 basis point change in deposit rate paid in terms Going from 0% to a 4% CD is obviously a big impact on margin or whether it's Because savings reprices, relatively small changes in rate there are kind of a lot of money when you've got Couple of $1,000,000,000,000 of deposits.

Speaker 1

So it's really not any more complicated than that, and that's why we're being so forceful about reminding

Operator

And we have no further questions at this time. Thank you all for participating in today's conference. You may disconnect at this time and have a great rest

Speaker 4

of your day.

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Earnings Conference Call
JPMorgan Chase & Co. Q2 2023
00:00 / 00:00