Oct 13, 2021
JPMorgan Chase & Co. JPM Q3 2021 Earnings Call Transcript
JPMorgan Chase & Co. (JPM) reported Q3 2021 earnings on October 13, 2021. Read the full transcript here.
Transcribe Your Own Content
Try Rev and save time transcribing, captioning, and subtitling.
Please stand by. We’re about to begin. Good morning, ladies and gentlemen. Welcome to JP Morgan Chase’s the third quarter of 2021 earnings call. This call is being recorded. Your line will be muted for the duration of the call. We will now go right to the presentation. Please stand by. At this time, I’d like to turn the call over to JP Morgan Chase’s chairman and CEO, Jamie Dimon, and chief financial officer, Jeremy Barnum. Mr. Barnum, please go ahead.
Jeremy Barnum: (00:22)
Thanks, operator. Good morning, everyone. The presentation is available on our website, and please refer to the disclaimer in the back. Starting on page one, the firm reported net income of $11.7 billion, EPS of $3.74 on revenue of 30.4 billion and delivered a return on tangible common equity of 22%. These results include a $2.1 billion net credit reserve release, which I’ll cover in more detail shortly, as well as an income tax benefit of 566 million. Adjusting for these items, we delivered an 18% ROTC this quarter. Touching on a few highlights, it was another strong quarter for investment banking, including an all-time record for M&A. While loan growth remains muted, we see a number of indicators to suggest it has stabilized and may be poised to begin more robust growth across the company and particularly in card. Consistent with last quarter, credit continues to be quite healthy. In fact, net charge-offs are the lowest we’ve experienced in recent history. On page two, we have some more detail. Revenue of $30.4 billion was up $500 million, or 2% year on year. Net interest income was up 1% with balance sheet growth and higher rates primarily offset by MICs and lower CIB markets on NII. NIR was up 3%, driven by solid fee generation across investment banking and AWM, largely offset by net securities losses in corporate versus gains in the prior year and lower revenue and home lending. Expenses of 17.1 billion were up 1% year on year on continued investments and higher volume and revenue-related expenses predominantly offset by lower legal expense and the absence of an impairment in the prior year. Credit costs were a net benefit of $1.5 billion, driven by the reserve release. But it’s also worth noting that net charge-offs of just over $500 million were approximately half of last year’s third quarter number.
Jeremy Barnum: (02:38)
Let’s cover reserves on the next page. We released $2.1 billion this quarter, driven by less severe downside scenarios as the macro environment continues to normalize. Reserves stand at 20.5 billion, which still accounts for elevated uncertainties surrounding COVID and the current labor market dynamics, including the expiration of expanded unemployment benefits.
Jeremy Barnum: (03:04)
Now moving to balance sheet and capital on page four, we ended the quarter with a CG1 ratio of 12.9%, down modestly primarily on higher RWA. The firm distributed $8 billion of capital to shareholders this quarter, including 5 billion of net repurchases, and the common dividend was increased to $1 per share.
Jeremy Barnum: (03:29)
With that, let’s move on to our businesses, starting with consumer and community banking on page five. CCB reported net income of 4.3 billion, including reserve releases of 950 million on revenue of $12.5 billion, down 3% year on year. Deposits were up 3% quarter on quarter, indicating some deceleration as excess deposits are stabilizing. Notably contributing to this growth, we ranked number one in retail deposit share based on the FDIC data and were the only large bank to show meaningful share growth of 70 basis points year on year. Similarly, client investment assets were up 29% year on year, and while market performance was a driver, retail flows in both advisor and digital channels were strong.
Jeremy Barnum: (04:23)
Touching on spend, combined credit and debit spend was up 24% versus the third quarter of ’19 and in line with last quarter. Within that data, travel and entertainment spend was up 8% versus 3Q ’19 and very closely tracked the patterns of the Delta variant within the quarter, softening in August and early September and reaccelerating in recent weeks. Card outstandings were up 1% year on year and 4% quarter on quarter, benefiting from higher new account originations. While the payment rate is still very elevated, it’s come down from the highs, and revolving balances have stabilized. When we look inside our data, we see evidence of the excess deposits starting to normalize in segments of the population that traditionally revolved. So as a result, we’re optimistic about the growth prospects of revolving card balances.
Jeremy Barnum: (05:20)
Moving to home lending, average loans were down 6% year on year, but up 2% quarter on quarter with portfolio additions now outpacing prepayments. It was another strong quarter for originations, totaling nearly 42 billion, up 43% year on year, reflecting record purchase volume and share gains in the refi market. In auto, we had 11.5 billion of originations, second only to last quarter’s record. So overall, loans ex-PPP were up 3% quarter on quarter on the growth in card and home lending I just mentioned. Expenses, 7.2 billion, were up 5% year on year, driven by investments in the business, including marketing. More generally, we continue to see that the acceleration in digital adoption during the pandemic has persisted, with active mobile users up 10% year on year to almost 45 million.
Jeremy Barnum: (06:20)
So with that, looking forward, we are encouraged by our household growth and balance sheet trends. However, we expect it to take some time for revolving credit card balances to return to pre-pandemic levels, given the amount of liquidity in the system. In the meantime, credit losses and delinquencies remain extraordinarily low. In card, on a year-to-date basis versus 2019, low charge-offs more than offset lower NII.
Jeremy Barnum: (06:51)
Next, the corporate and investment bank on page six. CIB reported net income of $5.6 billion on revenue of 12.4 billion. Investment banking revenue of $3 billion was up 45% versus the prior year and down 12% sequentially. IB fees were up 52% year on year, driven by strong performance in advisory and equity underwriting, and we maintained our number one rank with a year-to-date wallet share of 9.4%. In advisory, it was an all-time record quarter, benefiting from the surge in M&A activity, and we almost tripled fees year on year in a market that doubled. Debt underwriting fees were up 3%, driven by an active leverage loan market primarily linked to acquisition financing. In equity underwriting, fees were up 41%, primarily driven by our strong performance in IPOs. Looking ahead to the fourth quarter, the overall pipeline is healthy, and the M&A market is expected to remain active. If so, IBGs should be up year on year, but down sequentially.
Jeremy Barnum: (08:04)
Moving to markets, total revenue was 6.3 billion, down 5% compared to a record third quarter last year. Notably, we were up 24% from 2019, driven by the continued strong performance in equities and spread products. Fixed income was down 20% year on year due to ongoing normalization across products, particularly in commodities, as well as an adjustment to liquidity assumptions in our derivatives portfolio. Equities was up 30%, a record third quarter, with strength across regions and reflecting higher balances in prime, strong client activity in cash, as well as ongoing momentum in derivatives.
Jeremy Barnum: (08:48)
In terms of outlook, keep in mind that it will be a difficult compare against a record fourth quarter last year, but the current environment continues to challenge our ability to forecast revenues. Wholesale payments revenue of $1.6 billion was up 22%. We’re up 10% excluding gains on strategic equity investments, and the year on year growth was driven by higher deposits and fees, partially offset by deposit margin compression. Security services revenue of 1.1 billion was up 9%, primarily driven by growth in fees on higher market levels. Expenses of 5.9 billion were flat year on year as higher structural and volume and revenue-related expense, as well as investments were offset by lower legal expense. Credit costs were a net benefit of 638 million driven by the reserve release I mentioned upfront.
Jeremy Barnum: (09:49)
Moving to commercial banking on page seven, commercial banking reported net income of $1.4 billion. Revenue of 2.5 billion was up 10% year on year on higher investment banking and wholesale payments revenue. Record gross investment banking revenue of $1.3 billion was up 60%, primarily driven by increased large deal activity with continued strength in M&A and acquisition-related financing across both corporate client and middle-market banking. Expenses of $1 billion were up 7% year on year, predominantly due to investments and higher volume and revenue-related expenses. Deposits were up 4% sequentially, mainly driven by higher operating balances, and loans were down 1% quarter on quarter. C&I loans were down 3%, but up 1%, excluding PPP, driven by higher originations. It’s also worth noting that consistent with last quarter, we are seeing a slight uptick in utilization rates in middle market, and those among larger corporates seem to have stabilized, albeit at historically low levels. CRE loans were flat with modestly higher originations in commercial term lending offset by net payoff activity in real estate banking. Finally, credit costs were a net benefit of 363 million, driven by reserve releases with net charge-offs of six basis points.
Jeremy Barnum: (11:23)
Then to complete our lines of business AWM on page eight, asset and wealth management reported net income of $1.2 billion with pretax margin of 37%. Record revenue of 4.3 billion was up 21% year on year as higher management fees and growth in deposit and loan balances were partially offset by deposit margin compression. Expenses of 2.8 billion were up 13% year on year, largely driven by higher performance-related compensation, as well as distribution fees. For the quarter, net long-term inflows of 33 billion continued to be positive across all channels, asset classes, and regions with notable strength in equities and fixed income. AUM, up $3 trillion, and overall assets of $4.1 trillion up 17% and 22% year on year respectively were driven by higher market levels and strong net inflows. Finally, loans were up 3% quarter on quarter with continued strength in custom lending, securities-based lending, and mortgages, while deposits were up 5% sequentially.
Jeremy Barnum: (12:38)
Turning to corporate on page nine, corporate reported a net loss of $817 million, including 383 million of the 566 million tax benefit that I mentioned upfront. Revenue was a loss of $1.3 billion, down 957 million year on year. NII was a loss of 1.1 billion, down 372 million primarily on limited deployment opportunities as deposit growth continued. We realized 256 million of net investment securities losses in the quarter compared to 466 million of net gains last year. Expenses of 160 million were down 559 million year on year, primarily driven by the absence of an impairment on a legacy investment in the prior year.
Jeremy Barnum: (13:36)
On the next page, let’s discuss the outlook. Our full year outlook for 2021 remains largely in line with our previous guidance. We still expect NII to be approximately $52.5 billion and adjusted expenses to be approximately $71 billion. But as you’ll see on the page, we’ve lowered our outlook for the card net charge- off rate to around 2%, as delinquencies remain very low.
Jeremy Barnum: (14:06)
So to wrap up, we’re pleased with this quarter’s performance as we approach what we hope is the tail end of the pandemic. The strengths of the company both in terms of our diversified business model as well as our fortress balance sheet, talent, and culture have enabled us to perform well through this difficult period while continuing to serve our clients, customers, and communities. As we look ahead and the environment normalizes, new challenges will undoubtedly arise, but we feel confident with the position of the company and the strategy going forward. With that, operator, please open the line to Q and A. (silence).
Our first question is coming from John McDonald from Autonomous Research. John, please proceed.
John McDonald: (15:05)
Good morning, Jeremy. Wanted to ask about the net interest income guidance for the year. It seems to imply a nice step-up in NII for the fourth quarter to roughly 13.5 billion. Was wondering, what do you expect to be the drivers of that sequential step-up, and would you see the fourth quarter NII as a good starting point for us to think about our 2022 NII forecast?
Jeremy Barnum: (15:29)
Yeah, John, good question and good catch there. It’s true. That is quite a bit of sequential growth. If you do the math, it suggests about 350 million. In reality, if you think about what we’ve been saying about the outlook for increased revolve and deployment and so on, the increase is not intuitively high. So just to explain, within that, there are a couple of factors. So one, there’s actually a meaningful amount of markets NII growth between the third and the fourth quarter, which in general we would sort of encourage you to ignore. There’s also some sequential increase in NII from PPP forgiveness contributing to the fourth quarter number.
Jeremy Barnum: (16:07)
So if you strip those two out, you still see a little bit of modest growth, which is a little bit more consistent, I think, with the overall story that we’ve been telling, which is that the real acceleration in NII, especially from higher cart revolve, is a 2022 item. In that context then, if you take that sort of lower number and think about annualizing that, I think it’s fair to assume that that would be a sort of lower-end estimate for the 2022 number in light of what we believe will happen in terms of especially cart revolve. But obviously, we’ll give you a little bit more color about 2022 on next quarter.
John McDonald: (16:47)
Okay. As a followup, your cash balances continue to grow, and you’ve been conservative on liquidity deployment. Could you update us on your thinking around liquidity deployment, pacing that, and what factors you’re balancing?
Jeremy Barnum: (16:59)
Yeah, totally. So at the highest level, I would say that nothing’s really changed, meaning-
So at the highest level, I would say that nothing’s really changed, meaning we’re still [inaudible 00:17:05] happy to be patient. We still believe in a robust global recovery. We still are a little bit concerned about inflation, I think relative to the consensus. And all of that contributes to a willingness to be relatively patient about deployment. But it’s also fair to say that relative to last quarter, rates are obviously higher. We start to see central banks around the world normalizing their policy stance a little bit. So the market implied rates are coming a little bit more in line with our view. And given that, it wouldn’t be surprising if we saw some more opportunities for front end deployment cash and cash like activity, as well as possibly some duration management.
Speaker 1: (17:49)
Got it. Thank you.
Speaker 2: (17:53)
Our next question is coming from the line of Jim Mitchell from Seaport Global Securities. Please proceed.
Jim Mitchell: (17:59)
Hey, good morning. Just first on loan growth, as you noted, auto has been strong, card’s starting to show signs of life, but it looks like outside of acquisition finance, CNI still seems a little weak and we’ve got ongoing supply chain issues. So I don’t know, as we think about the big picture, how are you seeing, I guess, loan demand trends playing out and what are you expecting as the next 12 months progresses?
Yeah, so let’s go through long growth because obviously that’s one of the areas that everyone’s interested in. So if we start with card, which is obviously the one that’s going to amount to the most in terms of NII impact, as you said, we see some signs of life and we believe that recovery is strongly underway, and it seems hopefully like Delta’s really fading. So, that’s going to help. If you just look forward just to the holiday season, we would expect to see normal seasonality, normal growth there.
The question really for card, as we’ve talked about a lot, is whether that growth in spend and incurred outstandings translates into revolve. But as I noted in the prepared remarks, when we look inside the data and we look at the customers who have both deposit accounts with us and our card customers, and we look at those who would typically be the ones that are most inclined to revolve, we actually do see slightly faster spend down the excess deposit balances there. So that makes us relatively optimistic about both the potential for card outstandings to grow with higher spend, but also for increased revolve and lower pay rates as we go into next year. It’s going to take time, obviously, but that is the core view.
In home lending, broadly we expect this quarter’s trend with portfolio additions outpacing prepayments to continue. And then in CNI, which you mentioned, just a reminder that as you go to the higher end of the spectrum, in terms of the size of the CNI, customers were eager to lend to them as a key part of the franchise, but from a financial performance perspective, that’s more of an outcome rather than a goal. But we do, as I noted upfront, see a little bit of an uptick in utilization rates among smaller corporate. So that’s consistent with the theme that we’ve been seeing, which is that the smaller you are and the less likely you are to have benefited from the wide open capital markets, the more likely you are to be borrowing. We do hear a lot about supply chain issues from that customer segment. So, it’s going to be interesting to see how that plays out.
And then in CRE, we see quite a robust origination pipeline as we have fully removed any pandemic related credit pullbacks. We’re leaning into that and we do expect to see a little bit of net loan growth going forward. And then finally, I would note that we do see some long growth in markets actually. And we generally discourage you from focusing too much on NII in loan growth within markets, but it is an indicator that there are some opportunities there that we’re taking advantage of in the usual nimble way that you would expect us to do in markets.
Jim Mitchell: (21:12)
Okay. That’s all very helpful. And maybe just a followup on the expense side. You and your peers have all seen higher expenses this year, higher capital markets and expense and increased investment spend, but if we think about going into next year of capital markets, activity normalizes as many expect, can we start to see expense growth flow or are there other considerations to think about whether it’s investment spend or inflation pressures that we should think about?
Yeah. So it’s a little bit of an all of the above story, I would say. So first of all, we’re still in the middle of budgeting and it’s a little early to be giving you 2022 expense guidance. We’ll do more of that next quarter. But realistically expenses are going to be up next year. Now, to your point about capital markets related expenses, it’s obviously true that we pay for performance, and in light of the very strong performance over the last couple years in both banking and markets, we have seen increased compensation expense on the way up. And therefore, as a function of the amount of normalization that you see in 2022, you’re going to see that come down in line, all else equal. Obviously I would point out that I think that the amount of growth in that number that we’ve seen through the pandemic is less than a lot of people would have expected actually. And therefore, on the way back down, you would also potentially expect lost participation, not to mention just the timing dynamics associated with the treatment of stock based compensation vesting.
So all of that aside, at the same time, we are still investing. We still see significant opportunities. We still see marketing opportunities in card. And yeah, labor inflation is a question. You saw us raise wages in parts of the US at the entry level. That just came into effect this September. And as we look out, we see a lot of churn. And as Jamie was saying, it’s good stuff. It’s normal. It’s understandable in this environment, but labor inflation is definitely a watch item for us. So when you put all of that stuff together, as I say, we’ll update you more next quarter, but that’s how we see the expense outlook for next year.
Jim Mitchell: (23:29)
Okay, great. That’s helpful. Thanks.
Speaker 2: (23:34)
Next question is coming from Mike Meyer from Wells Fargo Securities. Your line is open, please proceed.
MIke Meyer: (23:39)
Hi, there are a couple events during the quarter that I wanted to ask about. And specifically, how has the tech strategy evolved? One, you made the announcement that you’re changing the retail bank core system entirely to the public cloud, and that’s a big change. And Jamie, I would love to hear your comments on that. And then second, your expansion in the UK with digital banking, what metrics are you shooting for? And third, your recent FinTech acquisitions, to what degree are there synergies among the acquisitions in addition to JP Morgan? Thanks.
Okay. Mike, hang on. I’m writing down your questions because I don’t want to lose track. Okay. So let’s start with the cloud first. So yeah, you will have seen some press coverage around our partnership with Thought Machine. At a high level, there’s actually nothing new here. We’ve actually been committed to the cloud for a long time. By the way, when I say cloud, I think we’re talking about both private and public cloud. Our core strategy involves really leaning into both and being very nimble across both, and I think that’s very important for us as a regulated institution from a resiliency perspective. And that’s all part of our overall tech modernization roadmap in a lot of the investments that we’re doing that you’ve heard all the leadership of the company talk about.
When it comes to Thought Machine in the consumer space, there are five main reasons why we did that, and it’s all the normal reasons why you do cloud stuff and you do tech modernization. We want to be able to innovate quickly and bring products to consumers faster. We want to be able to run multiple products on the same platform. As I mentioned, resiliency is critical. Increasingly we want to be able to run the bank much more in real time, rather than based on batch processes. And obviously APIs are central to the entire strategy in this environment. So that’s what I would say about that.
Jeremy Barnum: (25:37)
Could I just say, real quick?
Yeah, please. Jamie.
Jeremy Barnum: (25:40)
Thought Machine is basically the core general ledger. It’s not all the other stuff around consumer. And when you do these conversions different than conversions in the past, you could schedule pieces, do part at a time, not all at once like a big bang, which we used to have to do when we did a big merge and stuff like that. So I put it as a low risk for the company, but the core strategy hasn’t changed at all.
Yep. And then Mike, international consumer and acquisitions, I think you asked about. So in terms of international consumer, you will have seen that we launched. It’s obviously early days to give meaningful updates on that, but you will have noted actually that we just rebranded Nutmeg as a JP Morgan company just a couple days ago. So all that’s proceeding at pace and it seems to be pretty well received. I think the offering is seen as differentiated and innovative. So we’ll have more to say about that over time. Generally-
Jeremy Barnum: (26:44)
Again, just to add here. This is a 10 year game plan. This is not, they’re going to worry that much about metrics in the next month or two. This is a long-term work to try to get this thing right. Because if we’re ever going to be retail overseas, it’s going to be digital. So we’re going to be very patient. And at one point, Mike, we will report some metrics so you can see them, but they’re not going to be material to the firm’s numbers for years.
Yeah, it’s going to take time for sure. But just more generally in terms of the acquisition strategy, we’ve talked about this a little bit before. We’re not claiming that we have some overarching top-down acquisition strategy. I think broadly, we’re just doing things that make sense. But there are some themes that you can detect around bolt-on and adding capabilities. Just for the sake of argument, if you start with AWM, you see a pretty consistent theme in there of ESG related capability additions. You’ve mentioned already international expansion and the potential for growth, and it’ll be a long game as Jamie says.
And then, yeah, there’s definitely a FinTech narrative a little bit in terms of some of the stuff that we’ve done in the CIB. And then within consumer, most recently the collection of things that we’ve done, I think is unified by the theme of providing more integrated and holistic experiences to our customers. We’ve always been very proud of the value proposition that we offer, especially in the car product, but we think we can take it up even another notch with some of the stuff that we’re doing around lounges and CX loyalty and stuff like that. So I think I touched on everything there, Mike.
MIke Meyer: (28:27)
You certainly did. And just a follow-up. I mean, we see the results. The marginal efficiency in the businesses where you’re growing has improved, and we just don’t have the why. So how much of that is tech driven versus other reasons. I mean, I guess you have metrics internally that we just don’t have, but your marginal efficiency is what or your unit costs are going down or any additional color as to the why the marginally efficiency is improving?
Yeah. So, I mean, I think reasonable people can differ on how you talk about this stuff, especially in terms of what parts of the expense space you see as a little bit more fixed versus a little bit more floating. I would have said that in reality marginal expense increases as a function of most types of marginal revenue are actually lower than a lot of people think. So the operating leverage that you see, especially in the type of environment that we’ve had with really big increases in revenue in the capital markets, or as on the NRR side, is actually relatively consistent with what I would’ve expected. But a little bit to your point, Mike, what’s also true is that we’re a big organization. There’s a scale play here. We have a big fixed cost base. And a lot of the modernization agenda is about making sure that that doesn’t creep and that it’s as expensive as possible so that it can be as nimble as possible, and that marginal efficiency over time is as good as possible. But that’s a long play there.
MIke Meyer: (30:01)
All right. Thank you.
Jeremy Barnum: (30:02)
Let me just say, Ed, Mike, one of the things you just think about, why is you people worried about the forecast for next year and stuff like that. We’re playing the game for 10 years here. We’re not going to disclose certain things like margin by product or something like that because it’s competitive information. But the long game, we are competing with some very large, talented global players who are not even in banking today. And we are going to compete in that. So even some of these acquisitions are more around that than around just what I consider traditional banking. And my whole life, just so you know, we’ve been modernizing technology. Every year of every month of every quarter, that’s a permanent state of affairs. Obviously now it’s to the cloud and stuff like that. Those things are critical to do to be competitive going forward. That was true by the way, 20 years ago.
MIke Meyer: (30:52)
Got it. Thanks.
Speaker 2: (30:57)
Next up, we have a question from Ken Austin from Jefferies. Your line is open, please proceed.
Ken Austin: (31:02)
Thanks. Good morning. I wanted to ask if you can expand a little bit more upon card fees and card revenue rate. We all certainly expected the marketing expenses to go up inside that line. And just I’m wondering if you can help us understand how much of that was captured in the third quarter and just what your general outlook is for the fee line and the underlying overall revenue rate. Thank you.
Yeah. Thanks, Ken. So you’re right. Part of the drop in the revenue rate this quarter is a function of higher card marketing spend, which you would have expected as a result of what we said last quarter, in terms of the importance of getting our fair share of the growth in spending as we emerge from the pandemic and the fact that we’re out in the market with a lot of offers that are seeing good uptake, and we’re seeing nice growth there. So that’s expected. And I think that card marketing number will actually remain elevated, and if anything, tick up a little bit sequentially just based on how the amortization there works. So you should expect to see that continue. But in addition, this quarter, we have just an adjustment to the rewards liability, which is contributing to the drop this quarter as well. That is not something that we see continuing, so that should come out of the run rate as we look forward.
Ken Austin: (32:20)
Can you help us understand what the magnitude of that is and what you think about overall card revenue rate going forward?
Yeah. I mean, as you know, we don’t really manage the card revenue rates, so it’s not a number that I’m eager to guide to, but if I remember correctly, I think the rewards liability adjustment this quarter was of the order of something like 180 million. So we’ll confirm that, but I think that’s right.
Ken Austin: (32:50)
Okay. Thanks. If I might just ask Jamie, you made a comment yesterday about the supply chain hopefully easing by next year around this time. What are you just hearing from your partners around the world in terms of the log jams and the potential for that to open up from here?
Jeremy Barnum: (33:07)
Yeah. I’m not hearing much different than you’re hearing. I know that the over-focus over time is so extraordinary sometimes from the press that people forget the big picture. The economy’s growing 4 or 5%. What people are buying has changed, which has also hurt supply chains a little bit. There’s not one company I know of that’s not working aggressively to fix the supply chain issues. Sales are still up. Credit card, debit card spend is still up. Consumer’s in great shape, and capitalism works. I doubt we’ll be talking about supply chain stuff in a year. I just think that we’re focusing on it too much and it’s simply dampening a fairly good economy. It’s not reversing a fairly good economy.
Ken Austin: (33:48)
Got it. Thank you.
Speaker 2: (33:52)
Next up, we have a question from Betty Graseck from Morgan Stanley. Please proceed.
Betty Graseck: (33:57)
Hi. Yeah, two questions. One, just following up on the card discussion that we just have regarding the fees and the-
… following up on the card discussion that we just have regarding the fees and the roughly 180 million on the rewards adjustment. It still leaves us with a pretty big decline, Q on Q, and I’m just trying to think through that a little bit because I know marketing, rewards, et cetera, is up. But was there anything in particular that would’ve driven a one timer that is unlikely to persist or not? I realize that cashback is a little more expensive so maybe that’s a piece of it and it’s a one time move, or is it more a function of, hey, we’re going to be ramping our offerings here and so you should expect that the forward look is a step down from what you had been seeing in 2Q?
Yeah. So Betsy, in short, it’s really the latter. So the only thing that is one time-ish in nature, for lack of a better term, is the rewards liability adjustment, and the rest of it really is marketing spend. And we see that as a critical investment in this moment, it’s a moment of high engagement with the product and we’re very committed to making those investments. And so that is going to remain elevated, and if anything, tick up a little bit as we look forward.
Okay, thanks. And then separately, I think today is the last day of the vice chair of supervision, Randy Coral’s term as vice chair of sup and reg, and so the question is how should we be thinking about how you are positioning for an environment where maybe these rules don’t change, like the LCR, the SLR, the things that we had been hoping might have some changes in them? Should we be anticipating that in order to help deliver the growth that you’re looking for, that we should anticipate more pref issuance going forward?
Yeah. So I think obviously we’re a little disappointed that we haven’t seen some of the changes on the non-risk sensitive size based constraints that we’d expected, but we’re still hopeful that that will come soon. We know the staff is hard at work on the Basel III end game and that’s complicated stuff, and it may be the case that some of those things are connected. And our strategy on pref issuance has been to try to balance giving ourselves the capacity that we want to deal with the SLR constraint without over issuing, and therefore being stuck with high cost prefs that aren’t callable for five years. So that’s part of the reason why we’re operating a little bit above our CT1 target right now and we’re just going to continue to be nimble in that respect.
Speaker 3: (36:48)
Next up, a question from Glen Shore from [Epicor ISI 00:36:50]. Your line is proceed.
Glen Shore: (36:54)
Hi, thanks very much. So in the spirit of your thought on not overly focusing on the near term, I heard your comments on payment rates and cards, 4Q seasonality, optimism about revolving card balances. So is there an implicit comment within there about buy now, pay later, and the impact it may or may not have? I’d love to get your perspective on him this old but I guess new payment option might have on the cards industry overall. Thanks.
Yeah. Thanks Glen. So yeah, BNPL, everyone’s talking about it. It is funny how layaway is back in the e-commerce checkout lane, and obviously we’re looking at it, everyone’s talking about it, and it’s a moment for us as a company where even though for any given thing that’s emerging, you can easily convince yourself that it’s not a threat, we’re in a moment of taking all types of potential disruptions, especially FinTech-y type disruptions quite seriously. And in the case at BNPL, it’s obviously particularly high profile because of the growth that we’ve seen, although it’s a relatively small portion of the overall market. I’ll remind you that we have our own very compelling offerings that speak directly to the installment payment experience in the form of My Chase Loan and My Chase Plan, which we get really good feedback on the customer experience there in terms of the post purchase experience. You can select eligible purchases on the app and then move that to an installment plan if you want.
But yeah, we acknowledge that it is downstream of the point of sale, which potentially raises some questions about whether we should be looking at moving a little bit more upstream there. But even more generally when you take a step back, what we’re really trying to do in the consumer business here is think about what is the actual customer need that is driving the growth in BNPL, and how can we respond to it in a strategic, holistic way across all of our customers? And not too narrowly until reactively just respond to BNPL, but it’s obviously a thing that we’re looking at and it’s quite interesting.
Jeremy Barnum: (39:14)
I think it’s another example of FinTech a company, because you saw a firm come out and it’s no longer just about BNPL, they’re going to have a debit card and a cash banking account. And so these are all different forms of competition which we have to respond to, and so that’s why when we talk about expenses, we will spend whatever we have to spend to compete with all these folks in our space.
Glen Shore: (39:43)
I appreciate all that, maybe one other comment or to get your of thought on the right perspective to think about China and Evergrande. And what people care about most is is there an expansion across border? Meaning is this contained within their market? Is the funders that will have some marks within their market or do you see any domino effect in crossing borders? Thanks.
Yeah. So look, obviously, everyone’s looking at Evergrande. Let me start by just saying that for us, in terms of direct Evergrande exposure, it’s absolutely de minimis, so that’s one piece. As you would expect, we’ve also looked at more indirect exposures in terms of the broad China property sector, as well as exposures of financial institutions that we deal with to the China property sector. And in general, those exposures are all very modest so we’re obviously watching it closely and continuing to look for read across and do what you would expect us to do, but we’re not terribly concerned right now about the impact on us. I think in terms of cross border contagion, I don’t hold my own opinion on this in particularly high regard, but it does seem like this was pretty well telegraphed by the Chinese authorities when they talked about their three red lines, so it’s a process that’s being managed, and I would say that the better view right now is that it will be contained, but of course, it’s the market so we’ll see what happens.
Glen Shore: (41:23)
Thanks for all that sharing. Thanks.
Speaker 3: (41:28)
Next up, we have a question from [Ibrahim Punivala 00:41:30] from Bank of America, Merrill Lynch. Please proceed.
Ibrahim Punivala: (41:34)
Good morning. I guess I just wanted to follow up on two themes that we discussed. One around FinTechs and the regulatory changes, a lot of focus on the change in leadership at the regulatory agencies. Jamie, you’ve talked about in the past in terms of the regulatory arbitrage when you look at big tech, non-bank players, I think BNPL is a good example of that. Do you think, as we have new leadership at the regulatory agencies, they’re alert to this arbitrage and do you think we see a clamp down, or is it too late for really them to create a framework that would level the playing field?
Jeremy Barnum: (42:12)
I don’t expect that there will be beneficial changes that help banks, and I think that we just have to compete with the hand we’re dealt and not expect anything like that. And I think that you’re going to have some people clamp down more on banks and maybe some people regulate FinTech based on products or service, something like that, but I’m not expecting any relief.
Ibrahim Punivala: (42:39)
Got it. Yeah. And I was just wondering if there would be increase scrutiny of the non-bank players relative to the banks, but point noted. And I guess just on a separate question, Jeremy, we didn’t see any build in the [CET 1 00:42:50] when I look at the numerator. Anything going on there this quarter that impacted it? And with the stock where it is at 2.4 times tangible book, just remind us of how important are buybacks here as opposed to just keeping some dry powder as the economy gets better?
Yeah. So the answer to how important buybacks are is that they’re at the end of our capital hierarchy, as we often say, right? So organic growth, including acquisitions, sustainable dividend, and only then do we look at buybacks. And in light of the [SCB 00:43:23] environment that we’re in where we don’t have a fed approved buyback plan anymore and we just simply have to comply with the minimums and BAU, that gives us quite a bit of nimbleness, which is an important thing to preserve in light of a world where we do a hope for long growth next year and where acquisitions are still potentially on the horizon. So nothing really going on this quarter other than a little bit of RWA growth in the denominator, and we’re just really going to stay nimble there.
Ibrahim Punivala: (43:55)
But is there a case to be made, Jeremy, in terms of just holding some dry powder and excess capital, given your macro outlook, as opposed to buying back stock at current valuations?
Jeremy Barnum: (44:06)
Yeah, I think the valuations, as the stock goes up, you should expect us to maybe one day buy less, and we don’t need dry powder. We have an extraordinary amount of capital liquidity. I mean, extraordinary, and we earn 40 billion pretax a year. I mean, how much dry powder do you need? We have 1.6 trillion of cash in marketable securities, we have well over 200 billion of equity, we can issue preferred, we can issue debt, we could issue stock if we had to do something. So I don’t think we need dry powder. I think our capital cup runneth over where it is.
Ibrahim Punivala: (44:42)
Noted. Thank you.
Speaker 3: (44:46)
Next one is from Steve [Tubac 00:44:48] from [Bolt 00:44:48] Research. Please proceed.
Steve Tubac: (44:52)
Good morning. So Jeremy, you provided some helpful detail on the drivers of long growth by category. Just looking ahead, is your expectation that loan growth begins to keep pace with GDP or economic growth? Or is there anything that would actually justify more meaningful acceleration lending activity, whether it’s just greater pent up loan demand, normalization of the card payment rates or something else?
Ooh, good question, Steve. But I think you’re potentially leading me into giving fairly detailed loan growth guidance for 2022, which I am not really in a position to do. But let me see if I can answer this at a high level. We’ve talked a lot about spend, which we believe in, driving card loans higher, so that’s one piece. And the revolve story within that as a function of the spend down in cash buffers, especially in our revolver, the revolving segment of our customers. And obviously as you know well, if you think about our NII as the sum product of the NIM and the outstandings in the various loan categories, it is really disproportionately card that drives things.
In the meantime, if you move a little bit away from consumer to the larger wholesale system, in a world where even if tapering starts relatively soon, if that plays out over roughly eight months at $15 billion of decrease a month, you still, if you do the math, wind up with another half a trillion dollars of QE, so we are dealing with a system that has a lot of surplus liquidity. And so in that context realistically, it’s hard to imagine seeing a lot of wholesale long growth at a minimum, but frankly, that’s not really a big driver of performance for us. So I don’t know if that helps but it’s a good question.
Steve Tubac: (46:50)
No, thanks, Jeremy. It absolutely helps. Just one clarifying question on the fit commentary. You noted this quarter’s result included an adjustment to liquidity assumptions in the derivatives portfolio. I was hoping you could help unpack what that adjustment actually entails, what prompted it and could you help size the impact in the quarter?
I could help unpack it, but it would take another 20 minutes, which we don’t really have. It’s just bog standard liquidity evaluation type stuff in the derivatives book, in terms of as we revise our assumptions about what the potential transaction costs would be associated with transferring certain types of positions. It’s normal course stuff that just happened to be a little bit bigger. I think fixed income was down 20%, and I think without that, it would’ve been down 15%, so if that helps.
Steve Tubac: (47:49)
Very helpful. Thanks for taking my questions.
Speaker 3: (47:54)
Next question is from Matthew O’Connor from Deutsche Bank. Please proceed.
Matthew O’Connor: (47:59)
Hey guys. I was hoping to follow up on the capacity to deploy liquidity, and I guess just to lead it a little bit, if we look at the growth and deposits, I know some of them are considered non-core, but take out the loan growth in the growth and securities book since COVID, you’ve got about an extra 500 billion of deposits. And how much of that do you think can be deployed into securities and understanding that you expect loan growth to pick up, so that’ll go to some? But is there a way to size that 500 billion capacity in terms of buying securities?
Yeah, so I think there’s a lot of factors that play into what the deployment decision is in any given moment. Obviously as you said, loan growth, but also we always make these decisions on the long term economic basis, not for the purpose of generating short term NII. And so when you do that, you have to think about capital volatility, draw downs, and frankly, whether or not you see value. And that, if anything, is probably the biggest single factor right now. As I talked about earlier, it is true that the market has come a little bit more in line with our views, at least from a rate perspective, and that may lead to a little bit more deployment, [inaudible 00:49:23] sequel right now.
But when you start talking about spread product for example, in light of the liquidity environment that we’re in and the QE numbers that I mentioned a second ago, that remains very, very compressed, and there’s just not a lot of value there. So we always try to be long term economically motivated there, considering all the scenarios, considering risk management, considering the complexity of the balance sheet and looking at value and being tactical there, so that’s really how I would think about that.
Matthew O’Connor: (49:56)
Yep. I mean, understood on the near term basis, but I think a lot of investors are sitting here saying if the 10 year, or really any part of the curve hits that magic point for you, what is just the capacity? So for example, if the 10 year gets to say 3% and your confidence is not going to go to five, do you have 100 billion of capacity? Is it 300 billion? Just any way to frame it longer term, appreciating that it’s not what you’re looking to do at this moment at these levels.
Yeah. No, I get the question and-
Jeremy Barnum: (50:27)
We can easily do 200 billion.
Yeah. I get the question, I get why you want to know. I guess I just think for a company of our sophistication and given how carefully we think about this stuff, the idea of a particular target at which we would deploy a particular amount, of course, Jamie’s right but it’s always going to be situational, it’s always going to be a function of why the rate is where it is. I mean, in your question, you alluded to it. If the 10 year note’s at three and we’re sure it’s not going to five, but then where’s the rest of the yield curve? What are the other options? What’s going on in that moment? So…
… the older options, what’s going on in that moment. We’re always going to be situational and tactical about it.
Matthew O’Connor: (51:11)
That’s helpful. And then can I just squeeze in, you’ve announced a bunch of, what most of us would characterize as relatively small acquisitions. Some this quarter, and obviously looking back for the full year. Is there a way you can size the capital impact of that? I know most of the terms weren’t disclosed individually, but any way to frame the capital and financial impact? And then just lastly, remind us, what is the driving force when you look for a deal? Because some of the deals you look at and you’re like, “How does that fit into broader JPMorgan Chase? Thank you. Yeah.
Jeremy Barnum: (51:52)
The capital impact in total isn’t that big a deal, and we’re not going to disclose anymore, nor is the immediate financial impact. And each one is different, so consumer, Jeremy already said it’s more about lifestyle travel, lounges, millennial, stuff like that. In asset management of products, it was tax efficient products, ESG products, timber products, stuff like that. And then between nutmeg and C6 and stuff like that, that is the longer term view of us trying to get positioned into retail overseas, over 10 years if we can.
Matthew O’Connor: (52:34)
Great. Thank you.
Next one is coming from Jared Cassidy from RBC Capital Markets. Please proceed.
Jared Cassidy: (52:44)
Thank you. Good morning. Jeremy, you were saying, when we were talking earlier, about the potential SLR changes and such, and we haven’t seen anything [inaudible 00:52:56] is leaving today. But you mentioned about maybe the Fed is focused on the Basel III End Game that’s coming very soon here. Can you share with us, from your guys’ perspective, what are you focusing in on with the Basel III final rules and regulations that could affect your growth going forward?
Yeah. So I think the thing about the Basel III End Game is that you need to essentially deal simultaneously with the Basel floors, the Basel standardized floors, and the Collins floor. So you need to simultaneously… So from the perspective of the staff that’s working on this stuff, they have a tough challenge to simultaneously put in place a US rule which is Basel compliant while also complying with the Collins floor standardized RWA minimum. And so that’s complicated and it’s hard and it’s quite technical and it explains why it’s taking a little bit than we might have otherwise thought.
In terms of the impact of that on our long term growth, at a high level, it’s unlikely to be significant. I think that the related point is whether or not there are some changes as part of that, or contemporaneously with that, to these non-risk sensitive side based constraints like G7 SLR, where obviously, most prominently in the case of GSIB, it’s really getting pretty extreme in terms of the growth in the score for reasons that really have nothing to do with what the original design of the metric was, and to a very significant degree, are driven by the expansion of the system that we’ve seen in the last 18 months.
So that’s why we believe that that should be addressed, as was contemplated in the original rule. And so across all of those potential changes, you could see us doing a little bit of optimization in response to those. You can imagine that Basel III End Game in terms of standard as in advance and the impact on different products might make some things a little bit more capital efficient and others a little bit less capital efficient at the margin, but we’re a big, diversified company. We’re pretty good at navigating this stuff. So when we have clarity, we’ll make the necessary tweaks.
Jared Cassidy: (55:17)
Very good. Thank you. And then obviously, you in the industry have seen really good deposit growth on a year-over-year basis. I think your deposits were up 20% all in. You talked specifically about retail being the number one market share in retail deposits. When the Fed ends QE, assuming it does sometime by the middle of next year, and I’m not asking you guys to forecast what your deposits are going to be, but just higher level, should we anticipate that deposits could actually decline or know that they are going to be so sticky even with the liquidity that everybody carries, that we shouldn’t really see a decline in deposits after QE ends, let’s call it, second half of next year?
Yeah. So I think there’s a couple factor in here. So let’s, for the sake of argument, set ROP aside for a second and hold that constant. If you just look at the impact of QE on system wide deposits, we talk about tapering, but as I said earlier, tapering still involves another half a trillion of system expansion between now and the end of tapering, or rather between the start of tapering and the end of tapering. If the Fed follows the same type of trajectory that it followed last time, there would be an extended pause between the end of QE and the beginning of QT. And again, setting ROP aside for a second, it would only really be with the beginning of QT that you would expect the size of the system deposit base to start shrinking. And I think the timing last time, if I remember correctly, was something like 22 months between the end of QE and the beginning of QT. Now, of course, ROP could bounce around and there could be other factors, but at a high level, that’s how we’re thinking about it.
Jared Cassidy: (57:02)
Jeremy Barnum: (57:04)
Yeah. I would just add my 2 cents. I think they’ll have to go quicker than that and they’ll have to reverse some of it. So you’re talking about, we’re still going to increase deposits for a year and then there’ll be a fairly large reduction over a two or three year period, which we should be prepared for.
Jared Cassidy: (57:23)
Next question is from Charles Peabody buddy from Portellis Partners. Please proceed.
Charles Peabody: (57:31)
Yes. Good morning. I wanted to get a progress report on your new headquarter building. Specifically, what’s the projected move in date, or has that been affected by the pandemic? Secondly, are there noticeable costs running through 2021 expense structure for that build out? And does that tick up noticeably when you move in? And then thirdly, what’s the plan for unloading the properties that you’ll be vacating? And how’s that being affected by the current real estate market? Thank you.
Jeremy Barnum: (58:09)
Yeah. So the plan is on schedule, move in date, I think, 2025. There are no material expense. Of course, there’s duplicate expenses and we have to sell the building and stuff like that, but there’s nothing material to our shareholder we need to disclose. Operator, any other questions?
Yes, sir. That is coming from Andrew Lynn from Societe Generale. Please proceed.
Andrew Lynn: (59:00)
Hi, good morning. Thanks for taking my questions. So you thought, Jamie, about how you are focusing on inflation. Just wondering if you could outline what you are looking at exactly metric wise across your businesses to signal to you that inflation is actually materializing as a concern. And how would that pan out versus your expectations? And in terms of how we deal with this, if it does materialize as a concern, is there anything that you can do to try and protect the bank against inflationary forces there?
Jeremy Barnum: (59:35)
Yeah. Well, I think we should look at the big picture here, which I think is always important. Two years ago, we were facing COVID, virtually a great depression, global pandemic, and that’s all in the back mirror, which is good. So by hopefully a year from now, there’ll be no supply chain problem, the pandemic will become endemic. And I think it’s very good to have good, healthy growth, which we have. And I think it’s good to have unemployment at 4%. It’s good that there are jobs that are open. I think it’s good the wage is going up long again, I think there’s too much focus on… And none of this changes how we run the business, which we add clients all the time, consumer, card, auto, deposits, real estate, small business, large companies and stuff like that, which is really the underlying thing that drives JPMorgan. It’s not whether they take the revolver from 25% or 27%.
Jeremy Barnum: (01:00:25)
So having said all that, yeah, and I’m not focused on inflation. We simply are pointing out, well, firstly, you have inflation, 4%. It’s been 4% now for the better part of a couple of quarters. And it’s, in my view, unlikely to be lower than that next quarter or the quarter after that. The only question is, does it start to ease after that with supply chains and wages, more people looking for workers? Or does it continue to go up? And of course, we prepare for probabilities and eventualities, and one of those probabilities is that it might go higher than big think that that’ll have [inaudible 01:00:57] down. I doubt that’ll happen before late 2022. In the meantime, I think it’s unbelievable that we’re getting out of this thing. We have 4% unemployment, and you can have good growth with some inflation and that’s okay.
Jeremy Barnum: (01:01:10)
I think that people are always focusing too much on immediate concerns. If you have a inflation of 4% or 5%, we’re still going to open deposit accounts and checking accounts and grow our business. I also should point out, because this is always in the back of my mind, of our $30 billion of revenues, 20 billion is subscription revenues, asset management, commercial banking, consumer banking, which is pretty good, wholesale payments, security services, custody. And so we’re pretty proud with the people who’ve accomplished all this. If you look at the actual underlying numbers, getting earnings per second, more customers, more accounts, more share. And at the end of the day, that is what drives everything.
Andrew Lynn: (01:01:58)
Okay. That’s great. So it seems like you’re taking a benign view that it’s manageable, it’s not going to get out hand. Fair enough.
Jeremy Barnum: (01:02:08)
It’s the opposite. No, it’s the opposite. I’m telling you, I don’t know. We’re prepared for all eventualities. There may be a fat tail of inflation. And one of the things about our balance sheet, you guys talk about liquidity stuff like that, one of the fat tails that a bank should be worried about is high inflation and high rates. And [inaudible 01:02:31] been very liquid protects us more against debt and other things.
Andrew Lynn: (01:02:37)
Right. Got it. Thanks for the clarity on that. And just a short follow long question, really, could you update us on the amount of excess provisions you’ve got versus your base case economic scenario? You’ve given that number in the past, and perhaps a bit of color and also on how that base case has changed over the quarter, if it has indeed.
Yeah. So I think the base case, the central case has probably actually gotten a tiny bit worse quarter-on-quarter in light of the revisions and GDP outlook. But as you know, the framework also involves looking at probability weighted scenarios. And as I said in the prepared remarks, the less extreme downside scenarios contributed a bit to the release of this quarter.
In terms of sizing the overall balance, again, as I said in the prepared of remarks, they remain a little bit elevated relative to what they would be if we had this type of economic performance with none of the COVID related unusual features, ie, uncertainty about the virus, as much as we are optimistic about that right now, or uncertainty about labor market conditions, or the fact that even though essentially all the federal level unemployment assistance has now rolled off and most of the states have too, there’s still some forms of assistance. The mortgage foreclosure moratorium, student loan stuff, rent moratorium, stuff like that, that don’t roll off until later in the year. So there’s a number of factors in the environment that are still unusual, which do contribute to slightly elevated reserves relative to what we would otherwise have. As things play out, those will develop.
Jeremy Barnum: (01:04:34)
Hey, Jeremy, just to interrupt real quickly. I got to go because I’m out of town. I have meetings I have to go to, but you guys should continue. And folks, thanks for listening to us and we’ll talk to soon.
All right. Thanks, Jamie.
And [inaudible 01:04:51], we have no further questions waiting.
Okay. Thanks very much.
Everyone, that marks the end of our call for today. You may now disconnect. Thank you for joining. Enjoy the rest of your day.