JPMorgan Chase & Company (JPM) — Q2 2018 Earnings Call Transcript

Thank you, operator. Good morning, everyone. I’m going to take you through the earnings presentation which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on page one, the firm reported net income of $8.3 billion and EPS of $2.29 on revenue of $28.4 billion, all were record for the second quarter, even exceeding the benefit of tax reform. Our return on tangible common equity was 17%. And also included in the results were two notable items, which I will call out in a moment, excluding which EPS would have been about $0.10 higher. The strength this quarter was broad-based across businesses and highlights include average core loan growth excluding CIB of 7% year-on-year, consumer deposit growth of 5% which we believe continues to outpace the industry; card sales up 11%; and client investment assets and merchant processing volumes, each up 12%. We maintained our number one rank in Global IB fees and CIB delivered double-digit revenue growth across the board. Commercial bank revenue was up 11% year-on-year with IB revenues being a bright spot this quarter. And in asset and wealth management, AUM and client assets were both up 8%. Turning to page two for more details about the second quarter. The firm delivered strong core positive operating leverage this quarter. Revenue of $28.4 billion was up $1.7 billion or 6% year-over-year. Net interest income was up $1.1 billion or 9%, reflecting the impact of higher rates and loan growth, partially offset by lower market NII. Net interest revenue was up over $600 million, driven by strong performance in markets and IB fees and also higher auto lease income. NII this quarter was negatively impacted by a rewards liability adjustment in cards. And remember that last year included a significant legal benefit. Excluding these two items, NII would have been up $1.6 billion and total revenue up 10%. Expense of $16 billion was up 8% year-on-year, with half of the increase directly related to incremental revenues, principally compensation in the CIB, transaction expenses and auto lease growth. About a third related to continued investments in technologies as well as headcount across the businesses and the remainder was largely a loss on the liquidation of a legacy legal entity as part of our simplification efforts. And if you exclude this item, expense was up only 7%. The legal entity loss, together with the rewards liability adjustment in cards are the two notable items I mentioned at the beginning for a total reduction of over $500 million pre-tax. Credit costs of $1.2 billion were flat year-on-year and credit trends remained favorable across both consumer and wholesale. Shifting to balance sheet and capital on page three. We ended the second quarter with CET1 of 11.9%, up about 10 basis points versus the last quarter as most of the capital generated was returned to shareholders. Risk-weighted assets were relatively flat, despite solid growth in loans and commitments, being offset across other categories. In the quarter, the firm distributed $6.6 billion of capital to shareholders and last month the Fed informed that they did not object to our 2018 capital plan. We were pleased to announce gross repurchase capacity of nearly $21 billion over the next four quarters and the Board announced its intention to increase our common dividend to $0.80 per share effective in the third quarter. Moving on to page four on consumer and community banking. CCB generated $3.4 billion of net income and an ROE of 26%. Core loans were up 7% year-on-year driven by home lending up 12%, business banking up 6%, card up 4%, and auto loans and leases also up 4%. Deposits grew 5%. And although growth is slower than a year ago, we are seeing record high retention rates and customer satisfaction scores. Client investment assets were up 12% with more than half of the growth from net new money flows and we are capturing an outsized share as our customers shift from deposits to investments. Card sales volume was up 11%. And we announced several new cards as we continue to update our product offering. Revenue of $12.5 billion was up 10% year-on-year. Consumer and business banking revenue was up 17% on higher NII, driven by continued margin expansion as well as deposit growth. Our lending revenue was down 6% on production margin compression and lower net servicing revenue, despite higher purchase volume in retail. And cards merchant services and auto revenue was up 6% driven by lower card acquisition costs, higher card NII on margin expansion as well as loan growth, as well as higher auto lease volumes. This was largely offset by lower net interchange, driven by a rewards liability adjustment of about $330 million, reflecting strong customer engagement across our Ultimate Rewards offering. As a result, the card revenue rate was 10.4% for the quarter, but our full-year guidance of approximately 11.25% holds. Expense of $6.9 billion was up 6% year-on-year, driven by higher auto lease depreciation and investments in technology. Finally, on credit. Charge-offs were down $36 million year-on-year, including a recovery of about $130 million from a loan sale in home lending. This was largely offset by higher net charge-offs in cards. The card charge-off rate was 3.27%, reflecting seasonality and is in line with expectations and in line with our guidance. There were no reserve actions taken this quarter. Turning to page five and the corporate and investment bank. CIB reported net income of $3.2 billion on revenue of $9.9 billion, up 11% and an ROE of 17%. In banking, we maintained our number one ranking for the quarter and year-to-date in Global IB fees and with a record first half performance, and we grew share across the regions. IB revenue of $1.9 billion was up 13% year-on-year, outperforming the market but was down slightly as we saw robust activity, particularly in M&A and ECM. It was a record second quarter for advisory fees, which were up 24%, benefiting from a number of large deals closings this quarter. We gained share and ranked number two globally. Equity underwriting fees were up 49%. We ranked number one globally as well as in North America and EMEA and gained share in a competitive environment, driven by IPOs and convertibles in the two most active sectors, healthcare and technology, which are areas of strength for us. Additionally, we saw good momentum in private capital market as clients are exploring alternative sources of capital. And debt underwriting fees were relatively flat versus a very strong prior quarter, supported by healthy acquisition related activity. And we ranked number one in DCMs globally and across all the products. Looking forward, the overall pipeline remains strong. Moving on to market. Total revenue was $5.4 billion, up 13% year-on-year or up 16% adjusting for the impact of tax reform and was driven by strong results in equities, solid performance across categories and with performance picking up in the second half of the quarter. Fixed income markets revenue was up 12% adjusted on the back of good client flow and decent volatility and with commodities making a notable recovery from a challenging prior year. It was a record second quarter for equities with revenue up 24%, driven by strong client activity and favorable trading results, and with particular strength in cash, prime and flow derivatives. Treasury services and securities services revenues were each up 12%, driven by higher rates and deposit balances, and security services also benefited from higher asset-based fees on new client activity and higher market levels. Finally, expense of $5.4 billion was up 11%, driven by higher performance-related compensation, volume-related transaction costs and investments in technology. The comp-to-revenue ratios for the quarter were 27%, consistent with the prior quarter. Moving to commercial banking on page six. Another strong quarter for this business with net income of $1.1 billion and an ROE of 21%. Revenue was a record for the second quarter, up 11% year-on-year driven by higher deposit NII and strong investment banking activity. Gross IB revenue of $739 million was up 39%, driven by several large transactions and strong underlying flow of business and the overall pipeline is robust and active. Expense of $844 million was up 7% as we continue to invest in the business, both in bankers and in technology. Loan balances were up 4% year-on-year and 2% sequentially. C&I loans were up 3% year-on-year and sequentially due to increased M&A related financing with strengths in our expansion markets as well as in specialized industries, and despite lower tax-exempt activity. CRE loans were up 4% year-on-year and flat versus last year as there continues to be a lot of competition for high-quality assets and we are selective given where we are in the cycle. Finally, credit performance remains strong with a net charge-off rate of 7 basis points. Moving on to asset and wealth management on page seven. Asset and wealth management reported net income of $755 million with a pretax margin of 28% and an ROE of 33%. Revenue of $3.6 billion was up 4% year-over-year driven by higher management fees on growth in long-term products as well as strong banking results. Expense of $2.6 billion was up 6%, driven by continued investment in advisors and technology as well as higher external fees on revenue growth. For the quarter, we saw net long-term inflows of $4 billion with positive flows across multi-assets, equities, and alternatives, partly offset by outflows in fixed income. Additionally, we saw net liquidity inflows of $17 billion. AUM of $2 trillion and overall client assets of $2.8 trillion were both up 8% with the increase being split about equally between flows and higher market levels globally. Deposits were down 7% year-on-year, reflecting continued migration into investments where we are also capturing the vast majority, and down 3% sequentially on seasonal tax payments. Finally, we had record loan balances, up 12% with strength in global wholesale and mortgage lending. Moving to page eight and corporate. Corporate reported a net loss of $136 million. The result included a pretax $174 million loss on the liquidation of a legacy legal entity, previously mentioned. But it’s of note that while this loss through expense affects retained earnings this quarter, it is offset from a capital perspective. So, it’s capital neutral. Before I wrap up, you may note, we have no outlook page here. Although both revenue and expense are trending higher market-related, given we’re only halfway through the year, we’re not updating our outlook at this point. So, to close, the macroeconomic backdrop continues to be supportive. Consumer and business confidence and sentiment remain high, client activity levels are robust, and the markets are open and active. We are pleased with the firm’s results this quarter. Our broad-based financial performance clearly demonstrates the power of the platform. Revenue grew strongly, double digits year-over-year in many cases. We realized positive core operating leverage, despite significant investments and credit trends remain favorable across both consumer and wholesale. This was a clear record for the second quarter, whichever way you slice it. We remain focused on consistently delivering for our customers and our communities and investing for the long term. With that, operator, can you open up the line for Q&A?

Hey. Good morning, Marianne. Can I ask you to talk a little bit about the card business? And you mentioned the strong customer engagement with regards to the rewards markdown. Can you just walk us through what’s the drivers of that and this is a one-time event and does it affect the card revenue rate outlook?

So, I’ll start with the end because that’s pretty simple. It obviously affected the card revenue out in the quarter. You can see that that was 10.4%. And you can see on the page, we’ve adopted for the impact. But, the 11.25% for the year remains true, which is to say that while this may be slightly larger than normal, it’s not exactly a one-time item. We regularly review our liability as we observe the mix of our portfolio and the behaviors of our customers. On face value, I know rewards is often talked about as a competitive matter. I mean, this is less about competition per se. In fact, we have record low sales attrition, which in a competitive environment is really very good. And it’s more about customers' awareness of the value proposition of rewards and them being engaged in redeeming them, which for us is a positive thing because engaged customers spend more and we’re seeing that they attrite less, and we’re seeing that. And they will bring us more deposits and investments as we deepen relationships. So, I would say it’s a little larger than normal. We do it pretty regularly. So, it’s not one-time but it’s not completely typical.

Got it. And in the press release, Jamie mentioned the first paragraph about increasing competition. Is that a global across all businesses comment or are you seeing it now really in specific areas? Thanks.

I think it's pretty widespread across all businesses in general, and there are certain areas where it's particularly intense. In the retail space, for instance, we mentioned commercial real estate and mortgage, both of which face capacity issues and competitive pressures for various reasons related to the current economic cycle. Overall, this competition is everywhere. However, we are maintaining our position and, in many instances, gaining market share. So, we’re performing quite well.

Hi, Marianne. I wanted to ask you what you are seeing this quarter in terms of customer deposit trends, a little more color on both the pricing beta and volume balances. Kind of wondering, if you are seeing a lot of competition from the online competitors like Marcus and whether those are affecting your deposit balances with consumers being attracted towards high yields and affecting your pricing decisions?

Consumer deposits have increased by 5% year-on-year, as expected, although the growth is slowing down. While we've noticed some online and regional competitors attempting to expand into the large bank sector, we haven't experienced that ourselves yet. Analyzing the deposit slowdown, it seems most customers are shifting their funds into investments, especially among regional customers who appear to be managing their accounts rather than seeking better rates. Increased spending is also contributing to this shift, but to a lesser degree, and we aren't currently seeing a significant outflow of deposits to online or other competitors. Presently, we are not adjusting pricing as we observe these trends. In the higher net worth segment, we continue to witness a movement towards investment assets, but we are effectively recapturing most of those funds. Overall, the situation is developing as anticipated, and we are not losing deposits in large quantities to third parties.

Okay. And just a follow-up on that. Can you remind us what’s the opportunity you see with the rollout of Finn and what advantages you expect to have in that arena?

I see Finn as one of several digital innovations we're implementing, and it's important to consider it alongside our broader digital account opening efforts. Now that we've launched Finn nationwide, it's still in the early stages, and we are still gaining insights from it. We will continue to improve it, and it has a very high net promoter score, indicating that customer experience is positive. However, it remains quite new.

We haven’t really marketed…

So, we’re just starting. I would say, digital account opening on the other hand is a pretty good success story. And we are seeing a lot more accounts opened digitally across the channels and we’re seeing of those, a decent chunk of net new to bank. And where we’re seeing existing customers open new accounts, we’re getting incremental money. So, we are seeing our digital asset pay off and even more broadly than that we could go into quick payments and the like. But, I wouldn’t focus overly on Finn as an eye focusing but think digital more broadly.

Hey, good morning. Maybe just talk a little bit about loan growth. Obviously, it seems to have picked up in the Fed data over the last month or two. What are you guys seeing on the ground? And do you think what we’ve seen so far is a good indicator for maybe a more sustained pickup in growth?

Yes. I would say that we would use the commercial bank C&I loans as kind of bellwether. There has been decent demand. And I mentioned it in my remarks, decent demands, not exclusively but partly on the back of a very robust and active M&A environment. And so, the demand is there, I would say, growth is solid and in line with our expectations we will continue to hope to see that growth as we go through the year. And there may be other tailwinds. We’ve yet to see the full effect of tax reform flow through in profitability and free cash flow. And so, I would characterize loan growth as solid and our expectations for the outlook to remain solid, benefitting from a very active capital markets environment.

Okay. As a follow-up, when considering net interest margin going forward, you mentioned a couple of years ago that a normalized range might be around 265 to 275, and currently it's at 246. Is there a specific loan to deposit ratio you believe is necessary, or a certain interest rate level? I'm just trying to understand how to approach net interest margin moving ahead.

Yes. Currently, we're looking at fed funds rates between 125 to 200, but we haven't reached what we would consider normal rates yet. When discussing the normalization of NIM, we're considering it in the context of the economic cycle, taking into account the new liquidity regulations and various other factors. We still have several rate hikes to implement before we attain that normalization. However, on a core basis, and with a significant market balance sheet, we are observing NIM expansion as expected, progressing toward that normal range. We anticipate year-over-year growth towards that level, but we’re not there just yet.

My question is about the regulatory process this year under the new leadership. I would like to know if you can share any observations regarding changes. Specifically, how receptive were the regulators during the comment period for the SEB and the CCAR process? Was there any noticeable difference in the processes this year compared to previous years?

Yes. I would say regarding the SEB commentary, the regulators were quiet during the comment period, which meant there wasn't any two-way dialogue at that time. Now that the comment period has ended and the industry and bilateral letters have been submitted, we expect that dialogue to begin. I remain optimistic about the current leadership's willingness to consider the feedback provided. The proposal that was issued for comments included many questions seeking input, and the proposal itself aligns well with what we've understood from previous speeches, indicating that discussions are still ongoing rather than concluding. We are hopeful that the feedback will be taken seriously, especially considering the significant volatility observed in this test. We believe that industry discussions will begin now. Regarding CCAR, it seemed similar to previous years, not that it isn’t constructive, but it doesn’t feel like it has fundamentally changed compared to prior years.

And just my follow-up question is, the pushback that I am getting from a lot of investors on bank stocks is that we are long in the tooth in the economic cycle. Clearly, there is strong activity levels that you posted this quarter and the credit metrics that you posted would suggest otherwise. And I am wondering, both Jamie and Marianne, how you would respond to that pushback that now it’s not the time to invest in banks because we are late in the game from an economic standpoint?

Yes. I mean, I would say two things, which is while this cycle is older than potentially typically cycles have been, growth over the last decade has been lower through the recovery. So, there is plenty potentially of room to play. And as we look at all the economic data, not just here in the U.S. but also globally, there are no real signs of fragility. And I know people are staring at the flat yield curve and we would say that that flat yield curve is a bear flattening, a good flattening compared to profitability perspective and not some looming risk of a recession embedded in it. So, I am saying it’s still negative. Real policy rate is still at zero, credit is very benign. That said, we are in cyclical businesses, no doubt. And so, we are preparing and we will be ready when the cycle turns and no doubt there will be impact from that. But through the cycle, I think we’ve proven our business model will produce strong shareholder returns and among best-in-class performance.

I wanted to follow up on that last question, if Jamie could respond to. I mean, Marianne, you said the macro is very supportive, you sound very positive. On the other hand, the 10-year treasury yield has flashed some warning signs to a variety of parties. So, Jamie, we have the tax cut, we’ve been waiting for the extra boost to the economy, whether it’s capital expenditures or whatever. Do you think the economy is accelerating, it’s still on steady footing, it’s the same or maybe it’s slowing down? And how should we think about the 10-year? And how do you think about the 10-year, and how do you manage to a flatter yield curve?

Yes. Mari mentioned that over the past 9 or 10 years, we've seen growth at 2% while averaging 20% over that period, which should have been nearer to 40%. There’s substantial evidence that labor market slack is being addressed as people return to work. Consumer finances are solid, capital spending is increasing, household formation is on the rise, housing supply is tight, and the banking sector is much healthier than in the past. Although consumer and business confidence have dipped from their peaks, likely due to trade issues, the outlook for growth appears strong, with few potential obstacles in sight. It's important to note that while past patterns may suggest certain outcomes, I believe the current situation is different. The Federal Reserve is adjusting its balance sheet, and it’s feasible for interest rates, including the 10-year, to rise in a favorable economic environment. Historically, increases in rates can occur alongside healthy economic conditions, and it isn't always detrimental when the 10-year rises.

Right. I would also say that the shape of the curve is correlated to fed funds in a tightening cycle and that is what we’re seeing. So, while there are other factors weighing potentially on the 10-year in terms of still very accommodative central bank policy, particularly in the banks of Japan and the ECB where obviously trade is not necessarily constructive just in terms of the narrative, short-term underfunded pensions going into bumps, there are some technicals. But fundamentally, what you are seeing in terms of the flattening is pretty typical of a tightening cycle. And as long as it’s accompanied with solid to strong economic growth, it doesn’t concern us at this point. And in fact, as we’ve been pointing out, we are still levered toward fund and rates from a profitability perspective, and we do expect the curve to steepen over time.

Just one follow-up on the competition conversation. I just want to see, your loan growth decelerated but it was in line with your 7% to 8% goal. Your loan beta capture, what you’re getting on the pricing side is actually a little bit better than what you’ve given up on the deposit side. So, that all seems fine, but this is the first time I remember putting in the comment about the competition. Are you still okay with the 7% to 8% goal? And maybe just an add-on to that, I’m just curious if part of the competition has anything to do with the private credit market that seems to be growing pretty strongly.

I would say just a tiny little correction. Our outlook was 6% to 7% core loan growth excluding the CIB. We’re at 7% now. Things are still moving ahead in line with that. I would also just point out that it is an outlook, not a target. So, while we still feel like that is our outlook at this point, we obviously are going to make the right decisions, based upon the environment that we’re in. Competitively the private credit market for commercial real estate, for leverage lending, it’s competitive, but so are also the mainstream competitors. It’s just the environment is pretty constructive and everybody is trying to get access to the high-quality assets. So, margins are under pressure. And we will make sure we’re getting the right return for the risk we’re taking.

Okay. And then, the follow-up on the expense side. If you did 16 times 4 would be 64. Your outlook is 62, but a lot of those were good expenses on better volumes. Are you still on track in your mind for the overhead ratio goals? I don’t want to overly focus on a dollar amount.

There are a couple of things to consider. The 62 billion figure was prior to the impact of the expense gross up. The actual outlook for the full year was around 63 billion, including those factors. This quarter saw a one-time item of 174 million related to the legal entity liquidation, which was known and included in our numbers, but it cannot be annualized or multiplied by four. You're correct that looking ahead for the full year, if we exceed our outlook of 63 billion, it would be primarily due to increased performance-related compensation tied to higher revenues. Additionally, we are waiting for the removal of the FDIC surcharge, which was anticipated to occur in the middle of this year, but now it may be at risk of being pushed to the third or fourth quarter. That could impact this year's projections, but to address your broader question, yes, we are still on track for our expense overhead ratios.

Following up on the topic of economics and policy, how do you perceive trade friction and geopolitical concerns affecting client sentiment, whether from institutional or corporate clients? Furthermore, how do you assess these factors as a potential risk to global and U.S. growth?

Yes. So, I would say, so far, where we are is that trade is firmly part of the risk narrative. So, it’s definitely, as Jamie has said, on the psyche of people. But it’s not at this point causing them to change the strategic actions and decisions that they’re making, but clearly part of the conversation. And as currently outlined, it’s more of that than it is a real impact to sort of the global macroeconomic outlook. But that isn’t to say that uncertainty can’t ultimately lead to more challenges or slower growth but because confidence is a really important part of not just business investment cycle but also the financial market stability. So, at this point, it’s more of a risk narrative than it is an actual driver. But, it is important that that uncertainty is taken off the table.

Okay. And if I could just ask a quick follow-up, and I apologize if you addressed it earlier, a lot of multitasking this morning, but on the market side, you did much better than what Daniel suggested in his update in terms of year-on-year being flattish overall. Can you just give us a sense of what changed in the last month of the quarter?

Yes. I’m going to say yes. In a nutshell, it got better. But let me just give you the context. The context is as you’ll recall, as we ended the first quarter, there were some bouts of volatility and clients became more cautious. And that carried over into the first part of this quarter. And so, while activity was fine, it wasn’t as strong. In the second half of the quarter, that generally faded, activity levels picked up. And I would say there were more catalysts. And ironically, one of the more catalysts when you’re thinking about trading volatility or intraday volatility or vol of vol, trade is part of that; emerging market idiosyncratic events are part of that. The European sovereign Italy situation, so, there’s just more catalysts in the market and just generally, more client participation. Sorry. Just to finish that to make sure that no one is confused. It was pretty broad-based. It was pretty consistent throughout the second half of the quarter. And it wasn’t a lot of one-off large trades.

Jamie, I wanted to ask about the China investment. I know that you put in the press release that you announced this quarter plans for a more significant investment in China. I just wanted to understand the timing. Is this something that’s over the next year or this is a longer-term three to five-year? And if you could give us a sense as to how much is in your control versus needing regulatory approval from folks over there etc.?

Sure. I'll provide a broader comment about our business. We don’t operate under the assumption that a recession could happen; we are aware one is coming. We've already adjusted our pricing for a potential recession. We tend to look at clients, bankers, cards, accounts, and services to guide our business decisions. Some choices are based on portfolio strategies, such as increasing or decreasing our mortgage portfolio or adjusting our growth and lending practices if we perceive credit quality risks. We will make those adjustments when necessary, but we also plan to continue adding accounts. I’m not overly concerned with the 10-year bond or other fluctuations; we can manage those risks. Our goal is to attract more clients across all our businesses and provide excellent products and services. Regarding China, it’s a long-term opportunity. We aren't looking for immediate results. Within the next 12 years, China’s internal markets, including its bond and stock markets, may grow to be comparable in size to those in the United States. Therefore, we aim to conduct our operations in China just as we do elsewhere. Currently, we can do a significant amount of this in Hong Kong, but not yet in Shanghai. We've applied for the necessary licenses, which ultimately depend on regulatory approvals from both our regulators and theirs. This situation may or may not be influenced by trade relations. I view this as a specific moment in time, and eventually, we expect to receive these licenses and become a major competitor in Shanghai. It's important to note that we already engage extensively with Chinese companies globally and in Hong Kong. With many firms entering China, we're seeking the complete set of licenses to meet the needs of Chinese businesses. I genuinely believe it would be beneficial for China to have a firm like JP Morgan operating within its market, especially in terms of equity, debt, credit, transparency, and governance.

But right now, today, the ability to operate in Shanghai?

No. We already handle deposits and certain banking services. What we cannot engage in are equity, debt, and trading of those assets. If we were to obtain this license with a 51% stake one day, we would then be able to conduct basic equity underwriting, equity sales and trading, research, debt underwriting, and debt sales and trading. We could do all of this now in Hong Kong. However, keep in mind that Chinese companies have the option to operate in Shanghai, Hong Kong, London, or New York. Our goal is to have the complete range of capabilities.

Marianne, can you share with us, and correct me if I’m wrong, I think you guys have given us some color in the past about the impact of the fed taking down their balance sheet over the next three to five years by a couple trillion dollars that it will impact your deposit side of the balance sheet. Can you give us an update of where that stands today?

The Federal Reserve has been following a clear strategy, decreasing their balance sheet by approximately $50 billion each quarter. We previously discussed that removing $1.5 trillion from the system will ultimately affect deposits, with our share estimated at 10%. We indicated that this could lead to deposit outflows ranging from $50 billion to $75 billion over the next several years. These outflows would mainly come from non-operational sources, which would have a limited effect on liquidity. Everything is progressing as expected.

Okay. And then, as a follow-up, I know you’ve touched on this increased competition. Can you give us maybe some more details in the commercial real estate and the residential mortgage area, what you’re actually seeing? Is it just pricing, or is it now loan covenants, is it loan-to-values, any further color there?

So, residential mortgage correspondence in particular is pricing; pricing, pricing, pricing. And so, we will see share if pricing goes to what we consider to be not sufficient to return shareholder value. In the commercial real estate space, I would say, it is primarily pricing. So, spreads are under a lot of pressure. And the competition, as I said, it’s GSEs, it’s insurance companies, it’s non-bank commercial institutions. It’s a little bit less credit terms but still pretty robust, albeit that we are seeing a tiny shift to the right in LTVs. We’re not going there, by the way, but I would call it pretty modest. So, I’d say generally terms are holding up quite well.

On the competition issue. I think it’s good for the country, United States that we have a fully competitive field in card, mortgage, retail, asset management, commercial banking, investment banking, sales and trading. There are strong competitors everywhere. It’s just recognizing that. That’s all it is. It’s a good thing. It’s called capitalism.

Thank you for addressing my question. I have one question and a follow-up. I’m interested in the geographical speed of the IB performance. You mentioned some catalysts, including the situation in Italy and the niche market. I would like to know if the strength was primarily due to the U.S. or if there were specific areas that exhibited either weakness or strength. Additionally, do you believe it is gaining momentum?

I am sorry.

It would be really helpful if you guys weren’t on your cellphones.

I am really, really sorry. But actually you were breaking up. And so, I didn’t catch most of that question.

Where is the IB doing well internationally, USA or Italy?

Okay. So, I would say across regions. Equities, strong performance across regions. While there were more catalysts this quarter, but you mentioned Italy, I think. None of those were particular drivers. So, we did fine on all of those, as well as I mentioned. So, I would say broad-based, gaining share we think in some areas in equity, cash and prime in particular, and holding our own elsewhere. And I would say solid performance across the FICC spectrum. And investment, yes, gaining share in investment banking. But obviously, you can’t look at any one quarter.

Thank you for that. Regarding the second part, do you believe you have begun to gain market share from European competitors in the U.S., particularly those that are deleveraging?

I mean, I would say that if you just go back over the course of the last couple of years, you have seen some share shift from European banks to U.S. banks broadly. In the prime space, I would say U.S. prime incumbents are gaining some share, but it’s not a particularly new trend and it’s not the dominant trend.

To follow up on the net interest margin, you mentioned ex the markets business it was still increasing. And I was wondering if you could size the magnitude of the NIM increase linked quarter on a core basis, ex markets.

Yes. So, linked quarter, reported down 2 basis points because of lower markets NII and higher market assets, $20 billion; core up 8 basis points.

Okay. That’s helpful. And then, just separately within CIB, the net charge-offs went up. Is that just some of the cleanup in energy? I know, you mentioned that there was a reserve release related to energy, but you had a little blip in the charge-offs there and I just wanted to get some color on that.

So, in CIB, the charge-offs were driven by two names and the principal one was the remaining piece of the Steinhoff loan we sold this quarter. We had a reserve release against it that was larger.

Thank you. Just a follow-up, Marianne. On the capital return that you guys were approved for in terms of the share repurchase. Is that going to be spread out evenly over the next four quarters or will it be more frontend loaded?

So, we haven’t disclosed that. But, if you look at our historical pattern, it’s pretty even.

Just a question on CECL. I think, Jamie mentioned in the past that CECL is not a big deal for you guys, and maybe you could explain why and what kind of prep work and what you are thinking about as you work to adopt that over the next couple of years?

Sure. I mean, look, CECL is not a big deal insofar as we are getting ready for it. I will tell you that we haven’t disclosed an adjustment number on the basis that we’re still working through the modeling and the data. And it is more complicated, perhaps operationally to get everything lined up than you might think. We’re going to intend to be running some stuff in parallel next year. So, we’ll be able to give you much more color next year. Generally speaking, as we move to life of loan losses, it won’t shock you to know that we will have an adjustment to our reserves through equity. It will be driven most likely by any of the portfolios that have longer weighted average life versus incurred loss models, and card would be the most notable, to a lesser extent unfunded wholesale commitments. But, it’ll be manageable in the context of the firm; it goes through equity. And then, if you think about the economics, the cash flows, the NPV of these loans doesn’t change…

So, this is what my comment relates to.

Yes. It doesn’t change the economics of the loans. You upfront a little bit of reserves you get paid for over time. We don’t think it’s going to fundamentally shift the dynamics. But that will play out.

You don’t make economic decisions based upon accounting.

Are there any asset classes where it’s shorter under CECL than under the incurred loss model?

It’s challenging because it's the life of the loan. It's hard to envision a life of loan that could be shorter than an incurred loss. So, no, not really. For us, the main reason it's pretty limited—though not to say there's no other impact—is that it will mainly be driven by the areas I mentioned, because in most of our wholesale space and many of our other products, we are covered for multiple years, if not close to the life of loan at this point.

A quick question, follow-up on card retention. You mentioned that rewards redemption is a sign of engagement. I’m wondering if you could share with us, once redemption hits a certain level in terms of the number of points, so, the number of points remaining may not be enough to redeem a trip or whatever. What is the retention level then?

I am not sure that I totally follow the question…

They are constantly creating rewards points and using those points. When they redeem rewards points, some points cost us more than others. The rate of use will slightly affect the economics. Overall, it aligns with our expectations over time.

And remember that in a very simplified model of the universe, we would experience an exceptionally high level of redemption. We provide these rewards to customers because we believe they perceive great value in them. So, we’re continuing to observe this as the mix changes.

Thank you very much you guys. Bye, bye.

Thanks for joining. We will talk real soon.