JP Morgan Chase & Co.

Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's fourth quarter and full year 2018 earnings call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation. Please stand by. At this time, I would like to turn the call over to JPMorgan Chase's chairman and CEO, Jamie Dimon, and Chief Financial Officer, Marianne Lake. Ms. Lake, please go ahead.

Thank you, operator. Good morning, everyone. I'm going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on page one, the firm reported fourth quarter net income of $7.1 billion and EPS of $1.98 on revenue of nearly $27 billion, with a return on tangible common equity of 14%. Market impact aside, underlying business drivers remain solid. including core loan and deposit growth, consumer sentiment and spending in a robust holiday season, capital market activity, and with credit performance continuing to be very strong across businesses. For the full year of 2018, the firm reported revenue of $111.5 billion and net income of $32.5 billion, both clear records even adjusting to the impacts of tax reform. And we feel we're entering 2019 with good momentum across our businesses. Turning to page two and some more detail about our fourth quarter results. Revenue of $26.8 billion was up $1.1 billion, or 4% year-on-year, driven by net interest income. NII was up $1.2 billion, or 9%, on higher rates and on loan and deposit growth. Non-interest revenue was down slightly, with lower market levels impacting asset wealth management fees and private equity losses, being offset by higher card fees and auto lease growth in CCB. Expense to $15.7 billion was up 6% year-on-year. The increase relates to investments we're making in technology, marketing, real estate and front office, as well as revenue-related costs, including growth in auto. This was partially offset by a reduction in SEIC fees. As we had hoped, the incremental surcharge was eliminated effectively at the end of the third quarter, and this is a benefit of a little over $200 million for the quarter across our businesses. Credit trends remain favourable across both consumer and wholesale. Credit costs of $1.5 billion were up $240 million year-on-year, driven by changes in reserves. In consumer... We built reserves of $150 million in card on loan growth. In wholesale, over the last several quarters, we have seen net reserve releases and recoveries. However, this quarter we had about $200 million of credit costs. Again, largely reserve bills on select C&I client downgrades driven by a handful of names across multiple sectors. While we are constantly looking at a granular level for Shadows, these downgrades are idiosyncratic. and do not reflect signs of deterioration in our portfolios. The outlook for credit as we see it remains positive. Shifting to the full year results on page three, we reported net income for the year of $32.5 billion, a return on tangible common equity of 17% and EPS of $9 a share. Net income was a record for the firm, as well as for each of our businesses, even excluding tax reform. Revenue of $111.5 billion was also a record and was up nearly $7 billion or 7% year-on-year, $4.3 billion of which was higher net interest income on higher rates with growth and card margin expansion being offset by lower market NII. Non-interest revenue was up $2.5 billion or 5%, driven by CID markets and growth in consumer, being offset by private equity losses and the impact of spread widening on SBA. The end of the year, with adjusted expense of $63.3 billion, up 6%, which brings our overhead ratio to 57% for the year, even as we continue to make very significant investments across the franchise. And although we are showing modest positive operating leverage on a managed basis, remember our revenues were impacted by lower growth ups given tax reform. Adjusted to this, or looking on a gap basis, we delivered nearly 200 basis points of positive operating leverage for the year and well over 100 basis points for the fourth quarter. On credit, the environment remained favourable throughout 2018. Credit costs were $4.9 billion, down 8%, driven by lower net reserve bills in consumer, as well as the impact in 2017 of the student loan sale. Moving on to page four and balance sheet and capital. We ended the quarter with a CET1 ratio of 12% flat to last quarter. Risk rate of assets decreased, with loan growth more than offset by the risk of counterparty in trading RWA, given a combination of seasonality, market conditions, and model enhancements. Our net payout ratio for the quarter exceeded 100%, and we repurchased $5.7 billion of shares. Moving to consumer and community banking on page 5. CCB generated net income of $4 billion and an ROE of 30% for the fourth quarter. And for the year, nearly $15 billion of net income and an ROE of 28%. Customer satisfaction remains near all-time highs across our businesses. For the quarter, core loans were up 5% year-on-year, driven by home lending up 8%, card up 6% and business banking up 5%. Deposits grew 3%, growth continues to slow given the rising rate environment, but importantly, we believe we continue to outpace the industry. Of note this quarter, we opened the first 10 branches in our expansion markets, including DC, Boston, and Philadelphia. And although it's clearly early, reception in the market and the performance of the new branches has been strong. Despite volatile markets, Client investment assets were still up 3%, and we saw record net new money flows for the year. Card sales were up 10%, debit sales up 11%, and merchant processing volumes up 17%, reflecting a strong and confident consumer during the holiday season. And in keeping with our focus on digital everything, of note, active mobile customers were up 3 million users, or 11% year on year. Revenue of $13.7 billion was up 13%. Consumer and business banking revenue was up 18% on higher deposit NII driven by margin expansion. Home lending revenue was down 8%, driven by lower net production revenue in a low-volume, highly competitive environment. And on note, while not a material driver of overall expense, revenue headwinds here were offset by lower net production expense. And card, merchant services and auto revenue was up 14%, driven by higher card NII on both loan growth and margin expansion, lower card net acquisition costs, principally Sapphire Reserve, and higher auto lease volumes. Card revenue rate was 11.6% for the quarter and 11.27% for the year, as expected. Expense of $7.1 billion was up 6%, driven by investments in technology and marketing and auto lease depreciation, partly offset by lower FDIC charges and other expense efficiencies. On credit, net charge-offs were down $18 million, as modestly higher charge-offs in-card were more than offset by lower charge-offs in auto and home lending. Charge-off rates were down year-on-year across all portfolios. Economic indicators remain upbeat, And given the breadth and depth of our franchise, we have a pretty good barometer. From everything we see, the U.S. consumer remains very healthy. Now turning to page six and the corporate and investment bank. CID reported net income of $2 billion and an ROE of 10% on revenue of $7.2 billion for the fourth quarter. And for the year, net income of nearly $12 billion and an ROE of 16%. In banking, it was a record year for both total fees and advisory fees. We ranked number one in global IB fees for the 10th consecutive year, gaining share across all regions. For the quarter, IB revenue of $1.7 billion was up 3%. We saw continued momentum in advisory, with fees up 38%, driven by the closing of several large transactions. For the year, we ranked number two in wallet, gaining share. Equity underwriting fees were down 4%, but significantly outperforming the market. We ranked number one for the year and a quarter, and saw leadership positions across all products globally, with particular strength in IDOs as well as in the technology and healthcare sectors. And debt underwriting fees were down 19%, versus a strong prior year, and better than the market. We maintained our number one rank for the year, and continued to hold strongly less emissions in high-yield bonds and leveraged loans. Moving to markets, total revenue was $3.2 billion, down 6% reported, and down 11% adjusted to the impact of tax reform and the sign-off margin loan loss last year. A confluence of factors throughout the quarter, including trade, concerns around global growth and corporate earnings, fears of a more hawkish Fed, as well as other negative headlines, caused spikes in volatility, which were amplified by markets that lacked depth and liquidity. And although we saw decent client flow, rates rallied, spreads widened, and energy prices fell significantly, all against general market conviction that was anticipating a stronger end to the year. As a result, fixed income markets in particular were challenging, with revenue down 18% adjusted. Weaker performance across rates, credit trading, and commodities was partially offset by good momentum in emerging markets. Equities revenue was up 2% adjusted, a solid end to a record year. Prime continued to do well, but we saw clients deleveraging over the course of the quarter, and cash and derivatives were solid in a tougher environment. Treasury services revenue was $1.2 billion, up 13%, driven by growth in operating deposits as well as higher rates, but also benefiting from fee growth on higher volumes. Security services revenue was $1 billion, up 1%, Underlying this was strong fee growth and a modest benefit from higher rates, together being substantially offset by the impact of lower market levels and the business exit. Credit adjustments and other was a loss of $243 million, reflecting higher funding spreads on our derivatives. Finally, expense of $4.7 billion was up slightly, with continued investments in technology and bankers and volume-related transaction costs, partly offset by lower FGIC charges and lower performance-based compensations. The comprehensive revenue ratio for the quarter and for the year was 28%. Moving to commercial banking on page 7. The commercial bank reported net income of $1 billion and an ROE of 20% for the fourth quarter, and for the year, $4 billion of net income and an ROE of 20%. Revenue of $2.3 billion for the quarter was down 2%, as the prior year included a cash reform-related benefit. Excluding this revenue was up 3%, driven by higher deposit NII. Gross IB revenue of $600 million was down 1% year-on-year, but up 4% sequentially, on a strong underlying flow of activity, particularly in M&A. Full-year IB revenue was a record $2.5 billion, up 4% on strong activity across segments, in particular middle market banking, which was up 8%. Deposit balances were up 1% sequentially as client cash positions are seasonally highest toward year-end, although down 7% year-on-year as we continue to see migration of non-operating deposits to higher-yielding alternatives. We believe we are retaining a significant portion of these lows. Expense. of $845 million was down 7% year-on-year, and the prior year included $100 million of impairment on these assets, excluding those expenses up 5%, driven by continued investments in the business, in venture coverage, as well as in technology and product initiatives. Loans were up 2% year-on-year and flat sequentially. C&I loans were up 1%, reflecting a decline in our tax-exempt portfolio given tax reform. Adjusting to this, we would have been up 4%, which is still below the industry, as we focus on client selection, pricing, and credit discipline. But keep in mind, in areas where we have chosen to grow, such as in our expansion markets, we are growing at or above industry benchmarks. CRE loans were up 2%, also below the industry, as we've proactively slowed our growth due to where we are in the cycle. to continue structural and pricing discipline and targeted selection of new deals. Underlying credit performance remains strong, with credit costs of $106 million, including higher loan loss reserves, largely due to select client downgrades. Moving on to asset and wealth management on page eight. Asset and wealth management reported net income of $604 million with a pre-tax margin of 23% and an ROE of 26% for the fourth quarter. And for the year, net income was nearly $3 billion, pre-tax margin of 26%, and an ROE of 31%. Revenue of $3.4 billion for the quarter was down 5% year-on-year, with the impact of current market levels driving lower investment valuations and management fees, as well as to a lesser extent lower performance fees. These were partially offset by strong banking results and the cumulative impact of net inflows. Expenses of $2.6 billion of flat, a continued investment in advisors and in technology, were offset by lower performance-based compensation and lower revenue-driven external fees. For the quarter, we saw net long-term outflows of $3 billion, with strength in fixed income more than offset by outflows from equity and multi-asset products. Additionally, we had net liquidity inflows of $21 billion. For the 10th consecutive year, we saw net long-term inflows of $25 billion this year, driven predominantly by multi-asset, and in addition saw $31 billion of net liquidity inflows this year. Asset funder management of $2 trillion and overall client assets of $2.7 trillion were both down 2%, as the impact of market levels more than offset the benefit of net inflows. Deposits were flat sequentially and down 7% year-on-year, reflecting migration into investments, and we continue to capture the vast majority of these flows. Finally, we had record loan balances up 13%, with strength in global wholesale and mortgage lending. Moving to page nine and corporate. Corporate reported a net loss of $577 million. Treasury and CIO net income of $175 million was up year-on-year, primarily driven by higher rates. Other corporate saw a net loss of $752 million, including on a pre-tax basis funding our foundation for corporate philanthropy, $200 million this quarter, flat year-on-year, and including $150 million of markdowns on certain legacy private equity investments market-related. The remainder is driven by tax-related items, totaling a little over $300 million, and within this are two notable components. The first is regular-weight tax reserves, and the second represents small differences between the effective tax rate for each of our businesses and that for the overall company as we close the year, so therefore there is an offset across our businesses. Our full-year effective tax rate was just a little over 20% in line with guidance. Moving to page 10 and outlook. We will give you more full year outlook and sensitivity information at Invest Today as always. However, for now, I did want to provide some colour and reminders about the first quarter. Net interest income will continue to benefit from the impact of higher rates and growth, but quarter over quarter will be negatively impacted by day count, and we expect the first quarter NII to be relatively flat sequentially. While it is too early, clearly, to give guidance on fee revenues, it's also fair to say that this quarter markets feel calmer and more positive, and capital markets' pipelines are strong. So if the environment remains supportive, we would expect normal seasonal strength in the first quarter. But I will remind you that the first quarter of 2018 included a $500 million accounting write-up, as well as broad strength in performance. Expect expense to be up 19 more digits year-on-year, obviously market dependents, primarily annualisation effects. And finally, as I said, we expect credit to remain favourable across products. So to close, while the markets in the fourth quarter were more challenging, we should not lose sight of the fact that 2018 was a strong year, indeed a record for revenues, net income and EPS, both reported and adjusted to tax reform. Fundamental economic data remained supportive of continued growth, And we're generally constructive on the outlook for 2019. We have good momentum coming into the year. And the company and each of our businesses are very well positioned. With that operator, we can open up the line for Q&A.

If you would like to ask a question, please press star then the number one on your telephone keypad. We kindly request that you ask one question and only one related follow-up. If you would like to ask additional questions, please press star one to be re-entered into the queue. Our first question is from Erica Nigerian of Bank of America. Hi, good morning. Good morning, Erica.