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spk03: Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's second quarter 2021 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, Jeremy Barnum. Mr. Barnum, please go ahead.
spk14: Thanks, operator. Good morning, everyone. And before we get going, I'd just like to say how honored I am to be on my first earnings call, following in the footsteps of Marianne and Jen, both of whom taught me so much during my time working for them, and whose shoes will be very difficult to fill, but I'm gonna try. So with that, this presentation is available on our website, and please refer to the disclaimer in the back. Starting on page one. The firm reported net income of $11.9 billion EPS of $3.78 on revenue of $31.4 billion and delivered a return on tangible common equity of 23%. These results include $3 billion of credit reserve releases, which I'll cover in more detail shortly. Touching on a few highlights, combined debit and credit spend was up 45% year-on-year and, more importantly, up 22% versus the more normal pre-COVID second quarter of 2019. It was an all-time record for IVPs, up 25% year-on-year, driven by advisory and debt underwriting. We saw particularly strong growth in AWM, with record long-term flows as well as record revenue. And finally, credit continues to be quite healthy, as evidenced by our exceptionally low net charge-offs across the board. Regarding our balance sheet, the trends from recent quarters have largely continued. Deposits are up 23% year-on-year and 4% sequentially, and loan growth remains low, flat year-on-year and up 1% quarter-on-quarter, although we have bright spots in certain pockets and the consumer spend trends are encouraging. So now turning to page two for more detail. As I go through this page, I'm going to provide you some context about the prior year quarter because the year-on-year comparisons are a bit noisy. So with respect to revenue, the second quarter of 2020 was an all-time record for markets with revenue of over $9.7 billion, and we recorded approximately 700 million of games in our bridge book. With that in mind, revenue of $31.4 billion was down $2.4 billion or 7% year-on-year. Non-interest revenue was down $1.3 billion or 7% due to the prior year items I just mentioned, partially offset by strong fee generation and investment banking in AWM, as well as from card-related fees on higher spend. And net interest income was down $1.1 billion, or 8%, driven by lower markets on AI and lower balances in card. Expenses of $17.7 billion were up 4% year-on-year, largely on continued investments. And then on credit costs, going back to last year again, you will recall in last year's second quarter, we built $8.9 billion in credit reserves during the height of the pandemic, whereas this year we released $3 billion. So in this quarter, credit costs were a net benefit of $2.3 billion. And setting aside the reserve release, it's also worth noting that net charge-offs of just over $700 million were half of last year's second quarter number and continued to trend near historical lows. On the next page, let's go over the reserves. We released $3 billion this quarter as we grow increasingly confident about the economy in light of continued improvement in COVID, especially in the U.S. In consumer, we released $2.6 billion, including $1.8 billion in card and $600 million in home lending. And in wholesale, we released nearly $450 million. So this leaves us with reserves of $22.6 billion, which, as a result of elevated remaining uncertainty about COVID and the shape of the economic recovery, are higher than would otherwise be implied by our central economic forecast. Now moving to balancing and capital on page four. We ended the quarter with a CT1 ratio of 13%, down slightly versus the prior quarter, as net growth and retained earnings was more than offset by higher RWA across both retail and wholesale lending. This quarter also reflects the exploration of the temporary SLR exclusions, and as we anticipated, leverage is now our binding constraint. As you know, we finished CCAR a couple of weeks ago, and our SCB will be 3.2%, which reflects the board's intention to increase the dividend to $1 per share in the third quarter. Okay, now let's go to our businesses, starting with consumer and community banking on page five. CCB reported net income of $5.6 billion including reserve releases of $2.6 billion on revenue of $12.8 billion, up 3% year-on-year. Of particular note this quarter is the acceleration of card spend. And so while card outstandings remain lower than pre-pandemic levels, this quarter's trends make us optimistic. Total debit and credit spend was up 45% year-on-year, and more importantly, up 22% versus the second quarter of 2019. And within that, compared to 2019, June total spend was up 24%, indicating some healthy acceleration throughout the quarter. And travel and entertainment has really turned a corner, with spend flat versus the second quarter of 2019 accelerating from down 11% in April to actually up 13% in June. The rest of the CCB story remains consistent with prior quarters. Consumer and small business cash balances remain elevated, resulting in depressed loan growth. Overall loans were down 3% year-on-year from continued elevated prepayments and mortgage and on lower card outstandings, partially offset by strong growth in auto and the impact of PPP. Home lending and auto continued to have strong originations with home lending up 64% to $40 billion, the highest quarterly figure since the third quarter of 2013, and auto up 61% to a record $12.4 billion. Deposits were up 25% year-on-year, or approximately $200 billion, and client investment assets were up 36%, driven by market appreciation and positive net flows across our advisor and digital channels. And our omnichannel strategy continues to deliver, We are more than halfway through our initial market expansion commitment as we have opened more than 200 new branches out of our goal of 400, which have exceeded our expectations by generating $7 billion in deposits and investments. And we are planning to be in all 48 contiguous states by the end of the summer. Digital trends continue to be strong as retail mobility recovers at a faster pace than branch transactions, which are still down more than 20% versus 2019. Active mobile users grew 10% year-on-year to over 42 million, and total digital transactions per engaged customer were up 12%. Expenses of $7.1 billion were up 4% year-on-year, driven by continued investments and higher volume and revenue-related expenses. Looking forward, the obvious question is the outlook for loan growth, especially in cards. And we are quite optimistic that the current spend trends will convert into resumption of loan growth through the end of this year and into next. And while we wait, the exceptionally low level of net charge-offs provides a substantial offset to the NII headwind. Next, the Corporate and Investment Bank on page six. CIB reported net income of $5 billion and an ROE of 23% on revenue of $13.2 billion. IB fees of $3.6 billion were up 25% year-on-year and up 20% quarter-on-quarter, an all-time record driven by advisory and debt underwriting, leading to a year-to-date global IB wallet share of 9.4% and a number one ranking. In advisory, we were up 52% year-on-year, benefiting from the surge in announcement activity that has continued into the second quarter. Debt underwriting fees were up 26%, driven by an active acquisition finance market offset by lower investment grade issuance. And in equity underwriting, fees were up 9%, primarily driven by a strong performance in IPOs. The resulting investment banking revenue of $3.4 billion was roughly flat year on year due to the headwind of the prior year's markup in the bridge book. Looking ahead to the third quarter, the pipeline remains very strong. We expect M&A activity in the IPO markets to remain active, and while IVCs are likely to be down sequentially, we still expect them to be up year on year. Moving to markets, total revenue was $6.8 billion, down 30%, compared to an all-time record quarter last year. While normalization has been more prevalent in macro, overall, we ran above 2019 levels throughout the quarter on the back of strong client activity. of performing our own expectations from earlier in the year. Fixed income was down 44% compared to last year's exceptional results, but up 11% compared to the second quarter of 19. Equity markets was up 13% driven by record balances in prime, as well as strong performance in cash and equity derivatives where we matched last year's great results. Looking forward, While we expect normalization to continue across both investment banking and markets, and most notably in fixed income, the timing and the extent of the normalization is obviously hard to predict. Wholesale payments revenue was $1.5 billion, up 5%, driven by higher deposits and fees, largely offset by deposit margin compression. And security services revenue was $1.1 billion, down 1%, as deposit margin compression was predominantly offset by growth in deposits and fees. Expenses of $6.5 billion were down 4% year-on-year, driven by lower performance-related compensation, partially offset by higher volume-related expense. Moving to commercial banking on page 7. Commercial banking reported net income of $1.4 billion and an ROE of 23%. Revenue of $2.5 billion was up 3% year-on-year, with higher investment banking, lending, and wholesale payments revenue largely offset by lower deposit revenue and the absence of a prior year equity investment gain. Record gross investment banking revenue of $1.2 billion was up 37% from increased M&A and acquisition-related financing activity compared to prior year lows. Expenses of $981 million were up 10% year-on-year, driven by higher volume and revenue-related expenses and investments. Deposits of $290 billion were up 22% year-on-year, as client balances remain elevated. Loans of $2.5 billion were down 12% year-on-year, driven by lower revolver utilization compared to the prior year quarter, and down 1% sequentially. CNI loans were down 1% quarter on quarter, with lower utilization partially offset by new loan activity in middle market. And CRE loans were down 1%, but we saw pockets of growth in affordable housing activity. Finally, credit costs were a net benefit of $377 million, driven by reserve releases, with net charge-offs of only one basis point. And to complete our lines of business, On to asset and wealth management on page eight. Asset and wealth management reported net income of $1.2 billion with pre-tax margin of 37% and an ROE of 32%. Record revenue of $4.1 billion was up 20% year on year as higher management fees and growth in deposit and loan balances were partially offset by deposit margin compression. Expenses of $2.6 billion were up 11% year-on-year, driven by higher performance-related compensation and distribution expenses. For the quarter, net long-term inflows of $49 billion continued to be positive across all channels, with notable strength in equities, fixed income, and alternatives. AUM was $3 trillion, and for the first time, overall client assets were over $4 trillion, up 21% and 25% year-on-year respectively, driven by higher market levels and strong net inflows. And finally, loans were up 21% year-on-year, with continued strength in securities-based lending, custom lending, and mortgages, while deposits were up 37%. Turning to corporate on page nine. Corporate reported a net loss of $1.2 billion, Revenue was a loss of $1.2 billion, down $415 million year-on-year. And AI was down $274 million, primarily on limited deployment opportunities as deposit growth continued. And we realized $155 million of net investment securities losses in the quarter. Expenses of $515 million were up $368 million year-on-year. So with that, on page 10, the outlook. Our 2021 NII outlook of around $52.5 billion remains in line with the updated guidance we provided last month. But as you'll note, we've also lowered our outlook for the card net charge-off rate to less than 250 basis points, which, as I mentioned in CCB, provides a meaningful offset to the NII headline. And it's worth mentioning that the current environment makes forecasting NII, even in the near term, unusually challenging. So while $52.5 billion remains our current central case, you should expect some elevated uncertainty around that number, not only because of the ongoing impact of stimulus on consumer balance sheets, but also due to volatility coming from markets, among other things. And as a reminder, most of any fluctuation in markets NII, whether up or down, is likely to be offset in NIR. On expenses, we've increased our guidance to approximately $71 billion, driven by higher volume and revenue-related expenses. So, to wrap up, we are encouraged by the continued progress against the virus and the economic recovery that is underway, especially in the United States. Although we want to acknowledge the challenges that much of the rest of the world is facing, and we're hopeful that a global recovery will follow closely behind. Our performance this quarter once again showcases the power of our diversified business model as headwinds in NII from consumer delivering are offset by strong pre-generation across AWM and CIB and exceptionally low net charge-offs across the board. While we're proud of the performance of the company and of our people through the crisis, the competition in every business from banks fintechs, and others is as intense as ever. So, as we look forward to an increasingly normal environment, we are enthusiastically focused on competing for every piece of share in every market, product, and business where we operate and making the necessary investments to win.
spk06: With that, operator, please open the line for Q&A.
spk03: And our first question is coming from the line of Glenn Shore from Evercore ISI. Please go ahead. Your line is open now. Hi, Glenn.
spk15: Hi there. Hi, Jeremy. Welcome. Welcome to the party. Thank you very much. Question if I could. I apologize if it's a little multifaceted. But so, you know, even though we're getting some inflationary data and you're positively inclined on the economy as my rates sell, I'm not sure you want to opine on why, but let's talk about you kept the NII guide, I'm assuming because deposit growth is strong. Curious your thoughts on consumer payment rates staying at this elevated level, deposit growth staying at this elevated level, and then most importantly, if you're managing the balance sheet any differently, meaning you had been slow playing putting money to work. Rates are even lower now. Are you still slow playing putting money to work? I appreciate it. Thanks.
spk14: Yeah, thanks, Glenn. All right, so let's sort of take that in parts. So in terms of our NII guidance, so yeah, so we're reiterating 52.5 for the full year. So just to take your deployment point first, obviously rates are a little bit lower, long-end rates are a bit lower. The curve has flattened a little bit since we provided that guidance. But When we provided that guidance, we were reasonably conservative in our deployment assumptions for the rest of the year. So as a result of that, it's not really a meaningful factor, sort of at the level of precision that we're talking about here. In terms of the consumer side, as you say, obviously, it's really card is really going to be the big driver. So you heard us talking about payment rates, and you see the sequential growth in card loans. So We do believe that the sort of acceleration and the pickup and spend is going to translate to, you know, as I said, a resumption of loan growth in card. But we do think that pay rates are going to remain quite elevated at a minimum through the end of this year. So as a result, we don't really see revolving interest-bearing balances increasing meaningfully this year. And so as a result, that remains, you know, a headwind for the overall NII for this year, which is incorporated in the outlook.
spk15: Okay, and then in terms of managing balance sheet any differently in terms of putting money to work, it still concerns them on that front?
spk14: Yeah, look, I mean, I think, you know, you've heard us talk about this before, right? So our central case, from an economic perspective, is for a very robust recovery. And that's, you know, pretty much a consensus view between us, our research team, the Fed, et cetera. And that view is associated with higher inflation along the lines of the Fed's own targets for higher inflation. All those things together, you know, it's an outlook that's associated with higher rates, all else equal. And so in light of all that, we do remain happy to stay patient here. And, you know, if you look at our EIR disclosure, which you obviously won't see until you get the cue, but some of you guys have written about this recently, our overall sensitivities here are kind of in line with the industry. So when you consider kind of the tail type things that Jamie always talks about, the convexity of the balance sheet and various other factors, we do still feel that being patient here makes sense.
spk15: Okay. And just one quickie on on the recent both acquisitions and investments. And you or Jamie could feel free to take it. I'm curious on a big picture. Is it just coincidence that there's been five things in a very short period of time? And maybe if you want to expand on maybe Nutmeg specifically and why the change in terms of shying away from international expansion in the past and now... making a little bit bigger move in. I appreciate it. Thanks.
spk14: Sure, Glenn. So let me start with the international expansion point on the consumer side, because that's interesting. You've heard Jamie over the years talk about why it wouldn't really make sense to do international expansion and consumer when you think about that through the lens of a branch-based strategy. So if you imagine going outside of the U.S. and opening branches in other countries and competing with the incumbents, just from a branding perspective, from an operating leverage perspective, we've never felt that that was likely to be a successful strategy for us, and that hasn't really changed. The difference right now is the ability to do that digitally. So what's really particularly exciting about the international expansion narrative, both in the UK and now with our recent investment in C6 in Brazil, is the ability to kind of experiment a little bit. Obviously, it's a strategically compelling opportunity. Brazil, as you probably know, is like the third biggest consumer banking market in the world. But it's kind of fun to be the disruptor. And so I think for us, given our position in consumer banking in the United States, being in a place where we are actually the outsider disrupting through these kind of digital channels, We see it, among other things, in addition to being compelling financially, as a really good opportunity to learn and to challenge ourselves a little bit from the inside. So we're quite excited about that stuff.
spk06: All right. Thanks very much. Thanks, Glenn.
spk03: Our next question is coming from the line of John McDonald from Autonomous Research. Please go ahead. Your line is open now.
spk01: Hi. Good morning, Jeremy. I wanted to ask you about capital. You mentioned leverage is now the binding constraint, and Jen has previously talked about a 12% CET1 target. I guess, could you talk about the multiple variables that you're balancing as you guys decide what capital levels to run at? You've got a rising GSIB score, an SLR cushion that's shrinking, but maybe the rules get revised, and obviously an SCB that came down a little bit, but maybe you're hoping for more. How are you wrapping that all together into what kind of capital levels to target?
spk14: Yeah, it's a good question, John. And yeah, there are a lot of variables. So let me start by saying that in terms of the 12% target, it's not off the table is what I'll say about that. Meaning 12%, it's not necessarily, doesn't necessarily need to be higher. So for now, it's not off the table. But the element of time, i.e. when are we bound by what, matters quite a bit as you think about this. So just to go through some of the pieces, You've noted the G-sug point, so we're in the 4% bucket now as of the end of last year. That comes into play in 2023. We're currently operating in 4.5. As you know, that's quite a seasonal number, so it's still possible to get under 4.5 for the end of this year. But, you know, we have to acknowledge an elevated probability, I would say, of landing in the 4.5 bucket this year. But the four and a half bucket would be binding in 2024. And as you noted, in the meantime, we're bound by SLR. And we've been quite public about our views about these things, about the extent to which increasingly our capital requirements are driven by non-risk sensitive size-based measures, which were really designed, especially in the case of SLR, as backstops, which, you know, the Fed has acknowledged. So our priority, right, you know, and the Fed has talked about potentially addressing some of these things. We know we're waiting for an NPR and a SOLAR, but also they've said that a potential GSEV fix could come as part of the holistic implementation of the Basel III endgame. So there's a lot of things that are going to play out between now and some of those minimums becoming binding. And realistically, right now, we're going to be operating above 12% anyway in light of the leverage bound in all likelihood. So we're managing a variety of different factors, near-term, short-term, you know, preps, common, et cetera. And we're just going to try to be nimble about it as more information comes out over the next few quarters.
spk13: Can I just also make a supported point? We have tons of capital, $200 billion of CET1 $35 billion of preferred, $300 billion of long-term debt, only $1 trillion of loans, which is the riskiest asset we have, and $1.5 trillion of cash and marketable securities. But the underlying thing is there's just tons of capital in the system. I think one day people are going to look at it and say, why so much, particularly the liquid side.
spk01: Yep. And then a quick follow-up, Jeremy, on expenses. You revised the fiscal year 21 outlook upward a few times now. Could you give a little more detail on the business volumes and revenues that are driving this? And also, we hear a lot about inflation across the economy. Are we seeing broader inflation play a role in your company's expenses and outlook?
spk14: Yeah, so a couple things there. So yeah, As you note, we have revised up from 70 to 71, and the biggest single driver there is volume and revenue-related expense. Which is comp. It's comp, but it's other stuff too.
spk13: The comp, we're going to be competitive in comp no matter what it takes. Keep that in the back of your mind.
spk14: It is a little bit of comp. It's also transaction-related volumes. It's also marketing expense in certain pockets. So it's all the stuff that fits in the category of volume and revenue-related. And I think the point is, Obviously, we're all a little bit focused on the NII headwinds right now. But from an NIR perspective, you know, across markets, AWM, IB, CIB in general, and even pockets, you know, wealth management and CCB, we're actually outperforming the revenue expectations that were built into our prior expense guidance. So that's kind of the dynamic there. In terms of inflation, I would say that we're not seeing inflation in our actuals. But obviously, you know, your guess is as good as mine in terms of, you know, the future. But it would be reasonable to assume that that's going to be a little bit of a challenge to a greater or lesser degree, you know, if the economy as a whole is in a slightly higher inflationary environment. And we did probably include a little bit of that expectation in the 71 for this year.
spk06: Got it. Thanks.
spk03: Our next question is coming from the line of Ken Austin from Jefferies. Please go ahead. Your line is open now.
spk04: Thanks. Good morning. Jeremy, if I could just follow up on your points about capital and just how we should be thinking about the, you gave us clarity on the dividend and we know there's the 30 billion open authorization on the buyback, you know, again, just kind of, you know, fitting for the middle there. How do you balance just the magnitude of buyback you do from here versus the ongoing growth that we have in the balance sheet vis-a-vis what you just talked about as far as the limitations? Thanks.
spk14: Yeah, so, I mean, the answer to how we balance it is we talk about it a lot. We have a lot of smart people looking at it, trying to balance all the different constraints that we're managing. And I think, you know, Jen talked before, especially when it comes to, you know, the balance between our risk-based minimums and the SLR which, as you know, we can address with PREFs, about kind of the mixture of PREFs in common. So, you know, we're looking at that. I think RRP is helping a little bit on the deposit growth side, which helps a little bit with the management of SLR. But, you know, as I said previously, we're going to stay nimble there and use the tools at our disposal to try to strike the right balance between, you know, buybacks and PREF issuance, recognizing you know, that did over issuing preps, uh, potentially locks us in to, uh, you know, high cost preps that, uh, with low flexibility because of the five-year lockout. So there's a lot of balancing there and we're just, uh, staying involved as, uh, information potentially trickles out on, on the evolution of the rules.
spk04: Okay. And then just so then as far as how you guys will communicate, we'll just find out about the buyback on a quarterly basis, as opposed to you giving, uh, a more broad outlook of your expectations around buybacks, you know, as it happened more in the past. Is that fair?
spk14: Yeah, I think that's right, especially in the new environment that we're operating in from a buyback perspective now that it's not, you know, sort of an approved plan through CCAR, but it's rather just the overall $30 billion board authorization, given what I just talked about in terms of the need to stay nimble across multiple constraints. We wouldn't want to box ourselves in by speaking publicly ahead of time in terms of what we're going to do. And you know, obviously, our normal capital hierarchy. At the end of the day, we're always going to invest first and look at interesting acquisitions and pay sustainable dividend. And at the end of that, we'll look at buybacks in the context of all the other factors.
spk13: Yeah, we could probably give you a more definitive thing after they finish Basel III, which is now 10 years in the making. and SLR and all the updates, and then you'll have more certainty about how this operates going forward.
spk06: Okay. Thanks a lot, guys. Appreciate it. Thanks, John. I mean, Ken, sorry.
spk03: Our next question is coming from the line of Jim Mitchell from Seaport Global Securities. Please go ahead. Your line is open now.
spk05: Hey, good morning. Um, maybe just to follow up on the card business, um, you had 7% quarter of a quarter growth and balances, but I think your guidance was still a little cautious. Is that just being conservative? You're still not sure about the relationship between spending and balance growth, or how do we think about. The good quarter and sort of that cautious outlook.
spk14: Yeah. So I wouldn't use the word conservative. We've tried very hard in our outlook to give you central case numbers. So we're going to be wrong. but hopefully we'll be wrong symmetrically. So we really want to try hard to give you central case numbers that don't have baseless optimism or unnecessary conservatism in them. So the point that you highlight, the sort of apparent disconnect between the sequential increase in card loans and the relatively muted NII outlook is really just about pay rates. So we continue to see very elevated pay rates by historical standards really highly unusual as a result of some of the themes that we called out in terms of the strength of the consumer balance sheet. So as long as that's true and we're seeing sort of unusually low conversion of spend into revolving balances, that's going to be a little bit of an NII headwind until the consumer starts to relever, which we do think will happen. We just don't think it's likely to be a meaningful effect this year.
spk05: That's fair. And then on the charge offsets, that's always been a big benefit. I think if we look at delinquencies, both early stage and later stage, they kept falling throughout the quarter. Is there anything unusual this quarter where we saw a pretty big drop? Should we expect further declines in NCOs as the year progresses, given delinquency trends?
spk14: um yeah so i think on charge-offs you know i would just stick to the the updated card guidance that we gave um which is you know lower just saying that it's going to be below two and a half but again it's the same themes right like you know elevated cash buffers in consumers are resulting in you know exceptionally strong nco performance and sort of upside surprises in terms of people paying so They're sort of two sides of the same coin right now. Lower revolving balances, better NCOs, and then as we continue returning to normal, presumably in 2022, we should see both of those come back slightly to historical trends.
spk06: Right. Fair enough. Thanks.
spk03: Our next question is coming from the line of Mike Mayo from Wells Fargo Securities. Please go ahead. Your line is open now.
spk02: uh welcome jim hey jeremy welcome um i my question i want to follow up i think glenn asked jamie for the answer to this question so i'm going to try again are these acquisitions that you've done i count eight since december and the question is jamie you know what is the the strategy is the strategy i guess in some cases it's to disrupt a new market that jeremy said maybe it's to avoid cost maybe it's the scale across tens of millions of customers Or, and this is the real question, are you looking to connect some of these acquisitions like Nutmeg with, I can't even read all these, Kraft Analytics, Maxx, C6 Bank, Open Invest, 5.5 IP? Is the goal to somehow, you know, one plus one plus one to equal more than three as you introduce these acquisitions, these companies, these people to each other to create kind of like a 21st century digital banking storefront? or is that too much of a reach? What's the grand plan here?
spk13: A little bit too much of a reach, but there's a very smart analyst who said it was a thing of pearls, and I put it in that category. So asset management, Campbell, is just a managing lumber assets. Timber assets is going to be a great thing for asset management. 55 IP adds tax-efficient management to it there. Obviously, Nutmeg, and we're already doing the UK, will be linked together. You know, offering consumer digital products, both in deposits, small business, eventually lending and investments, global investments, et cetera, makes sense. C6 is another one. You know, Jeremy says it's a huge market. So, you know, we're looking at anything which has adjacencies. It could be data. It could be management. A lot of these are going to fill in, and some are a little bit more of a skunk works. So, you know, how we look at the retail digital overseas, we've got patience and time, and we're going to spend a lot of time to see if we can build something very different than we have in the United States. And so it's a little bit of everything. CX Loyalty, the travel company, again, if you look at that, we are only so large in the travel business. So think of this as enhanced services and products and capabilities to offer our clients, travel packages, et cetera, which we already, I forgot the number, I think we're the seventh largest travel company in the United States. And that doesn't include all the travel that goes across our credit card and debit card that's travel, but we aren't effectively the travel agent. And so it's a little bit of all of that. I'm thrilled we're doing it. You know, we're looking all the time. We're not going to, you know, we're not going to end up with a lot of wasted assets. But, you know, some of these things may not work out, but that will be okay.
spk14: Yeah. Mike, the only thing I would add is there's a couple of themes that to me come through some of the things that we've done recently. One of them is ESG. You see that especially in the AWM deals. And the other is just improving the customer experience, you know. whether it's through various FinTech deals or CX loyalty, customer experience is a key priority for us, and we want to have all the tools necessary to deliver that.
spk13: And equally important, we're putting a lot of money into building. We have like every quarter for the next two years, you're going to have new products and new services being rolled out across the company. I think it's just exciting and very good and more and more integrated, more and more simple to use, more and more customer-friendly, et cetera. And so we're doing a little bit of all of that.
spk02: Go ahead, Mike. My follow-up, as you talked about disrupting, I thought that was interesting, disrupting in the U.K. But since you wrote your CEO letter, Jamie, I mean, it's only gotten more competitive from the fintech and big tech and big retail and everybody else. And that's a question that comes up probably to everyone on this call. Are you going to be disintermediated over the next five years? Whether it's, you know, you know all the companies, but it just seems like they're ramping up that much more. You have an executive order from the White House. Maybe you have to share data. What's your current mark to market of the threat from outside of banking to your business?
spk13: I don't feel any different than when I wrote the chairman's letter. I think we have huge competition in banking and shadow banking and fintech and big tech and now Walmart. Obviously, there's always a change in landscape, but we also have a huge – we've got brands and capability and products and services and market share and profitability. I think some of these competitors are going to do quite well. I think a lot of them will succeed over time, but that's good old American capitalism. I'm quite comfortable. We'll do fine. I do think there's going to be a lot of people struggling in the banking business. I'm talking over 5 or 10 or 15 years. I think one day they're going to call, when they talk about shadow banks, they mean the banks who will be shadows of themselves.
spk14: We're working hard to make sure that we're offering services that are not disruptible because they're good. So if our clients are happy and we're providing them a great experience, then there's nothing to disrupt.
spk06: All right, thanks, Jeremy. Thanks, Jamie.
spk03: Our next question is coming from the line of Ibrahim Poonawalla from Bank of America Merrill Lynch. Please go ahead. Your line is open now.
spk00: Good morning, and thanks for taking my question. I guess just sticking with the digital strategy, we heard Jamie talk about multiple times around the lack of imagination that costs the banking industry in terms of either payments or buy now, pay later. And you talked about your international expansion. But again, going back to Mike's point, as shareholders of banks in the U.S., should the expectation be that banks will be fast followers of what fintech comes up with and replicating that, given the risk of cannibalizing your own sort of revenue set? Or do we expect or do you think we should expect more disruptive innovation coming from banks in the United States on consumer banking?
spk13: I think it's both. I mean, it's not an either-or question. And remember, a lot of these banks have done quite well, including Bank of America has done quite well in digital products and stuff like that. So when I talk about lack of imagination, I don't mean the whole company. I mean, when you look at some of these things, we could have imagined more of why they'd become a competitor down the road. So some of these competitors are quite good. I call it bobbing and weaving. They start with one little thing. They have products, they have services, they have eyeballs, they have customers, and they find ways to monetize it. So we've got to be a little more forward-looking in how they're looking at this strategy and stuff like that. But in our case, it would be a little bit of everything.
spk14: Yeah, and I would just say the whole, like, cannibalization and fast-following thing, you know, I think we've moved a little bit beyond that. Like, there will be times where we have the first idea and we're eager to lean in and innovate that way. There will be times when someone else has the first idea and we're eagerly copying it. But, you know, the whole, oh, we don't want to do this thing that makes sense for the customer because we might be cannibalizing our own revenues, that's a recipe to become a shadow of your form of service.
spk13: We have no problem cannibalizing our revenues. Just keep that in mind. We will do the right thing when the time comes. And sometimes we're a day late, a dollar short, but we'll do the right thing. And just when you look at the company, I mean, you look at, you know, we talk about SLR. I always get, you know, we talk about CISO and SLR. But look at the flows across this company. Look at the debit card, the credit card, the trading flows, the market share. That's what I look at much more than, you know, what are the ups and downs, the earnings this quarter because of CECL. I don't think that means anything for the future of the company. I mean, our bankers, our traders, our credit card, our debit card, our merchant services, our auto business, our digitization. It's doing pretty good. I mean, I read these reports. My God, the company is doing quite fine. Yeah. And we'd like to be a little critical of ourselves. I think when companies aren't, that's part of their failure. They should look at what they didn't do well and what other people have done well and have a really fair assessment of the competition. It is very large and it's going to be very tough. It does not mean that J.P. Morgan won't win. It just means their eyes are open.
spk00: And I agree. I think banks don't talk enough about client acquisitions and market share. So I agree with you there. Just as a follow-up, Jamie, very quickly, there's some questions around peak inflation, peak growth. I know you guys are very bullish. Compare and contrast how the world looks to you today versus back in 2011 when we came out of the financial crisis and the risk of GDP growth disappointing over the next few years.
spk13: I think they are completely different fundamentally. Coming out of the 2009 crisis, the world was massively over-leveraged. You had investment banks at 40 times leverage, not J.P. Morgan, who did not need TARP and didn't need help, Lehman, Bayer, Goldman, Morgan. You had banks overseas, Dexia, the land of banks that I can't remember half of them, all went bankrupt. You had hedge funds deleveraging. You had card funds deleveraging. You had half a trillion to a trillion dollars in mortgage losses. That were going to be recognized. Actual losses spread around balance sheets and derivatives and stuff like that. So the world is in massive de-leveraging mode. The consumer is over-leveraged, companies are over-leveraged. The bridge book on Wall Street was $400 billion. Today it's, I think, 60. Now, look at today. Today, everything we talk about loans being down is the consumer is, the pup is primed. The consumer, their house value is up, their stock value is up, their incomes are up, their savings are up, their confidence are up. The pandemic is kind of in the rear view mirror. Hopefully nothing gets worse with it. And they're raring to go. And you see it in home prices. You see it in auto purchases. You see it. I mean, they'd be much higher, but for supply constraints right now. And businesses equally are in good shape. They're not over leveraged today. They do have a lot of charts show that corporate debt is like higher than it was. But so is corporate cash. And look at middle market losses. It's almost zero. almost zero, and huge unutilized revolvers and stuff like that. So the second the economy starts to grow, and I mean, you're going to see loans go up because inventory receivables and capital expenditures and stuff like that. So it is completely different. And you've got fiscal policy on autopilot, meaning there's a lot that hasn't been spent yet. There's a lot more that's going to be passed. And you have QE. So far, it's a little bit under a pile of $220 billion a month. And I just think you're going to see a hopefully see a very strong economy. We don't know how long. Obviously, if you listen to what I just said, there's a little inflationary effect on that. And we don't know the future. I talk about Goldilocks. Goldilocks to me is, and I'm hopeful, I'm not predicting. Goldilocks is that inflation goes up, the 10-year bond goes up, the growth is still quite strong. You may have growth in the second half of this year that's stronger than it's ever been in the United States and America. And Europe is probably six months behind America. And so growth can go into next year and, you know, the 10-year bond goes to 3%, a lot of growth, the short rates go to 12%. It won't make any difference. As long as you have that strong growth and consumers there, jobs are plentiful, wages are going up. These are all good things. And so, you know, obviously inflation can be worse than people think. I think it will be a little bit worse than the Fed thinks. I don't think it's all going to be temporary. But that doesn't matter if we have very strong growth.
spk14: Yeah, there are always risks in any environment, but the risks in this one, I think, are quite different from the ones that we had coming out of the global financial crisis.
spk06: Got it. Thank you.
spk03: Our next question is coming from the line of Steven Shuback from Wolf Research. Please go ahead. Your line is open now. Hey, good morning.
spk08: So I wanted to start off with just a follow-up question on card NII. Jeremy, you did strike an optimistic tone on the higher spend trends and the potential for future NII tailwind as payment rates start to normalize. And just looking at the card revenue rate, given there are another of inputs in that metric, I was hoping you could just help us isolate the potential NII benefit versus the current baseline from a normalization in payment rates. So just the payment rate normalizing What would be the incremental step up in the quarterly NII run rate?
spk14: Okay, so there's a lot of pieces in that question, Stephen. So first, let's talk about the revenue rate. So a couple things. So in terms of the NII, we don't really see a meaningful uptick in card NII happening this year. Like you might maybe see a tiny bit of it sequentially fourth quarter versus third quarter, but I think it's going to be pretty hard to see. So I think you want to be thinking about that as a 2022 effect. I'm not going to get into guiding on revenue rate for 2022. And I will actually point out that we're in the market right now, you know, competing aggressively with some great offers. And I'm happy to say actually the client acquisition in CARD is going great and we're seeing great uptake on the offers. But that comes with a bit of elevated marketing expense. So as I look out to next quarter, you might actually see a bit of a dip in the revenue rate just because of the way the accounting works there.
spk08: Okay, for my follow-up, Jeremy, I just wanted to ask or at least hone in on one comment you made where you said you could potentially still manage to a 12% capital target. I was just trying to better understand how much capital cushion you are looking to manage to under the SEB, and if the GSIB surcharge is not recalibrated, where do you think you'll have to run on a steady-state basis? Just because it feels like waiting for Godot, we haven't seen any changes on the recalibration front, specifically with the GSIB surcharge.
spk14: Yeah, okay, so basically that's a question about the management buffer and a question about, you know, what we would do in a world where G-SIB doesn't get recalibrated. And, you know, a world where G-SIB doesn't get recalibrated is a world where our capital minimums are quite a bit higher, you know, starting in 2023. We obviously disagree with that. We don't think it makes any sense at all. given that a big part of the driver of that increase in the amount of capital that we would have, and as Jamie pointed out earlier, both we and the system are really flush with capital, and the regulators have been pretty clear that there's enough capital in the system right now, and that growth would increase that amount quite a bit for us and for everyone else. So that's a big part of the reason why we've been so vocal for so long Well, they need to recalibrate that, and I think we see some of our competitors making those points too as they start to creep up into higher buckets. And, you know, to be fair, the Fed has acknowledged that this is a thing that needs to get fixed. It's just that They're kind of busy trying to get the Basel III endgame put in place in the U.S. rules, which, you know, brings particular complexities in light of the Collins floor.
spk13: Can I just add this? So I've always, you know, I thought the G-60 calculation was one of the stupidest I've ever seen in my whole life. And then we doubled it here. So, you know, the European banks have a lot of disadvantages in terms of, you know, they don't have common regulations. They can't expand across Europe. But one of the advantages, they have pretty much half the G-60s. But I just don't think that in the long run that's right for America to be doubling. But I consider basing artificial numbers. So let's just wait to see what all the new rules are, and then we'll answer that question. We don't have to sit there and guess what's going to happen.
spk14: Yeah, and I think, too, the important point is that in the near term, we're actually bound by leverage. So that's what we're focused on right now. That's our biggest single thing that we'd like to see fixed, because that is affecting leverage. the management of the balance sheet right now in ways that we think really don't make sense and eventually result in higher costs that they will get passed on into the real economy. Just to touch on your buffer point briefly, you know, when all is said and done and the framework is fully settled, hopefully we're back to being bound by risk-based constraints. We have a bit more experience with a couple of years of SCB and there's a little bit less rule uncertainty. there's an interesting conversation to have about what the right management buffers are for people in a world where we do think it's important and we've made these points to destigmatize the use of buffers. We've made this point in the context, for example, of the money market complex too. We have all these kind of guidelines and the rules have them as buffers that you're supposedly free to use, but that's not the way everyone treats them. So buffers become minimums, and that adds a brittleness to the system that makes it more pro-cyclical than anyone wants it to be. So, you know, down the road, when things are stable, the buffer discussion could become interesting, but right now, it's a somewhat simpler story, and it's really about SLR.
spk13: Remember, there's one buffer you guys don't really talk about, which is $40 billion of pre-tax earnings a year. Okay? That's a huge buffer. It's huge. It allows you to change your forward-looking capital. If you buy back stock, you don't buy back stock, and so We have a lot of levers, and whatever happens, we're going to figure out a way to do a great job for shareholders.
spk08: Fair point. Thanks so much for taking my questions.
spk03: Thanks, Steve. Our next question is coming from the line from Matt O'Connor from Deutsche Bank. Please go ahead. Your line is open now.
spk11: Good morning. I want to circle back on costs. Obviously, this year, some of it is driven by the stronger than expected fees. Some of it is the inflationary pressures you mentioned. Some is, I think, discretionary, as you've pointed out in the past, accelerating some investment spend. But the question is, as we exit this year, will we look back on costs from 2021 and say they're a little bloated because of all those factors? Or is this going to be a good base year to grow off of going forward?
spk14: Okay, so there's a couple points in there. There's the word, let's talk about bloated. I mean, you know, you've heard Jamie talk about cost before, right? So we go after everything all the time. We go after waste. We try very hard to never be bloated and to not waste. That is a constant discipline. It's hard work. We look for it everywhere. So I would like to say that bloated is not a word we would ever use to describe ourselves. And having spent a bunch of time in the, in the bowels of this organization, I really don't think that that's true. And I don't think anything about what we're doing in terms of how money is being spent this year, um, is, is wasteful. Um, and in fact, you know, as you know, the really big driver of the kind of impact on run rate spend is the investments that we're making, especially investments in technology and customer experience, and then transforming the core efficiency of the company in terms of things like technology, Modernization and data centers and so on. So, in terms of projecting forward into 2022, you know, I don't want to get into giving 2022 expense guidance here. And I think that, you know, you really have to unpack that cost number between the parts of it that are volume and revenue related and the kind of more run rate structural and investment costs as we've talked about before. So, I think this year it's a little bit tricky to unpick the components from their perspective to project into that.
spk13: If we can find more good money to spend, we're going to spend it. I told you guys that there's good expense. When we have credit cards to spend so much money in marketing, the returns are very good, we're going to spend it. If we can open higher-grade bankers, we're going to spend it. If we can spend $200 billion in new data centers, which have huge benefits for us down the road, we're going to spend it. We do not manage the company so we can tell analysts what the expense number is going to be. That is just a bad way to run a company. And conversely, a lot of revenues suck too. Revenues aren't always good. And we all know how much risk we take in these businesses and stuff like that. So we spend a lot of time on good revenues and bad revenues and good expense and bad expense. And that's what's going to drive the franchise for the next five or ten years.
spk11: Understood. And then separately, as we think about capital allocation longer term, Is there a thought to more meaningfully increase the dividend payout? I mean, as we saw at the beginning of the COVID crisis, buybacks were suspended after stocks dropped sharply. Banks couldn't repurchase until they roughly doubled. But dividends were maintained. And, you know, obviously your pre-tax earnings power that you alluded to is very strong. It seems like that soft 30% cap, you know, is gone, obviously. So just thoughts, it's not going to happen all in maybe one CCAR cycle, but if we do get a multi-year economic recovery, is there thoughts of pushing the dividend higher, maybe closer to like a 50% payout?
spk13: Probably not. I mean, you know, I think, you know, first of all, you want a dividend which is sustainable through a bad downturn. And so we really want to do that. And I think this time kind of proved that. It was a very minor thing relative to capital retention. But, you know, we want to invest in our future and invest in growing and stuff like that. And if we can't – and the only way to raise the dividend is so high that it cripples your ability to do other things.
spk10: Yeah.
spk14: And the way that flows into just capital buffer sort of makes that point clear, right? So every – you know, part of the reason that we're at 3.2 instead of 3.1 is the 10 cent increase that the board announced its intention to do. So – And if I owned 100% of the company, there would be no dividend.
spk13: Yeah.
spk06: Okay, thank you.
spk03: The next question is coming from the line of Gerard Cassidy from RBC Capital Markets. Please go ahead. Your line is open now.
spk07: Thank you. Good morning, Jeremy. Can you guys share with us, if you take a look at your net interest margin in the quarter, obviously it came under pressure. And if we assume, and I know this is a big assumption, but if we assume that rates are don't really change from here over the next six to 12 months. The long end stays anchored where it is. At what point does the average yield in your average interest earning assets start to stabilize or maybe go up because the new business that you're putting on equals or exceeds what's running off in terms of interest rates on the products that are coming off the balance sheet?
spk14: Yeah, good question, Gerard. So, I mean, I guess one way to think about your question is whether we basically think that NIM has hit the bottom in this quarter. And, you know, I think we've all learned the lesson that calling the bottom is a very dangerous thing. And I would also point out, and I would direct you to, like, the last page of our supplement. I'm not going to give you a big speech on markets and AI, which is my favorite topic, and why that is really sort of a distraction that we shouldn't look at. Maybe we'll do that next quarter. But we do have that disclosure where we split out, you know, total NII and markets NII as well as, you know, NIM and excluding markets. And the reason I raise that is that, yes, your overall mental model is not wrong. It's reasonable to think that NIM might stabilize around these levels, but it's noisy. And the market number's in there, and that's going to add noise. And also, I would say right now, there's an unusual amount of numerator and denominator type effects. So, you know, whatever winds up being true about the numerator, you also have quite a bit of volatility in the denominator there, which is one of the reasons that we obviously don't manage to that number, as you've heard us say before. But your overall, you know, frame sounds reasonable to me.
spk07: Very good. And then as a follow-up, and I may have misheard you, so correct me if I'm wrong, but I think you said that... the higher level of non-interest expense, the outlook that is, was really driven by the improved outlook for non-interest income. Can you give us an in-color on that part of it, the outlook for non-interest income improvement?
spk14: Well, I mean, some of it's in actuals and some of it's in the outlook. But at a high level, the point is simply that if you look at the mix of revenue across this company, We have some offsetting dynamics right now. We've got NII headwinds from the consumer delivering, as we've discussed. But as you saw in this course, CIB and AWM results, we have exceptional performance in banking and in wealth management. And even though markets is down year on year, it's actually up significantly from what we expect from our expense guidance. So that's kind of how it all comes together. I appreciate it. Thank you.
spk13: You want solar dispensers to go up because that means that good revenues are going up.
spk06: Indeed.
spk03: Our next question is coming from the line of Betsy Grasack from Morgan Stanley. Please go ahead. Your line is open now.
spk09: Hi. Thanks. Good morning.
spk06: Hey, Betsy.
spk09: I had a couple questions. One was just on thinking through the outlook for NII, like you indicated, $52.5 billion subject to market conditions. Can you just give us a sense as to how you're thinking about market conditions? What's the trigger point for being maybe better than expected versus coming down? And I ask in context of, I noticed your securities book, you shifted a bunch from AFS to HTM. So it feels like, you know, from that, you know, you're waiting more for rates to move up materially before you would lean into that, you know, yield curve trade. But maybe you can give us a sense as to what that market conditions comment was referring to and how you're thinking about that.
spk14: Sure. So let's go through that for a second. So I said I wasn't going to give my big markets and I had a speech until next quarter, but I can't resist. So you talk about market conditions, you know, The market's NII component of that NII outlook includes things like the extent to which we have spec pools versus TBAs, the extent to which we have futures versus cash in high-rate countries like Brazil, the growth in prime brokerage balances. The common theme across all of these is there are situations where you're deploying balance sheet in the market's business to serve clients and And that's profitable deployment on a spread basis, but there's quite a bit of gross-out between the kind of non-derivative piece of it and the derivative or derivative-like piece of it, where the derivative piece of it doesn't have any NII and the non-derivative piece of it does. So every unit of that sort of activity that you do creates a significant swing in the NII number, either up or down, with very little impact at the bottom line. Now, that's not the entirety of the market story, There are parts of the market's business where we're actually doing more HMI lending. I think you meant the market, not the market. No, I know, but part of the market-dependent comment is the market-dependent on the market's business. I'll go to the other point in a second, and I'm almost done with the speech. Anyway, you get the point. So that's one point of fluctuation. By going to your other piece, so the AFS-HTM, and I think your implied question, which is, basically what would make us want to deploy more into a higher rate environment. So I will say that the AFS-HTM changes that you've seen are really just primarily about managing capital across the various constraints while preserving the right level of flexibility to do deployment. But given the level of cash balances right now, the AFS-HTM is really the main constraint in terms of duration buys, and I think we have enough flexibility in there to do kind of short-term cash deployment tactically as we always do. So to get to the punchline, it's kind of what we said before, which is we're bullish on the economy. We believe that that comes with higher inflation and therefore higher rates. And in light of that, we're happy to be patient right now. When that actually changes and we decide to deploy more, you know, you'll see it in the future.
spk13: Just a simple way to think about it, the 52 and a half, other than the market's business, which goes up or down, if rates go up, you can see our earnings at risk disclosure, we will earn more NII. All things being equal, which of course they never are, but all things being equal. And in addition to that, we can make decisions to deploy more money for more NII's.
spk09: You know, it's interesting, versus when you were at our conference, Jamie, it seems like, you know, the 52.5 is more a function of the curve, given the fact that CARD did, it looks like, better than you had thought at that time, you know, in the middle of June, based on your comments about, you know, spend being up so much.
spk14: Betsy, let me just, sorry to interrupt you, but let me just pick up on that point for a second, because I think someone else has a similar question, but I would just remind you that We do see that very healthy sequential growth in card loans on the back of spending, but the key issue is the revolve behavior. And so our view on that really hasn't changed, and we do see elevated pay rates as a result of the cash buffers, which remains kind of the consistent reason why we have a muted outlook for card on AI this year.
spk09: Yes. Yeah, no, I totally get that.
spk13: And I don't want to correct anyone here, but I personally think you'll see it go up by the end of the year. Okay? I think we'll be a little concerned on that because of all the spend and stuff like that. But we hate guessing. What I look at much more is how many cars you have, how much spend you have, how many happy customers you have, and that aisle will take care of itself.
spk09: And on that front, your card fees were quite good, right? You mentioned that in your press release. Maybe you can give us a sense as to the drivers. Is that, you know, new drivers? Is that basically what it is? How sustainable is that? Because that was a bit of an upside surprise in this result, the card fees.
spk14: Yeah, I mean, I think it's just spend, right, Betsy? I mean, we can get you a bit more color than that. You know, Reggie can follow up if you want. But at a high level, I think the card spend number is really all about – I mean, sorry, the card fee number is really all about the spend trends.
spk09: Okay, and then just one last, if I can squeeze it in. Your VAR came down significantly. Can you give us a sense as to what's going on there?
spk14: Yeah, I mean, that's just the volatility of last year's prior core coming out of the time series, right, if you think about it.
spk06: All right. Okay, thanks.
spk03: Our next question is coming from the line of Charles Peabody from Portalist Partners. Please go ahead. Your line is open now.
spk12: Yeah, I wanted to ask that, and I question a little bit differently. In reiterating your $52.5 billion guidance, you said there was potential for some variation or variability around that number. And I'm trying to understand where the greatest variation could come from. Is it in your loan growth expectations? Because I'm hearing that you really are not expecting much in the way of loan growth. Or is it in the shape of the yield curve because of the Fed's QE actions or words around taper? And talking about the yield curve, could you also... talk a little bit about what's more important, the short end of the yield curve, you know, between Fed funds in the two-year or the long end. And in that conversation, I'll also talk about the significant amount of liquidity that's about to hit the short end.
spk13: Thanks. There is a disclosure in the March 31st 10Q that shows earning at risk if rates go up 100 basis points, U.S. dollar and non-U.S. dollar of $7 billion if the whole curve goes up 100 basis points. So the $7 billion some number like four and a half or five is short rates versus long rates. The long rate number is cumulative. That would add every year, every time you roll over these things, it's like higher rates. That is the number, okay? Obviously, loan growth is the loan growth. That's in the plus or minus, but the biggest thing is interest rates. But yeah, let's talk about the variables.
spk14: Let me give you the variables, Charles, because it's kind of a reasonable question. So I'll spare you my markets high speech. You heard it already, but that's obviously a big factor. Within CARD, you know, we are somewhat optimistic about loan growth, but just remember that that loan growth has to translate into a revolve to drive NII. And so if pay rates, you know, if pay rates remain, you know, as I said earlier, it's a central case forecast that reflects the recent experience. So we are forecasting elevated pay rates, but of course we could be wrong. They could be even more elevated than we are currently forecasting. So that would be a downside. And the opposite of that, if we see the consumer levering starting a little bit sooner, would create upside there. And then, you know, there's the impact of deployment. So we're staying patient right now. That means that we're not burning the steepness of the yield curve. And if that changes, that could create a little bit of upside. And then there's always the tactical actions that we can take, you know, in the front end of the curve. Right now, those aren't very interesting because IOERs is above money market rates, which is a big part of the reason that you see RRP having so much uptake. But if that were to change and there were opportunities in repo and so on, then that could help a little bit as part of our constant tactical deployment there. But that's not, again, our simple case.
spk12: Just to follow up on that. the liquidity that's going to hit in July and August is substantial, and that's going to have some impact on the shape of the yield curve at the short end. We saw a rise in the overnight repo rate, reverse repo rate in June. Is it possible that we have to have another one to keep rates from falling too far?
spk14: Yeah, I mean, I think that's a question for our kind of short on fixed income market strategists and my old research team. But right now it seems like the Fed is pretty committed to making sure that repo rates don't trade negative. That's part of the reason they made the technical correction. That's part of the reason RRP is paying what it pays. So we'll see what happens there. But to me, the front end of the yield curve from a deployment opportunity perspective looks not very interesting right now. And that is kind of our central case for the rest of this year.
spk12: And did the rise in the RRP rate have any – your comments about market-driven NII, did it have any impact on market-driven NII?
spk14: Yeah, that's not really the way that works. Yeah, I mean, I think you may be – I mean, I don't know if this is part of your question or not, but there's, of course, the increase in IOER, and there's some pretty simple math you can do there about, you know, five basis points on – or ten basis points on IOER. on half a trillion dollars for half a year. So, but those are pretty small numbers in the scheme of the level of precision we're dealing with here.
spk06: Okay. Thank you. Thanks.
spk03: A follow-up question is coming from the line from Gerard Cassidy from RBC Capital Markets. Please go ahead. Your line is open now. Thank you. Jeremy, I just wanted to follow up.
spk07: Can you give us some color about the residential mortgage lending business How was the gain on sale margins this quarter? Any outlook on margins or any outlook on volumes, I should say. But also, did you say also that you guys sustained a small loss or a loss in the servicing area? If so, what drove that? Thank you.
spk14: Yeah, so let's talk a little bit about mortgage, which is a business I'm still learning. But we've had very robust originations, $40 billion this quarter. I think the most significant, one of the significant things that's going on is we've really finished unwinding all of our credit pullbacks from the crisis. So we're fully back in the correspondent channel, which is obviously helping the volumes. There's obviously been a huge refi boom over the last year with lower rates. That's starting to slow down a little bit. The purchase market has been quite robust. although now we've seen so much home price appreciation that maybe affordability starts to be a little bit of a headwind. So as we sit here today, from a margin perspective, you have your kind of typical dynamics. As rates go up a little bit, refi slows down a little bit, the industry has built capacity. You have probably a little bit of a margin headwind looking forward, and obviously there's a mix effect. So as corresponding becomes a much bigger part, of the originations, you know, you have mix-based margin compression.
spk13: So, and obviously… I think gain in CL was at all-time highs, and now it's not even normally. It's just getting low at an all-time high. Yeah, exactly.
spk14: So, it's a headwind relative to a super-elevated prior year quarter, but it's still perfectly healthy. In terms of the servicing business, I think really, as you all understand, in the current environment, the prepayment rates, prepayment speeds have been running significantly above our model forecast. And so as we continually update those as part of our risk management, that can trigger some small risk management losses. But in general, the risk management of the parts of the MSR that can be managed has actually been very good and very stable. So I think that's everything you had, Gerard, right?
spk07: Yes, thank you very much.
spk13: Yep.
spk03: Any incoming questions in the queue?
spk13: I just want to thank Jen Peepsack for the great job she did as CFO. We also know she's happy in Wisconsin, a new job. And Jeremy, I know a lot of you know Jeremy, but he's been the CFO of the IB for seven or eight years or so, so a complete professional person. And so, Jeremy, welcome to your first call and congratulations. Thank you, Jamie. Talk to you all soon. Thank you.
spk06: Glad I survived it.
spk03: Thank you. Everyone, that marks the end of your call. Thank you for joining and have a great day.
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