JP Morgan Chase & Co.

Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's third quarter 2020 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, Jennifer Piepsak. Ms. Piepsak, please go ahead.

Thank you, operator. Good morning everyone. I'll take you through the presentation which, as always, is available on our website and we ask that you please refer to the disclaimer at the back. Starting on page 1, the firm reported net income of $9.4 billion, EPS of $2.92, and revenue of $29.9 billion with a return on tangible common equity of 19%. Included in these results are $524 million of legal expenses primarily related to the resolution of legal matters announced last month.

My career path is not conventional. You know, being a singer-songwriter, most people don't think that's going to be a steady job. So I found myself in a lot of difficult situations, and that's when I started thinking I really have to learn how to run a business, not just play good music. One of the most useful tools about WGU is you're not just a tuition-paying student. It's me participating in something that's bigger than me. And I think that's the beauty of good marketing, is creating something that's authentically you and allowing people to plug into it.

ScoreMaster is a fast, simple solution to a better credit score, more online privacy, and greater control of your money. Did you know the average person can add 97 points to their credit score but aren't aware of it? They don't even know how to get these points. Our average member adds 61 points in just 20 days using ScoreMaster. That could save you $10,000 in interest on a car loan and over $100,000 in the life of the average mortgage loan. And ScoreMaster is the only credit management system that gives you a spending and payment plan to help you add more points to your credit score. And if you already have a good credit score, this feature shows you how spending could affect your score and how to prevent losing these hard earned points. Plus, we don't just show your credit score and provide alerts. We're the only ones to give you a personalized plan with action buttons to add points. Our patented action buttons allow you to communicate directly with your creditors and even your financial institutions to dispute errors, ID fraud, and more. No more mailing letters and no more long hold times. We also help protect you and your loved ones. Our $1 million whole family fraud and scam insurance covers your entire family in your household at a much lower cost than the competition. And by the way, have you Googled your name lately? You may be shocked by how many websites expose and sell your private information. Use Privacy Master to easily request the removal of your information to stop these sites from selling it permanently. all with the push of a button another way we beat the competition our money manager feature finds your bank accounts so you can link them without searching we also have instant statements and action buttons to ask questions fix problems and reverse unrecognized credit card charges directly with your financial institutions score master it only takes one minute to enroll so get started today

Overall for the quarter, while we're still in a very uncertain environment, our underlying business fundamentals performed quite well. So I'll just touch on a few highlights here before getting into the line of business results. The CIB continued its strong performance with IB fees up 9% and markets revenue up 30% year-on-year, and we had record revenue in AWM up 5% year-on-year. On deposits, While we expected to see some normalization in our balances, instead we saw another quarter of growth, with average deposits up 5% sequentially, and notably we moved into the number one spot in U.S. retail deposits with 9.8% market share, gaining 50 basis points of share year-on-year. On the other hand, average loans were down 4% quarter-on-quarter, primarily on revolver paydowns from our wholesale clients. With that, let's turn to page two for more detail on the third quarter results. We recorded revenue of $29.9 billion, which was flat year on year. Net interest income was down approximately $1.2 billion, or 9% on lower rates, partly offset by higher markets NII and balance sheet growth. And non-interest revenue was up $1.2 billion, or 7%, primarily driven by CIB, including higher banking and markets revenues, as well as net securities gains in corporate. Expenses of $16.9 billion were up approximately $500 million or 3% year-on-year on the higher legal expenses that I already mentioned. This quarter, credit costs of approximately $600 million were down $900 million year-on-year, primarily driven by modest reserve leases, which you can see in more detail on page 3. We released approximately 600 million of reserves this quarter, primarily on runoff and home lending and changes in wholesale loan exposure. Charge-offs across our portfolios remain relatively low, and in fact, we're down slightly year on year and quarter on quarter. While we could see an uptick in charge-offs over the next few quarters, given payment relief and government stimulus already provided, we don't expect any meaningful increases in charge-offs until the second half of 2021. As you can see at the bottom of the page, our updated base case reflects some improvement from last quarter. However, the medium for longer term is still highly uncertain, in particular as it relates to future stimulus. And so we remain heavily weighted to our downside scenarios, and with reserves of $33.8 billion, we're prepared for something worse than the base case. And now turning to page four, I'll provide a quick update on what we're seeing in our customer assistance programs. You can see here that the vast majority of cars and auto customers have exited relief. And so what's left in deferral is primarily in home lending, including 11 billion of owned loans and 17 billion in our service portfolio. And in terms of what we're seeing with our customers that have exited relief, approximately 90% of accounts remain current. Now turning to balance sheet and capital on page five. We ended the quarter with a CET1 ratio of 13%, up 60 basis points versus last quarter, on earnings generation and lower RWA, partially offset by dividends of $2.8 billion. And it's worth noting that we have over $1.3 trillion of liquidity sources available to us across HQLA and unencumbered securities. Now let's go to our businesses, starting with consumer and community banking on page six. CCB reported net income of $3.9 billion and an ROE of 29%. Revenue of $12.8 billion was down 9% year-on-year, driven by deposit margin compression and lower card NII on lower balances, partially offset by deposit growth and strong home lending production margins. Deposit growth was 28% year-on-year, up over $190 billion. largely on lower spending and higher cash buffers across both our consumer and small business customers, as well as organic growth. Fine investment assets were up 11% year-on-year, driven by both net inflows and market performance. Overall, consumer customers are holding up well. They have built savings relative to pre-COVID levels and, at the same time, lowered debt balances. With regard to digital adoption, early signs suggest the increased customer migration to digital will persist. In fact, nearly 69% of our customers are digitally active, and that's up three percentage points year-on-year and accelerating. And quick deposit now represents more than 40% of all check deposits versus 30% pre-COVID. Moving on to consumer lending, starting with home lending, total originations were down 10% year-on-year driven by correspondence However, consumer volumes were up 46% year-on-year, and notably more than half of consumer applications were completed digitally, twice the level of the first quarter. In CARS, while net sales were down 8% year-on-year, spend continued to improve throughout the quarter, and in the month of September, sales were down only 3% year-on-year, reflecting the lowest decline since March. Retail, which is a significant portion of overall spend, was a bright spot. reaching double-digit year-on-year growth in the third quarter, largely driven by card-not-present transactions. And then in auto, record originations for the quarter of $11.4 billion were up 25% year-on-year. Total CCD loans were down 7% year-on-year, with home lending down 15% due to portfolio runoff, and cars down 11% on lower spend, offset by business banking up 83% due to PPP loans. Expenses of $6.8 billion were down 4%, predominantly due to lower marketing investments. And lastly, credit costs of $794 million included a $300 million reserve release in home lending and net charge-offs of $1.1 billion driven by card. Now turning to the Corporate and Investment Bank on page 7.

Real Cowboys Customize and Save with Liberty Mutual.

Hey Tex, can someone else get a turn?

CIB reported net income of $4.3 billion and an ROE of 21% on revenue of $11.5 billion. Investment banking revenue of $2.1 billion was up 12% year-on-year and down sequentially off an all-time record quarter, and we maintained our number one rank in IB fees year-to-date. The quarter's performance was largely driven by our equity capital markets business, which saw an uptick in IPO issuance driven by a strong equity backdrop with stocks trading at or near all-time highs. In advisory, we were down 15% year-on-year, largely impacted by the muted M&A announced volumes in the first half of the year. However, we saw a surge in M&A activity this quarter with announced volumes returning to pre-COVID levels as companies began to shift their focus from day-to-day operations to more strategic and opportunistic thinking. Debt underwriting fees were up 5% year-on-year, but down 21% sequentially, as we saw investment grade activity return to more normalized levels from the record volumes we saw in the second quarter. The leveraged finance market continued to recover, with high yield spreads approaching pre-COVID levels and some notable acquisition financing deals closing. We maintained our number one rank in overall wallet and were the leaders in lead left across leveraged finance. In equity underwriting, fees were up 42% year-on-year, resulting in the best third quarter ever, primarily driven by our strong performance in IPOs and follow-ons. In terms of the outlook, we expect fourth quarter IB fees to be roughly flat versus a strong quarter last year and down sequentially. However, if valuations remain elevated, we could continue to see momentum in capital markets. Moving to markets, Total revenue was $6.6 billion, up 30% year-on-year. While activity continued to normalize with spreads, volumes, and volatility reducing from the elevated levels of the first half of the year, the performance was strong throughout the quarter and across products, reflecting the resilience and earnings power of this franchise through a broad range of market conditions. Fixed income was up 29% year-on-year against a strong third quarter last year, driven by a favorable trading environment across products, notably in commodities, as well as elevated client activity in credit and securitized products. Equities was up 32% year-on-year on continued robust client activity in equity derivatives, as well as a recovery in prime balances and a solid performance in cash. Looking forward, it's important to remember that 4Q19 performance was very strong, making for a difficult year-on-year comparison, and obviously forecasting markets performance remains challenging in this environment. Wholesale payments revenue of $1.3 billion was down 5% year-on-year, driven by deposit margin compression, largely offset by balance growth, as well as a reporting reclassification in merchant services. Security services revenue of $1 billion was flat year-on-year, where higher deposit balances were offset by deposit margin compression. Expenses of $5.8 billion were up 5% compared to the prior year, largely due to higher legal expense, partially offset by lower structural and volume and revenue-related expenses. Now moving on to commercial banking on page 8. Commercial banking reported net income of $1.1 billion and an ROE of 19%. Revenue of $2.3 billion was flat year-on-year driven by deposit margin compression offset by higher balances and fees and higher lending revenue. Gross investment banking revenue of $840 million was up 20% year-on-year on increased debt and equity underwriting activity. Expenses of $966 million were up 3% year-on-year. Average loans were up 5% year-on-year but down 7% quarter-on-quarter due to declines in revolver utilization by C&I clients and lower origination volume in CREs. Deposits of $248 billion were up 44% year-on-year and 5% quarter-on-quarter as client balances remain elevated. Finally, credit costs were a net benefit of $147 million, including a $207 million reserve release and net charge-offs of $60 million. Now on to Asset and Wealth Management on page 9. Asset and wealth management reported net income of $877 million with pre-tax margin of 31% and ROE of 32%. Record revenue of $3.7 billion for the quarter was up 5% year-on-year as growth in deposit and loan balances along with higher management fees and brokerage activity were largely offset by deposit margin compression. Expenses of $2.6 billion were flat year-on-year. and credit costs were a net benefit of $51 million, primarily due to reserve releases. For the quarter, net long-term inflows of $34 billion were positive across all channels and driven by fixed income and equity. At the same time, we saw net liquidity outflows of $33 billion, AUM of $2.6 trillion, and overall client assets of $3.5 trillion, up 16% and 15% year-on-year, respectively. were driven by net inflows into liquidity and long-term products, as well as higher market levels. And finally, deposits were up 23% year-on-year, and loans were up 13%, with strength in both wholesale and mortgage lending. Now onto corporate on page 10. Corporate reported a net loss of approximately $700 million. Revenue was a loss of $339 million, down a billion dollars year-over-year, driven by lower net interest income on lower rates, including the impact of faster prepays on mortgage securities, partially offset by $466 million of net securities gains in the quarter. And expenses of $719 million were up $438 million year-on-year, primarily due to an impairment on a legacy investment. Now let's turn to page 11 for the outlook. You'll see here that our full year outlook for 2020 remains in line with what I said at Barclays. We expect net interest income to be approximately $55 billion and adjusted expenses to be approximately $66 billion. And while we don't have anything on the page for 2021 and we're not planning to do Investor Day, we'll share more color with you on the outlook in the first quarter of next year. So to wrap up, even though recent economic data has been more constructive than we would have expected earlier this year, There remains a significant amount of uncertainty, and so we continue to prepare for a broad range of outcomes while focusing on serving our customers, clients, and communities through this time. With that, operator, please open 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 1 to be re-entered into the queue. Our first question comes from Matthew O'Connor of Deutsche Bank.

Good morning. Hello. So I think one of the key questions on investors' minds right now is how will banks grow revenue kind of medium-term here as we think about lower for longer rates. And I was hoping you could just talk about how you think about managing a company if rates stay very low for a long time and how you can grow revenue. And obviously, year-to-date, the revenue has been very good, up 4%. And if you could just weave in the branch expansion that you alluded to in the comments as part of that answer, that would be helpful. Thank you.

Sure. So in terms of how we think about the revenue outlook for 2021, first of all, it's early and we'll come back to you in the first quarter with more details. But it is true that if we think about the NII outlook, that that will be under pressure relative to 2020, and I can give more detail on that. Also, we are on pace for record revenue in markets and investment banking, and so that will be a tough compare. Having said that, we're not going to change the way we run the company because of what might be temporary rate headwinds. And we see significant franchise value in the growth that we're seeing in the deposit base. And with that, branch expansion, we are continuing on our plans in branch expansion. I think almost 120 branches open in our expansion markets. We'll do more than another 150 so far this year. We got approval to enter 10 additional states, which will ultimately put us in all lower 48. So we continue with the branch expansion and remain very excited about it with those new branches, in most cases, performing well above the original business case.

Can I just add to give you a little bit of longer-term view? There's not one single business we're not adding bankers, countries, products, digital. We're growing security services and cash management services. We're adding, we're growing the Chase Wealth management business. We're adding private bankers. We're adding products and asset management. And we kind of look through all the things. I kind of call them the weather. We just keep on growing. The branch expansion is one example of that. We never stopped doing that. We never stopped getting credit card products. We never stopped growing digital home lending products. And we'll be doing that for the next decade. And, of course, you'll have all these ins and outs from what I call the weather, NAIs, spreads, margins, markets, et cetera. But the goal is always the same. You grow the business to serve your clients around the world.

And then just as a follow-up, Jen, you'd said that you'd elaborate on the net interest income. I didn't know if you meant now or you're going to wait until January for that in terms of the outlook for next year and some of the puts and takes.

Sure. So there, I had said at Barclays that the current run rate was a good place to start. So $13 billion is a good place to start. And for 2021 – reflects the impact of the rate environment and some normalization in markets NII. But from there, you know, balance sheet growth and mix should be supportive throughout the year. And so for the full year of 2021, you know, my best view at this point would be $53 billion plus or minus. But yeah, we'll sharpen our pencils on that and continue to provide updates. But right now, full year, $53 billion.

Our next question is from Glenn Shore of Evercore ISI.

Hello there. Hi, Glenn.

So, good morning. So, I guess the reserve release was definitely driven by mortgage prepay and runoff, so I get that. But NPAs were still up 18% quarter on quarter. I wonder if you could talk about what drove that. maybe comment on commercial real estate specifically. It would be appreciated. Thanks.

Sure. So the reserve release, as you said, was largely on portfolio runoff and changes in exposure in wholesale, so not a reflection of a change in our outlook. And then the increase in non-accrual loans on the consumer side is mortgage, and it represents the customers that have come out of forbearance and are not paying. And so as you saw on that slide, the payment deferral slide, about 90% are still current. The other 10% have now been reflected in the non-accrual exposure. So that is all mortgage. And then the increase in non-accrual on the wholesale side was just a few name specific Downgrades which are in sectors you would expect as you just said You know retail related real estate and oil and gas and then more broadly on on commercial real estate I'll just share that we feel adequate reserve for for what we're facing But if you look at rent collections as an example overall with the exception of retail between 85 and 95 percent and then even retail is in the month of September was about 80%, had recovered to about 80%. So still a lot of uncertainty there, but we feel adequately reserved.

Okay, I appreciate that. Maybe one on asset management. You've been doing great. I don't need to ask on your specific business. But in the past, you've spoken about potential interest in participating in industry consolidation. We saw some of that happening lately. Can you just talk, remind us about the parameters of what you would and might not be interested in doing as a wealth management bank?

Well, since we have you all in the line, our doors and our telephone lines are wide open. We would be very interested in reducing the OECD consolidation of the business. But we're not going to be more specific. The system, the technology, the business logic, the ability to execute. There are a lot of issues that will determine whether something makes sense for us in the

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

Hi. Hey, Jen and Jamie. That was some comment. You said you do not expect much higher charge-offs until the second half of next year, and that's even with the higher NPAs. So, what are your assumptions behind that, Jen, as far as specifically when the forbearance actions, you know, run their course, and, Jamie,

policy actions that might be embedded in that expectation okay so i'll just start mike with um first of all the increase in non-accrual was on mortgage and when you look at the ltv on those the loans of value on those loans that's that's what is embedded in how we're thinking about the um what charge-offs will look like in the near term they're still very healthy ltds on those loans So really, when we talk about losses really emerging in a significant way, not until the back half of 21, we're talking about CARDS. And just given the amount of stimulus and payment relief and just support in the system, we haven't seen the delinquency buckets begin to fill up. And we charge 180 days past due in CARDS. So that is primarily just a timing issue as it relates to CARDS. We could see increases in charge-offs in the next few quarters. you know, on the wholesale side or maybe here and there on the consumer side. It's just that the meaningful change in charge-offs we don't expect until the second half of 2021.

And Mike, about policy, first of all, I wouldn't say that policy is determinative here because this is unprecedented times. And what we're saying is that policy will matter and will skew the odds in favor of a better outcome. So I think the policy, obviously the Fed's doing what it can to keep markets open, but the policy on the fiscal side is to have some kind of continuation of unemployment insurance and PPP. Those are the two most vulnerable areas. So just maximize the chance that we'll have better outcomes. And I do think that over time, intelligent return to work. I caution people, remember, 100 million people go to work. every day so the complete focus is on the 50 million who don't go to work but the 100 million go to work it's rather safe there's a lot of examples where you have to do this social distancing and the cleaning and all the very things like that that it may be safer than being home in your community and so but the getting back to work is a little bit important because you look at cities and travel and a whole bunch of stuff, there are a lot of people who are under a lot of stress and strain who won't be able to survive another year of complete closed down. So the other policy is a nuanced, rational, thoughtful, return to the office, done properly, which will help all those businesses support the big office towers and buildings and stuff like that. And those two things will maximize the chance of a good outcome. They don't guarantee the chance of a good outcome.

And I know this is a tough question, but you're in the middle of the stress test part two. When all is said and done, Jamie or Jen, where do you think these charge-offs go as a percentage of the global financial crisis? You have to have – I know you have scenarios, but where should we be thinking? Is it like half the GFC level, same GFC level, twice the GFC level? What are you guys thinking in the back of your mind?

After saving with customized car insurance from Liberty Mutual, I customize everything. Like Marco's backpack.

It's a very difficult question to answer. It's very different, of course, because the GFC was heavily mortgage-related, and this will probably be less so. We also, our portfolios are in... significantly better shape coming into this, whether it's mortgage or card. But just given the amount of uncertainty about where this could go, we still have 12 million people unemployed. You know, I think it's very difficult. I don't know, Jamie, whether you would add.

It's very hard. I agree with you, Jen. It's very hard to say. And it depends on the outcome. Again, we look at the good case, the medium case, the relative adverse case, and the extreme adverse case, and we There the answers are completely different, and we don't know the future. So it's hard to predict what it's going to be. But our reserves are prepared for a relative adverse case, which is equal to the roughly equivalent to the CCAR extreme adverse case that we just got, roughly. Again, it's very hard to compare apples to apples in these things.

Our next question is from Erica Nigerian of Bank of America.

Hi, good morning. I'm going to ask the two questions that I often get from investors that are hesitant to dip their toe back into bank stocks. And the first is, and Jen, this goes back to your earlier comment. The one question I get on credit quality is, did stimulus and policy redefine cumulative credit losses lower for this cycle? In other words, I think Jamie said change the outcome. or do you think it just delayed the realization of these losses?

So I think it's difficult to know. I think the purpose of it was to change the outcome, not just delay the losses. But it's difficult to know. People have sort of described it as a bridge, and the question as to whether the bridge will be long enough and strong enough to bridge people back to employment and bridge small businesses back to normalcy. So I think it remains to be seen. As Jamie said, we're obviously preparing for it to not necessarily change the outcome, obviously, because we've built significant reserves. So we're prepared for it to be a delay rather than change the outcome.

Got it. And my follow-up question, and perhaps if I could direct this to Jamie, this is a bit of a follow-up to Matt's earlier question. But investors are essentially worried on the other side of the credit recovery about what the interest rate environment may imply for, quote, normalized ROTCE. And as you think about what you mentioned to be, quote, weather considerations, you know, what prevents J.P. Morgan from going back to that 17%, 19% ROTCE that you posted in 18 and 19?

Well, you know, you guys have to forecast the future. It's hard to tell. I think negative interest rates are a bad idea and will probably force, over time, the banking industry to shrink, which means they'll be buying back stock and doing other things with their capital. But we're able to handle low rates, and we can have decent returns at low rates. I think it's a bad long-term strategy. I also think it's a bad idea for you all to assume you're going to continue like that forever. I mean, we had massive global QE in the last go-round, and we didn't have inflation. But I remind people, a lot of QE was a round trip. The Fed and the central banks bought securities. That created deposits for the banks. The banks were forced to put deposits in the central banks. So it was not new inflationary fiscal stimulus. Fiscal stimulus, which has been extraordinary around the world, is by its nature inflationary. And so we don't really know the outcome of that. But my view, what I tell investors, we're going to build our businesses day in and day out, regardless of interest rate environments, et cetera. And we have plans to adjust interest rate environments. We can not do certain things. We can charge for certain things. We can do a whole bunch of different stuff. But the services are still required. Moving money around the world, trading for people, underlying securities, helping manage their money. And we'll be okay. We'll work through it.

Our next question is from Betsy Grasick of Morgan Stanley. Hi, good morning. Can you hear me?

Yes. Hi, Betsy.

Hi. I had two questions. One was, I'd be interested in understanding how you are threading the needle between the your outlook here for reserves and the potential to buy back stock. You've got the reserve level high with a base case outlook for unemployment that's above where we are today for the next six months, it looks like, or even longer. And your capital build is obviously continuing to increase here. How should we think about that? Could we imagine that your buyback could kick off before reserve release happens? And would you release reserves before the net charge-offs start to come through, like you mentioned, in second half 21? Sure.

So first of all, on stock buybacks, obviously we are restricted here in the fourth quarter. we are hopeful that the Fed will see what they need and get what they need in the resubmission to give them the confidence to revert to a more normal distribution framework under SCB in the first quarter. So that's obviously the most important hurdle for us. And then if we have excess capital, and the reserve decision and the buyback decision are not related to one another. We are always going to make sure that we have our best estimate of losses that we're facing considering the uncertainty as well. And then, of course, our capital hierarchy would always look to grow our businesses first and foremost. But if we have excess capital and if we do not have regulatory restrictions, you could see us buy that stock as early as the first quarter. And like I said, that wouldn't necessarily be related to a reserve release. The other thing on potential reserve releases, we obviously need to see the economy continue to deliver on the base case to give us the confidence that that is what we're dealing with. But I would just say that, remember, there was a capital relief, a partial capital relief on CECL bills So when you release reserves, only about half of that actually falls through to capital.

Jen, could you talk a little bit about the slide three where you've got the base case outlook for unemployment and just give us a sense as to what's driving this base case outlook for unemployment in 4Q20? at 9.5% and then 2Q21 at 8.5%. They're obviously above where we are today. And could you help us understand how you're thinking about flexing that going forward? What would change those assumptions?

Yeah, that's like largely a timing issue with when we actually run the models for the reserve. That's not necessarily, as you rightly point out, reflective of our economists' latest outlook. So we would, as we progress through the fourth quarter, use the latest outlook for the base case. But then again, as Jamie said, we look at a number of different scenarios. And depending upon what we think we're dealing with in terms of the uncertainty, we may continue to heavily weight the downside scenarios or maybe even more heavily weight the downside scenarios. We have to see. So if you look at the weighted outcome of all of the scenarios that we use to drive the reserves, it is, you know, we are prepared for a double-digit unemployment, peak unemployment level, but it would start with the revised base case, shall I say, from our economists.

Yeah, and kind of just putting it in perspective, it's a little bit of capital. I mean, we have extraordinary amounts of capital, $200 billion. We've got $1.3 trillion of liquid assets and securities You know, and the way you should look at it is the $200 billion in the next eight quarters will earn PPNR, like pre-tax, pre-provision earnings, roughly $80 billion, give or take. And we don't know exactly what that's going to be. So with the $80 billion, you know, if things get better, it'll be more than that and take down reserves. If things get worse, it may be about that or a little bit worse than that, we'll have to put up $20 billion. Even if you put up the $20 billion, in my view, that won't emerge in a quarter. That will emerge over several quarters. which means you can pay the dividend, buy back stock, have plenty of capital, and still be very conservatively capitalized. And that's the reality of it, okay? Forget all the other stuff you read, and we're conservative. We like to be conservative regarding loan law services and capital, so we'll be patient, but we have tremendous amount of wherewithal to do both when the time comes. And I hope we're allowed to do it before the stock is much higher.

And the $20 billion that Jamie references, we talked about the extreme adverse scenario last quarter.

So you can think that that's the $20 billion that Jamie's referencing, if that is what... Yeah, and that $20 billion is unemployment of 12% to 13% that goes up into the better part of six quarters. I mean, it's really extreme adverse. It's far worse than the CCAR case we just got.

Our next question is from John McDonald of Autonomous Research.

Morning. Jan, you mentioned that next year you have some tough revenue comps. Can you talk about the notion of expense flexibility at J.P. Morgan? Underneath the surface of flattish expenses, where are you on saving money from digitization and structural change, and how does that give you flexibility against where you'd like to be investing?

Sure. First of all, it's early. We're still working through next year, so I will certainly refine the guidance in the first quarter. But as it relates to expenses, we will, and you mentioned digital, that's one, we will continue to deliver on structural expense efficiencies as we have been for the last several years. There will, as we do expect the world to normalize a bit. There will be opportunity in volume and revenue-related expenses, but we are going to continue to invest. And so, you know, there will be puts and takes and we'll provide, you know, more detailed guidance in the first quarter.

Okay. And as a follow-up, on capital, can you talk about the notion of reducing your SCB and maybe your G-SIB surcharge footprint over time. I think you've commented that there's potential to do that. What is the path and the route to doing that, and how do you feel about the prospects for those two things getting better over time?

Sure. So I'll start with GSIB, which is that we do expect to be in the 4% bucket at the end of this year, but it is not effective immediately. And so we will have 2021 to manage that back down. What I would say there is that, you know, with the Fed balance sheet at these levels possibly expanding, that makes managing the GSIB back down quite challenging. So in the absence of recalibration, which we remain hopeful, about managing that back down will certainly be challenging, but not impossible, but will certainly think about any impact on our client franchise before we do anything. So we have some time there. We could see recalibration. That would help, but no doubt that that's a challenge. On SCV, I'd start by saying it's scenario dependent, of course. So all else equal, we do think that we have opportunities to manage down the SCV, and that can include transferring securities from AFS to health and maturity, and then some other mechanical issues on our side that we're confident will all things equal reduce our SCV. But again, it's scenario dependent. So all that being said, John, I would just say that our expectation at this point over time is that our target capital level of 11.5% to 12% should be unchanged over time.

Got it. Thanks.

Our next question is from Ken Oosden of Jefferies.

Thanks. Good morning. Jen, Jamie mentioned earlier that you've got $1.3 trillion of cash and securities. It didn't look like you really changed the size of the investment portfolio this quarter, but you did make a bunch of moves into held to maturity from available for sale. And I'm just wondering, you guys have talked about expectation that deposits might settle down, but they're continuing to grow. And so what can you do at this point and going forward with starting to move some of that cash into things that might at least earn some more to protect the NII going forward. Thanks.

Sure.

I just think that we're not going to do anything to protect the NII. We have $300 billion of cash we can invest today, and that becomes $400 billion. We're not going to invest in stuff making 50, 60, or 70 basis points so we get a little bit more of NII. We're going to make long-term decisions for the company and And if you're an NII and didn't get screwed a little bit, so be it. But we don't want to be in a position where we lose a lot of money because you made investments in five- or ten-year securities, which you'll lose a lot if rates go up. So we're not protecting NII.

Yes, so as a principle matter, it's important to remember that we manage the portfolio across multiple dimensions, not just optimizing NII, as Jamie said, and we're thinking about capital protection at these levels. But just in terms of the activity that you saw in the securities portfolio, we've been very active. We added about $160 billion through the end of Q2. In Q3, we were active buyers and sellers because in Q3, we saw attractive selling opportunities, which made economic sense for us. So just to Jamie's point, so you give up some NII, but it just made economic sense for us. But we were also buying in the third quarter. We also focused on optimizing liabilities with the excess liquidity. So you'll see that our debt is down nearly $40 billion from last quarter. So then just in terms of the transfer to health maturity with the significant growth in the securities portfolio, it just made sense from a capital protection perspective. It's also helpful for SED, as I mentioned, and these are high-quality core holdings.

Yep, and fully agree on that duration point, Jamie.

Follow-up just on, if you think about the fee businesses and some of the— You guys should be raising the question about why moving something to health and maturity reduces SCV. Like, is that a rational thing? I don't think it is, but that's what it is, and that's what we're going to deal with, is why we can drive down SCV. Yep.

On duration, the tenure has backed up a bit over the last couple of weeks, and so we'll remain opportunistic, but we have added at these levels.

Great. And then just one follow-up on just fees in general. You've got the consumer fee businesses that are still trying to get back to where they were a year ago. And then last quarter, Jamie had made the comment about cut it in half in trading, and it wasn't anywhere close to that, which was positive. It's still quite, quite good. And just how you think through just pushes and pulls between fees as you look forward in terms of How much better do you think the consumer can get from where it is, and how much, if any, are the institutional businesses over-earning relative to where they posted in the first half? Thanks.

Sure. So on consumer fees, you'll see that consumer fees recovered a bit in the third quarter. The decline there was both relief actions that we took, but also because of the higher cash buffers, that consumers are experiencing, that also impacts fees. And that's a good thing. So we'll take that. So that did recover a bit in the third quarter, but that will take time to get back to what you might consider normalized levels. And then on the institutional side, we did expect to see markets normalize in the third quarter. We did see that a bit, but not as much as we had thought when we were at second quarter earnings. And IB fees also continue to be very strong in the third quarter, exceeding our expectations for what we might have thought the second quarter. Looking forward, though, the fourth quarter is a tough compare. So we do expect markets to continue to normalize. And then on the IB fee side, our pipeline is flattish to what it was last year. It's still down a bit in M&A, but we did see M&A recover in the third quarter, and it's up in ECM. So, as I said, Plattish in the fourth quarter feels about right at this point.

Only two things are forever, love and Liberty Mutual customizing your car insurance so you only pay for what you need.

Our next question is from Steve Chuback of Wolf Research.

Hi, good morning. So, Jen, I was hoping you could speak to this expectations for loan growth across both the institutional and consumer channels. When do you anticipate we could begin to see balances inflect positively? And separately, just what level of loan growth is contemplated in the $53 billion NII guide that you provided for 21? Sure.

So, loan growth will be challenged, I think, for, you know, in the short term. On the wholesale side, yes. I think we'll probably tread water at these levels, but increasing CEO confidence with M&A activity and capital investment should be supportive of more normalized loan growth, but that may take some time. On the consumer side, we are seeing cards continue to revert to more normal levels, and so that will continue into 2021. But that could be offset by continued prepays and mortgage, so there will be puts and takes there. And then asset management, I think, will continue to see solid growth. So, you know, net-net, not significant loan growth, but mixed will be helpful because card growth is supportive of, you know, a mixed benefit on NII.

Thanks for that. And maybe a question for you, Jamie. You had alluded to the potential for charging for additional products and services to offset rate pressures. And was there something you could speak to some of the areas where you might look to potentially charge clients? And just philosophically, how you're handicapping the risk of client attrition if competitors ultimately don't follow suit?

First of all, I don't think it's going to happen, so I don't spend too much time worrying about it. But we have, as a company matter, gone through everything we do and how we do it and how we respond to negative rates. I'm not going to go through account by account, but like I said, a lot of these are necessary services. All the competitors, it's a competitive world, so I agree with you. If competitors don't do stuff, you'd have a hard time doing it. But I think you will see a lot of competitors respond to negative rates in a lot of different ways. So there will be an opportunity to do something like that.

Our next question is from Jim Mitchell of Seaport Global.

Hey, good morning. Maybe just a question on deposit growth. I think we've all been surprised at the continued growth. Can you just kind of talk to what you're seeing? It looked like we had further growth in September. Are you expecting this to continue? Is it sort of moving out of money markets into deposits? What do you think is driving the growth and do you expect to continue?

Sure. So there's no doubt that with the Fed being this active that there is significant excess liquidity in the system. We did think that we would see deposits normalized in the third quarter, both on consumer spending on the consumer side and then on the wholesale side, you know, in places like security services with asset managers holding cash on the sidelines. We didn't see what we thought we would. So, yes, we did continue to see deposit growth here in the third quarter. Going forward, I think that normalization is still very much a part of our outlook, except for that, given that the normalization is a bit deferred here, it will likely be offset by continued organic growth, perhaps more than offset by continued organic growth.

Right. Makes sense. And then maybe a follow-up on credit. I mean, I appreciate that we're not going to see charge-offs given where delinquencies are today, but what do you think, how do we think about delinquencies and what triggers you to either release or build I would imagine we'll see it before you would be making those decisions before charge-offs. Where do we see delinquencies? You've had very good experience so far in your core book, as well as the deferrals acting well. When do we – are we – I mean, it just seems very surprising that we haven't seen delinquencies tick up yet in any material way. When do you expect that, or is it really all dependent on sort of the goodwill of the government?

One of the reasons we haven't seen delinquencies pick up is because of the payment relief, but also the extraordinary support that has been provided through stimulus. So we'll probably see delinquencies pick up in the early part of 2021. We're not assuming further stimulus beyond the end of this year and how we think about reserves. So we do think you'll start to see delinquencies pick up early 2021 and then charge-offs in the back half of 2021. I think future stimulus would give us more confidence in the economy delivering on the base case. There's a lot of factors that we'll be looking at as we think about the right level of our reserves over the coming quarters, and delinquencies will be just one part of that.

Our next question is from Gerard Cassidy of RBC.

Thank you. Good morning, Jennifer. I may have missed this. I had to jump off for a minute on the call. But can you give us some color? You've spoken very well about what's going on in the consumer credit area. But when you go into the commercial side of the business, can you share with us the sectors that you're seeing the biggest challenges? And can you give us some color on the re-rating process that you're going through on those credits that are in trouble today and what kind of deterioration you're seeing in those specific credits in terms of possibly write-downs or revaluations of if it's collateral like on a commercial real estate loan?

Sure. So the sectors I think are ones that you would expect, airlines, lodging, restaurants, other T&E, real estate, oil and gas, and those continue to be the sectors under the most pressure. When you look at downgrades here in the third quarter, or not here in the third quarter, in the third quarter, we saw downgrades slow a bit because in the second quarter we saw significant downgrades just on the increased level of debt that companies were taking on. So we saw downgrades slow a bit in the third quarter, but we do expect downgrades to continue, particularly in real estate. And then elsewhere in wholesale, I would say CEO sentiment is is guarded but constructive.

Very good. And then as a follow-up, I know Jamie touched on interest rates and how you're very focused in growing your business in any rate environment. Could you give us some color? Inflation, if it does pick up and if we get a steepening in the curve, obviously Chairman Powell has indicated he's not going to move on rates for quite some time. But if we're looking in your third quarter of, let's say, 21, and the 10-year government bond yield is, let's say, 125 basis points, can you just give us some color? I know that's not your prediction, but what would that do for the margin in revenues if we were fortunate enough to see a steeper curve due to higher inflation?

It's a great question. I don't have the sensitivity to hand. Go ahead, Jamie.

Yeah, there's a disclosure we make in the 10Q that shows what would happen if rates go up 100 basis points. And I forgot the number, Jen. It's going to be like, I'm going to say a billion and a half dollars a year. But what's the long end is a piece of that, but the smaller piece. And that rolls in and compounds over time. But that's not the right way to look at it. You have to ask the why. You know, if you have an active environment, rates are going up, we're going to have more volume and more NII's. If you have stagflation by any chance, that's a really bad idea. So the why is more important than just the what here.

Our next question is from Saul Martinez of UBS. Saul, your line is open.

Please proceed.

Hello. Sorry about that. I was on mute. I wanted to follow up on an earlier question. I think it was from Ken on on partly on sales and trading. But you're tracking this year in sales and trading to a revenue of, you know, close to $30 billion. And if we go back to, you know, say 2010, you know, shortly after the crisis, it's been pretty consistently the annual revenues in, say, the $18 to $21 billion range. There's obviously a lot of volatility on a quarterly basis, but It's generally been in that range. So how do we think about or frame the range of outcomes as market conditions normalize? Do you feel like there have been changes in terms of either share or market structure that maybe allow you to have a larger revenue base and more revenues from those businesses than you have had historically, even as market conditions normalize, or is it just kind of too hard to tell. I'm just trying to think through because it obviously has a pretty big impact on your overall PPNR and revenue forecast going forward.

So I think that, I mean, as you know, we're on pace for a record year. So I think any compares are going to be challenging. And we do expect the market to continue to normalize. and that could be partially offset by share games, as you mentioned, but it is never a good idea to try to forecast markets even early in a quarter, never mind the year before. I don't know, James, if you've got anything.

I'd say, look, this is a ground war game. We've got a lot of tough competitors, and we're all building systems and stuff like that that can do a better job for them. almost impossible forecast short-term numbers in that.

Yeah, no, and I understand that. I totally, you know, get that and appreciate that. It's just that you're kind of tracking to a revenue that's about 50% higher than what you've done in the post, you know, any year in the post-crisis environment or to that, somewhere to that effect. So, you know, just that delta between the current run rate and what has been a more normalized run rate is pretty you know, pretty sizable. So, you know, I'm just trying to get, you know, any color in terms of kind of thinking through kind of a range of outcomes for, you know, where that could settle in. Not necessarily in a given quarter, per se, but just, you know, more on a normalized basis, you think about the business as a whole. Yeah.

First of all, I'd say our trader did have done an exceptional job. But I would say the second quarter will not be typical, and the third quarter probably won't. Hopefully, it might be better than it's been in the past couple of years, but we don't know. But remember, the market itself, total bonds, total assets under management, total credit products, total mortgage products, total global products, that's growing over time. So there is an underlying growth. It spreads itself around and competition moves around.

Our next question is from Andrew Lim of Societe Generale.

Hi, good morning. Thanks for taking my questions. So the first one, you've got 33.8 billion of reserves. I guess that's in line with an extreme adverse scenario. I know you can't tell what's going to happen going forward given many different variables, but we've already seen some of that being released. So I was wondering if we had the base case scenario pan out over the coming years? How much of that $33.8 billion should we expect to be released back through the P&L and over what time period?

So I'll start by saying we're not reserved for the extreme adverse scenario. So we are reserved for something worse than the base case because we have put heavy weights on scenarios that are worse than the base case, but we are not reserved for the extreme adverse scenario. And the release this quarter was, first of all, very small in the grand scheme of things and was almost exclusively related to portfolio runoff or exposure changes, not anything to do with a change in our outlook. And then if the economy delivers the base case, you will see reserve releases from us in the coming quarters, but it is very, very difficult to try to tell you how much and when.

I mean, surely you've got like – you can make it like an estimate of your reserves if you did assume the base case going forward.

And I guess it's the difference between what you are – I've already said that if the Fed base case happens, we're probably something like $10 billion over-reserved.

$10 billion over-reserved?

Over-reserved. Or $10 billion for today? No, no, $10 billion over-reserved. Got it. Understood.

I mentioned it earlier. It's just important to remember that there were capital modifications to CECL, so only about half of that ends up in capital.

Yes, of course. Got it. Understood. Thanks for that. And then just a follow-up question on your CC1 ratio. You had a nice pickup there. This quarter, obviously, you've had strong earnings, but you've also had a near 2% reduction in misrated assets. I was just wondering if you could give a bit more color on the moving parts there and how you expect that to pan out in the coming quarters.

That's largely – the RWA reduction was largely on revolver paydowns. So I wouldn't expect that kind of pace to continue. We will continue to build if we're not allowed to buy back stock, but we will continue to build capital on earnings.

But probably less so on RWA reduction.

Our next question is from Charles Peabody of Portalis Partners.

Yeah, good morning. Question about your rate sensitivity to the long end. If I look at a time series going back to the second quarter of last year, your rate sensitivity has increased every single quarter to a steepening yield curve. In other words, your NII would improve the more the yield curve steepened at the long end. So my question is, was that an intended action or residual effect? Because I did notice that you've been adding fairly significantly to your MBS portfolio.

Yeah, so Charles, I don't know precisely the answer to that, but it's largely going to be, I'm assuming, on the growth in our deposit base, which then has supported the growth in the securities portfolio.

Okay. It's substantial. I mean, if you go back to the second quarter of last year, you had a $600 million potential increase, and the second quarter of this year was $1.7 billion. Anyway. My second question is related to the legacy impairment charge. Can you give us some color around that, what sort of asset class that was in, and is it over a half a billion, under half a billion?

So under a half a billion of what remains, and it was a legacy investment that we took an impairment on, and it's not meaningful in the grand scheme of things.

Our next question is from Brian Klein Hansel of KBW.

Great, thanks. Just a quick question to start with. Maybe as you think about kind of what you've been doing for a customer accommodation as it relates to the pandemic, I know there would have been a few waivers first quarter, second quarter of this year, but what kind of customer accommodation was happening in the third quarter? Is it kind of a clean number from a fees perspective in the third quarter, or is there still a certain level of accommodation going on?

There is probably, I don't actually know, Jason and team can get you the details. It's less than what it was in the second quarter. And it's more, what we've made in terms of the reduction in fees is more a function of cash buffers.

Okay. And then is there a way that you can give an update on the IB pipeline, but on a geographic basis? I mean, as we've seen negative headlights around COVID kind of around the world, is there different pipelines building in different regions.

Thanks. There's less of a regional story, but from a product perspective, overall we're flattish to last year, but M&A is a little bit lower. Importantly, though, we're covered quite nicely in the third quarter, and ECM is a little bit higher, but overall flattish.

And we have no further questions at this time.

Okay. Thanks, everyone.

Thank you for participating in today's call you may now disconnect.