JP Morgan Chase & Co.

Please stand by. We are about to begin. Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's first quarter 2019 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, Maryann Lake. Ms. Lake, please go ahead.

Thank you, Operators. Good morning, everybody. 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 record net income of $9.2 billion, an ETF of $2.65, a record revenue of nearly $30 billion, with a return on tangible common equity of 19%. The results this quarter were strong and broad-based. Highlights include poor loan growth XCIB of 5%, with loan trends continuing to progress as expected. Credit performance remains strong across businesses. We saw record client investment assets in consumer of over $300 billion, and record new money flows this quarter. And double-digit growth in both card sales and merchant processing volumes, up 10% and 13% respectively. We ran us number one in global IV fees and gained meaningful share, which share well above 9% this quarter. In the commercial bank, we had record growth IV revenue in assets and wealth management record AUM and client assets, and the firm delivered another quarter of strong positive operating leverage. Turning to page two and talking in some more detail about the first quarter. Revenue of $29.9 billion was up $1.3 billion, or 5% -on-year, driven by net interest income, which was up $1.1 billion, or 8%, on higher rates as well as balance sheet growth and mix. Non-interest revenue was up slightly, as reported, but excluding fair value gains on the implementation of a new accounting standard last year, NIR would have been up 5%, reflecting auto lease growth and strong investment banking fees. And while market revenue was lower, there were other items more than offsetting. Expense of $16.4 billion was up 2%, relating to continued investments we're making in technology, real estate, marketing, and front office, partly offset by a reduction in FDIC charges of a little over $200 million. Credit remains favorable across both consumer and wholesale. Credit costs of $1.5 billion were up $330 million -on-year, driven by changes in wholesale reserves. In consumer, charge-offs were in line with expectations, and there were no changes to reserves this quarter. In wholesale, we had about $180 million of credit costs, driven by reserve builds on select C&I client downgrades. And recall that there was a net release last year related to energy. Once again, these downgrades were idiosyncratic. It was a handful of names and across sectors. Net reserve builds of this order of magnitude are extremely modest, given the size of our portfolios, and we are not seeing signs of deterioration. Moving on to page 3, and balance sheet and capital. We entered the quarter with a CET1 ratio of 12.1%, up modestly from last quarter, with the benefit of strong earnings and AOCI gains given rallying rates being partly offset by slightly higher risk-weighted assets. RWA is up, primarily due to higher counterparty credit on trading activity, but most of these are being offset by lower loans across businesses on a spot basis. -on-quarter loans were down in home lending as a result of a loan sale transaction, in the CIB as a result of a large syndication, and in card and asset wealth management seasonally. Also on the page, total assets are up over $100 billion -on-quarter, principally driven by higher CIB trading assets, in part a normalization from lower levels at the end of the year, given market conditions. Lower -of-period loans are partially offset by Treasury balances, including higher securities. In the quarter, the firm distributed $7.4 billion of capital to shareholders, including $4.7 billion of share repurchases, and last week we submitted our 2019 CCAR capital plan to the Federal Reserve. Moving to consumer and community banking on page 4. CCB generated net income of $4 billion and an ROE of 30%, with consumers remaining strong and confident. Poor loans were up 4% here -on-year, driven by home lending and card both up 6% and business banking up 3%. The profits grew 3% in line with our expectations, and we believe we continue to outperform. Client investment assets were up 13%, driven by record new money flows, reflecting growth across physical and digital channels, including Uinvest. We also announced plans to open 90 branches this year in new markets. Revenue of $13.8 billion was up 9%. Consumer and business banking revenue up 15% on higher deposit NII driven by continued margin expansion. Home lending revenue was down 11% driven by net servicing revenue on both lower operating revenue and MSR, but notably while volume bar down, production revenue is up nicely -on-year on discipline pricing. And card merchant services and auto revenue was up 9%, driven by higher card NII on loan growth and margin expansion, and higher auto lease volumes. Expense of $7.2 billion was up 4%, driven by investments in the business and auto lease depreciation, partly offset by expense efficiencies and lower FDIC charges. On credit, net charge-offs were flat, as lower charge-offs in home lending and auto were offset by higher charge-offs in card on loan growth. Charge-off rates were down -on-year across lending portfolios. Now turning to page 5 and the corporate investment bank. CID reported net income of $3.3 billion and an ROE of 16% on strong revenue performance of nearly $10 billion. For the quarter IB revenue of $1.7 billion was up 10% -on-year, and outside of an accounting nuance, all of advisory, DTM, and total IB fees would have been records for a first quarter. Advisory fees were up 12% in a market that was down, benefiting from a number of large deals closing this quarter. We ranked number one in announced dollar volumes and gained nearly 100 basis points of wallet share. Debt underwriting fees were up 21%, also outperforming a market that was down, driven by large acquisition financing deals and our continued strong lead-leve positions in leverage finance. We maintained our number one rank and gained well over 100 basis points of share. And equity underwriting fees were down 23% but in a market down more. As a combination of the government shutdown, uncertainty around Brexit, and residual impacts from December volatility weighed on issuance activity across the region in the first quarter. But already in the second quarter we've seen a major recovery in US IPO volumes back to normalised levels, and we're benefiting from our leadership in the technology and healthcare sectors, which again dominate the calendar. Moving to markets, total revenue was $5.5 billion, down 17% reported, or down 10% adjusted to the impact of the accounting standard last year that I referred to. Big picture, on a -on-year basis we're challenged by a tough comparison. Backdrop in the first quarter of 2018 was supportive, clients were active, and we saw broad-based strength in performance with a clear record in equities last year. In contrast, this quarter started relatively slowly, and overhanging uncertainties kept clients on the sidelines, despite a recovered and more stable environment. So with that in mind, I would characterise the results as solid, and a little better than we thought had invested just a few weeks ago, largely due to a better second half of March. And for what it's worth so far, the environment in April feels generally constructive, but it's too early to draw any conclusions in terms of P&L. Fixed income markets revenue was down 8% adjusted, driven by lower activity particularly in rates and in currencies and emerging markets, which normalised following a strong fire year. However, we did see relative strengths in credit trading on strong flow, as well as in commodities. In terms of equity, equity's revenue was down 13% adjusted, speaking more to the record fire year quarter than this quarter's performance, which was still generally strong across products. Although derivatives got off to a somewhat slower start, cash in particular nearly matched last year's exceptional results. Treasury services revenue was $1.1 billion, up 3% -on-year, benefiting from higher balances and payments volume, being partially offset by deposit margin compression. Security services revenue was $1 billion, down 4%, as organic growth was more than offset by fee and deposit margin compression, lower market levels and the impact of a business exit. Of note, deposit margin in both Treasury services and security services is impacted by funding basis compression rather than client basis, and at the firm-wide level doesn't offset. Finally, expense of $5.5 billion was down 4%, driven by lower performance-based compensation and lower FDIC charges, partially offset by continued investments in the business. The console revenue ratio for the quarter was 30%. Moving to commercial banking on page 6. A strong quarter for the commercial bank, with net income of $1.1 billion and an ROE of 19%. Revenue of $2.3 billion was up 8% -on-year on strong investment banking performance and higher deposit NII. Record growth IB revenue of over $800 million was up more than 40% -on-year, due to several large transactions, and the pipeline continues to fill robust and active. Deposit balances were down 5% -on-year and 1% sequentially, as migration of non-operating deposits to higher yielding alternatives has accelerated, and we believe is largely behind us. From here we expect deposits to stabilize, given the benign rate outlook. Expense of $873 million was up 3% -on-year, as we continue to invest in the business, in banker coverage, and in technology. Loans were up 2% -on-year and flat sequentially. CNI loans were up 2% or up 5% adjusted for the continued runoff in our tax-adempt portfolio. We continue to see solid growth across expansion markets and specialized industries. CRE loans were up 1% as competition remained elevated, and we continue to maintain discipline given where we are in the cycle. Finally, credit costs of $90 million were predominantly driven by higher reserves from select client downgrades, and net charge-offs were only two basis points on strong underlying performance. Before moving on, I want to address the perceived gap between our reported CNI growth statistics and those that we all see in the Fed weekly data. If we look across all of our wholesale businesses, we also show strong growth -on-year at about 8%. There are three comments I would make. The first is that there can be reasonable noise in the Fed weekly data. Second, CIV is a big contributor for us, and CIV loan growth this quarter was supported by robust acquisition financing and higher market loans. And third, as previously noted, the definition of CNI for the Fed does not include our tax-adempt portfolio which has seen significant -on-year declines given tax reform. So while it's true that the Fed data is showing strong growth -on-year, and apples to apples so are we, in the mainstream middle market lending space we're seeing good -single-digit demand in line with our expectations. Moving on to asset and wealth management on page 7. Asset and wealth management reported net income of $661 million, with a pre-tax margin of 24% and an ROE of 25%. Revenue of $3.5 billion for the quarter was flat -on-year, as lower management fees on average market levels, as well as lower brokerage activity, were offset by higher investment valuation gains. Expense of $2.6 billion was up 3% -on-year, as continued investments in our business, as well as other headcount-related expenses, were partially offset by lower external fees. For the quarter, we saw net long-term inflows of $10 billion, with strength in fixed income, partially offset by outflows from other asset classes. Additionally, we had net liquidity outflows of $5 billion. AUM of $2.1 trillion and overall client assets of $2.9 trillion were both records up 4%, driven by cumulative net inflows into liquidity in long-term products, and with first quarter market performance nearly offsetting fourth quarters of kinds. Deposits were up 4% sequentially on seasonality and down 4% -on-year, reflecting continued migration into investments, although decelerating, as we continue to capture the vast majority of these flows. Finally, we had record loan balances up 10%, with strength in both wholesale and mortgage lending. Moving to page 8 and corporate. Corporate reported net income of $251 million, with net revenue of $425 million compared to a net loss of over $200 million last year. The improvement was driven by higher NII on higher rates, as well as cash deployment opportunities in treasury. And recall, last year we had nearly $250 million of net losses on security sales, relative to a small net gain this quarter. Expense of $211 million is up -on-year, and includes a contribution to the foundation of $100 million this quarter. Concluding on page 9. To wrap up, this is the sort of quarter that really showcases the strengths of the firm's operating model, benefiting from diversification and scale, and our consistent investment agenda. We delivered record revenue and net income in a clean first quarter performance, despite some hangover from the fourth quarter. Underlying drivers across our businesses continue to propel us forward, and in March and coming into April, the economic backdrop feels increasingly constructive, client sentiment has recovered, and recent global data shows encouraging momentum. Invexate is only six weeks behind us, so our guidance for the full year hasn't changed. We do remain well positioned and optimistic about the firm's performance. With that, operator, we'll take questions.

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 as a member. We'll get into the queue. Your first question comes from the line of John McDonald with Autonomous.

Hi, good morning. Marianne, you had good expense control this quarter, and in your Jamie's letter, you show goals of improving the efficiency ratio on each of the main business units for the next few years. I'm just kind of wondering what's driving that. Is there any kind of cresting of investment spend that's going to occur in 2020, or is this just kind of positive operating leverage carrying through?

Yeah, hey John. So, I would say just a big picture is a combination of both, obviously. We talked at Invest Today about the fact that we're always going to make the net investment, the net incremental investment decision based on its own merits. But in total, with the amount we're spending now and the amount of dollars that roll off every year that get re-decision for investment, we feel like we should see our net investment spend reach a reasonable plateau over the course of the next several years. And so that is part of it. Obviously, a lot of the investments that we've been making in technology are also not only to do with customer service and risk management and revenue generation, but they're also to do with operating efficiency. So we would also expect to start to see some of that drive operating leverage. But it's also the case that we're looking for revenue growth too, so it's a combination of both.

Okay, and then just on the NII outlook, it's reassuring to be able to hold the Invest Today outlook for the $58 billion for this year, even though the curve's flattened, there were some concerns there. What are the dynamics that enable you to keep the guidance, even with the change in curve that we've seen?

Yeah, so I mean, the first thing I would say is that, you know, we've said this before when we've seen these periods where you get kind of short-term fluctuations in the curve, is that it's a bit dangerous to chase it up and down every month or so. And so, you know, in the big picture, we said, you know, $58 billion, yes, it's true that a persistent flatter curve would have a small net drag on carry, and, you know, we're not immune to that, so there is a little bit of pressure as a result of that, if it is persistent at this level throughout the year. But, you know, we continue to grow our loans and our deposits, and, you know, against that, there's a mixed bag of lower for longer. So while we may not have a tailwind of higher rates, we also may not have the same kinds of pressures that we would see on, you know, on betas necessarily. And, you know, while lower long-end rates may be a net small drag in the short-term on earnings, there's just a credit on the balance sheet, and, you know, you could argue a patient's bed and lower rates for longer may elongate the cycle. So net-net, there are pluses and minuses. I would say there may be some pressure as a result of that, if it's persistent, but it's modest.

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

Hi. You mentioned consumer deposit growth is outperforming. We get average consumer deposits of over 20 billion year over year. So those are the numbers. I just, I was hoping for a little bit more on the why, and to what degree does that reflect your build out of branches? How is that deposit growth going? How much of this is related to digital banking? And then how much would be due to simply a perception that you have superior strength? I know that came up during the CEO hearings, the IMS study thing, that you get a benefit due to a perception of being too big to fail. Thanks.

Yeah. So, look, I would say there's lots of different opportunities for people to get insured deposits. So, you know, we'll come back to the third point. But, you know, all of that plays a piece. So you'll recall that we built, you know, a large number of branches following the financial crisis as we, you know, identified our position in New Market in California and Florida and Nevada and the like. And so we do have a decent portion of our branches that are still in their maturation phase. And so we're definitely seeing, you know, some growth in deposits there. I also, you know, firmly believe, and we've talked about it many, many times, that we've been investing, you know, consistently over the last decade in customer experience. Customer satisfaction in our consumer bank is at an all-time high and continues to increase consecutively. Digital products, new products and services, value propositions to our customers, convenience, New Market, all of which I think are, you know, increasingly important to our customers as well as obviously, you know, a number of other factors. So, you know, for me it's a combination of all of the above. And less so, you know, at this point a perception of a flight to quality, that people have a lot of choices. Year over year, I would say, you know, we're seeing deposit growth though exactly in line with our expectations. But this year the slowdown speaks a little bit more as far as we can see to higher consumer spend and a little bit less to do with deposit flows out to, you know, rate-seeking alternatives. So customers are voting with their business. They're bringing deposits to us. And I think it speaks to a combination of the investments we're making and also including branches.

So how much of the deposit growth is due to digital banking? And you quantify that or give us a ballpark figure?

Well, I can tell you that, and so it's not just about deposit growth as well. Remember it's also about investment assets and we talked about, you know, our digital offerings providing headwinds there. So I don't have a breakout for you. We can follow up. You know, it's decent but our branch growth, you know, there's a reason why we continue to believe in a physical and digital, you know, combined channel presence. Both are important. But we can get back to you.

Your next question comes from a line of Glenn Shore with Evercore ISI.

Hi. Thanks very much. On SEC services, I heard you loud and clear about the funding basis compression being part of the answer on revs down. Could you talk about the business exit? I wasn't aware of that, how big that is. And then flip to the better side, you also did mention about organic growth. We haven't heard too much since the big trillion-dollar win, but I know there's stuff going on underneath the covers. Talk about what type of business you are winning there.

Yeah. So on the business exit, this is, you know, it's the sort of feature of always talking about year over year. To me this feels like really old news. It was the U.S. broker-dealer exit that, you know, we talked about many quarters ago but obviously we're still on a -over-year basis for another couple of quarters going to see the impact of that on our revenues. It's about a 20, just over a $20 million -on-year revenue negative impact but it's, you know, relatively speaking old news in terms of the exit that took place last year. Lower market levels were about an equivalent drag on revenues. And then, you know, we are seeing, you know, solid underlying growth, but this is a very competitive, you know, environment. And as we are growing our assets, you know, our custody assets, and as we're growing and winning new mandates, fees are under competitive pressures and it also depends on mix. So there's a bunch of factors going on. What we're focused on is, you know, for both of these businesses that the long-term growth opportunities are, you know, very big and the organic growth and the underlying businesses are performing well. And even with these revenue pressures, we're focused on continuing to drive efficiencies and these are, you know, good ROE businesses, you know, above mid-teens.

Appreciate

it. I'm sorry, can I just make one more comment? Mike, I didn't say this on the digital space, but, you know, I think it's important as we think going forward that, you know, as we think not just about our digital assets, but digital account opening and that as being, you know, a feature of how we're attracting new accounts, 25% of checking production, 40% of savings production, now able to be open digitally. So increasingly digital will be a driver, but we will get back to you with the mixing.

Sorry. Cool. Mary Ann, just one quick qualifier on the seven-hour marathon the other day in D.C. Besides finding out Jamie's a capitalist, that's shocking news. One of the risks that I think that the group talked about was in the private credit markets and non-bank lending, and I just wanted to get a little qualifier of that. I'm pretty sure you didn't mean the exposure JP Morgan has to those. It's just more risk being taken, but if you can just expand on that, that would be helpful.

Yeah, so for sure the comment is more about the overall risk in the environment and not about our risks to, you know, those sectors. And our risks are all the things that we've always told you about which are relatively modest, relatively senior, well-secured, well-diversified. We look at, you know, losses under a variety of stress scenarios that are manageable. The comments are really about, you know, the percentage of leverage lending or the percentage of some of our businesses that have now been taken outside of the banking market. And while, you know, we wouldn't say necessarily that that's systemic, being not systemic and suggesting that there won't be problems are two different things. Not all non-banks are situated similarly, so there are some healthy-driving, you know, well-capitalized, well and responsibly-run companies, and there are some others who may not be standing at the end of another downturn. So the real question for all of this business that is migrated outside of banks is, you know, how much of it will be unable to be rolled over, refinanced, you know, on the same terms and with the same prices as it is now. So it's not about us, but it's about understanding that, you know, we would want to be able to be there to support and intermediate risk in these markets going forward, but for a variety of reasons, whether it's structure, whether it's capital-equity pricing, you know, that may not be as easy as it sounds in a downturn for portions of that market.

Yeah, so as I just said, just take the big numbers, put those growing, so obviously regulators keep an eye on it, and without particularly worried about it, and just to give you some facts, the banks, there's a 2.3 trillion, the banks have the, generally, the senior piece at the A piece, about 800 or 900 billion, then institutional investors, some of them are quite bright, you know, these are life insurance companies, funds, et cetera, own the B piece, which is about 900 billion, and there's 500 billion, which they call direct, and think of these as large funds, for the most part, large funds, some are very capable, very bright, they have long-term capital, and the institutional piece that I mentioned, a lot of it is CLOs, and I know that people worry about that, but if you actually look at the CLOs, there's more equity of the CLOs, they're more funded, and both the direct piece, the CLO piece, is more capital, permanent capital, and so the system is okay, it's just getting bigger, and it's more outside the regulated system, and it should be something that should be watched, but it's not a systemic issue at this point.

The next question comes from the line of Betsy Grossick with Morgan Stanley.

Hi, good morning. I had a question for Jamie. Jamie, in the shareholder letter, you mentioned, because of some significant issues around mortgage, that you are intensely reviewing your role in origination servicing, and holding mortgages, and the odds are increasing that we will need to materially change our mortgage strategy going forward. Could you give us some color and context for that statement, and what kind of things you're thinking about there?

Yeah, so if you look at the business, I mean, it is a very, very, it is costly. You know, you have 3,000 federal and state origination of servicing requirements. It is litigious. If you just look at history, you can see that, and it's becoming, huge non-banks are becoming competitors, and they don't have the same regulations, the same requirements, either servicing or production. So you're having that issue. Servicing itself is a hard asset. So we just want to, we know it's an important thing for a bank. We also want, and also standardized capital, since a lot of banks are constrained by standardized capital, it's a capital pot, far more than it should be, if you look at it, relative to the real risk of bed and holding mortgages. So we just want to have our eyes open, look at that, go through every piece, and structure it in a way that we're very happy going forward. We don't mind the volatility. We don't mind staying in the business. But you've got to look at that and ask a lot of questions about whether banks should even be in it.

Okay, and then separate topic, but just a question I wanted to ask, because I got a couple of questions on it yesterday. The whole group of CEOs was asked, who do you think could succeed you? Would a woman or would a person of color succeed you? And I don't think you raised your hand. And just wanted to understand why and just hear from you. Why you answered the question that way.

Yeah, so what I should have just said is that we don't comment on or speculation on succession plans. It's a board-level issue. It's not something you do in Congress where you play your hand out in Congress. But also I was confused by a question likely without a timetable. So we have exceptional women, and my successor may very well be a woman, but it may not. And it really depends on the circumstance of the time, and it might be different if it's one year from now versus five years from now. So that's all that that was. I think a bunch of people were kind of confused and saying what does the word likely mean and all this stuff like that. So I mean it's been going out of proportion to other several people on the operating committee who can succeed me.

Thanks, I appreciate that. Because that's the answer I expected you were going to give, but wanted to hear it from you. So I appreciate that,

thanks. You're welcome.

Our next question comes from the line of Stephen Chubok with Wolf Research.

Hi, I just wanted to follow up on the remarks on the mortgage business. You know we did see a healthy decline in the REZE mortgage loans. And Mary Ann, I know you spoke at Investor Day of the balance sheet optimization strategy which could drive more growth in securities versus loans. I'm wondering is that what's really driving the slowdown that we saw in REZE loan growth and maybe more broadly how we should think about core loan growth or sustainable pace of core loan growth in 2019?

Yeah, so mortgages, you know, and 2018-19 are the epicenter of it for mortgage. So the market itself is smaller year on year. It's about 15% smaller because notwithstanding all of the discussion about lower rates, they're still higher year on year than they were this time last year. So that obviously is having an impact and we're down similarly. So we've added about $6 billion of core mortgage loans to our portfolio. But against that, as you saw last year, we did a number of loan sales and we did another sale again in the first quarter. And that speaks to optimizing the balance sheet. So we're trying to take loans off of our balance sheet, core loans off our balance sheet, and sell them if we can reinvest in agency, MBS, and non-lab based assets that have better capital liquidity characteristics. So it's going to be a little bit harder to look at a trend. You're going to need to look at things gross. So we are originating high quality loans. We are adding a number of those to our portfolio. We're distributing based on best execution as that would go. But we will continue to optimize our balance sheet.

Very helpful. And just to follow up for me on CCAR, sorry, the federal visa document recently highlighting the changes to the loss models this year, including some higher card and auto losses in the upcoming exam. I'm just wondering how does that inform the way you're thinking about capital return capacity? And are you still confident in that sustainability of the 75 to 100% net payout as well as the 11 to 12% CT1 target?

Yes. So I didn't hear the second part of the question on losses, which losses were up this year that you were mentioning. But here's what I would say.

The card and auto losses.

Yes. So I applaud transparency for sure. And we love to be able to get more detail as we think about the way that the Fed models losses for our portfolios. And we've been observing that over time. Necessarily it's the case that the Federal Reserve models are typically less granular and less tied to our specific risks necessarily because they're industry wide. Net-net, it doesn't change our point of view that as we're at .1% CT1 right now, so arguably a little bit above the high end of our range, and continuing to grow earnings that we ought to be able to, you know, distribute a significant portion of earnings. But we always invest in our businesses first. So, you know, we are growing our businesses as responsibly as we can. We're adding branches, we're adding customers, we're adding advisors. We're adding, you know, across our businesses. But to the degree that we have excess earnings, we'll continue to distribute them. And the ranges that we gave you at the end of February, nothing's changed.

Next question comes from the line of Brian Klein-Hansel with KBW.

Hi. Good morning, Miriam. Quick question. I know you mentioned that the increase in MPLs within wholesale was, again, idiosyncratic, but last quarter there was also an increase, and it was five credits last quarter. Is there any way we could give more color as to specific drivers in there? I know you said in the past that you're expected to normalize, that you're off a low base. I got that, but I mean, just a little bit of additional color perhaps?

Yeah. So the color is there is really no color, which is to say if you were to go back over the course of the last, you know, eight quarters and take oil gas energy releases out, you would have seen, you know, quarters where reserve bills were close to home and other quarters where there are $100 million and 50 million. So there's always been, you know, the propensity for there to be one or two or three or four downgrades. The thing we look for is whether or not, as we look at the portfolio of facilities we have, whether we're seeing, you know, pressure on corporate margins and free cash flow, and whether we're seeing that broadly across the, you know, sectors and companies we're banking, and we're just not. So, you know, it's not to say that we aren't paying close attention to real estate given where we are in the cycle. It's not to say we aren't paying close attention to retail, but, you know, the color is there is no real color, that these are genuinely a handful of names across a handful of sectors, as was true last quarter. And even if you look quarter over quarter over quarter, that there's no trends to call out. And it, you know, we have a large wholesale lending portfolio. These are extremely modest in the context of that. And remember, every quarter, like we talk about a few because, you know, it's non-zero, but we downgrade and upgrade hundreds of facilities every quarter. And it's not just downgrades, it's upgrades, and they're approximately of equal measure. So, you know, we're looking very carefully at it. We understand why people are questioning, concerned, and these are cyclical businesses in the cycle of time, but we're not seeing it yet.

Okay. And then a separate question in the mortgage banking. Let's say gain on sale margins were at a high point over the last five years this quarter. Was that something in the market, something with the rates, or was there a one-off impact in that number this quarter?

So, you may recall that we did a mortgage loan sale last quarter and realized – and there's geography. In the home lending business, when we do these mortgage loan sales, because we're match-funded, net-net there's very little P&L. But there's – last quarter there was a loss in the NIR and an offset in break funding in LAR. This quarter there's a gain. So, you've got a loss last quarter, a gain this quarter, both small, but nevertheless that's driving the majority of the production margin going up. But in addition, if you just strip all that noise out, which is not material, but nevertheless, you know, significant quarter over quarter, we are seeing better revenue margins on, you know, better pricing.

Okay. Great. Thank you.

Your next question comes from the line of Gerard Cassidy with RBC.

Good morning, Miriam.

Morning.

Can you share with us – obviously you've got your de novo branching strategy moving forward. And what have you guys discovered and how long does it take for the branches to reach break even and then eventually get to your desired return on investment numbers?

Yeah. So, you know, we're really, really excited to be able to open these branches in these markets and serve more customers, you know, across the United States. But when you talk about branches, you know, you are talking about investment for, you know, the long term and when I say long term, multiple years, decades. So, with respect to the new markets that we're entering, these are extremely nascent investments, the branches in many cases we haven't even broken ground on. However, that said, you know, early indications, very, very early indications are, you know, strongly positive. We're seeing a lot of excitement in the market. We're seeing new accounts and production a little better than we would have expected at this very early stage. On the whole, you see branches break even over several years and, you know, mature in terms of, you know, deposits and investments and relationships, you know, closer to 10 years but below that.

Very good. And then following up on some comments you made at Investor Day and I believe touched on today about technology spending. If I recall correctly, next year technology spending should be self-funding and stabilized at the level, just about where you are today. When you compare it to the past five years, what has changed where the growth trajectory of technology, nominal dollars has now kind of stabilized versus what it was like again in the past five years?

So I just want to reiterate something that I want to make sure you guys completely internalize, which is, you know, we believe given the level of spend and the continued efficiency we're getting out of each dollar spend that overall our net investment should be more flat going forward than they had in the past. But we will continue to look at every investment on its own merits. That said, we've been growing our technology spend and in particular we've been growing the portion of it that is invested in changing the bank and that runs the gamut from, you know, platform modernization and, you know, cloud to controls and security and customer experience and, you know, and digital R&D the whole lot. It's a large number and each year a lot of that, you know, a lot of those dollars that we've been investing roll off and we get the ability to re-decision and reinvest them. So, you know, this is not that we're going to be doing anything other than continuing to invest very, very heavily in the agenda and in particular in the technology agenda. It's just that each year, you know, we're going to make the right decisions and we'll continue to make the right decisions and we see that being flatter going forward than it has been.

Thank you.

And we're getting more efficient. So, you know, in the past the way that technology was delivered was, you know, very different and the more that we're in a modern virtualized cloud-ready, you know, way with new technologies, each dollar of technology is, you know, more productive.

Great. Thank you.

Your next question comes from the line of Al Alasazakis with HSBC. Oh,

hi. I've got a quick question and a follow-up basically. My question is on the treasury services. Year on year the growth going from double digit you just go to a 3% where apparently the volumes remain healthy but the margins started to deteriorate. I wonder how you feel going into the remaining of 2019, especially given that the trade talks are still ongoing and therefore volumes could actually be a bit more problematic. Do you still believe that we can go back to kind of double digit growth year on year for the remaining quarters? And my follow-up question is you talked about change the bank versus run the bank for IT budget. Can you give us a number just to get an indication of how much you're spending on innovation? Thank you.

Yeah. Okay. So first point on treasury services. Last year revenue growth was in double digit. You're right. This quarter 3% year on year. I mentioned earlier that, you know, for both of our wholesale businesses we happen to have basis compression between the funding spread that we provide to the businesses and pricing to clients. And so, you know, that sort of just given where rates have moved maybe a headwind this year as the segment results are reported. But for the company it's obviously net zero. The more important point is that organic growth underlying all of that balances and payments is holding up very well. And we do expect that to continue. So, you know, you will see, you know, margins may decompress, you know, on that. It's not speaking to deposit flows. It's not speaking to volumes. It's not speaking to escalating payout at this point. And we've talked about the underlying, you know, organic growth in the business. With respect to technology spend, you'll recall last year we were kind of 60-40 run the bank, changed the bank, and it's more 50-50 this year. So $11.5 billion of spend, about half and half. Thank you very much. Remember in the change the bank it runs the whole gamut from platforms and controls to, you know, customer experience, digital. Data, R&D. So it's the whole spectrum.

Your next question is from the line of Matt O'Connor with Deutsche Bank.

Good morning. I just want to follow up on the net interest income. And, you know, it came in a lot better than expected this quarter. Is there anything that's lumpy or one time that you'd flag? Because if you annualize it you're already above the full year target of $58 billion plus. And obviously there's day count drag this quarter. And I realize there's puts and takes with rates and balance sheet growth. But it seems like the guidance is conservative versus where you're at right now.

Okay. So we just saw you better in the first quarter. Two things driving it. One is small but nevertheless is, you know, arguably nonrecurring, which is we talked about the fact that overall in the company when we do these, you know, loan sales, net net there may be a more residual gain or loss. That resides in treasury and it was a small gain in the first quarter in NII. Call it $50 million approximately. And then in addition we talked in the fourth quarter about the fact that we were seeing the opportunity to deploy cash in short duration liquid investments that were higher yielding than IOER. That continued into the first quarter. So we did benefit from that. And it may or may not continue, but, you know, we're not necessarily expecting that to continue all the way through. So I would say that, you know, day count was a drag. As you look forward, risks and opportunities, you know, honestly, obviously there's a risk associated with the flat yield curve. Not big, but nevertheless, you know, net neutral to downward pressure or downward pressure if long end rates stay lower for longer. You know, as we don't have the tailwind anymore from higher rates and we continue to process the December rate hike, you could see, you know, more rates paid, you know, a little bit more into the second quarter. So there are risks and opportunities. We still think it's a decent outlook, but I don't think it's conservative. I think it's $58 billion straight down the middle at this point. The trouble with the yield curve is it can fluctuate, you know, dramatically over the short term and we shouldn't over interpret or over chase it. At this point, I think it's a decent estimate and we'll continue to update you.

Okay. And then just on the rate positioning of the balance sheet and the approach to adding security, are you thinking any differently going forward than maybe you were six weeks ago? You clearly seem more positive on the macro and obviously things can change there, but are you approaching the balance sheet management a little bit differently, given maybe a more positive macro outlook?

Well, so, you know, we only spoke to you most recently, about six weeks ago, so the sort of overall answer is, you know, no, not really. We expected at that point that we would have, you know, a patient fed. It turns out that the, you know, all the central banks, you know, are pointing to being a little bit more dovish, which could generally be constructive for the environment and for credit risk on the balance sheet. So obviously the curve being flatter is not sort of a compelling situation to add more duration, but there's natural drift in our balance sheet. So overall very little. We feel good about credit, the curve flat, and, you know, we'll continue to manage the overall environment and company as we see the economy unfold.

Okay. Thank you.

Your next question comes from the line of Erica Najarian with Think of America.

Yes. Hi. Good morning. I just wanted to follow up, Marianne, on the comments. In the backdrop for lower rates for longer, could you give us a sense on how you're thinking about your deposit strategy in retail and wholesale? In other words, I know you discussed some dynamics on pricing for the first quarter, but when do you expect competition to taper off, and do banks have room to actually lower deposit costs if the rate curve stays this way for a prolonged period of time?

So I'll just put the big contextual answer will always be the same, which is, you know, when we think about our strategy around deposits and deposit pricing, it is 100% driven by what we're observing in our consumer behaviors and what we're seeing in deposit flows. And so, you know, that's the environment that we look at to determine what's happening. And, you know, you've seen naturally over the course of the last, you know, couple of years as rates have been rising that, you know, we've seen flows of deposits to, you know, higher yielding alternatives, whether it's investments or whether it's, you know, more recently in CDs, and that may continue. We'll continue to watch that. It is our expectation that, you know, rates will be relatively stable from here in terms of the short end, and it's the short end that predominantly drives the sort of deposit pricing agenda. So, you know, even if the curve is flatter, as long as it's, you know, because the front end is stable, I don't necessarily see, you know, deposit costs going down. But we're going to continue to watch our customer behaviors and deposit flows and respond accordingly.

Thank you. And my follow-up question is, we heard you loud and clear during your prepared remarks that the increase in wholesale non-accruals was idiosyncratic. And I'm wondering, as we look at a tick-up in non-accrual loans in the corporate and investment bank for the past two quarters, are we just in the part of the cycle where, you know, we're just growing from a low base, or should we expect a step down in the second quarter in non-accruals? And I'm wondering if you have any thoughts similar to how we saw last year.

There are a couple of situations that we would expect to maybe, you know, not be present in the second quarter, but I would say it's a feature more of the extremely low base. And so from that, any movements, whether they're up or down, are somewhat exaggerated. But, you know, we would continue to call the credit environment benign.

Great. Thank you.

Your next question comes from the line of Ken Ustin with Jeffery.

Thanks. Marion, just if I could ask you, you mentioned that you had some signs that the economy is strengthening, and I wanted to just ask you to, can you split that between just what you're seeing on the consumer side versus the wholesale corporate side in terms of, you know, the spend numbers are obviously still double-digit year over year. Some others have talked about a little bit of a slowdown. Yours are still staying quite good. And then there's this unevenness about just capbacks and spending and corporate side. So just, could you just kind of walk us through just where you're seeing pockets of relative strength and improvement?

Yeah, I mean, I think that, you know, as it relates to the U.S. in a particular, you know, looking at the U.S. consumer, you know, you've got all of jobs, more recently auto, housing, spend, all generally encouraging and holding up well and robust. And whether, you know, whether it's double digits or whether it's not, you know, we're continuing to see that and consumer confidence, by the way, which is still very high and, you know, has recovered from any sort of hangover from the equity market actions over the four quarters. So, you know, for us, U.S. consumer has always been strong and, you know, and confident. And even if we're not at all time highs in confidence, we're still very high. And generally, the data is, and even some like housing and also that hasn't necessarily been super strong is looking encouraging. And then on the global front, you know, it is a little harder. But as you look at some of the areas that have been struggling a bit and, you know, Europe would be a good example. You know, we would think that in the first quarter, sort of transitory factors around social unrest and politics and Brexit and trade seem to be, you know, fading a little. Business confidence has recovered a little. You know, businesses are still spending on labor, which is generally a good sign of underlying confidence, notwithstanding any kind of sentiment numbers. And, you know, even there, there's job growth, there's wage growth, there's, you know, helped by dovish monetary policy and general financial conditions having, you know, improved and eased. I think generally we feel optimistic across the consumer and the rest of the spectrum will be that it sort of green shoots on the wholesale side. So, you know, it's early, but it's what we were expecting to see. And so long may it continue.

Yep. And one follow up just on the investment banking business, you had mentioned that the pipelines look good. And obviously, we've seen the reopening of the ECM market. What your general outlook just again on that global point about the a bit on evenness between US and global. Just how do you feel about the advisory backdrop and obviously some big deals on the tape again today, but had it been a little bit of an air pocket here, partially probably because of the soft fourth quarter, but how's that side of the business feeling and sounding from a backlog perspective?

Yeah, so I would say that a couple of things. Obviously, there was some, you know, there were some deals that, you know, moved into the first quarter out of the second half of 2018. And so, you know, we did benefit from that. But just as a general market matter, you know, M&A is still attractive in a low growth environment, albeit a growth environment. Investors are still constructed. North America, which is by far the biggest market for M&A is still healthy. And so, you know, Europe was a big driver last year in Europe has seen a change. Drop off in volumes and wallet. And so that, you know, may may continue, although we have a pretty good position there. So I would say that the pipeline is down, but still M&A is attractive and people are looking for synergistic growth.

That makes sense. Thanks very much.

Your next question comes from the line of Jim Mitchell with Buckingham Research.

Hey, good morning. Maybe just a follow up on the NIA outlook. I mean, I think we've talked a lot about a flat curve. What kind of leverage do you have to pull if we were to see, you know, what some are speculating? It doesn't sound like you're in that camp, but if we were to get a rate cut, how do you manage that? How do you think the balance sheet reacts and how do you react to a rate cut over the next 12 months?

Right. So the market, which is usually more, you know, I'm going to say pessimistic, but more more in that camp than us is still only expecting an ease at the end of the year. So we are not, by the way, as you point out. So I think for 2019 NIA outlook, you know, it's not a clear and present danger. Obviously, you know, we have on the way up on rates been over indexed to short end rates. And so clearly if we were to have an ease, it would have an impact on our NIA. If we felt generally that that was the direction that the economy and rates were going in, then, you know, it might change our view on how we position the balance sheet. But right now, the Fed is on pause right now. That's constructed for, you know, corporate profit margins constructed for credit and, you know, generally constructed for how we're positioned on the balance sheet.

Do you feel like you have room to, you know, I guess extend duration to kind of protect NIA and NIM if that were to happen?

Yes. Yes, we do. Okay. All

right. Thank you very much.

Your next question comes from the line of Saul Martinez.

Hi. Good morning. I wanted to follow up on Matt's question on sort of idiosyncratic items in the quarter and lumpiness. This is obviously a pretty strong quarter from an earnings standpoint. And, you know, earnings well ahead of my estimates and consensus, especially in CCB. But there weren't a lot of obvious non-core items, you know, really called out. So, Mary Ann, can you just comment on, you know, the sustainability of the results and whether there's, you know, some idiosyncratic things that weren't necessarily called out during the call? You mentioned corporate cash deployment revenues were really high relative to, you know, historical levels there. So are there any sort of idiosyncratic items that call into question how sustainable the results are?

So first of all, just sort of big picture. First of all, you know, really high I think is a bit of an overstatement. Higher I think is fair. No, not really. If there were, you know, we would have called them out. There are a few little things. So, you know, I'm just going to call out a few of the things that we have mentioned. You know, we contributed $100 million to a foundation this quarter. You know, net-net legal was a very, very small but nevertheless positive this quarter. So, you know, there's a few little bits and pieces like that. But if you look at, you know, revenue performance, you know, we did a little better across the board than, you know, you all were expecting. We did better in IV fees and we gained a lot of share. We did a little better in markets. We did a little better in NII. So, you know, it was just a little bit of a wind at our backs sort of phenomenon. And then, I'll just add on, probably my best answer to you is as happy as we are with the performance, and we are, gaining share and continuing to see our underlying drivers, you know, propel us forward and the momentum we've got in our businesses, we are not making material changes to our full year outlook. So, you know, we'll still see how markets perform for the year. You know, we do still expect, as Daniel mentioned at Invest Today, that while, you know, we feel great about our positioning in investment banking in the first quarter, you know, coalition is still expecting the wallet to be down between 5% and 10% year on year. So, we do expect to gain share to help offset that. But, you know, last year was a record. So, you know, we haven't changed our full year guidance, you know, at all yet. We'll take this as a very good down payment to that. And, you know, if markets are constructive and, you know, while it expands, we'll benefit from that.

But

we're not leaving it across and changing everything.

That's helpful. I'll change gears a little bit. Any update on the stress capital buffer, what the Fed is thinking there and when you think we could see a little bit more details or a little bit more clarity on the proposal?

So, as best I know, you know, there is a chance, but not necessarily a probability, that there could be an SCB proposal for 2020 CCAR. So, you know, there's a meeting, a set of meetings or a meeting that's coming up sometime in the summer that I think might be, you know, an important moment. But we continue to work as constructively as we can to, you know, help, you know, understand the best way to bring stress capital together, point in time capital. But it's complicated. No, as we said, the most important thing is not to issue an SCB proposal that doesn't deal with the entire landscape of capital and look at it cohesively. So, we're talking about GC, we're talking about, you know, minimums, we're talking about bars, or we're talking about SCB. It's complicated. I'd say there's a chance, but not a probability, that we might have something in time for 2020 CCAR.

Got it. Thanks a lot.

Your next question comes from the line of Marty Mosby with Dining Sparks. Thanks for taking

the question. Hey, good morning. First, I want to ask, as we go into CCAR, now we're getting into that season again, one of the things that I think has an impact is that, you know, what we had was a significant 30% plus growth in earnings last year. So, if you kind of look at the plan for your capital going forward, and you think of holding payout ratios, let's say they were just constant, doesn't that kind of presume that you have kind of some wind behind the sails just to increase, you know, fairly significantly just off the increase in earnings last year?

I mean, yes, if you look at payout ratios, you know, obviously, sort of described as a percentage, then, you know, we said over the longer term, we'd expect to pay out, you know, in a benign environment between 75% and 100%, and, you know, analysts have estimates of 90% plus, and obviously, as earnings grow, that would be a bigger dollar number. But, you know, again, we'll always calibrate that relative to our opportunity to invest in our businesses, and, you know, it's capacity, not a promise, so, you know, we'll continue to see how the whole environment unfolds. But you're right. If, you know, as earnings continue to grow, you know, a strong payout ratio, we're above the top end of our capital range. So, you know, we are starting at a robust level, would be a higher dollar number yet.

And then, Jamie, I was just curious. I think one of the issues facing the industry, and just as we get pushed from the outside, is that the cycle is 10 years old, and my thought is that that internal time clock is just off this time. And so if we look at it, I think there's things that you're seeing, or Mary Ann, that you see inside the company that probably dispel that the recession is kind of, you know, on the horizon. So just wanted to get your comment on that as well as my follow-up question.

Thanks. Yeah, so I think I, sorry, go, Jamie.

Yeah, no, I was going to say, you know, someone showed a number the other day that Australia had growth for 28 years,

you

know, and just off-staying the notion a little bit that you have to have a recession. Now, they've had a lot of backwind with their growth in Asia and stuff like that, but if you look at, you know, you look at the American economy, the consumer's in good shape, the balance sheet's in good shape, people going back to the workforce, companies have plenty of capital, capital expenditures are still up year over year, you know, a little bit less this quarter than last quarter. Capital is being retained in the United States. Business confidence and consumer confidence are both rather high, not at all time peaks, rather high. So, you know, you could just easily, it could go on for years. There's no law that says it has to stop. You know, we do make a list and look at all the other things, you know, geopolitical issues, you know, lower liquidity. So there may be a confluence of events that somehow, you know, causes a recession, but it may not be in 2019, 2020, 2021. You know, obviously at one point, though, you know, it'll probably, it'll probably be something and, you know, I think the biggest short-term risk could be something going wrong with China, the trade issue with China. So I just wouldn't count them having to be a recession in the short run. I agree. Thank you. In the short run. Thank you.

The question comes from the line of Andrew Lamp with Society General.

Hi, morning. Thanks for taking my questions. So my first question is on the end of period loans. So if we look across the board, it looks like there's some contraction down the quarter to quarter basis of about three to four percent. And I was just wondering if you if you saw that as a one quarter issue relating to what happened in Q18. And if you can give some color maybe on the quarters ahead, speaking to the company CEOs, whether you see growth reemerging again.

Yes. So quarter on quarter, you know, and I think I mentioned a couple of these things, but, you know, we across our businesses for a variety of reasons on an end of period basis, loans are down. So like stepping through them, the first one that I would point out is mortgage. And we just talked about that, I think, earlier in the call, which is, you know, we continue to originate mortgage loans. We continue to distribute them and portfolio them. But we did do a loan sale, which is part of the discussion that we've been having with you about optimizing our balance sheet. We did a sale, you know, at the end of the quarter. So that's impacting our mortgage loans in the CID. And one of the reasons why we call out core loan growth X the CID isn't because we don't consider CID loans core. It's because they are just by their nature, oftentimes, you know, more episodic and lumpy. And so we did see, you know, a large funded syndicated loan at the end of last quarter, which was fully syndicated, you know, into the first quarter. You know, and then in our other businesses, in asset wealth management, a bit of seasonality, a few pay downs in card seasonality. So it's a sort of combination of factors, but I would say two drivers, CID and home lending, CID on sort of large syndication, home lending on a loan sale. Going forward, we'll continue to, you know, to optimize the loan versus security part of our balance sheet, you know, as best we can for capital and liquidity purposes. But, you know, just underlying core business demand for bank balance sheet lending, you know, I look at the middle market space and say we're still seeing solid demand. It is in our investment areas and our expansion markets and specialized industries, but we're still growing that portion of our loans in the single digits year over year.

Great. Thanks. So my following question is on. There

are going to be other areas where we just won't grow loans. You know, I mean, you know, in commercial real estate, you see loan growth is much lower. It's very competitive. Stress has gone down. We continue to, you know, provide, you know, financing and funding for our core loans, but we're not going to chase it down. And similarly, auto.

Sure. Okay. Thanks. So my following question is on CLOs. So I understand Japanese institutions are big buyers of US highly rated CLOs. But a few weeks ago, the Japanese FSA introduced some new rules saying that there had to be five percent risk retention by US issuers in order for the Japanese institutions to buy them. So I'm just wondering if you're if you're seeing yet any change in demand from Japanese institutions and likewise on the other side, if there's any change in behavior from US CLO issuers in terms of trying to integrate five percent risk retention.

That is a great question. The answer I'm going to give you is not that I'm aware of at this point. But I'll have to follow up with you. Jamie, are you aware? No. Sorry, Andrew, we'll come back to you. Not that I'm aware of, but that, you know, it's a good but nevertheless quite detailed question.

Okay. Thanks.

Thanks.

There are no further questions at this time. Thank you, everyone. Thank you for participating in today's call. You may now disconnect.