JPMorgan Chase & Company (JPM) — Q4 2017 Earnings Call Transcript

Thank you. Good morning, everyone. I'm here to guide you through the earnings presentation available on our website. Please check the disclaimer at the end of the presentation. Starting with Page 1, the firm reported a net income of $4.2 billion, earnings per share of $1.07, and a return on tangible common equity of 8% on revenue of $25.5 billion. The significant item affecting this quarter is the impact of U.S. tax reform, resulting in a $2.4 billion reduction to our fourth quarter net income. Excluding this impact, our performance would have shown $6.7 billion in net income, earnings per share of $1.76, and a return on tangible common equity of 13%. As in previous quarters, our underlying results were robust in the fourth quarter, highlighted by an average core loan growth of 6% year-on-year, totaling 8% for the full year; continued strong credit performance; a successful holiday season contributing to double-digit growth in Card sales and merchant volumes, both up 13%; an increase of 17% in client investment assets; maintaining our top rank in global investment banking; and achieving record net income and revenue in the Commercial Bank alongside record revenue and assets under management in Asset & Wealth Management. Before discussing our results, let's delve into tax reform on Page 2. The $2.4 billion tax reform impact was largely due to deemed repatriation of our unremitted overseas earnings and adjustments to our tax-oriented investments, including affordable housing and energy. This was partially offset by revaluation benefits of our net deferred tax liability. Most of the impact is in Corporate, though some affected the Corporate and Investment Bank and the Commercial Bank. The capital impact stands at $1.2 billion higher at $3.6 billion, or about 25 basis points of common equity tier 1 ratio. Our effective tax rate for this year is projected to be around 19% and 20% in the near term through 2020, after which it will gradually increase as certain business credits phase out. While the bill has been enacted and clarity has improved, numerous implementation and accounting questions remain to be clarified, which may refine our estimated impact in future quarters. Now, let’s address important questions. First, regarding deemed repatriations, the key term for us is deemed. Our unremitted overseas earnings can be viewed similarly to bricks and mortar required for fulfilling local capital and liquidity requirements, and we do not anticipate remitting anything substantial. Second, despite a 14% reduction in the corporate tax rate, our effective tax rate has only reduced by about 10% due to various factors including the geographic mix of our taxable income and the disallowance of certain fees. On the BEAT tax, while open questions remain, we currently do not anticipate a BEAT liability, and should we be incorrect, it wouldn't be significant. The question of benefit competition and timeline varies across products, as pricing strategies differ. Given the competitive markets we operate in, some benefits may eventually be passed to customers, influenced by competition, scale, and the range of products and services. However, for some businesses, pricing isn't immediately affected by capital cost changes, and adjustments will be nuanced across products over time. We're preparing a comprehensive set of long-term actions in response to tax reform, which could include support for lower-income borrowers and small businesses, benefiting some customers sooner. Regarding our capital plan, there are no immediate changes; our strategy remains unchanged, as the first half of 2018 follows last year's CCAR. The modernization of the U.S. tax code is a positive advancement for the economy, potentially contributing 20 to 30 basis points of growth this year and next. However, clients are still adjusting to the tax bill, and we'll observe its impact over time. Tax reform generally provides positive prospects, giving our clients increased confidence. Moving on to Page 3, let's review the fourth quarter results. Revenue reached $25.5 billion, up $1.1 billion or 5% year-on-year, with net interest income rising by $1.3 billion due to higher rates and strong loan and deposit growth, partially offset by lower net interest income in Markets. Loan interest revenue saw a slight decline, with Auto and Asset & Wealth Management growth somewhat countering lower market performance. Adjusted expenses totaled $14.8 billion, a 9% year-on-year increase attributed to higher compensation costs and business growth. We recorded an impairment charge exceeding $100 million related to certain leased assets in the Commercial Bank and increased our contribution to the foundation by $200 million this quarter. Credit costs of $1.3 billion rose by about $450 million year-on-year, with charge-offs remaining flat and increases in Card offsetting declines in other portfolios. Even though net reserve builds were modest this quarter, we had releases approximating $400 million in the fourth quarter of last year. Looking at the full year on Page 4, we reported a net income of $24.4 billion, a return on tangible common equity of 12%, and earnings per share of $6.31. Excluding significant items, like this quarter's tax reform and the benefit from the WaMu settlement in the second quarter, net income would have been a record $26.5 billion with a ROTCE of 13% and EPS of $6.87. Our total revenue surpassed the $100 billion mark this year, totaling $104 billion, a 5% increase with $4.1 billion attributed to higher net interest income due to increased rates and growth, alongside modest deposit repricing but lower net interest income from Markets. Noninterest revenue increased by $400 million, supported by higher Auto lease income and fees across several sectors, which compensated for headwinds in Home Lending. Adjusted expenses totaled $58.5 billion, including a $350 million contribution to our foundation, resulting in an adjusted overhead ratio of 57% for the year while making significant investments. Credit costs for the year amounted to $5.3 billion, a 1% decrease in a benign environment. Moving on to Page 5 regarding balance sheet and capital, we concluded the year with a common equity tier 1 ratio of 12.1%, down nearly 40 basis points from the prior quarter, with about 25 basis points related to tax adjustments and the rest due to loan growth. All ratios and tangible book value per share reflect a combination of $6.7 billion in capital distributions and the $3.6 billion tax reform impact. Page 6 discusses Consumer & Community Banking, which generated $2.6 billion in net income and an ROE of 19%. Core loan growth of 8% year-on-year was driven by Home Lending (up 13%), Business Banking, Card, and Auto loans, each up 6%. Consumer deposits grew by 7%, allowing us to maintain our lead over the market despite an industry slowdown amid rising rates. Card sales and merchant processing volumes were each up 13%, aided by strength in Card new products and Merchant Services momentum. In December, we completed the acquisition of WePay, enhancing our integrated payment capabilities, and finalized negotiations with Marriott for our co-branded cards, making us the largest issuer in this major program. Revenue of $12.1 billion climbed 10% year-on-year. Consumer & Business Banking revenue increased by 16%, driven by higher net interest income, while Home Lending revenue decreased by 15% due to lower net servicing revenue and compression in loan spreads. Our originations fell by 16%, with Markets declining by an estimated 25%. We gained market share, a trend we anticipate will continue due to our investments. Card, Merchant Services & Auto revenue rose 11% year-on-year from higher Auto lease income, Card loan balance growth, and reduced acquisition costs. For the full year, the Card revenue rate was 10.6%, consistent with our guidance, and we still aim for 11.25% in the first half of this year. Expenses reached $6.7 billion, an increase of 6% year-on-year, driven by higher Auto lease depreciation and ongoing business growth. The overhead ratio stood at 55% for the quarter and 56% for the year as we transitioned past investment impacts, achieving positive operating leverage in the latter half of 2017. Regarding credit, Card charge-offs aligned with guidance at 2.95%, with increases in Card charge-offs mostly balanced by solid performance in other portfolios. The net $15 million reserve build this quarter came from a $200 million build in Card, offset by releases of $150 million in Home Lending and $35 million in Auto. Moving to Page 7 in Corporate & Investment Bank, CIB reported a net income of $2.3 billion on revenue of $7.5 billion and an ROE of 12%. Revenue faced two major impacts this quarter, primarily in Markets. Total Markets revenue hit $3.4 billion, a 26% decline year-on-year. However, Fixed Income Markets included a $260 million impact from tax reform, accounting for 6% of the Markets decline. Additionally, Equity Markets faced a notable $143 million loss due to a single margin loan, accounting for 3% of the year-on-year decline. It's crucial to note that this loss appears in Markets as we chose the fair value option on the loan, whereas others may not have made the same choice. Moreover, $130 million of credit cost this quarter stemmed from a reserve build related to this name. Adjusting for these factors, our Markets revenue would have been down 17% year-on-year, more aligned with experiences leading into early December. Fixed income revenue adjusted down 27%, principally affected by challenging comparisons from the prior year and continuing low volatility and tight credit spreads. Equities revenue saw a 12% increase, aided by ongoing performance in cash, prime, and corporate derivatives. Shifting to banking, we celebrated a record year for total fees and debt underwriting fees, remaining the top-ranked global investment bank with expanded share, ranking number one in North America and EMEA. IB revenue for this quarter reached $1.6 billion, up 10% year-on-year, supported by broad strength in capital markets. Advisory fees rose by 2%, driven by momentum from large deal closures. For the year, we secured the number two position for wallet share, completing more deals than any other bank. Equity underwriting fees increased by 14%, with rises across all regions at or near all-time highs. We retained leadership in wallet and volume across all products this year, finishing at number two in wallet share with a narrow margin to number one. Debt underwriting fees rose 12% as the market remained favorable for new issuances and refinancing activities prospered. We continued to rank number one, gaining share while recording the most deals in our history. The overall pipeline stays robust, similar to levels from last year. Our balance sheets are solid, and market conditions remain positive. Treasury Services revenue hit $1.1 billion, increasing 13%, supported by higher rates and organic growth from prior investments that enhanced client experiences. Security Services revenue totaled $1 billion, rising 14% due to rates and balances, with average deposits increasing 12% year-on-year and higher asset-based fees on record assets under custody. Lastly, expenses reached $4.5 billion, a growth of 8% year-on-year primarily due to compensation timing. The compensation-to-revenue ratio for the quarter was 27%, and for the year, it was 28%, consistent with previous years. Moving to Commercial Banking on Page 8, we had another exceptional quarter with a record net income of $957 million, record revenue of $2.4 billion, and an ROE of 18%. For the year, both net income and revenue also reached new records. The business is thriving, achieving an ROE of 17%. Revenue this quarter included a benefit of slightly over $100 million linked to tax reform and our Community Development Banking business. Without this benefit, revenue still increased 14% year-on-year, driven by higher net interest income from elevated rates, combined with deposit and loan growth across various businesses. Investment Banking revenue of $587 million fell by 3% year-on-year but still showcased a robust performance. Over the full year, we achieved a record investment banking revenue of $2.3 billion, up 2%, with notable strength in the middle market, which rose over 50%, offsetting fewer large deals. Our momentum and pipeline for the first quarter appear positive. Expenses hit $912 million, inclusive of a little over $100 million impairment charge on certain leased equipment expected to be sold in the first half of this year. Excluding this, we experienced a mild expense growth of 9% due to investments in technology and product development. This year, we onboarded 120 new bankers and entered six new markets, establishing a presence in all top 50 metropolitan statistical areas. Loan balances grew by 7% year-on-year, and 1% quarter-on-quarter. Commercial and Industrial loans increased by 6% year-on-year, buoyed by strength across expanding markets and specialized industries. While quarter-on-quarter growth was modest at 1%, deal flow remains strong and pipelines steady. Client sentiment is robust, aided by corporate tax reform. Commercial Real Estate saw a 9% increase year-on-year and 1% quarter-on-quarter growth, aligning with industry trends. Multifamily lending faced tighter pricing due to intensified competition. We continue to prioritize client selection, particularly around construction lending given the current cycle. Credit quality remains strong, as evidenced by a $62 million benefit this quarter largely from reserve releases in the Oil & Gas portfolio, with net charge-offs at four basis points. Shifting focus to Asset & Wealth Management on Page 9, this division reported net income of $654 million, maintaining a pretax margin of 30% and an ROE of 28%. Revenue reached a record $3.4 billion this quarter, fueled by higher management fees driven by growth in assets under management and increased interest income on deposits and loans. Full-year results also set new records with a pretax margin of 28% and an ROE of 25%. Quarter expenses reached $2.3 billion, an 8% year-on-year increase, resulting from higher compensation and offsetting external fees recognized in revenue. Long-term net inflows for the quarter were $30 billion across all asset classes, reflecting sustained strong performance. For the year, long-term net inflows totaled $68 billion, primarily from fixed income, multi-asset, and alternatives. We achieved record assets under management of $2 trillion and client assets of $2.8 trillion, reflecting year-on-year increases of 15% and 14%, respectively, driven by higher market levels and net inflows. Deposits decreased by 10% year-on-year and 2% sequentially as clients moved to investment-related assets, most of which we are retaining. New client flows remain solid. Lastly, we achieved record loan balances with an 11% increase year-on-year, including a 14% rise in mortgages. Moving to Page 10, Corporate reported a net loss of $2.3 billion, which includes a $2.7 billion tax reform adjustment. Results from Treasury & CIO improved year-on-year, driven by higher rates. Finally, turning to Page 11 and our outlook. Ahead of specifics, I want to remind you about our Investor Day in February, where we will provide further guidance. We need to address two structural topics. First, regarding tax reform, the lower corporate tax rate in 2018 will reduce the tax equivalent adjustments in our managed revenues, amounting to approximately $1.2 billion on a run rate basis, predominantly affecting net interest income. Secondly, effective January 1, 2018, a new revenue recognition accounting rule has been implemented, requiring certain expenses to be grossed up that were previously recognized as contra revenue. We project this will increase both revenues and expenses by another $1.2 billion across the firm, mostly impacting Asset & Wealth Management and a minor portion in the corporate investment bank. For guidance, anticipate first quarter net interest income to decline modestly quarter-on-quarter due to lower gross ups alongside normal day counts, which will compensate for the benefits of increased rates and growth. We estimate the first quarter effective tax rate will be around 17%, factoring in seasonal adjustments for stock compensation. In conclusion, the end of 2017 was constructive, characterized by strong equity markets, rising interest rates, positive global economic data, healthy client activity, high confidence levels, and the enactment of the Tax Cuts and Jobs Act. Given this backdrop, our financial performance in the fourth quarter and for 2017 was strong, reflecting our scale and diversity while consistently delivering value to our clients and communities, gaining share across our sectors. Adjusting for significant items, net income and earnings per share would have set clear records, yielding a healthy 13% return on tangible common equity. We look forward to 2018’s landscape and opportunities for our clients, remaining committed to their needs while ensuring the company's continued performance. I will now take questions.

So I do expect you to defer either the response to February 27th, Marianne, but I just had to ask the question. The revenue outlook seems to be quite strong for the banking industry generally in 2018, and many investors were wondering, is the 55% overhead ratio a long-term target for JPMorgan, regardless of the revenue environment? Or could that potentially be better over the short term as we get a boost in the economy from the Tax Act?

You're correct that this is likely more suited for an Investor Day discussion. However, I can share that when we provided our medium-term guidance, we envisioned a more normalized environment in various aspects. We expected interest rates to be more typical, anticipated a stable credit landscape, and planned to continue investing in our businesses. You've seen this commitment from us in 2017, and we intend to do even more in 2018. There may be years when we fall short of that target, and some when we exceed it, but I believe it remains a reasonable goal for us in the near term.

And my follow-up question to that is a lot of investors are excited about the prospect of stronger economic activity in 2018 leading to greater markets activity and greater lending activity. And if you look back into the 1980s, at least for loan growth, loan growth actually stepped down in 1987. And I'm wondering if you could share your insights on how you think those activity trends will shape up in 2018.

Yes. So I know that everybody is eagerly awaiting there to be direct and noticeable impacts of tax reform, but we're only a couple of weeks into the year. Our expectation, as I said before, just really stepping back, is that it will boost growth in the economy. People have different points of view. Our research team is saying by up to 30 basis points in each of the next two years. But know it could be better than that. We do know that there will be puts and takes across our businesses, but in general, we would expect that the sort of certainty that people have been waiting for, coupled with the confidence that we know they've had, and the need for people to try and deliver growth to their shareholders, should mean that things that they were going to do become more compelling, and they might be willing to do more. So I think you'll see the capital markets space potentially react more quickly, and I think loan growth may have a bit of a lag, but never say never. So we just need to be a little patient to see some of that play out. But sentiment is strong. Cash positions will be improved, profitability will be higher, things that were rich before will be more fairly valued now. And so I think it should be all very constructive. And certainly, we would take the upside, and we support our clients.

Maybe a question on NII, just I want to make sure I understand the moving parts. So if I think about your guidance for the first quarter of down slightly. You have two less days in the quarter, that's maybe almost $300 million sequentially. And then half of the impact from the Tax Act in terms of tax equivalent adjustments is going to be felt in NIIs, that's sort of linear and equal, so that's another $150 million. So if I do the math, is it about a $400 million sort of apples-to-apples benefit from higher rates that you've seen? Is that the way to think about it?

It's a good model with just one clarification. So yes, a little more than half of the gross-up adjustment is NII. Yes, it is broadly linear for the sake of argument. So $150 million is not a bad estimate; it's actually more like $160 million, but pretty close. The day count is actually not worth $300 million; it's worth a little bit less than $200 million. So you've got a sort of headwind, for want of a better word, of call it $300 million and change. Then we would have had a combination of the impact of the December hike, with obviously each hike, the impact is less, some growth and other puts and takes. So call it $350 million of a headwind offsetting growth, and the rate hike.

It seemed like deposit betas actually slowed this quarter. Are you expecting that to reaccelerate this year? How should we think about the benefits of rates beyond the first quarter?

Regarding deposit betas, it's important to consider them in two distinct ways. First, while the cumulative beta we have seen hasn't exactly slowed down, it has generally remained disciplined. The trends we're observing in this rate cycle closely mirror previous cycles, and we haven't gained any groundbreaking insights that would lead us to alter our long-term repricing expectations. In the retail sector, such as checking and core savings accounts, movement in the industry has been minimal, which aligns with our expectations given current rates. On the wholesale side, we are definitely in a repricing phase, which is quickening with each rate increase and varies across different areas, particularly in the TS and Securities Services sectors. Looking ahead, I believe that in the retail sector, we will continue to see a lot of discipline in the market this year. Ultimately, we maintain our expectation that, regardless of the timeline, we will achieve an overall repricing of over 50%, though we will need to monitor the situation closely.

Sorry, I was on mute. It feels like we have a once in a lifetime, or at least in my lifetime, benefit to earnings with this tax change. We have a lot of PMs asking the question about how management's going to use that. I saw your comment in the deck that competitive over time might compete away, but I wonder if you could help give us some insight as to how, at a management level, you're thinking about strategically using this benefit that you're getting in the various buckets of reinvestment in tech, in people, and in clients. Do you feel like it's equal across those? Or is there a skew that you're thinking about to take advantage of this? Because how managements use this benefit is going to be critical for stock performance over the next 2 to 3 years.

Yes. So I'll give you a framework to think about it, if it's helpful. You are familiar with the way we think about our strategy over time and our investment strategy in particular. Investing in our businesses for growth and profitability has always been first and foremost in our minds. To be honest, we've talked to you before about the fact that we don't constrain ourselves because we have budgetary targets on those activities if we think we can execute well and we see great opportunity. So expect that the first thing that we would do is to continue to lean into the investment opportunities we have writ large. That's bankers, offices, global expansion to the degree that that's on the cards. It's digital capabilities, co-payments capabilities. It's across all of our businesses. We've been working even before tax reform on identifying where those opportunities are, and we want to lean into that. Jamie said it earlier, and we are really pleased that there are some immediate responses for employee benefits. We will be doing that plus more across our stakeholder constituents. There will be more to come on that over the next few weeks. We want to focus on that being comprehensive and sustainable. We are trying to be thoughtful about the things that will matter to our employees and customers. To the degree that we end up still with earnings that were otherwise above plan, then our normal capital strategy comes into play. We've been clear. We think that we are adequately capitalized, that we should expect to have the capital ratio move down slowly over time. Our strategy on potentially continuing to see dividend increases and having repurchase programs that allow us to achieve our target ratio, that hasn't changed. It just might be a bigger dollar number.

Just to move to, I guess, a business question. A couple of things just on the Card business. Just looking like credit continues to be pretty good. You did build the reserve for growth, as you mentioned. I noticed that the Card revenue rate was also still a little bit down. Can you just talk a little bit about your outlook for that Card business as you look forward?

Yes. I'll just deal with the Card revenue rate real quick because I think we sort of gave a little bit of this in the third quarter, that given the Sapphire Reserve product and given the extraordinary success we had with that in the fourth quarter of 2016, there is an annual travel credit renewal that took place in the fourth quarter, which we already told you, you would expect to see the revenue rate go down. It was contemplated, and which is why our full year revenue rate of 10.6% was in line with our guidance. As we lap the acquisition costs and reward costs associated with acquiring all of those Sapphire Reserve customers, and for that matter, our other new products, we're going to see that revenue rate get to the 11.25%, if not in the first quarter, in the first half of next year. You're going to stabilize out at or above that level.

Okay. That's great to hear, that impact. Just consumer credit, broadly speaking, Auto has continued to look a little bit better, and Card's still within reasonable expectations. A lot of the focus on tax has obviously been on the potential for commercial lending to potentially pick up. How are you guys just thinking about how the consumer behaves and what that means for both consumer loan growth and consumer credit?

Yes. Again, it's nuanced, so what I expect though, the first question generally that we're getting is the impact on the housing market given certain specific changes in the tax code. I would say that overall, net-net, we would expect there to be not a significant impact on the housing market and demand nationally, although it could differ by state. We feel like that's going to hold up nicely. You're right. Whether you're talking about consumers or small businesses, think about the small business environment, this was quite positive for them, so they're going to see higher profitability, higher free cash flow, and to all intents and purposes, the equivalent of an upgrade. We would be hopeful that, much like the commercial space, that could be the catalyst to see them spend money and hire. We’ll be focusing on that as we think about programs to help. So I think in general, it's going to mean that the already very good credit trends we're seeing will be good for longer.

The first question is about fixed income. The industry has experienced a decline in revenues over several years due to various structural and cyclical factors. Currently, we are moving away from quantitative easing in the U.S. and increasing interest rates, while Europe is performing better but remains on quantitative easing with low to negative rates. Can you share your insights on the situation, considering its significance for this key revenue category?

Sure. So Glenn, because I feel like in 2017, we spent so much time talking about year-over-year declines in comparable periods, it's helpful to, I think, remember the full performance for 2017 for fixed income and for equities and to markets in total. Acknowledging that the first quarter was quite strong, if you look at the last three quarters, we were talking about reasonably quiet environments, low volatility, historically tight spreads. Yet, those businesses individually and together delivered meaningfully above the cost of capital for us. Maybe not at the sort of outperformance level of 2016, but really good performance. Discipline, scale, optionality, those are the ways we think about the fixed income business. I don't have a crystal ball; I can't tell you when there will be a catalyst for change. Fixed income is a little on the counter-cyclical side. There will be change. We're positioned to continue to be able to grow with our clients. Our businesses are doing well, and I can't tell you when things will become more volatile. Obviously, that's always an emotional discussion, but it will happen, and when it does, we will be there to serve our clients.

I appreciate that. I have a follow-up question about Steinhoff. I understand that predicting fraud is impossible, but I'm curious about the business in general, considering many banks were involved. How many other similar types of situations are there? Can you discuss the nature of those relationships?

This will garner attention because of the sudden and significant decline. It is by far and away the largest loss in that business that we've seen since the crisis. It will happen from time to time, maybe not this significantly or this suddenly. Remember that because we've got that in fair value, we brought that down, down. It's not a reserve; that's a mark to market on a publicly traded equity at this point that has significantly declined. While we are obviously disappointed with the outcome, it's the business we're in. It's a large and diversified business that even after this loss, it's still very profitable. It's noteworthy because of its size, its rapidity, and its significance. But it's a profitable business. Without sort of laboring the point, we go through talking about the potential for rifles and sudden-risk situations. Sometimes, that will happen.

I wanted to follow up on the tax question. Jamie mentions in the release that there will be an accelerated spend for tax benefits for employees, customers, and communities. How much of that benefit, considering you paid $11 billion in taxes last year and it might have been under $7 billion with the lower rate, would be passed on to employees, customers, and communities versus contributing to the bottom line? Additionally, should this be a critical factor for stock performance? How much of it should ideally go to the bottom line?

Yes. I'm not going to give you quantification, but you're not wrong about the sort of assessment you made, which it is a significant positive. Much of it will fall to our bottom line in 2018 and beyond. Time is important to how this plays out. We want to do really constructive, thoughtful things for all of our constituents, but it won't be the significant portion of that.

I would just say that we take the $3.5 billion benefit next year. The two major uncertainties you should put back in your mind; one is the code has to be written. There'd be a lot of noise going down the road about what that actually means for various industries. The second area, as spoken by extensively, is competition; some of it will be competed away. I'm only telling you because you have to keep it in mind. I think it's optimistic to think everything falls into the bottom line. The second is on our investments. Marianne already spoke about being fairly aggressively investing for our future. We can't go too fast in hiring new bankers, and we may accelerate some of that. At Investor Day, we'll be clear if we change how we look at that kind of thing. We also think it's time that America shares broadly. We're committed to helping support and grow communities. That may bite into some of that $3.5 billion, and so be it. That's what we're supposed to do, we're a bank.

I want to add two points to what Jamie said. First, if some of this is competed away over time, we get lower cost of credit, improved pricing for our customers, which helps grow their businesses and allows them to spend more strongly. If we increase dividends or repurchase programs, that also recycles back into the economy. There are elements of this good for the economy and clients, which will continue to drive long-term profitability for the company. Secondly, you can do your own math. Add up the cost of controlled market structure reform, capital and liquidity; much of which we're supportive of. The impact over the last five to ten years has overshadowed this change.

One follow-up on the feedback loop. Do you think that the tax code or other factors will result in an increase in capital markets activity, corporate lending, and CapEx that we've been waiting for all decade?

Yes. It's essential to note that people focus on what happens immediately because of tax reform. It's a very good thing. You've seen it with corporations, sentiment, and people's plans. That's very good. But the more critical thing is that 20 years ago, our corporate federal estate rate was 40%, the rest of the world was at the same rate. Over 20 years, they fell to 20%, but we stayed at 40%. This has driven capital and brains overseas, resulting in 5,000 companies that would have been headquartered here now shifted elsewhere. The cumulative effect of retained capital and increasing competitive American companies will drive jobs and growth in the long run. I have no question we will be better year after year if we've done this. It's impossible to tell the quarter-on-quarter impact. So we’ll be watching and waiting. I think improving competitive growth in the global economy will drive capital markets activity.

Apologies if this is asked. Marianne, I was wondering about charge-offs and credit. Things looked good this quarter, and for the full year, it came in line with your sort of $5 billion charge-off outlook. How are you thinking about the credit environment heading into this year? If the environment remains strong, do you still have some seasoning that might put some upward pressure on charge-offs, even in a good environment?

If you look across the consumer sector, excluding Card, the credit performance is really, really good and should continue to be really good in 2018. 2018 feels like very strong credit performance in Consumer. In Card, we would expect to continue to see charge-off rates go up, and we are growing loans. A combination of those things will mean we'll have higher charge-offs and some reserve builds. I want to stress, we're not seeing anything that isn't in line with our expectation. This is not normalization deterioration; this is seasoning and maturation of the newer vintages and growth. It’s probably closer to 3.25%, but in line with our expectations. We're expecting very much more of the same in the consumer space. In the wholesale space, credit is really, really good. Where we had been watching for stress, fundamentals are improved. We continue to monitor retail, given where we are in certain parts of real estate banking, but we're not seeing any fragility right now in our outlook.

Okay. And then just a follow-up on Card. You've had some good balance growth. Are you seeing any change in propensity to revolve from your customers? Or is your balance growth coming more from new customers? Or is there any increase in kind of revolve rate?

We had been on a pretty significant strategic drive to have a deeply engaged customer base. If you go back pre-crisis, there was a focus on balances and less on engaged customers. We worked hard to drive engagement over the last many years. We have a larger share of spend that we do of outstandings, and we've grown both. So we are getting balances from new customers, and we're making progress in making sure that the right customers are revolving.

Marianne, had a question on the tax guidance that you guys have given. The Slide 2 disclosure's really helpful, but I wanted to dig into the comment on the BEAT provision. You noted that the ultimate impact for your business shouldn't be material. At the same time, the guidance from some of your foreign bank competitors has been measured. I'm wondering if the impact is not that material for you but weighs more heavily on the peer set. Do you see a market share consolidation opportunity emerging within repo and sec lending sides?

The impact is different for the foreign banking set. As Jamie said, there’s still a lot of work to finalize the actual code. I don’t want to guess on how all of that will play out. I certainly don't want to guess about potential consolidation.

Fair enough. Well, maybe just try one more on tax specifically relating to CCAR. I'm assuming that the test parameters for '18 are broadly consistent with last year, which is most people's general expectation. You have the lower starting capital ratio from the tax hit. Your peers will have the same. Within the new tax law, there's also an element where it eliminates the ability to carry back NOLs against prior period income, which could impact your stressed ratios. I'm wondering, does that inform your outlook for the incoming test? Do you anticipate capital return capacity being more constrained just in light of these changes?

If you assume that the 2018 structure is much like 2017, just note the caveat that DTAs, DTLs, their impact can be volatile based on the scenario. Not carrying back NOLs has a very particular interplay with foreign tax credits, which means it's not really going to affect us in a meaningful way. Two things would change, but they offset. Your absolute level of losses would be higher with the lower tax rate, against which your NOL carryforward would be lower and that capital deducts. Our low point means we think not a significant impact. Our actual spot capital ratios were higher than our CCAR outlook.

And there's a new sheriff in town. They are going to be looking at the whole picture. I think that's more important than this one item.

Marianne, assuming the economy in 2018 and '19 accelerates due to this tax reform, I think it may imply that we will have higher interest rates and possibly a steeper yield curve. Do you have any thoughts about what you might do to the interest sensitivity of the balance sheet? Would you change it? Or do you want to just keep it the way it is?

For what it's worth, you should know our house view on interest rate is for there to be four hikes next year. The Fed says three; the market has two. Tax reform and a stronger growth outlook will solidify the path of rate hikes. We’ve been factoring this into our balance sheet positioning. So I would not expect a material change in our strategy.

In your release in the fourth quarter, you mentioned how the tax change would affect capital distribution plans. There’s no change, and the first day of distributions will be based on the 2017 CCAR approval. Is that in terms of the payout ratio on this 2017 CCAR or the nominal dollars? Your earnings now will be higher in the first half of '18 compared to what you got approved for in CCAR '17. This may imply a higher nominal payout in the first half of '18.

Our capital plan approval is on a nominal dollar basis.

As you think about the winners and losers from tax reform, do you anticipate changes in how you come to market? There are discussions about the impact on high tax states and how money might flow to others. Just trying to think through how you might tweak your business model or focus on certain products in those markets.

Time is our friend. If you go back and look at similar empirical evidence, influences in migrating flow funds is pretty modest and gradual. Think about something as first order as housing in high tax states; people are pretty situated where they live with their families and jobs. Higher income borrowers' activity is less price-sensitive. Many things come into play. The area we’re thinking about more is the optimal financing structure for clients given the changes across the capital market structure. Even if the mix and optimal structure change, I believe we're well positioned. It's early days to indicate that we would have strategic changes.

What about aggregate consumer underwriting? If you feel more positively about the economy, we could see growth in personal income before the tax code here. Will that make you more open to loosening underwriting standards? Are aggregate standards still tight versus where they were pre-crisis, and could there be opportunities for you?

I think that may be a fair observation; however, as much as we imagine that all of this takes effect immediately, we need to see favorable elements in the income and spending and creditworthiness of people before making adjustments. It may develop, but I believe it’s going to unfold gradually.

We haven't changed our stance significantly, except in mortgage lending. Due to requirements and regulations, it’s tightened the credit box around those who probably deserve credit—like younger people and first-time buyers. It will take the agencies working together to set new rules. If that happens, it's good for America. It’s not a giveaway but opening credit will reduce the average mortgage cost, and we're hopeful agencies will do that.

I wanted to take a devil's advocate position for a bit. I've looked at the credit markets, and the oil cap has increased across the spectrum, especially at the short term. I'm thinking that these high-interest rates would lead to higher credit losses at some point. Is that part of your thought process? If so, at what time might credit begin to accelerate?

It's important to note that there's attention on the flatter yield curve; but it's driven by a higher front-end, which is a good type of flattening. This drives NII growth for us. We expect it, together with the Fed normalizing the balance sheet, will lead to a higher long end of rates. We’re optimistic. At some point, typically, you would see potentially higher rates resulting in a credit cycle. This won’t change our models or outlook for the near term. Hopefully, monetary policy will be gradual and rational, but yes, it might occur, just not in the immediate future.

Could you share what the average maturity of your corporate loan book is across the loan book in general?

It differs. It’s disclosed in the 10-K but varies for every product and changes with interest rates.

On your tax Q&A, you mentioned what the impact of tax reform is across different businesses from a growth standpoint. You also talked about the potential for competition being uncertain in terms of its impact on various products. Can you talk to that and speak to which products and businesses you see more scope for competition, less scope for competition? How does that influence your investment decisions across different businesses?

If you go below our top line businesses and the businesses beneath that, the majority are covering their cost of equity by a significant margin today. Our investment strategy wouldn't be directly impacted by marginal changes in pricing and profitability. We continue to invest in everything we can do to improve customer experience. It's uncertain, and you can see, if you have four organizations competing for a large structure transaction, the cost of capital and taxes will feature in discussions. On the other hand, high-volume businesses with very high margins will have less immediate impact. I believe we've been consistent on this over the last years.

An example away from finance: Utilities are under pressure because of rate base and after-tax returns; they will pass it on to consumers. This could vary by state with the process. Marianne spoke about your cap rates and stocks, and it’s noted that anything in the market might feel the change immediately. The chocolate or cereal industry won’t just recalibrate prices because of tax changes. It's a broad spectrum. We need to wait and see how it plays out.

The Commercial Banking business is doing extraordinarily well in terms of growth and profitability. Can you talk about sustainability of the momentum, balance sheet growth, and overall revenue growth?

Decades. We've entered the top 50 MSAs, and we're getting products and services. We built technology in cash management. We're better serving U.S. middle-market companies for their international needs; it can go on for a long time. We have good margins and people are doing a great job. We have specialty finance lines.

The Commercial Bank is the nexus of everything we do. It's delivering the entire company to our clients in a wonderful way. We’ve invested in 100 new bankers/year long-term, opening significant improvements across the customer experience and technology. Credit aside, where there will be a cycle, the business is positioned to excel.

We should not leave this call without mentioning our custody and fund services business. We have tremendous new technology, gained share in emerging markets, and improved service levels. We’ve also improved Treasury Services, providing a new international payments system.

On the consumer side, we have made great strides in our digital offerings; the outlook has improved with significant enhancements on Zelle and QuickPay. Many growth initiatives are on the way.

I just have one quick question on Securities Services. Within there, you saw a good growth in your assets, on custody, up over 3% quarter-on-quarter on an annualized basis, but the revenues were up less than 1%. Can you highlight what was the difference between AUC growth and revenue growth this quarter?

In Securities Services, we make money on NII, transactions, and AUC. Depending on whether it's fixed income or equities, it drives those revenues. Therefore, you can't directly link overall revenue to increases in assets under custody. It may not necessarily move in line. The decomposition shows time market levels and higher flows by region, and revenue based on AUC was in line.

The full year effect does not happen in 12 months. Even if you see AUC go up, it could be a year before you see that full-year effect.

Thanks, everyone.

Thanks for joining us; happy New Year, everybody.