JP Morgan Chase & Co.

JPMorgan Chase & Co. Earnings Conference Call will begin shortly. Music Music

Good morning ladies and gentlemen. Welcome to J.B. Morgan Chase's second quarter 2023 earnings call. This call is being recorded. Your line will be muted for the duration of the call. We will now go to the live 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.

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 $14.5 billion, EPS of $4.75, on revenue of $42.4 billion, and delivered an ROTCE of 25%. These results included the First Republic bargain purchase gain of $2.7 billion, a credit reserve build for the First Republic lending portfolio of $1.2 billion, as well as $900 million of net investment securities losses in corporate. Touching on a few highlights, CCB client investment assets were up 18% year-on-year. We had record long-term inflows in AWM, and we ranked number one in IBP wallet share. Before giving you more detail on the financials, let me give you a brief update on the status of the First Republic integration on page two. The settlement process with the FDIC is on schedule, the number of key milestones being recently completed. Systems integration is also proceeding at pace, and we are targeting being substantially complete by mid-2024. First Republic employees have formally joined us as of July 2nd, and we're pleased to have had very high acceptance rates on our offer. And although it's still early days, as we get the sales force back in the market, we are happy to see that client retention is strong with about $6 billion of net deposit inflows since the acquisition. Now turning back to this quarter's results on page three. You'll see that in various parts of the presentation, we have specifically called out the impact of First Republic where relevant. To make things easier, I'm going to start by discussing the overall impact exclude the impact of First Republic in order to improve comparability with prior periods. With that in mind, in this quarter, First Republic contributed $4 billion of revenue, $599 million of expense, and $2.4 billion of net income. As noted on the first page, this includes $2.7 billion of bargain purchase gain, which is reflected in NIR in the corporate segment, as well as $1.2 billion of allowance bills. And remember that the deal happened on May 1st, so the First Republic numbers only represent two months of results. You'll see in the line of business results that we are showing First Republic revenue and allowance in CCB, CB, and AWM. And for the purposes of this quarter's results, all of the deposits are in CCB and substantially all of the expenses are in corporate. As the integration continues, some of those items will get allocated across the segments. Now, turning back to firm-wide results excluding First Republic, revenue of $38.4 billion was up $6.7 billion, or 21% year-on-year. And AIX Markets was up $7.8 billion, or 57%, driven by higher rates. And IRX Markets was down $293 million, largely driven by the net investment securities losses I mentioned earlier, partially offset by a number of less notable items, primarily in the prior year. And markets revenue was down 772 million, or 10% year-on-year. Expenses of 20.2 billion were up 1.5 billion, or 8% year-on-year, primarily driven by higher compensation expense, including wage inflation and higher legal expense. And credit costs of 1.7 billion included net charge-offs of 1.4 billion, predominantly in card. The net reserve build included a $389 million build in the commercial bank, a $200 million building card, and a $243 million release in corporate, all of which I will cover in more detail later. On to balance sheet and capital on page four. We ended the quarter with a C2-1 ratio of 13.8% flat versus the prior quarter. of net income less distributions was offset by the impact of First Republic. And as you can see in the two charts on the page, we've given you some information about the impact of the transaction on both RWA and CET1 ratio. And as you know, we completed CCAR a couple of weeks ago. Our new indicative SCB is 2.9% versus our current requirement of 4%, and it goes into effect in 4Q23. The new SCB also reflects the Board's intention to increase the dividend to $1.05 per share in the third quarter. On liquidity, our bank LCR for the second quarter ended at 129%, in line with what we anticipated at Investor Day. About half of the reduction is associated with the First Republic transaction. And while we're on the balance sheet, as we previewed in the 10K, we will be updating our earnings at risk model to incorporate the impact of deposit repricing lags. So when we release this quarter's 10Q, you will see the up 100 basis point parallel shift scenario will be about positive $2.5 billion, whereas in the absence of the change, it would have been about negative $1.5 billion. Now let's go to our businesses, starting with CCB on page five. Both U.S. consumers and small businesses remain resilient, and we haven't observed any meaningful changes to the trends in our data we discussed at Investor Day. Turning now to the financial results, which I will speak to, excluding the impact of First Republic for CCB, CB, and AWM. CCB reported net income of $5 billion on revenue of $16.4 billion, which goes up 31% year-on-year. In banking and wealth management, revenue was up 59% year-on-year, driven by higher NII on higher rates. End-of-period deposits were down 4% quarter-on-quarter, as customers continued to spend down their cash buffers, including for seasonal tax payments, and seek higher-yielding products. Fine investment assets were up 18% year-on-year, driven by market performance and strong net inflows across our advisor and digital channels. In home lending, revenue was down 23% year-on-year, driven by lower NII from tighter loan spreads and lower servicing and production revenue. Originations were up quarter-on-quarter, driven by seasonality, although still down 54% year-on-year. Moving to card services and auto, revenue was up 5%, largely driven by higher card services NII on higher revolving balances, partially offset by lower auto lease income. Hard outstandings were up 18% year-on-year, which was the result of revolved normalization and strong new account growth. And in auto, originations were up $12 billion, up 71% year-on-year, as competitors pulled back and inventories continued to slowly recover. Expenses of $8.3 billion were up 8% year-on-year, driven by compensation predominantly due to wage inflation and headcount growth, as we continue to invest in our firm office and technology staffing, as well as marketing. In terms of credit performance this quarter, credit costs were $1.5 billion, reflecting a reserve bill of $203 million driven by loan growth and card services. Net charge-offs were $1.3 billion, up $640 million year-on-year, predominantly driven by card, as 30-day-plus delinquencies have returned to pre-pandemic levels in line with our expectations. Next, the CIB on page six. CIB reported net income of $4.1 billion on revenue of $12.5 billion. Investment banking revenue of $1.5 billion was up 11% year-on-year or down 7%, excluding bridge book markdowns in the prior year. IB fees were down 6% year-on-year, and we ranked number one with year-to-date wallet share of 8.4%. In advisory, fees were down 19%. Underwriting fees were down 6% for debt and up 30% for equity, with more positive momentum in the last month of the quarter. In terms of the second half outlook, we have seen encouraging signs of activity in capital markets, and July should be a good indicator for the remainder of the year. However, year-to-date announced M&A is down significantly, which will be a headwind. Moving to markets, total revenue was $7 billion, down 10% year-on-year. Fixed income was down 3%. As expected, the macro franchise substantially normalized from last year's elevated levels of volatility and client flows. This was largely offset by improved performance in the securitized products group and credit. Equity markets was down 20% against a very strong prior year quarter, particularly in derivatives. Payments revenue was $2.5 billion, up 61% year-on-year. excluding equity investments, it was up 32%, predominantly driven by higher rates, partially offset by lower deposit balances. Security services revenue of $1.2 billion was up 6% year-on-year, driven by higher rates, partially offset by lower fees. Expenses of $6.9 billion were up 1% year-on-year, driven by higher non-compensation expense, as well as wage inflation and headcount growth, largely offset by lower revenue-related compensation. Moving to the commercial bank on page 7. Commercial banking reported net income of $1.5 billion. Revenue of $3.8 billion was up 42% year-on-year, driven by higher deposit margins. Payments revenue of $2.2 billion was up 79% year-on-year, driven by higher rates. Gross investment banking and markets revenue of $767 million was down 3% year on year, primarily driven by fewer large M&A deals. Expenses of $1.3 billion were up 12% year on year, predominantly driven by higher compensation expense, including front office hiring and technology investments, as well as higher volume-related expense. Average deposits were up 3% quarter on quarter, driven by implos related to new client acquisition, partially offset by continued attrition and non-operating deposits. Loans were up 2% quarter-on-quarter. C&I loans were up 2%, reflecting stabilization in new loan demand and revolver utilization in the current economic environment, as well as pockets of growth in areas where we are investing. CRE loans were also up 1%, reflecting funding on prior year originations for construction loans and real estate banking, as well as increased affordable housing activity. Finally, credit costs were $489 million. Net charge-offs were $100 million, including $82 million in the office real estate portfolio, and the net reserve bill of $389 million was driven by updates to certain assumptions related to the office real estate market as well as net downgrade activity in middle market banking. Then to complete our lines of business, AWM on page eight. Asset and wealth management reported net income of 1.1 billion with pre-tax margin of 32%. Revenue of 4.6 billion was up 8% year on year, driven by higher deposit margins on lower balances and higher management fees on strong net inflows. Expenses of 3.2 billion We're up 8% year-on-year, driven by higher compensation, including growth in our private banking advisor teams, higher revenue-related compensation, and the impact of global shares and J.P. Morgan Asset Management China, both of which closed within the last year. For the quarter, record net long-term inflows were $61 billion, positive across all channels, regions, and asset classes, led by fixed income and equities. And in liquidity, we saw net inflows of $60 billion. AUM of $3.2 trillion was up 16% year-on-year, and overall client assets of $4.6 trillion were up 20% year-on-year, driven by continued net inflows, higher market levels, and the impact of the acquisition of global shares. And finally, loans were down 1% quarter-on-quarter, driven by lower securities-based lending, and deposits were down 6%. Turning to corporate on page 9, as I noted up front, we are reporting the First Republic bargain purchase gain and substantially all of the expenses in corporate. Excluding those items, corporate reported net income of $339 million. Revenue was $985 million, up $905 million compared to last year. NII was $1.8 billion, up $1.4 billion year-on-year due to the impact of higher rates. NIR was a net loss of $782 million and included the net investment securities losses I mentioned up front. Expenses of $590 million were up $384 million year-on-year, largely driven by higher legal expense. And credit costs were a net benefit of $243 million, reflecting a reserve release as the deposit placed with First Republic in the first quarter was eliminated. Next, the outlook on page 10. We now expect 2023 NII and NIIX markets to be approximately 87 billion, the increase driven by higher rates coupled with slower deposit reprice than previously assumed across both consumer and wholesale. And I should take the opportunity to remind you once again that significant sources of uncertainty remain and we do expect the NAI run rate to be substantially below this quarter's run rate at some point in the future as competition for deposits plays out. Our expense outlook for 2023 remains approximately $84.5 billion, and on credit, we continue to expect the 2023 card net charge-off rate to be approximately 2.6%. So to wrap up, we are proud of the exceptionally strong operating results this quarter. As we look forward, we remain focused on the significant uncertainties relating to the economic outlook, competition for deposits, and the impact on capital from the pending finalization of the Basel III rules. Nonetheless, despite the likely headwinds ahead, we remain optimistic about the company's ability to continue delivering excellent performance through a range of scenarios. With that, operator, please open the line for Q&A.