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.

Good morning.

So the way bank stocks have performed clearly, investors are starting to worry about revenue trends near term and, of course, credit, which you addressed. I'm wondering if the revenue trends continue to be weaker than expected. If the overhead ratio of 57% that you posted in 17 and 18 – is something that you could continue to level off to, or will the investment horizon be more of a dominant factor when we're thinking about the overhead ratio?

Yeah, so I would say a couple of things. The first is just to remind you that, you know, 17 and 18, I would look at a gap rather than a managed basis because of the adjustments to our revenues from tax reform. But that said, you know, while we don't set expense targets, nor do we set overhead ratio targets, we have you know, given you some outlook that would suggest that we continue to believe that a combination of revenue growth and participant notwithstanding, you know, the investments that we've been making, you know, we should see our overhead ratio continue to be stable to trending down to the kind of mid-50s, so 55-ish percent. Obviously, you know, the timing of that will depend on, you know, rates and markets and everything else. So, you know, we would expect to continue to deliver positive operating leverage in on higher NII, on growth, if nothing else, and continued solid growth in fees. Clearly, in any one quarter, you can have pluses and minuses that can be market-dependent, but generally, over time, we would still expect those trends.

Thank you for that. And just as a follow-up question, the market is also thinking that the last rate hike from the Fed was December, and I'm wondering how we should think about the dynamics of net interest income and, more specifically, net interest margin and deposit pricing if December was indeed the last rate hike for some time?

So I would say, first of all, just to say that, you know, there's a question mark about whether that's a pause or a stop. Is it the end of the cycle? We don't think so. We think the outlook for, you know, growth in the economy is still strong, the consumer is still strong and healthy, and that we're expecting to still see maybe slower but still global growth going forward. You know, having said that, just as a, you know, general matter, You've seen through our earnings at risk that, you know, as we have put more and more of the benefit of past rate hikes in our run rate, each incremental hike from here has, you know, whilst still positive, significantly lower, you know, sort of incremental NII drive. And that, you know, the front end skew is a lower percentage. So, you know, it's not nothing, but clearly lower front end rates, a lower long end of the curve or a flatter curve, all other things would be net modesty negative. But against that, you kind of pointed out the potential for this to lead to lower or slower reprice. And so as the Fed pauses, it is fair to say there could be an offset from lower reprice as people digest the data and understand whether this is a pause or more. We would still look at – we've delivered $4.3 billion of NII growth in 2018. We'll still benefit in 2019 from the annualization effect of the higher rates we've already had as well as solid growth. So while you can't expect 2019 over 18 to be at that level, it would still be strong NII growth year on year.

And I would say the why is equally, if not more important than the what. So if it is a pause because you're going to go into recession, we're going to reduce rates, that obviously is very different than if it's a pause, the economy is strong and they raise rates.

Right.

You know which one you would choose.

Right. And if this were, you know, the end of a cycle, it's no cycle we've ever seen before. So, you know, in that scenario, you know, if terminal Fed fund rates are at 2.5%, not 4.5%, 5+, you know, I think we've never seen that movie before. But that's not our central case. And, by the way, you know, the house view, the research view, would still be to see, you know, incremental hikes this year, if not in the first half, in the second.

Our next question is from Jim Mitchell of Buckingham Research.

Hey, good morning. Maybe a question on the card business. There's been chatter about sort of pulling back on rewards to kind of focus more on profitability. I guess, you know, how do you think about the strategy in cards right now? And can that, you know, I think the revenue yield in the card business was up seven dips to $11.57. Can that go higher from here as you maybe pull back on rewards?

Yeah, I would say that, you know, when we think about, you know, the product continuum we have and the construct, rewards is a very important part of, you know, driving engaged relationships with our customers. Customers are very attuned to it and, you know, are looking for value in the product. Value and simplicity and ease of use, you know, are the three things in the products that we deliver. And so, you know, for us, engaged relationships drive profitability. This is still a very profitable business. And so while we'll always make adjustments, you know, to our offerings, it's not the case that we are looking at a meaningful pullback in rewards. If you think about things like Sapphire Banking where we're looking to bring the impact of our products together, we're continuing to offer rewards-based incentives to drive engagement with our customers. We think it's a solid strategy, a business that already has good returns. It's fair to say that we've seen a lot of competitive response. you know, and competitive products in the marketplace that are driving, you know, high rewards offerings too, and we've not seen that lower our ability to net acquire new accounts. So we feel great about the value proposition and simplicity and the compelling, you know, products that we have. Okay, so we think about... It's already a very popular business.

Right, and so we think about... Still seeing decent growth. How do we think about card losses specifically this year? You seem pretty optimistic on credit. Should we still expect some seizing, or do you think the macro trends are that positive that we hold steady? How do you think about credit and cards?

So I think the macro trends are definitely positive, so they are creating tailwinds, but it's also true, we talked about the fact that if you go back to 2014-15 that we had expanded our credit box, we'd expanded it intentionally at higher risk-adjusted margins, but Over the course of the last couple of years, as we've experienced that performance, we've done sort of surgical risk pullbacks and we've amended our collection strategy, all of which have led to a charge-off rate for the fourth quarter in 18 that's down slightly year-on-year, and for the year that's at 310 basis points, which is you know, reasonably meaningfully below our expectations, you know, even as late as the end of last year. So we feel great that that kind of, you know, lost trend, you know, at that 310 maybe, you know, a little bit higher is something we should look forward to at least into 2019, and it will be helped by a supportive macro environment. And we are seeing, you know, if you unpick, you know, all of our trends, you see the phenomenon of, you know, You see the mature vintages that continue to be stable to grinding lower in terms of delinquencies and loss rates. You see the older expansion vintages that have passed their peak delinquencies and are trending to a more stable lower level. And then you do have, obviously, with new acquisitions, a cohort that are still seasoning. That will continue, but net-net we're expecting relatively stable loss rates at levels similar to 2018.

Our next question is from Saul Martinez of UBS.

Hey, Saul.

And I'm sorry, his line has disconnected. Our next question is from John McDonald of Bernstein.

Hi, good morning. Morning, Marianne. Just wondering on the markets commentary, obviously super early in the quarter, but you mentioned things feeling better. Can you just talk about seasonality there, but also just what feels better so far? And then also in the fourth quarter, what you saw in leveraged lending market, how much did you have to take in terms of maybe marks on leveraged loans and hung deals? A little bit of color there would be helpful.

Sure. Okay. So I would say that obviously the fourth quarter was challenging and there was a lot of market moves a big sort of broad set-off. At that point, there were elevated concerns around trade. Global growth data was causing concerns. There were concerns that the Fed was going to continue to be hawkish and not necessarily as responsive to some of the things the market was worried about. So there were a lot of negativity. We think too much negativity priced into the fourth quarter. And it started to change a bit when we saw the first really strong unemployment print, which reminded people that there's a very long distance between 3% growth and a contraction. So, you know, yes, we could see slower growth, but still growth in the U.S. and across the globe. You know, a slightly more constructive narrative on trade, and that continues to broadly progress, we hope and believe, in a positive direction. A more dovish outlook from the Fed, the potential for there to be, you know, pauses in rates all being relatively supportive. And, you know, the fact that a lot of, you know, people were on the sidelines through the fourth quarter, and investor appetite is out there for good value where it can be found. So I would say just early days in the first quarter, there are still obviously risks to the outlook, and any of those things could go in a worse direction. But so far, things just feel a little bit more positive, and that's constructive. And therefore, you would hope to see normal seasonal strength in January. On leveraged loans, look sort of just directly Diving into the sort of potential for there to be hung bridges, it is true that there was a significant market correction with spread widening across high-yield bonds and leveraged loans in the fourth quarter. Clearly, you know, stepping back while the industry, you know, leveraged finance commitments are up, they are materially down from before the crisis and very different. So credit fundamentals look pretty good. Having said that, and by the way, we passed on a lot of deals in the fourth quarter. We've maintained our protection in terms of flex pricing and flex protections, and as a result, the vast majority of our bridge book has still got decent cushion. That's not to say that there's no deal that have the potential for there to be net losses after fees, but nothing that we would consider to be significant and nothing in the fourth quarter. I would also say that, you know, coming back to the first quarter, that actually the market could be quite constructive for fixed income into the first quarter, given a more dovish Fed, supporting corporate margins, corporate default rates are going to, you know, stay pretty low, and we do have time. So none of the deals that we have need to be brought to market in a hurry, and the market is, you know, moving in a positive direction.

Got it. Thanks very much.

Our next question is from Al Alavizakos of HSBC.

Hi, thank you for taking my question. I again want to focus a bit on the market's performance. You pretty much mentioned like weakness across the board in credit in effects in rates, which I assume like it's the case. First of all, I want a bit of an outlook on how you think rates will perform now that volatility has picked up. And more importantly, you mentioned strength in emerging markets. Can I ask whether that was primarily in Asia or Latin. Thank you very much.

So, you know, no good ever comes of talking about how we think things are going to pan out in the first quarter, you know, other than just the general comments I've already made, which is, you know, the environment, you know, should be more constructive and, you know, we are expecting, you know, decent volatility in client activity and, you know, we'll see how that pans out. With respect to emerging markets, you know, you know, Latin America was a big piece, but Asia too.

Thank you very much.

Our next question comes from Mike Mayo of Wells Fargo Securities. Hi, can you hear me?

Yes.

I guess I'm a little torn between the year and the quarter, so I'll just ask it to Jamie. Jamie, it seems like you guys are very happy with the year with all the record revenues and earnings. But the fourth quarter, are you happy with the fourth quarter, given expenses, credit, fees?

I am totally happy with it. The franchise is strong. We're investing in new products and services. But we're not immune from the weather and, you know, volumes and volatility. We're not immune from market prices and assets going up or down. And I like the, you know, loans up 6%, assets up 7%, long-term flows up. I like the fact that credit card spend is up 10%. Merchant processing is up 17%. shares in almost every business market shares have gone up. That's what I look at. I really don't pay that much attention to being buffeted a little bit by the fact that the volumes are low in the last three weeks of December. I honestly could care less. And, you know, I look at more like in equities, we've gained share and we're now bumping up to number one. Those folks have done a great job. Of course, cash, derivatives, prime broker, et cetera. And fixed income, we've maintained our share and we're adding products and services around the world and We don't know. You don't know what's going to happen next quarter, and I don't care.

And we take the same position, you know, like we had. strong first half of the year and we said, you know, long may it continue but it may not and, you know, one quarter doesn't make a trend and so, you know, we don't really react to the sort of micro even though it was driven by the macro. The real underlying business drivers continue to be strong and even in those businesses we are, you know, holding leadership positions and gaining share and so, you know, this too will pass and things will continue to move forward in a constructive manner.

Well, as a follow-up, let's talk about the weather. So the weather is lousy at the end of the year, and, Jamie, you were just appointed to your third year as chairman of the business roundtable. So in that role, what are you doing to help J.P. Morgan and, I guess, the other banks in terms of China, the government shutdown, immigration, some of these headline issues that Marianne talked about having hurt the CIB in the fourth quarter?

Yeah, so December is terrible, but if you look at January, you have half of it back generally in spreads and and markets and stuff like that. And at BRT, I don't do anything to benefit JP Morgan. That's about public policy that's good for the growth of American total. I've very specifically stayed away from doing anything about banks there. But the BRT does take up trade, and we are supportive of the fact there are serious issues with China. We'd like to see the trade deal get done, and it looks to us like they're marching along at least to this March 1st deadline date that enough will be done to kind of get an extension and hopefully complete the deal. We would like to see immigration reform, so proper border security, allowing people who have advanced degrees to stay here, having the DACA stay here, you know, having more merit-based immigration and having some path to citizenship. That is the BRT position. We want more innovation. We'd like to reduce regulations at the local and federal level to stop small business formation. So if you look at the BRT, there are There are 10 verticals around it, and we try to do things that are good for the growth of America. And, you know, bad policy can slow down the growth of America. And I've pointed out over and over, it takes 12 years to get the permits to build a bridge. I mean, and it took eight years to put a man on the moon. It is time that we reform ourselves and not blame anybody else for our own lack of that. We don't have kids getting out of school with educations. whether you get jobs that are innovation has slowed down, the government R&D spending is down. I always think it's look at yourself and what can you do better, and there's plenty of this country that can do better to help growth over the long run. It's not about helping it next quarter.

Our next question is from Glenn Shore of Evercore ISI. Hey there.

Good morning, Glenn. Good morning. Follow-up on John's question earlier on leverage lending. On slide 24, you see the balance in loans held for sale go from like $6.5 billion to $15 billion. I heard your comments on marks. I'm assuming that that is just disruption and you go back towards your normal level that's in the pipes and progress, but I just want to make sure that I'm not making that wrong assumption.

Yeah, we're not expecting anything to be, you know, elevated.

Okay, cool.

That number goes up or down all the time just based on episodic, we're just doing it out of the books. There's nothing in that number that we're afraid of. No.

Understood. Curious, on the credit, on the couple of marks in CNI, I'm just curious on how much of that is internal versus external rating agency and – I guess it's a feel for the underlying fundamentals. How do you know we should treat that as idiosyncratic as you call it?

Yeah, so it's internal and, you know, it's like five names, four sectors. You know, we know the specifics. It is. you know, situationally specific, you know, remember, just to give you some context, while those can drive the dollar value, you know, regular way in any quarter given the size of our portfolio, you know, we might downgrade and upgrade hundreds of individual names based upon the circumstances. And so when we say, you know, that we're looking at this and saying that things are idiosyncratic. It's not just looking at the five situations that drive the biggest dollar value. It's also looking at the, you know, hundreds of, you know, downgrades and the hundreds of upgrades and seeing if there's any trends or, you know, net worrying signs there. And, you know, honestly, not now. And so, you know, if anything, marginally we had more upgrades, but it's just there's nothing to see right now in our portfolios and we're looking.

We look for reasons to put up reserves, not to take them down.

I don't mean to paranoid divide. We're more paranoid than you are.

Last one. Obviously, markets all went down in the fourth quarter, and we had some freeze-ups, if you will, in high-yield first time in like 10 years. But I'm curious how you all think the markets functioned in general. In other words, things went down, spreads wide now. There was lots of fear. But it felt like the plumbing was working, but I don't want to put words in your mouth.

And half the people weren't even here the last two weeks in December.

That's right. The plumbing was working. You know, we didn't see any sort of algo or technology, you know, issues. We didn't see any volumes that can be coped with. You know, while I said that there was a little bit of a lack of depth of the markets and liquidity, that's typically the case when you have, you know, one-way trends in the market and a lot of people are similarly situated. So I would say that relatively functions well. Not challenging.

Our next question is from Andrew Lim of Societe Generale.

Hi, good morning. Thanks for taking my questions. I just had a follow-on question from the left-hand side of you with Mark's question. I mean, you seem to give the impression that society there weren't really much in the way of marks. Is that because you've got very strong hedging strategies in place and the decline in fixed revenues mainly was due to lower volumes?

There were no marks.

There were no marks. In our bridge book right now, we have, for the vast majority, we have good cushion and we expect to be able to clear and price through the market. And for anything that's even borderline, it's completely not material.

And I think some other fields did have a few marks. If you look at what happened to flex pricing like mid-December when things were worse, yeah, some of these things are very close to the end of their flex pricing. And that means they're very close to having some kind of mark. Of course, since then, the spreads have kind of come back 40%. Right.

Interesting. Thanks. And then my follow-up question is that, obviously, the debt capital markets had a tough time. but you're also lending the growth that accelerated quite nicely. Do you get the impression there that corporates had a general shift there to seek borrowing from banks such as yourselves because they were shut out of the market?

I mean, there was an uptick at the end of the year. You saw it in the industry data. We saw it in our spot data. For us, in fact, it was largely driven by, you know, one, investment grade. loan that we extended at the end of the quarter, but there was a little bit of an uptick, a little bit more in terms of acquisition financing on the balance sheet, but nothing I would call unusual or a trend. We didn't have to take down things that would otherwise not clear the market.

Our next question is from Matt O'Connor of Deutsche Bank.

Good morning. I want to circle back on The expense flexibility, I think in your base case, you know, you're pretty clear that you're targeting positive operating leverage and moving down the efficiency ratio to the mid-50s. But what is some of the expense flexibility and where would it come from if the revenue is light? I think in 2018, you know, you accelerated some of the technology spend given tax reform. You've been opening branches. Some of that stuff obviously can't be pulled back, but you always talk about some areas of flexibility. So maybe what are those and if you could kind of size or – help quantify some of the flexibility you have, that would be helpful. Thank you.

Yeah, so I would say, you know, first of all, that you saw that, you know, from 2013 through 16, we had a, you know, pretty structural expense reduction program associated with simplifying our businesses. So, you know, in terms of the, you know, low-hanging fruit and things like that, we would say largely that's, you know, been harvested. We are always looking to generate core operating efficiency so that we can, you know, we can absorb growth. And when we are investing in technology and data, one of the reasons to do it, customer satisfaction, product innovation aside, is for efficiency. So we are seeing some of that come through. We'll continue to drive that down.

But the efficiencies and the investments are all in the number that Maren gives, which she says, Up 5%. That's right. Not three digits.

The way I would say it is that we continue to drive for expense discipline, but as long as you feel, as we do, that the decision criteria that we use to determine the investments we're making, which we think are strategically important to the long-term growth of the company and the profitability of the company supporting our clients, if those are good decisions for long-term growth, While we could obviously make changes, we would not look to do that. And so, you know, marketing expense, for example, is one area where you would say, you know, there's pretty sizable and immediate flexibility. Nevertheless, when we invest in marketing, we're driving new accounts and, you know, engaged customers that drive long-term growth. So, you know, we invested through the cycle. We think it sort of differentiates our long-term performance and we'd like to continue to do that. 2019 over 18, you know, you wouldn't expect to see necessarily the same kick-up that you saw last year. We did accelerate investments in 18. So more of the growth will be revenue-related, but still decent investments as the opportunity is still, you know, good to do that.

Okay, that's helpful. And then just on a sidebar here on the reserve bill and as we think about credit quality, Are we just in the period now where we should assume kind of some reserve build consistent with loan growth each quarter? Or, you know, was this just a quarter where you had a couple of the lumpies that really drove it? I guess what I'm getting at is, you know, last year we had two. I guess what I'm getting at is, like, are we at the point where, like, just a couple of lumpy loans is going to drive a few hundred million reserves build, right? Or is it just, you know, maybe this is a bit unusual still?

So first of all, I just want to sort of point out that in the card space, we hope we continue to grow healthy mid-single digits. You know, there's a seasonality to card balances and losses. So you typically see reserve bills in the second half of the year. That's what we saw this year and, you know, actually a little bit lower year on year than last. And in the wholesale space, you know, you're going to see, you know, some things will be a bit lumpier and episodic given the nature of the loads that we have. I wouldn't necessarily say that we expect to see a trend of significant reserves, but we've been flattered by recoveries and releases over the course of the last couple of years, partly or a large part, at least earlier, releasing reserves we took on energy when the energy went through the downturn and So we'll have some downgrades. We might have some releases. I would net-net think that, you know, as we grow, we would build, but, you know, not disproportionately. We're arguably at the best point in the cycle. So, you know, Jamie mentioned it earlier, you know, to the degree that we have the flexibility, you know, we're making sure that we're reserved accordingly.

Our next question comes from Sal Martinez of UBS.

Hey, good morning. Sorry about earlier. I think I need to figure out how to use my phone. So, yeah, no comment there. A lot of talk on macroeconomics and the policy backdrop and volatile markets, but As you mentioned earlier, you guys are in a pretty unique position in that you have pretty consistent dialogue with a lot of economic agents, whether it's corporates, governments, institutional investors and whatnot. But just a sense of what your clients are saying, what are they concerned about, and is there any concern on your part that some of these issues have sort of a self-fulfilling effect in that it does end up leading to actions that precipitate a downturn or a recession?

So, I mean, I think that we would, you know, look to the sort of macroeconomic data, which is still generally supportive and say things should be good. But for sure, sentiment is not immune to, you know, external factors. And so, you know, manufacturing data has been a little weaker, I would say. CapEx is sluggish on fears around global growth. you know, government shutdown trades are not particularly helpful. Uncertainty is not good for anyone. So there's no doubt that, you know, as things continue, if there's a level of anxiety and uncertainty, it's just not constructive for confidence and confidence that gets, you know, stronger or less strong markets. So, you know, I wouldn't say that I think it's clear and present danger, but I think we should be extremely careful because, you know, sentiment, particularly consumer sentiment, will be incredibly important. And right now... it's good, right, sentiment in consumer, and we just got back some sentiment from, you know, a whole bunch of our middle market companies that, you know, while neither are at their highs, they're still very high.

Right. Okay. That's helpful. If I could just ask about loan growth and just a more broad question about your ability to continue to outpace the industry, and I suspect we'll get more color at investor day, but Just, you know, want to get your sense of the sustainability of growth. And you mentioned on the commercial side, maybe you scale back a little bit, maybe relate cycle. But where do you feel like you can continue to outgrow the industry? Where do you feel like maybe it's time to scale back on risk a little bit?

Okay. So, I mean, I think it's an incredibly, you know, nuanced question because, you know, in general, you know, home lending is, has a challenging market backdrop. For us, it's a turn of two cities. You know, we're doing quite well and gaining a bit of share in the kind of retail purchase market, and we're holding our sort of pricing disciplining correspondent and losing share there. So, you know, there's a challenging market backdrop. Card was, you know, was doing well at, and it's a factor of all things we talked about, investments in digital product, you know, rewards, all of the above. So we would like to believe that we'll continue to hold our own there. Also, is extremely competitive. You know, we play in the, you know, prime, super prime space. And, you know, we're seeing competition from people who have different economic drivers than us, like credit unions and captives. And so, you know, we're willing to lose share to maintain returns there. You buy the KC&I, we're growing, you know, in line or better in the industry, in our expansion markets where we've been making the investments, where we've been adding specialised industry coverage and we'd like to see that because of the investments we're making, but in mature markets we're, again, being pretty prudent. I wouldn't call it tightening, but being very selective. Commercial real estate, particularly construction lending, yeah, we are We are being very cautious about new deals and selective about those. So it isn't the case anymore that we would say we're seeking to grow or that we ever would. Loan growth is an outcome of a number of factors, mainly the strategic dialogue with our companies, but also the environment we're in, and it's extremely nuanced. And in many of our businesses, we're going to protect profitability and credit research and overgrowth at this point.

So let me just reemphasize that. We tell our management that we have no problem seeing loan books shrink. We are not going to be sitting here ever in our lives and saying, you've got to grow the loan book, you've got to show loan growth. Remember Warren Buffett used to say, in the insurance business, sometimes it's true in the loan business, you're better off with Salesforce to go play golf than they are to make new loans. We are not going to be stupid. And the other thing you have to always keep in mind is not the loan, it's the relationship you look at in total. And so when it comes to middle market or all these other things, there are reasons that we stay in a business knowing there's going to be a cycle, and we're not going to be children when there's a cycle. We know the loss is going to go up.

Our next question is from Betsy Grasick of Morgan Stanley. Hi, good morning.

Good morning.

Are we playing golf all day yet, or is that still far away?

Credit is pristine. More in credit is pristine. Middle market is pristine. Underwriting has been pretty good, other than a few little pockets that Miriam's mentioned. But, you know, we saw people stretching in auto. We saw some stretching, and we're not in the subprime credit card, but a little bit of people stretching in that. And, you know, Reverend Len, you and I worry about our loan book. I think you've been having a logical conversation about kind of the non-bank loan book, but that's not our concern. And

It is what it is at the time, so... And I think where businesses are notably, you know, a little bit less relationship-driven, so think about kind of loan-only relationships, commercial-term lending, real estate banking, you know, mortgage to a lesser degree also, we are being, you know, we are losing or feeding share where it makes sense to do it.

Yeah, and competition, we've noticed before, is back everywhere, and that's a good thing for America. And that means that pricing is a little tough and that you have to compete and...

Yeah, so we're still off the golf course. All right, that's good. Just wanted to understand a little bit more on the expense side. I know, you know, even with the weather, you guys put out a 14% ROTC, which is, you know, obviously best in class. The question is on the expenses, there's flexibility there, but yet I know you've guided to up single digits in 1Q19. Based on the prior conversation, it seems like, 1Q might be an aberration of mid-single digits, or should I take that that's kind of the run rate you're expecting for the full year? But why would 1Q be a little bit different, I guess, is really the question.

Yeah, so I wouldn't fully annualize the first quarter, but think about we've added bankers and advisors across our businesses, so you're going to get some annualization impact, particularly first quarter over first quarter. We had added more and more as the year progressed. Similarly, something like auto lease where we grew our auto lease business revenues and expenses strongly in 2018 and that will be in our run rate in the first quarter. So front office, auto lease, some of the technology investments we've been making, the annualization of those will be more pronounced first quarter to first quarter than fourth quarter to fourth quarter because many of them were in our run rate in the fourth quarter. And then, you know, outside of that, there's a bit more in real estate as we sort of execute on our head office strategy. And then, you know, marketing, you know, foundation contribution, those things are going to be timing. So the first quarter will be higher. I wouldn't annualize it. We are going to see, you know, likely growth year over year, much more because of revenue growth than because of investments at both year on year, not the same level as last year. And we'll obviously give you a lot more detail and insights and thoughts on, ranges and everything at Invest Today, you know, clearly.

Our next question is from Brian Klein Hansel of KBW.

Hey, good morning.

Hi, Brian.

Hi, Miriam. Just a quick question on the balance sheet, and sorry if you hear this already, but can you kind of walk through the idea of lowering down the deposit list banks and kind of moving into repo, what you saw in the quarter, and then kind of, Is that just something that was temporary that's expected to reverse in the first quarter? Thanks.

I mean, it's fair to say that money market rates traded above IOER throughout the fourth quarter and, you know, more pronounced at the end of the quarter. And so through the quarter and that year end, we were able to take advantage of the market opportunity to move out of cash into cash alternatives, think, you know, reverse repos and short-duration assets. And so for us, it was, you know, a yield-enhancing, you know, opportunity to redeploy cash and a mixed change rather than, you know, adding duration. And that, you know, continues to be the case into the first quarter. It contributed to our, you know, NIM expansion in the fourth quarter. We continue to have, you know, a bit of that mix shift in the third quarter, and it's a market opportunity.

Okay. And then a separate question on – I know it's not a big revenue driver anymore, but within the mortgage banking, you had a negative gain on sale in the quarter. If you could just give us a color there, what drove a negative gain on sale?

Yeah, so in the quarter, you know, as we were looking at optimising our balance sheet, we actually did a fair load of conforming loans for GFE for about $5 billion. The impact of that was to have, you know, a loss on the fair of the portfolio given that they've been originated at lower rates. So, you know, as rates are higher, the fair value of the loans is lower. Against that, if you were to look at the rest of the P&L, you'll see a benefit in net interest income because the interest rate risk of that has been transferred to the Treasury Department. So it's geography. It's a loss on the sale of a portfolio against which there's funding breakage in NII. Just so that you know, a mortgage loan with RWA at 50% versus a security at 20% with you know, better liquidity value, you know, we did reinvest some of those proceeds in multiple securities in Treasury. So we'll earn that back over time next to the company.

Our next question is from Stephen Chuback of Wolf Research.

Hey, good morning. So I wanted to start with just a bigger picture question on credit and the impact of normalization. Certainly the near-term guidance sounds quite encouraging and Jamie, you did make a comment recently at an investor conference talking about how the banking industry is over-earning on credit, not particularly a controversial remark, but in the past you've guided to a medium-term loss rate on a blended basis of roughly 65 bps. That does contemplate continued low losses in commercial. And just given that we're a late cycle, I was hoping you could maybe speak to your expectation for what a normalized credit loss rate is for J.P. Morgan and giving your current mix, and where that might differ from your medium-term loss guidance.

So we're not talking quarter over quarter. We're just talking in general trends.

We're talking bigger and bigger.

Right. So Marianne has shown year after year we consider normalized losses, and for years we've been doing better than that. In credit card, middle market, large corporate, mortgages come back down to a very low number. And, you know, at one point it's going to go up. And so I'm not telling you what's going to happen next quarter. Right now it looks like it's kind of steady state. But at one point, we will not be surprised to see it go up. I don't know if it's going to be the second quarter, the third quarter, fourth quarter. And I don't know if we're late cycle. We don't exactly know we're on the cycle. And so we just won't be surprised to see it go up. And the number, we look at it by product. We don't look at it in a total. So I can't actually, you know, they may vary in grades.

No, no, and I think, you know, I hate to say this because I know that you don't want to, you know, wait a few weeks. But we'll have a more complete conversation about kind of, you know, range of plausible outcomes on credit, you know, at Investor Day. But, you know, when we gave our, you know, medium-term simulation, we said, listen, you know, we did a 17% return on time for common equity in 2018 and our medium-term guidance is for 17%. You know, we've under-earned against our guidance in other parts of the cycle. Maybe we will or won't over-earn against it. But NII and, you know, reprice lags are higher and credit is benign. And at some point, we would expect both of those things to normalize but we would continue to see solid growth, you know, in all of our drivers. So we don't know when it will be, and actually we don't see anything that thinks, you know, I know you say is it second, third, or fourth quarter. There's no indication that it's in any of those quarters. But we'll have a more comprehensive discussion at Invest Today about, you know, range of plausible outcomes.

All right, looking forward to that. And just one follow-up for me on the IV outlook. Mary Ann, I was hoping I could unpack just some of your comments around how the ID backlog, you cited that as being quite strong, but just looking at the individual businesses for M&A, ECM, DCM, especially given some of the economic pressures outside the U.S., what informs your outlook across each of those?

Yeah, so, you know, I would say that, first of all, we did see, you know, given the conditions in the fourth quarter, a number of deals that got pushed from the fourth quarter into the first quarter, particularly In M&A, it was a little bit more balanced. For every deal that got pushed or struck, there were more that came to take its face. But as a result, as we go into the third quarter, pipelines across the board are elevated relative to last year and pretty strong. At the end of the day, we talked about it earlier, confidence is still high. Companies are still motivated to drive growth. you know, growth. And so, you know, the environment should be constructed for continued M&A. You know, technology, healthcare, you know, biotech innovation, technology innovation, momentum in ECM that we've been benefiting from and the IPO pipeline should, you know, continue market dependent. And, you know, notwithstanding December, actually a, you know, a sort of lower outlook for rates in the U.S. should broadly be a tailwind for fixed income in the first quarter and the first half. So the second half of the year, I think, is going to be determined by how things shape up over the next several months. But walking into January, again, if the market remains generally constructive, we should see tailwinds across the businesses.

I think you have to ask for backlogs. Generally, you want them high because they're good. But they're a little like an accordion, too. They come and go. So that's not a forecast for the future that you're definitely going to get those revenues. Things get delayed, particularly things like IPOs that you've already seen. And the other thing I just want to point out is a shout-out to the folks in the investment bank. Our market share went up in Europe, Asia, Latin America, and the United States last year. That's what we really look at when we look at the business.

60 basis points all year.

60 basis points all year. And first time ever it went up in all four main markets.

Our next question is from Marty Mosby of Vining Sparks.

Hi, Marty. Good morning. Jamie, I was glad that you mentioned that, you know, we don't know the end of the cycle because that's kind of just assumed because of the lapse of time but not really the economic factors. And then the other piece of this is, When you look at losses, they tend to be good until they go into recession, then they're bad. There's no just kind of normalization. So the question about a normal rate of loss, we really have two dichotomous answers. We have a good answer, which is when we're expanding and the economy is stable, and we have a bad answer when we're in a recession. It's kind of one or the other. Just wanted to see what you thought about that.

Yeah, you're exactly right. At one point you're going to overrun, at one point you're going to underrun. And we try to, when we look at the business, we try to price through that so that we, you know, we try to earn fair returns through the cycle. And I totally agree with you. We know they're going to change at one point. And we try to do a better job underwriting, too, by the way. We do work hard to make sure we underwrite other people as best we can.

Which then limits the volatility when you go into that bad period, which is what you want to do. You underwrite to make sure you're defending against that cycle.

Exactly. And the other one you have is the reserves. You put them up, you take them down. So our total reserves were $14 billion. No, but at one point they were $30. So we went from, in the Great Recession, we went from $7 to $30, back to $14. And I call that ink on paper. It doesn't mean anything. So when you go into that recession, your losses go up and your reserves have to go up. And we're completely aware of that.

Although I think we should say, for obvious reasons, that we wouldn't expect you know, any, you know, near-term recession, if there is one, to look anything like it did before. And even if it did, given the credit quality of the portfolio, performance would be, you know, not only absolutely better, but we think strong on a relative basis.

So other than, if you look at the consumer, the $13 trillion, that's outstanding. Other than student, which is fundamentally owned by the government, you know, the mortgage stuff that's been written is prime. So it's back to $10 trillion, but it's much better than what it was in 2007. And I think credit card, I forgot the exact number, is much more prime than it was in 2007. I think auto is about the same, but auto actually outperformed in the – More prime. Yeah, more prime and outperformed in the Great Recession. I think people in general have done a better job underwriting middle market and lever stuff than they did last time. So I think if you start a recession soon, going into it, your credit portfolio is much more than the last time.

And the follow-up question to that is, you know, we talked about auto and some of those other places where you saw some of that deterioration. You know, what our model is showing is that actually the discipline and the reaction time to that deterioration is much quicker than when we saw the one to four family, you know, cycle in the last time where you saw deterioration but growth just kept going. We've had, you know, so many banks jump in and say, look, we've already pulled back on, you know, auto lending or we pulled back on multifamily. There have already been places where you've seen that discipline. So that discipline in itself put the governor on economic growth, which is why we're having less growth or slower growth, but yet it also creates, like you said, a stronger portfolio for that eventual downturn.

And I agree with that. The lack of discipline we see is in student and a little bit in small commercial real estate.

Our next question is from Gerard Cassidy of RBC.

Good morning, Marianne.

Good morning.

Can you guys – there's been a lot of talk about leveraged loans and how this time around everything seems to be underwritten better. Are there any tangible – statistics that you can share with us, or maybe on Investor Day you might, to show us that, yes, the leveraged loan portfolio for you guys in particular is much healthier than maybe 06, 07. And then second, on this leveraged loan issue outside the banking industry, what are some of the indirect hits that you and maybe some of your peers may experience, not from the direct hit of a leveraged loan, but for some of the craziness that's going on outside the banking industry?

Can I just give you a big picture? There's, I think, a trillion-seven of leveraged loans, okay? So term A is about half of that. These are very rough numbers, okay, most of which are with banks and obviously safer than term B. A big chunk, over, I think, 60% or 70% of the term B is with non-banks. And so, you know, if you look at the banking system, if you look at the leveraged lending bridge book, in 07 it was over $400 billion. Today it's number, like, 80%. In 07, there were commitments and no flex. Almost everyone has plenty of flex now. So when you look at covenants, there's kind of covenants, but there's flex, and there's a whole bunch of other stuff in there. So it is far, far, far sounded today. Even these CLOs, you can go through underwriting institutes and CLOs, they are far better underwritten with more equity, more sub-debt, more mezzanines, stuff like that. Now, go to the shadow banks. You know, they do things slightly differently. A lot of those folks are, you know, they're quite bright. They kind of know what they're doing. Someone's going to get hurt there. And, you know, the issue there in the next recession isn't going to be what the loss is. And remember, most of the major banks don't fund a lot of that. We aren't taking huge indirect exposure to that by funding some of the non-banks. And I think the issue there for the marketplace is going to be when you have a real recession, the lender will not be there. So a lot of these borrowers will be stranded. And so that's not, that's an opportunity or a risk or something like that, but it's not, I wouldn't put it in the systemic category. And by the way, again, if you go back to 07, you know, it emerged in 07, there was a trillion dollars of bad mortgages that were kind of all over the place, CLOs, SIVs. There are no SIVs. The CLOs are much smaller. The leverage lending book is, you know, a much smaller book. Capital liquidity is much higher. So it is nothing like 07. You will have a recession. It just won't be like you had last time affecting the banking system like it will. It will affect the banking system. We're a little bit carried in the coal mine. We're not immune to what goes on in the economy. But it won't be anything like you saw last time for most of the large banks.

No, I would agree with that. And do you think Janet Yellen and other Federal Reserve officials' comments about leveraged lending is more directed to the exposure outside the banking industry than inside the banking industry?

Yes, I do. Yes. Again, I don't think they were saying it's huge and systemic. They're saying it's something they should keep an eye on. And, you know, I think that the regulars do keep an eye on that.

Right. And then just to pivot on a deposit question. Obviously, non-interest-bearing deposits are tough to keep as rates are going higher. Can you guys give us some color on the non-interest-bearing deposits? There was obviously a small decline. What parts of the business you're seeing that in the Fed's unwind of its balance sheet? How much of an impact do you think that might be having on the non-interest-bearing deposits?

So the migration intra-product from non-interest to interest-bearing is predominantly or largely exclusively a wholesale thing at this point. There's you know, not enough rate benefit in, you know, the interest-bearing savings to drive intraproduct migration. Definitely some, you know, growth outlook in CDs given pricing, but it's wholesale right now, and it's mainly rate-related and not balance sheet related in terms of the Fed online.

Can I just make a comment about interest rates and the balance sheet of the Fed? So interest rates is one thing, but the balance sheet of the Fed obviously is causing changes in the flow of funds. It's causing changes in that banks now have options other than reserves at the central bank. Because the two-year and three-year bond yields for government bonds are much higher, some people are preferring to own that because they think they're being paid better than on corporate risk. So it changes a whole bunch of fund flows. It concerns people, but I'd say it's part of the process of normalization.

Our next question is from Ken Uzvin of Jefferies.

Hi, thanks. Hi, good morning. There were a couple of Fed regulatory documents out in late December, one codifying the three-year burn-in of stated CECL impacts, and another one where they're pushing out until 22 on their own implementation of CECL accounting in the supervisory stress test. I'm just wondering just any takeaways you had from from reading that and any hopes you might have for just, you know, as we get towards some finalization of which way CECL goes and how it looks, aspirations around that and how that interacts with CCAR and such.

Before Marianne answers that question, I just want to do a shout-out to Jeffries, because if we actually look at what everyone does in every investment banking group, and you guys did a hell of a good job in health care this year.

I'll pass that along to you.

And following that, hard to follow, I would say that we've been pretty clear about the fact that our biggest concern around CECL was properly understanding, not just for us, but for regulators to properly understand the implications for capital, not only in benign but in stress scenarios, and what the implications of the outcome there could have on you know, the willingness for people to extend credit, particularly at cycles age and, you know, with the outlook for volatility to increase. So, you know, having a transition is obviously helpful. You should imagine that we would likely avail ourselves of that opportunity. That, you know, that is what it is. For me, the question that needs to be clarified is, you know, if we are to include the impact of season and company-run stress test, but the Federal Reserve is not going to include it in the stress test, we need to kind of understand the interplay between those two things, particularly if that might coincide with, you know, a turn in the cycle in actual fact. So, you know, I think we're looking for continued clarity from the regulators about what exactly that means. If we're embedding these assumptions into our stress tests and our results, you know, sooner than they are, how do we think about the implications of that on, you know, our distribution plans and capital outlooks? And, you know, importantly, if, you know, if it really is the case that we have to uprun significant amounts of capital for longer term or lower credit quality loans, I do really believe, even though the cash flows and the economics, you know, conceptually don't change, that you might find people less willing to lean into growth for longer duration assets if there are concerns around potential volatility. And we should worry about that.

And it'll be a big number for a credit card.

Yeah.

If you put on 3% now... when you build a loan book by $100, the number would be 6% or some number in the future would be much higher. So I do think particularly smaller banks will react very dramatically in how they run their loan books to do that.

So, you know, our view is that, you know, more analysis needs to be done in the industry about what this looks like. I hope that what was meant by, you know, we should include it in company-run stress tests is for us to, you know, collectively learn and for the regulators to have the time to respond to that. But remember, you know, 2022, considering all the discussion we've had on this call about, you know, the cycle, how long the cycle is, when there's a turn in the cycle, I mean, we could actually face a stress before that. And so it's great that they are, you know, waiting a bit, but it might all be a bit of an academic point depending on what happens actually.

Yeah, that's a fair point. And Jamie, you've also said in the past that you guys lend on accounting, right? Don't lend on accounting and lend on economic, right? But there's this kind of challenge to that that Marianne just mentioned about the unintended consequences. And so it would be interesting to see that, you know, if there is in fact a point where banks don't lean in, as you just mentioned, Marianne.

Yeah.

They will change.

And we have the luxury or the flexibility of being able to say that, you know, we can continue to, you know, lend based upon the underlying economics. But, you know, someone who has a differently situated, you know, balance sheet and return profile may not be able to do that.

Okay. Thanks for the call.

Our next question is from Mike Mayo of Wells Fargo Securities. Yes.

Hi. A follow-up on the net interest margin. Two sides to the question. One is commercial loan pricing. I guess it's been kind of brutal. You've had the BDCs, private equity firms, loan funds all competing. Has there been any let-up with some of the dislocation in the capital markets late in the year? And the other side, retail deposit betas, Marianne, you thought they would get a lot worse. I don't think it's been as bad as you thought. What was your retail deposit beta, and what do you still expect?

Before Mary answers that, can I just go back to this cyclical stuff? One of the issues, it's not just CECL. You know, a lot of things that have been built since the crisis were really good, but there was more pro-cyclicality built into it. And so you're going to see the next downturn that we have a far more pro-cyclical accounting, liquidity and rules, capital rules and stuff like that, which we don't know the full effect of that. But if I was a regular, I'd be very cautious about constantly building pro-cyclicality to the system. And I gave you the example of just our loan laws that are going from 7 to 30 or whatever they went to back to 14. You know, it will affect how people respond in a downturn. And it will cause people to pull back much quicker than maybe in the past in total.

Okay. So just on your question, so corporate loan spreads, I would say, you know, we did see sort of pretty brutal grinding down in corporate loan spreads over the last, actually a couple of quarters, we saw them find a bit of an equilibrium and stabilize, you know, at levels. So while I would say it's still true to say that there is, you know, a lot of competition, at least, you know, in the space in which we're operating, we're seeing spreads at relatively stable levels in the corporate space. And, you know, honestly, I don't remember saying that I thought we would see an acceleration that was dramatic in retail betas in the short term. I mean, obviously, at some point, when the absolute level of rates and the spread between market rates and rate pace gets to a And if normalization continues, we would expect to see reprize lags sort of catch up. But we have not seen that yet outside of CDs in retail space right now.

And the way you calculate it, what was your retail deposit data this quarter and how does that compare to the past?

So in checking the savings, the lead savings is nothing. In CDs, it's something, but it rounds to a very small number.

All right. Thank you.

Thanks, Elaine. Our next question is from Gerard Cassidy of RBC. Thank you.

Just a quick follow-up, Marianne. Have your investment bankers on the front lines passed on any information concerns about the government shutdown. There's been reports that the SEC is not open, and is that slowing down the investment banking business? And your thoughts on that, please.

Yeah, so I would say that we've benefited from the fact that year-end and into the early part of January and the holiday season have a light calendar, typically in January for IPOs in particular. But for sure, if we don't see the ability to get approval from the SEC on IPOs and to a lesser extent, some of the M&A deals that need approvals from government agencies, it will be problematic in the ability to see those activity levels play out and be realized. So, I mean, it's one of many things that would behoove us to end this sooner rather than later.

Thank you.

And we have no further questions at this time.

Thank you very much, everyone.

Thank you. This concludes today's conference call. You may now disconnect.