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spk07: JPMorgan Chase & Co. earnings conference call will begin shortly.
spk18: Please stand by. We're about to begin. Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's third 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'd 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.
spk17: Thanks, operator. Good morning, everyone. The 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 $11.7 billion, EPS of $3.74 on revenue of $30.4 billion, and delivered a return on tangible common equity of 22%. These results include a $2.1 billion net credit reserve release, which I'll cover in more detail shortly, as well as an income tax benefit of $566 million. Adjusting for these items, we delivered an 18% ROTC this quarter. Touching on a few highlights, it was another strong quarter for investment banking, including an all-time record for M&A. And while loan growth remains muted, we see a number of indicators to suggest it has stabilized and may be poised to begin more robust growth across the company and particularly in card. And consistent with last quarter, credit continues to be quite healthy. In fact, net charge-offs are the lowest we've experienced in recent history. On page two, we have some more detail. Revenue of $30.4 billion was up $500 million, or 2% year-on-year. Net interest income was up 1%, with balance sheet growth and higher rates primarily offset by mixed and lower CIB markets NII. And NIR was up 3%, driven by solid fee generation across investment banking and AWM, largely offset by net securities losses in corporate versus gains in the prior year and lower revenue in home lending. Expenses of $17.1 billion were up 1% year-on-year on continued investments and higher volume and revenue-related expenses, predominantly offset by lower legal expense and the absence of an impairment in the prior year. And credit costs were a net benefit of $1.5 billion, driven by the reserve release, but it's also worth noting that net charge-offs of just over $500 million were approximately half of last year's third quarter number. Let's cover reserves on the next page. We released $2.1 billion this quarter, driven by less severe downside scenarios as the macro environment continues to normalize. Reserves stand at $20.5 billion, which still accounts for elevated uncertainties surrounding COVID and the current labor market dynamics, including the expiration of expanded unemployment benefits. Now moving to balance sheet and capital on page four, we ended the quarter with a C2-1 ratio of 12.9%, down modestly, primarily on higher RWA. The firm distributed $8 billion of capital to shareholders this quarter, including $5 billion of net repurchases, and the common dividend was increased to $1 per share. With that, let's move on to our businesses, starting with consumer and community banking on page five. CCB reported net income of $4.3 billion, including reserve releases of $950 million, on revenue of $12.5 billion, dollars down 3% year-on-year. Deposits were up 3% quarter-on-quarter, indicating some deceleration as excess deposits are stabilizing. Notably contributing to this growth, we ranked number one in retail deposit share based on the FDIC data and were the only large bank to show meaningful share growth, up 70 basis points year-on-year. Similarly, client investment assets were up 29% year on year. And while market performance was a driver, retail flows in both advisor and digital channels were strong. Touching on spend, combined credit and debit spend was up 24% versus the third quarter of 19 and in line with last quarter. Within that data, travel and entertainment spend was up 8% versus 3Q19, and very closely tracked the patterns of the Delta variant within the quarter, softening in August and early September and re-accelerating in recent weeks. Card outstandings were up 1% year on year and 4% quarter on quarter, benefiting from higher new account originations. And while the payment rate is still very elevated, it's come down from the highs and revolving balances have stabilized. And when we look inside our data, we see evidence of excess deposits starting to normalize in segments of the population that traditionally revolve. So as a result, we're optimistic about the growth prospects of revolving card balances. Moving to home lending, average loans were down 6% year on year, but up 2% quarter on quarter, with portfolio additions now outpacing prepayments. It was another strong quarter for originations, totaling nearly $42 billion, up 43% year-on-year, reflecting record purchase volume and share gains in the refi market. And in auto, we had $11.5 billion of originations, second only to last quarter's record. So overall, loans ex-PPP were up 3% quarter-on-quarter on the growth in card and home lending I just mentioned. Expenses of $7.2 billion were up 5% year-on-year, driven by investments in the business, including marketing. And more generally, we continue to see that the acceleration in digital adoption during the pandemic has persisted, with active mobile users up 10% year on year to almost 45 million. So with that, looking forward, we are encouraged by our household growth and balance sheet trends. However, we expect it to take some time for revolving credit card balances to return to pre-pandemic levels. given the amount of liquidity in the system. In the meantime, credit losses and delinquencies remain extraordinarily low. In CARD, on a year-to-date basis versus 2019, low charge-offs more than offset lower NII. Next, the Corporate and Investment Bank on page six. CIB reported net income of $5.6 billion on revenue of $12.4 billion. Investment banking revenue of $3 billion was up 45% versus the prior year and down 12% sequentially. IB fees were up 52% year-on-year, driven by strong performance in advisory and equity underwriting, and we maintained our number one rank with a year-to-date wallet share of 9.4%. In advisory, it was an all-time record quarter, benefiting from the surge in M&A activity, and we almost tripled fees year on year in a market that doubled. Debt underwriting fees were up 3%, driven by an active leveraged loan market, primarily linked to acquisition financing. And in equity underwriting, fees were up 41%, primarily driven by our strong performance in IPOs. Looking ahead to the fourth quarter, the overall pipeline is healthy, and the M&A market is expected to remain active. And if so, IBPs should be up year on year, but down sequentially. Moving to markets, total revenue was 6.3 billion, down 5%, compared to a record third quarter last year. Notably, we were up 24% from 2019, driven by the continued strong performance in equities and spread products. Fixed income was down 20% year on year, due to ongoing normalization across products, particularly in commodities, as well as an adjustment to liquidity assumptions in our derivatives portfolio. Equities was up 30%, a record third quarter, with strength across regions and reflecting higher balances in prime, strong client activity in cash, as well as ongoing momentum in derivatives. In terms of outlook, keep in mind that it will be a difficult compare against a record fourth quarter last year. But the current environment continues to challenge our ability to forecast revenues. Wholesale payments revenue of $1.6 billion was up 22% or up 10% excluding gains on strategic equity investments. And the year-on-year growth was driven by higher deposits and fees partially offset by deposit margin compression. Security services revenue of $1.1 billion was up 9%, primarily driven by growth in fees on higher market levels. Expenses of $5.9 billion were flat year on year as higher structural and volume and revenue related expense, as well as investments, were offset by lower legal expense. And credit costs were a net benefit of $638 million driven by the reserve release I mentioned up front. Moving to commercial banking on page seven, commercial banking reported net income of $1.4 billion. Revenue of two and a half billion was up 10% year on year on higher investment banking and wholesale payments revenue. Record gross investment banking revenue of $1.3 billion was up 60%, primarily driven by increased large deal activity with continued strength in M&A and acquisition-related financing across both corporate client and middle market banking. Expenses of $1 billion were up 7% year-on-year, predominantly due to investments and higher volume and revenue-related expenses. Deposits were up 4% sequentially, mainly driven by higher operating balances. And loans were down 1% quarter-on-quarter. CNI loans were down 3%, but up 1% excluding PPP, driven by higher originations. And it's also worth noting that consistent with last quarter, we are seeing a slight uptick in utilization rates in middle market. And those among larger corporates seem to have stabilized, albeit at historically low levels. CRE loans were flat, with modestly higher originations in commercial term lending, offset by net payoff activity in real estate banking. Finally, credit costs were a net benefit of $363 million driven by reserve releases with net charge-offs of six basis points. And then to complete our lines of business, AWM on page eight, asset and wealth management reported net income of $1.2 billion with pre-tax margin of 37%. Record revenue of $4.3 billion was up 21% year-on-year as higher management fees and growth in deposit and loan balances were partially offset by deposit margin compression. Expenses of $2.8 billion were up 13% year-on-year, largely driven by higher performance-related compensation as well as distribution fees. For the quarter, net long-term inflows of $33 billion continued to be positive across all channels, asset classes, and regions, with notable strength in equities and fixed income. AUM of $3 trillion and overall assets of $4.1 trillion, up 17% and 22% year-on-year respectively, were driven by higher market levels and strong net inflows. And finally, loans were up 3% quarter-on-quarter with continued strength in custom lending, securities-based lending, and mortgages, while deposits were up 5% sequentially. Turning to corporate on page 9, corporate reported a net loss of $817 million, including $383 million of the $566 million tax benefit that I mentioned up front. Revenue was a loss of $1.3 billion, down $957 million year-on-year. NII was a loss of $1.1 billion, down $372 million, primarily on limited deployment opportunities as deposit growth continued. And we realized $256 million of net investment securities losses in the quarter, compared to $466 million of net gains last year. Expenses of $160 million were down $559 million year on year, primarily driven by the absence of an impairment on a legacy investment in the prior year. On the next page, let's discuss the outlook. Our full year outlook for 2021 remains largely in line with our previous guidance. We still expect NII to be approximately $52.5 billion and adjusted expenses to be approximately $71 billion. But as you'll see on the page, we've lowered our outlook for the card net charge-off rate to around 2% as delinquencies remain very low. So to wrap up, we're pleased with this quarter's performance as we approach what we hope is the tail end of the pandemic. The strengths of the company, both in terms of our diversified business model, as well as our Fortress balance sheet, talent, and culture, have enabled us to perform well through this difficult period while continuing to serve our clients, customers, and communities. As we look ahead and the environment normalizes, new challenges will undoubtedly arise, but we feel confident with the position of the company and the strategy going forward. With that, operator, please open the line to Q&A.
spk02: And our first question is coming from John McDonald from Osona Research.
spk18: John, please proceed.
spk05: Good morning, Jeremy. Wanted to ask about the net interest income guidance for the year. It seems to imply a nice step up in NII for the fourth quarter to roughly $13.5 billion. Was wondering, what do you expect to be the drivers of that sequential step up? And would you see the fourth quarter NII as a good starting point for us to think about our 2022 NII forecasts?
spk17: Yeah, John, good question and good catch there. It's true. That is quite a bit of sequential growth. If you do the math, it suggests about 350 million. And in reality, if you think about what we've been saying about the outlook for, you know, increased revolve and deployment and so on, the increase is not intuitively high. And so just to explain, within that, there are a couple of factors. So one, there's actually a meaningful amount of markets and AI growth between the third and the fourth quarter, which in general we would sort of encourage you to ignore. And there's also some sequential increase in NII from PPP forgiveness contributing to the fourth quarter number. So if you strip those two out, you still see a little bit of modest growth, which is a little bit more consistent, I think, with the overall story that we've been telling, which is that the real acceleration And an AI, especially from higher card revolve, is a 2022 item. In that context, then, if you take that sort of lower number and think about annualizing that, I think it's fair to assume that that would be a sort of lower end estimate for the 2022 number in light of what we believe will happen in terms of especially card revolve. But obviously, you know, we'll give you a little bit more color about 2022 next quarter.
spk05: Okay. And as a follow-up, your cash balances continue to grow and you've been conservative on liquidity deployment. Could you update us on your thinking around liquidity deployment, pacing that, and what factors you're balancing?
spk17: Yeah, totally. So at the highest level, I would say that nothing's really changed, meaning we're still all else equal, happy to be patient. We still believe in a robust global recovery. We still are a little bit concerned about inflation, I think, relative to the consensus. And all of that contributes to a willingness to be relatively patient about deployment. But it's also fair to say that relative to last quarter, rates are obviously higher. We start to see central banks around the world normalizing their policy stance a little bit. So the market implied rates are coming a little bit more in line with our view. And given that, you know, it wouldn't be surprising if we saw some more opportunities for, you know, front-end deployment, cash and cash-like activity. as well as possibly some duration management.
spk02: Got it. Thank you. Our next question is coming from the line of Jim Mitchell from Seaport Global Securities.
spk18: Please proceed.
spk08: Hey, good morning. Just first on loan growth, as you noted, auto has been strong, cards starting to show signs of life, but it looks like outside of acquisition finance, CNI still seems a little weak, and we've got ongoing supply chain issues. So I don't know, as we think about the big picture, how are you seeing, I guess, loan demand trends playing out, and what are you expecting as the next 12 months progresses?
spk17: Yeah, so let's go through loan growth, because obviously that's one of the areas that everyone's interested in. So if we start with CARD, which is obviously the one that's going to matter the most in terms of NII impact, as you said, we see some signs of life, and we believe that recovery is strongly underway, and it seems... hopefully like Delta is really fading so that's going to help. If you just look forward just to the holiday season you know we would expect to see normal seasonality and normal growth there. And the question really for card as we've talked about a lot is whether that growth in spend and in card outstanding translates into revolve. But as I noted in the prepared remarks when we look inside the data and we look at the customers who have both deposit accounts with us and our card customers and we look at those who would typically be the ones that are most inclined to revolve, we actually do see slightly faster, you know, spend down of the excess deposit balances there. So that makes us relatively optimistic about both the potential for card outstandings to grow with higher spend, but also for increased revolve and lower pay rates as we go into next year. It's going to take time, obviously, but that is the core view. In home lending, You know, broadly, we expect that this quarter's trend with portfolio additions outpacing prepayments to continue. And then in CNI, which you mentioned, you know, just a reminder, right, that as you go to the higher end of the spectrum in terms of the size of the CNI, customers were eager to lend to them. It's a key part of the franchise. But from a financial performance perspective, that's more of an outcome rather than a goal. But we do, as I noted up front, see a little bit of an uptick in utilization rates among smaller corporates. So that's kind of consistent with the theme that we've been seeing, which is that the smaller you are and the less likely you are to have benefited from the wide open capital markets, the more likely you are to be borrowing. We do hear a lot about supply chain issues from that customer segment. So it's going to be interesting to see how that plays out. And then in CRE, we see quite a robust origination pipeline as we've sort of fully removed any, you know, pandemic-related credit pullbacks, and we're leaning into that, and we do expect to see a little bit of net loan growth going forward. And then finally, I would note that, you know, we do see some loan growth in markets, actually, and, you know, we generally discourage you from focusing too much on NII and loan growth within markets, but it is an indicator that there are some opportunities there that we're taking advantage of in the usual kind of nimble way that you would expect us to do in markets.
spk08: Okay, that's all very helpful. And maybe just a follow-up on the expense side. You know, you and your peers have all seen higher expenses this year, higher capital markets and incentive expense and increased investment spend. But if we think about going into next year of capital markets, activity normalizes, as many expect. Can we start to see expense growth slow, or are there other considerations to think about, whether it's investment spend or inflation pressures that we should think about?
spk17: Yeah, so it's a little bit of an all-of-the-above story, I would say. So first of all, we're still in the middle of budgeting, and it's sort of a little early to be giving you 2022 expense guidance. We'll do more of that next quarter. But realistically, expenses are going to be up next year. Now, to your point about capital markets-related expenses, it's obviously true that we pay for performance. And in light of the very strong performance over the last couple of years in both banking and markets, we have seen increased compensation expense on the way up. And therefore, as a function of the amount of normalization that you see in 2022, you're going to see that come down in line, all else equal. Obviously, I would point out that I think that The amount of growth in that number that we've seen through the pandemic is less than a lot of people would have expected, actually. And therefore, on the way back down, you would also potentially expect less participation, not to mention, you know, just the timing dynamics associated with the, you know, treatment of stock-based compensation vesting. So all of that aside, at the same time, we are still investing. We still see significant opportunities. We still see marketing opportunities in card. And yeah, labor inflation is a question. You saw us raise wages in parts of the U.S. at the entry level. That just came into effect this September. And as we look out, we see a lot of churn. And as Jamie was saying, it's It's good stuff. It's normal. It's understandable in this environment. But, you know, labor inflation is definitely a watch item for us. So when you put all that stuff together, you know, as I say, we'll update you more next quarter. But that's sort of how we see the expense outlook for next year.
spk02: Okay, great. That's helpful. Thanks.
spk21: Next question is coming from Mike Mayo from Wells Fargo Securities.
spk18: Your line is open. Please proceed.
spk15: Hi. There are a couple events during the quarter that I wanted to ask about, and specifically, how has the tech strategy evolved? One, you made the announcement that you're changing the retail bank core system entirely to the public cloud, and that's a big change. And Jamie, I would love to hear your comments on that. And then second, your expansion in the UK with digital banking, what metrics are you shooting for? And third, your recent fintech acquisitions, to what degree are Are there synergies among the acquisitions in addition to JPMorgan? Thanks.
spk17: Okay, Mike, hang on. I'm writing down your questions because I don't want to lose track. Okay, so let's start with the cloud first. So, yeah, you will have seen some press coverage around our partnership with Thought Machine. At a high level, there's actually nothing new here. You know, we've actually been committed to the cloud for a long time. And by the way, when I say cloud, I think we're talking about both private and public cloud. Our core strategy involves really leaning into both and being very nimble across both. And I think that's very important for us as a regulated institution from a resiliency perspective. And that's all part of our overall tech modernization roadmap and a lot of the investments that we're doing that you've heard all the leadership of the company talk about. When it comes to Thought Machine in the consumer space, You know, there are five main reasons why we did that, and it's all the normal reasons why you do cloud stuff and you do tech modernization. We want to be able to innovate quickly and bring products to consumers faster. We want to be able to run multiple products on the same platform. As I mentioned, resiliency is critical. Increasingly, we want to be able to run the bank much more in real time rather than based on batch processes. And obviously, APIs are central to the entire strategy in this environment. That's what I would say about that. Now, yeah, please, Jamie.
spk03: The thought machine is basically the core general ledger. It's not all the other stuff around consumer. And when you do these conversions different than conversions of the past, you can do them, you know, you can schedule pieces, you know, do part of the time, not all at once, like a big bang, which we used to have to do when we did, you know, big mergers and stuff like that. So I just put it as a lower risk. for the company. But the core strategy hasn't changed at all.
spk20: Yeah. Okay.
spk17: And then, Mike, international consumer and acquisitions, I think you asked about. So in terms of international consumer, you will have seen that we launched. It's obviously early days to give meaningful updates on that. But you will have noted, actually, that we just rebranded Nutmeg as a JP Morgan company just a couple days ago. So All that's proceeding apace, and it seems to be pretty well received. I think the offering is seen as differentiated and innovative, so we'll have more to say about that over time.
spk03: Generally, I just, again, this is a 10-year game plan. This is not, they're going to worry that much about metrics in the next month or two. And, you know, this is a long-term work to try to get this thing right, because If we're ever going to be retail overseas, it's going to be digital, and so we're going to be very patient. And at one point, Mike, we will report some metrics so you can see them, but they're not going to be material to the firm's numbers for years.
spk17: Yeah, it's going to take time for sure. But just more generally in terms of the acquisition strategy, we've talked about this a little bit before. We're not claiming that we have some overarching top-down acquisition strategy. I think broadly we're just doing things that make sense. But there are some themes that you can detect around bolt-on and adding capabilities. Just for the sake of argument, if you start with AWM, you'll see a pretty consistent theme in there of ESG-related capability additions. You've mentioned already international expansion and the potential for growth, and it'll be a long game, as Jamie says. And then, yeah, there's definitely a fintech narrative a little bit in terms of some of the stuff that we've done in the CIB. And then within consumer, most recently, the collection of things that we've done, I think, is unified by the theme of providing more integrated and holistic experiences to our customers. We've always been very proud of the value proposition that we offer, especially in the card product, but we think we can take it up even another notch with some of the stuff that we're doing around lounges and CX loyalty and stuff like that. So I think I touched on everything there, Mike.
spk15: No, you certainly did. And just a follow-up, I mean, we see the results. The marginal efficiency in the businesses where you're growing has improved, and we just don't have the why. So how much of that is tech-driven versus other reasons? I mean, I guess you have metrics internally that we just don't have, but your marginal efficiency is what, or your unit costs are going down, or any additional color as to the why the marginal efficiency is improving.
spk17: Yeah, so, I mean, I think reasonable people can differ on how you talk about this stuff, especially in terms of what parts of the expense space you see as a little bit more fixed versus a little bit more floating. I would have said that in reality, you know, marginal expense increases as a function of most types of marginal revenue are actually lower than a lot of people think. So the sort of operating leverage that you see, especially in the type of environment that we've had with really big increases, in revenue in the capital markets areas in the NIR side is actually relatively consistent with what I would have expected. But a little bit to your point, Mike, what's also true is that, you know, we're a big organization. There's a scale play here. We have a big fixed cost base and a lot of the modernization agenda is about making sure that that doesn't creep and that it's as expensive as possible so that it can be as nimble as possible and that marginal efficiency over time is as good as possible. But, you know, that's a long play there. All right.
spk03: Thank you. And, Mike, you know, one of the things you think about, you know, one is people worried about the forecast for next year and stuff like that. We're playing the game for 10 years here. So we're going to – and we're not going to disclose certain things like margin by product or something like that because it's competitive information. But the long game, we are competing with some very large, talented global players who are not even in banking today. And we are going to compete in that. So even some of these acquisitions are more around that than around just what I consider traditional banking. And my whole life, just so you know, we've been modernizing technology. Every year of every month of every quarter, that's like a permanent state of affairs. Obviously, now it's to the cloud and stuff like that. Those things are critical to do to be competitive going forward.
spk02: That was true, by the way, 20 years ago. Got it. Thanks.
spk18: Next up, we have a question from Ken Asden from Jefferies. Your line is open. Please proceed.
spk06: Thanks. Good morning. I wanted to ask if you can expand a little bit more upon card fees and card revenue rate. We all certainly expected the marketing expenses to kind of go up inside that line. And just wondering if you can help us understand how much of that was captured in the third quarter and just what your general outlook is for the fee line and the underlying overall revenue rate. Thank you.
spk17: Yeah, thanks, Ken. So you're right. Part of the drop in the revenue rate this quarter is a function of higher card marketing spend, which you would have expected as a result of what we said last quarter in terms of the importance of getting our fair share of the growth and spending as we emerge from the pandemic and the fact that we're out in the market with a lot of offers that are seeing good uptake and we're seeing nice growth there. So that's expected, and I think that card marketing number will actually increase remain elevated and, if anything, tick up a little bit sequentially just based on how the amortization there works. So you should expect to see that continue. But in addition, this quarter we have just an adjustment to the rewards liability, which is contributing to the drop this quarter as well. So that is not something that we see continuing. So that should come out of the run rate as we look forward.
spk06: Can you help us understand like what the magnitude of that is and what you think about overall card revenue rate going forward?
spk17: Yeah, I mean, you know, we don't really manage to card revenue rate. So it's not a number that I'm eager to guide to. But, you know, I think if I remember correctly, I think the rewards liability adjustment this quarter was of the order of something like 180 million. So we'll we'll we'll confirm that. But I think that's right.
spk06: Okay, thanks. If I might just ask, Jamie, you made a comment yesterday about the supply chain hopefully easing by next year around this time. What are you just hearing from your partners around the world in terms of the logjams and the potential for that to open up from here?
spk03: Yeah, I'm not hearing much different than you're hearing. I know that the overfocus over time is so extraordinary sometimes in the press that people forget the big picture. The economy is going 4% or 5%. What people are buying has changed, which has also hurt supply chains a little bit. There's not one company I know that's not working aggressively to fix the supply chain issue. Sales are still up. Credit card, debit card spend is still up. Consumer is in great shape. And capitalism works. I doubt we'll be talking about supply chain stuff in a year. I just think we're focusing too much on simply dampening a fairly good economy.
spk02: It's not reversing a fairly good economy. Got it. Thank you. Next up, we have a question from Betty Gracek from Morgan Stanley.
spk18: Please proceed.
spk01: Hi. Yeah, two questions. One, just following up on the card discussion that we just had regarding the fees and the $180 million on the, you know, roughly $180 million on the rewards adjustment. I mean, it still leaves us with a pretty big decline queue on queue. And I'm just trying to think through that a little bit because I know, you know, marketing, rewards, et cetera, is up. but was there anything in particular that would have driven a one-timer that is unlikely to persist or not? I realize that cashback is a little more expensive, so maybe that's a piece of it and it's a one-time move, or is it more a function of, hey, we're going to be ramping our offerings here, and so you should expect that the forward look is a step down from what you had been seeing in 2Q.
spk17: Yeah, so Betsy, in short, it's really the latter. So the only thing that is one-time-ish in nature, for lack of a better term, is the rewards liability adjustment, and the rest of it really is marketing spend, and we see that as a critical investment in this moment. It's a moment of high engagement with the product, and we're very committed to making those investments, and so that is going to remain elevated and, if anything, tick up a little bit as we look forward.
spk01: Okay, thanks. And then separately, I think today is the last day of the Vice Chair of Supervision, Randy Corral's term as, you know, Vice Chair of SUP and REG. And so the question is, how should we be thinking about how you are positioning for an environment where, you know, maybe these rules don't change, right? Like the LCR, the SLR, the things that we had been hoping might have some changes in them. Should we be anticipating that in order to help deliver the growth that you're looking for, that we should anticipate more pref issuance going forward?
spk17: Yeah, so I think, obviously, we're a little disappointed that we haven't seen some of the changes on the non-risk-sensitive size-based constraints that we'd expected, but we're still hopeful that that will come soon. We know the staff is hard at work on the Basel III endgame, and that's complicated stuff, and it may be the case that some of those things are connected. And our strategy on pref issuance has been to try to balance giving ourselves the capacity that we want to deal with the SLR constraint without over issuing and therefore being stuck with high cost prefs that aren't callable for five years. So that's part of the reason why we're operating a little bit above our CT1 target right now and we're just gonna continue to be nimble in that respect.
spk02: Thanks. Next up, a question from Glenn Shore from Evercore ISI. Your line is proceed.
spk09: Hi, thanks very much. So in the spirit of your thought on not overly focusing on the near term, I heard your comments on payment rates and cards, 4Q seasonality, optimism about revolving card balances. So is there an implicit comment within there about buy now, pay later, and the impact it may or may not have. I'd love to get your perspective on this old, but I guess new, payment option might have on the cards industry overall. Thanks.
spk17: Yeah, thanks, Glenn. So, yeah, BNPL, everyone's talking about it. It is funny how, you know, layaway is back in the e-commerce checkout lane. But, you know, and obviously we're looking at it, everyone's talking about it. And it's a moment for us as a company where even though for any given thing that's emerging, you can easily convince yourself that it's kind of not a threat. We're in a moment of taking all types of potential disruptions, especially FinTech-y type disruptions quite seriously. And in the case of BNPL, it's obviously particularly high profile because of the growth that we've seen. It's a relatively small portion of the overall market. I'll remind you that we have our own very compelling offerings that speak directly to the installment payment experience in the form of MyChase Loan and MyChase Plan, which we get really good feedback on the customer experience there in terms of the kind of post-purchase experience. You can select eligible purchases on the app and then move that to an installment plan if you want. But yeah, we acknowledge that it is downstream of the point of sale, which potentially raises some questions about whether we should be looking at moving a little bit more upstream there. But even more generally, when you take a step back, what we're really trying to do in the consumer business here is think about what is the actual customer need that is driving the growth in BNPL and how can we respond to it in a strategic, holistic way across, you know, all of our customers and not sort of too narrowly and too reactively just respond to BNPL. But it's obviously a thing that we're looking at and it's quite interesting.
spk03: I think it's another example of a fintech company because you saw, you know, a firm come out and it's no longer just about BNPL. They're going to have a debit card and attached banking account. So these are all different forms of competition, which we have to respond to. And so that's why when we talk about expenses, we will spend whatever we have to spend to compete with all these folks in our space.
spk02: I appreciate all that.
spk09: Maybe one other comment or get your thought on the right perspective to think about China and Evergrande. And what people care about most is, is there competition? an expansion across border? Meaning, is this contained within their market? Is the funders that will have some marks within their market? Or do you see any domino effect in crossing borders? Frank?
spk17: Yeah, so look, obviously everyone's looking at Evergrande. Let me start by just saying that for us, in terms of direct Evergrande exposure, it's absolutely de minimis. So that's one piece. As you would expect, we've also looked at sort of more indirect exposures in terms of the broad China property sector, as well as exposures of financial institutions that we deal with to the China property sector. And in general, those exposures are all very modest. So we're obviously watching it closely and continuing to look for read across and do what you would expect us to do. But we're not terribly concerned right now about the impact on us. I think in terms of cross-border contagion, you know, I don't hold my own opinion on this in particularly high regard, but it does seem like this was pretty well telegraphed by the Chinese authorities when they talked about their three red lines. So, you know, it's a process that's being managed. And I would say the better view right now is that it will be contained. But, you know, of course, it's the market.
spk20: So we'll see what happens.
spk02: Thanks for all that, Sharon. Thanks.
spk18: Next up, we have a question from Abraham Punavala from Bank of America. Merrill Lynch, please proceed.
spk13: Good morning. I guess I just wanted to follow up on two themes that were discussed, one around fintechs and the regulatory changes. A lot of focus on the change in leadership at the regulatory agencies. Jamie, you've talked about in the past in terms of the regulatory arbitrage when you look at big tech, non-bank players. I think BNPL is a good example of that. Do you think as we have new leadership at the regulatory agencies, they are alert to this arbitrage, and do you think we see a clampdown, or is it too late for really them to create a framework that would level the playing field?
spk02: I don't expect that there will be beneficial changes that help banks.
spk03: And I think that we just have to compete with the hand we're dealt and not expect anything like that. And I think that, you know, you're going to have some people clamp down more on banks and maybe some people regulate fintech based on products or service, something like that.
spk02: But I'm not expecting any relief.
spk11: Got it. Yeah. And I was just wondering if there would be increased scrutiny of the non-bank players relative to the banks.
spk13: But point noted. And I guess just on a separate question, Jeremy, we didn't see any build in the CET1 when I look at the numerator. Anything going on there this quarter that impacted it? And with the stock where it is at 2.4 times tangible book, just remind us of how important are buybacks here as opposed to just keeping some dry powder as the economy gets better?
spk17: Yeah. So, I mean, the answer to how important buybacks are is that they're at the end of our capital hierarchy, as we often say, right? So, Organic growth, including acquisitions, sustainable dividend, and only then do we look at buybacks. And in light of the SCB environment that we're in, where we don't have a Fed-approved buyback plan anymore, and we just simply have to comply with the minimums and BAU, that gives us quite a bit of nimbleness, which is an important thing to preserve in light of a world where we do hope for long growth next year and where acquisitions are still potentially on the horizon. So Nothing really going on this quarter other than a little bit of RWA growth in the denominator. And we're just really going to stay nimble there.
spk13: But is there a case to be made, Jeremy, in terms of just holding some dry powder and excess capital, given your macro outlook, as opposed to buying back stock at current valuations?
spk03: Yeah, I think the valuations, you know, as the stock goes up, you should expect us to maybe one day buy less. And we don't need dry powder. We have an extraordinary amount of capital and liquidity. I mean, extraordinary. And we earn $40 billion pre-tax a year. I mean, how much dry powder do you need? You know, we have $1.6 trillion of cash in marketable securities. We have well over $200 billion of equity. We can issue prefers. We can issue debt. We can issue stock if we had to do something. So I don't think we need dry powder. I think our capital cup runneth over where it is.
spk11: Thank you.
spk02: Next one is from Steve Chuback from Wolf Research. Please proceed.
spk04: Good morning. So Jeremy, you provided some helpful detail on the drivers of loan growth by category. Just looking ahead, is your expectation that loan growth begins to keep pace with GDP or economic growth? Or is there anything that would actually justify more meaningful acceleration lending activity whether it's just greater pent-up loan demand, normalization of the card payment rates, or something else?
spk17: Oh, good question, Steve. But I think you're sort of potentially leading me into giving fairly detailed loan growth guidance for 2022, which I am not really in a position to do. But let me see if I can answer this at a high level. I mean, we've talked a lot about spend, which we believe in, driving growth, card loans higher. So that's one piece. And the revolve story within that as a function of the spend down in cash buffers, especially in our revolver, the revolving segment of our customers. And obviously, as you know well, if you kind of think about our NII as the sum product of the NIM and the outstandings in the various loan categories, it is really disproportionately card that drives things. In the meantime, if you move a little bit away from consumer to the larger wholesale system, in a world where even if tapering starts relatively soon, if that plays out over roughly eight months at $15 billion of decrease a month, you still, if you do the math, wind up with another half a trillion dollars of QE. So we are dealing with a system that has a lot of surplus liquidity. And so in that context, realistically, it's hard to imagine seeing a lot of wholesale loan growth at a minimum. But, you know, frankly, that's not really a big driver of performance for us. So I don't know if that helps, but it's a good question.
spk04: Thanks, Jeremy. It absolutely helps. And just one clarifying question on the FIT commentary. You noted this quarter's result included an adjustment to liquidity assumptions in the derivatives portfolio. Some of you could help unpack what that adjustment actually entails, what prompted it, and could you help size the impact in the quarter?
spk17: I could help unpack it, but it would take another 20 minutes, which we don't really have. It's just bog standard, you know, liquidity evaluation type stuff in the derivatives book in terms of, you know, as we revise our assumptions about what the potential transaction cost would be associated with transferring certain types of positions. It's normal course stuff that just happened to be a little bit bigger. I think fixed income was down 20%. And I think without that, it would have been down 15%. So if that helps.
spk02: Very helpful. Thanks for taking my questions. Next question is from Matthew O'Connor from Deutsche Bank. Please proceed.
spk12: Hey, guys. I was hoping to follow up on the capacity to deploy liquidity. And I guess just to kind of leave it a little bit, if we look at the growth in deposits, and I know some of them are kind of considered non-core, but take out the loan growth and the growth in securities book since COVID, you've got about an extra $500 billion of deposits. And how much of that do you think can be deployed into securities and understanding that you expect loan growth to pick up, so that'll go to some, but is there a way to size that 500 billion capacity in terms of buying securities?
spk17: Yeah, so I think there's a lot of factors that play into what the deployment decision is in any given moment. Obviously, as you said, loan growth, but also we will always make these decisions on a long-term economic basis, not for the purpose of generating short-term NII. And so when you do that, you have to think about, you know, capital volatility, drawdowns, and frankly, you know, whether or not you see value. And that, if anything, is probably the biggest single factor right now. As I talked about earlier, it is true that the market has come a little bit more in line with our views, at least from a rate perspective. And that may lead to a little bit more deployment all out SQL right now. But, you know, when you start talking about, you know, spread product, for example, in light of the liquidity environment that we're in and the QE numbers that I mentioned a second ago, that remains very, very compressed. And there's just not a lot of value there. So we always try to be long-term economically motivated there, considering all the scenarios, considering risk management, considering the convexity of the balance sheet. and looking at value and being tactical there. So that's really how I would think about that.
spk12: Yep. I mean, I understood on the near-term basis, but I think, you know, a lot of investors are sitting here saying, you know, if the 10-year or really any part of the curve hits that magic point for you, you know, what is just the capacity? So, you know, for example, if the 10-year gets to, say, 3% and your confidence is not going to go to 5%, you know, do you have $100 billion of capacity? Is it $300 billion? You know, just any way to frame it longer term, appreciating that it's not what you're looking to do at this moment, at these levels.
spk20: Yeah. No, I got the question.
spk12: We can easily do $200 billion.
spk20: Yeah.
spk17: I mean, I got the question. I get why you want to know. I guess I just think, like, for a company of our sophistication and given, you know, how carefully we think about this stuff, the idea of a particular target at which we would deploy a particular amount, of course, Jamie's right. But it's always going to be situational. It's always going to be a function of why the rate is where it is. I mean, in your question, you alluded to it. It's like if the 10-year note's at 3 and we're sure it's not going to 5, but then where's the rest of the yield curve? What are the other options? What's going on in that moment? So, you know, we're always going to be, you know, situational and tactical about it.
spk12: That's helpful. And then kind of to squeeze in, you've announced a bunch of kind of what most of us would characterize as relatively small acquisitions, some this quarter and obviously looking back for the full year. Is there a way you could kind of size the capital impact of that? I know most of the terms weren't disclosed individually, but any way to frame kind of the capital and financial impact? And then just lastly, Remind us, what is the driving force when you look for a deal? Because some of the deals you kind of look at and you're like, how does that fit into broader JPMorgan Chase?
spk03: Thank you. The capital impact in total isn't that big a deal, and we're not going to disclose any more, nor is the immediate financial impact. And each one is different. So consumer, Jeremy already said, it's more about lifestyle, travel, lounges, millennial, stuff like that, in asset management and products. It was tax-efficient products, ESG products, timber products, stuff like that. And then between Nutmeg and C6 and stuff like that, that is the longer-term view of us trying to get positioned into retail overseas over 10 years if we can't.
spk02: Great. Thank you. Next one is coming from Jared Cassidy from RBC Capital Markets.
spk18: Please proceed.
spk07: Thank you. Good morning. Jeremy, you were saying that when we were talking earlier about the potential SLR changes and such, and we haven't seen anything in quarrels that's leaving today, but you mentioned about Maybe the Fed is focused on the Basel III endgame that's coming very soon here. Can you share with us, from your guys' perspective, what are you focusing on with the Basel III final rules and regulations that could affect your growth going forward?
spk17: Yeah, so I think, I mean, the thing about the Basel III endgame is that you need to essentially deal simultaneously with the Basel floors, the Basel standardized floors and the Collins floor. So you need to simultaneously, so from the perspective of the staff that's working on this stuff, they have a tough challenge to simultaneously put in place a U.S. rule which is Basel compliant while also complying with the Collins floor standardized RWA minimum. And so, you know, that's complicated and it's hard and it's quite technical and that sort of explains why it's taking a little bit longer than we might have otherwise thought. In terms of the impact of that on our long-term growth, I mean, at a high level, it's unlikely to be significant. I think that the related point is whether or not there are some changes as part of that or contemporaneously with that to these sort of non-risk-sensitive size-based constraints like G-SIB and SLR, where obviously most prominently in the case of G-SIB, It's really getting pretty extreme in terms of the growth in the score for reasons that really have nothing to do with what the original design of the metric was and to a very significant degree are driven by the expansion of the system that we've seen, you know, in the last 18 months. So that's why we believe that that should be addressed as was contemplated in the original rule. And so, you know, across all of those potential changes, you could see us doing a little bit of optimization in response to those. You know, you can imagine that Basel III endgame in terms of standardized and advanced and the impact on different products might make some things a little bit more capital efficient and others a little bit less capital efficient at the margin. But, you know, we're a big diversified company. We're pretty good at navigating this stuff. So when we have clarity, we'll make the necessary tweaks.
spk07: Very good. Thank you. And then... Obviously, you and the industry have seen really good deposit growth on a year-over-year basis. I think your deposits are up 20% all in. You talked specifically about retail being the number one market share in retail deposits. When the Fed ends QE, assuming it does sometime by the middle of next year, and I'm not asking you guys to forecast what your deposits are going to be. But just a higher level, should we anticipate that deposits could actually decline or know that they are going to be so sticky even with the liquidity that everybody carries that we shouldn't really see a decline in deposits after QE ends, let's call it second half of next year?
spk17: Yeah, so I think there's a couple of factors in here. So let's, for the sake of argument, set our P aside for a second and hold that constant. If you just look at the impact of QE on system-wide deposits, We talk about tapering, but as I said earlier, tapering still involves another half a trillion of system expansion between now and the end of tapering, or rather between the start of tapering and the end of tapering. If the Fed follows the same type of trajectory that it followed last time, there would be an extended pause between the end of QE and the beginning of QT. And again, setting RRP aside for a second, it would only really be with the beginning of QT that you would expect the size of the system deposit base to start shrinking. And I think the timing last time, if I remember correctly, was something like 22 months between the end of QE and the beginning of QT. Now, of course, you know, RRP could bounce around and there could be other factors. But at a high level, that's how we're thinking about it. Thank you.
spk03: Great. I would just add my two cents. I think they'll have to go quicker than that, and they'll have to reverse some of it. So you're talking about we're still going to increase deposits for a year, and then there'll be a fairly large reduction over a two- or three-year period, which we should be prepared for.
spk02: Thank you. Next question is from Charles Peabody from Portales Partners. Please proceed.
spk18: Yes, good morning.
spk10: I wanted to sort of get a progress report on your new headquarter building. Specifically, what's the move-in, projected move-in date, or has that been affected by the pandemic? Secondly, are there costs, noticeable costs running through 2021 expense structure for that build-out, and does that tick up noticeably when you move in? And then thirdly, What's the plan for unloading the properties that you'll be vacating, and how is that being affected by the current real estate market? Thank you.
spk03: So the plan is on schedule, move-in date, I think 2025. There are no material expenses. Of course, there's duplicate expenses, and we have to sell the building, stuff like that, but there's nothing material to our shareholder we need to disclose.
spk02: Operator, any other questions? Yes, sir. That is coming from Andrew Lim from Societe Generale. Please proceed.
spk19: Hi, good morning. Thanks for taking my question.
spk00: So you talked, Jamie, about how you're focusing on inflation. Just wondering if you could outline what you're looking at exactly metric-wise across your businesses to signal to you that inflation is actually materializing as a concern and how would that pan out versus your expectations? And in terms of how we deal with this, if it does materialize as a concern, is there anything that you can do to try and protect the bank against inflationary forces there?
spk03: Yeah, well, I mean, I think we should look at the big picture here, which I think is always important. I mean, two years ago, we were facing COVID, virtually a Great Depression, global pandemic, and that's all in the back mirror, which is good. So by Hopefully, a year from now, there will be no supply chain problem. The pandemic will become endemic. And I think it's very good to have good, healthy growth, which we have. And I think it's going to be good to have unemployment at 4%. It's good that their jobs are open. I think it's good the wage is going to be long. And I think there's too much focus on – and none of this changes how we run the business, which is we add clients all the time, consumer, card, auto. deposits, real estate, small business, large companies and stuff like that, which is really the underlying thing that drives JP Morgan. It's not whether they take the revolver from 25% or 27%. So having said all that, yeah, and I'm not focused on inflation. We simply are pointing out, well, you have inflation, 4%. It's been 4% now for the better part of a couple of quarters. And in my view, unlikely to be lower than that next quarter or the quarter after that. The only question is, does it start to ease after that with supply chains and wages, you know, more people looking for work, or does it continue to go up? And, you know, of course, we prepare for probabilities and eventualities, and one of those probabilities is that it might go higher than people think, and the Fed will have to tamp down. I doubt that'll happen before late 2022. In the meantime, I think it's unbelievable that we're getting out of this thing. We're going to have 4% unemployment, and you can have Good growth with some inflation, and that's okay. I think that people are always focusing too much on immediate concerns. If you have inflation at 4% or 5%, we're still going to open deposit accounts and checking accounts and grow our business. I also should point out, because this is always in the back of my mind, of our $30 billion of revenues, $20 billion is subscription revenues, asset management, commercial banking, consumer banking, which is pretty good. you know, wholesale payments, security services, custody. And so we're pretty proud of what the people have accomplished with all this. If you look at the actual underlying numbers for getting earnings per second, more customers, more accounts, more share. And at the end of the day, that is what drives everything.
spk19: Okay, that's great.
spk00: So it seems like you're taking a benign view that it's unmanageable. It's not going to get out of hand. Yeah.
spk03: It's the opposite. I'm telling you, I don't know. We're prepared for all eventualities. There may be a fat tail of inflation. And, you know, one of the things about our balance sheet, you guys talk about liquidity and stuff like that. One of the fat tails that a bank should be worried about is high inflation and high rates. And, you know, being very liquid protects us more against that than other things.
spk19: Right, got it. Thanks for the clarity on that.
spk00: And just a short follow-on question, really. Could you update us on the amount of excess provisions you've got versus your base case economic scenario? You've given that number in the past, and perhaps a bit of color also on how that base case has changed over the quarter, if it has indeed.
spk17: Yeah, so I think the base case, you know, the The central case has probably actually gotten a tiny bit worse quarter on quarter in light of the revisions in GDP outlook. But as you know, the framework also involves looking at probability weighted scenarios. And as I said in the prepared remarks, the sort of less extreme downside scenarios contributed a bit to the release this quarter. In terms of sizing the overall balance, again, as I said in the prepared remarks, they remain a little bit elevated relative to what they would be if we had this type of economic performance with none of the COVID-related unusual features, i.e. uncertainty about the virus, as much as we are optimistic about that right now, or uncertainty about labor market conditions, or the fact that even though a lot of the, you know, essentially all the federal level unemployment assistance has now rolled off, and most of the states have too. There's still some forms of assistance, the mortgage foreclosure moratorium, student loan stuff, rent moratoria, stuff like that, that don't roll off until later in the year. So there's a number of factors in the environment that are still unusual, which do contribute to slightly elevated reserves relative to what we would otherwise have. And, you know, as things play out, those will develop.
spk03: Jeremy, just to interrupt real quickly, I've got to go because I'm out of town. I have meetings I have to go to, but you guys should continue. And, folks, thanks for listening to us, and we'll talk to you all soon.
spk02: All right. Thanks, Jamie. And by that, we have no further questions waiting. Okay, thanks very much.
spk21: Everyone, that marks the end of our call for today. You may now disconnect. Thank you for joining. Enjoy the rest of your day.
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