JPMorgan Chase & Company (JPM) — Q3 2018 Earnings Call Transcript

Thank you, operator. Good morning, everyone. I’m going to take you through the presentation which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on page 1. The firm reported net income of $8.4 billion and EPS of $2.34 on revenue of $27.8 billion with the return on tangible common equity of 17%. The result this quarter was strong. Record net income for the third quarter even excluding the impact of tax reform, with key drivers being higher net interest income across businesses reflecting continued rate normalization and solid growth in both loans and deposits, as well as very strong credit performance across all portfolios. Highlights include, average core loan growth excluding the CIB up 6% year-on-year, card and debit sales, as well as client investment assets and merchant processing volumes in consumer were all up double digits. We gained share in global IB fees and across all regions year-to-date, and in Asset & Wealth Management, AUM and client assets were both up 7%. Turning to page 2 and some more detail about our third quarter results. Revenue of $27.8 billion was up $1.4 billion or 5% year-on-year. Net interest income was up $945 million or 7%, reflecting the impact of higher rates, net of lower market NII, as well as loan and deposit growth. Noninterest revenue was up $425 million driven by market NII and higher auto lease income, partially offset by markdowns on certain legacy private equity investments. Expense of $15.6 billion was up 7% year-on-year. More than half of the increase relates to investments we’re making in technology, marketing, bankers broadly defined, and real estate. The remainder is driven by revenue-related costs, principally higher auto lease depreciation and transaction expenses on higher volumes. Credit trends remained favorable across both consumer and wholesale. For the quarter, credit costs of $950 million were down $500 million year-on-year, driven by changes in consumer reserves. Briefly on page 3, turning to the balance sheet and capital. So, little to say here other than as you can see, capital and risk-weighted assets remained basically flat quarter-on-quarter with the CET1 ratio of 12%. Moving on to page four and Consumer & Community Banking. CCB generated $4.1 billion of net income and an ROE of 31%. Core loans were up 6% year-on-year, driven by home lending up 10%, business banking up 5%, card up 4% and auto loans and leases up 3%. Deposits grew 4% year-on-year, continuing to outpace the industry although slower than a year ago. According to the recently released FDIC annual survey, we grew at nearly 2 times the average and we were the fastest growing bank in 9 of our top 10 markets. Chase also earned the number one spot in customer satisfaction in the J.D. Power U.S. National Banking Satisfaction Study. Client investment assets were up 14% as we saw clear record net new money flows, more than doubling year-on-year, with flows accounting for more than half of the growth. Card sales volume was up 12% with strength across our portfolio, and we also saw very strong debit sales performance, up 13%. Revenue of $13.3 billion was up 10%. Consumer and business banking revenue was up 18% on higher NII, driven by continued margin expansion and deposit growth. Home lending revenue was down 16% as higher rates drive loan spread compression and the smaller markets pressuring production margins. In addition, net servicing revenue was down including the MSR. Card, merchant services, and auto revenue was up 10%, driven by higher card NII on margin expansion and loan growth, higher net card fees on lower acquisition costs predominantly offset by lower net interchange, and also on higher auto lease volumes. Expense of $7 billion was up 7%, driven by continued investments in technology and by auto lease depreciation. The overhead ratio was 53%. Finally on credit, starting with reserves. This quarter, we built reserves in card of $150 million, largely driven by growth. And we released a reserve in the home lending purchased credit-impaired portfolio of $250 million, reflecting improvements in home prices and delinquencies. On charge-offs, there are few moving pieces. Year-on-year charge-offs were down $137 million, driven by a recovery from a reperforming loan sale in home lending this quarter of about $80 million, together with an approximately $50 million charge-off adjustment in auto this period last year. Excluding those, charge-offs were about flat. But, we are seeing improvement across all portfolios except for card. And in card, while charge-offs are up as newer vintages season, they are up less than expected and credit performance remained very strong. At this point, we expect card charge-off rates for the year to be below our guidance at about 310 basis points. Now turning to page five and the Corporate and Investment Bank. CIB reported net income of $2.6 billion, and an ROE of 14% on revenue of $8.8 billion up 3%. In banking, we maintained our number one ranking year-to-date in global IB fees as well as North America and EMEA, and gained share across regions. For the quarter, IB revenue of $1.7 billion was flat to a strong prior year and we outperformed in a market of sound meaning as we saw robust activity, particularly in ECM. Equity underwriting fees were up 40%, gaining share across all products with continued strength in IPOs, particularly in technology and healthcare. Advisory fees were down 6% compared to a third quarter record last year, outperforming the market and gaining share year-to-date. And debt underwriting fees were down 11% although better than the market, as our strong lead left positions drove share gains. Looking forward, the overall pipeline remains strong, up solidly from the prior year across products. Moving to markets. Total revenue was $4.4 billion, down 2% or up 1% when adjusting for the impact of tax reform, so another good performance. Fixed income markets revenue was down 6% adjusted with no single predominant driver. We saw mild weakness in rates, financing, credit rating, and securitized products as a result of compressed margins and tighter financing spreads in range-bound and competitive markets. This was partly offset by higher activity levels in emerging markets on volatility and commodities returning to more normal levels relative to a weaker prior year. Equities continued the momentum from previous quarters and was up across all segments on the back of strong client activity. Equity revenue was up 17%, reflecting continued share gains in cash and prime and strong performance in corporate derivatives. Treasury services and securities services revenue were $1.2 billion and $1.1 billion, up 12% and 5% year-on-year respectively, driven by higher rates and balances. And securities services also benefited from higher asset-based fees on new client activity. Quarter-on-quarter, securities services revenue was down principally on seasonality and the impacts of the business exit. Finally, expense of $5.2 billion was up 8%, driven by higher legal expense, higher compensation expense as we invest in technology and bankers, and volume related transaction costs. 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 of $2.3 billion was up 6% year-on-year, driven by higher deposit NII. Gross IB revenue of $581 million was flat, although we saw a strong underlying flow of business and pipelines remained robust and active. On deposits, while we continue to benefit from the normalizing rate environment, as expected, balances are down year-on-year and bases are trending higher, as we are seeing some migration at the top end to higher yielding investments. Expense of $853 million was up 7%, as we continue to invest in the business in banker coverage and technology initiatives. Loan balances were up 4% year-on-year and 1% sequentially. In C&I, demand remains muted in the wake of tax reform as well client confidence is high, the balance sheet is strong and liquid, and the environment is competitive. For us, C&I loans were up 4% year-on-year and flat sequentially, in line with the industry. But if you decompose it, we’re growing strongly in our expansion markets and specialized industries, growing solidly in our core markets, but are seeing notable offset in tax expense activity, given the mix of our business. CRE loans were up 3% year-on-year, a little less than the industry as we’re seeing increased competition and continue to be very selective. Finally, credit performance remained strong with net recovery of 3 basis points. Moving on to asset and wealth management on page seven. Asset and wealth management reported net income of $724 million with a pretax margin of 27% and an ROE of 31%. Revenue of $3.6 billion was up 3% year-on-year, driven by higher management fees, net of fee compression on higher market levels and continued growth in long-term products. These are partially offset by lower mark-to-market gains, including on seed capital investments. Additionally, banking is also strong. Expense of $2.6 billion was up 7%, driven by continued investments in advisors and technology, as well as high external fees on revenue growth. For the quarter, we saw net long-term inflows of $8 billion with positive flows across all asset classes. In addition, we saw net liquidity inflows of $14 billion. AUM of $2.1 trillion and overall client assets of $2.9 trillion were both up 7%, with more than half of the increase being driven by flows and the remainder on higher market. Deposits were down 8% year-on-year, reflecting migration into investments with us, and down 5% sequentially including seasonality. Finally, we had loan balances up 12% with strength in global wholesale and mortgage lending. Moving to page eight and corporate. Corporate reported a net loss of $145 million. Treasury and CIO net income was up year-on-year, primarily driven by higher rates. Other corporate was a net loss of $241 million, including markdowns on certain legacy private equity investments of $220 million pretax. For the whole company, legal costs were a modest negative, with the benefit here in other corporate being more than offset in the CIB. Moving to page 9 and outlook. We recently gave you updated outlook, so unsurprisingly that still holds and it’s here on the page. Only two things of note. Our expense outlook assumes that the FDIC surcharge ended this quarter. So, clearly an extension would pose a risk. And on tax, there are a number of questions in the rules, which we expect to be clarified by the end of the year. We will have to work through them but would not expect any changes to be material. So to close, we are growing across most of our businesses. We’re investing heavily in all of them. We’re investing in technology, bankers, and beyond. Credit is in great shape and the earnings power of the company is evident. We are particularly proud of the strength and improvement in customer satisfaction broadly and our continued investments which drive leadership positions and market share gains. This quarter, we announced Sapphire Banking and our digital investing platform You Invest. We opened our first branch as part of our expansion strategy in Washington DC, announced additional expansion into Philadelphia and Boston, and also announced our Advancing Cities initiative as we invest for growth in the clients and communities that we serve. With that, operator, please open the line to Q&A.

Good morning, Glenn.

Good morning. So, at the Investor Day, I remember asking you the same question. So, I apologize. But, you have talked about consumer and corporate balance sheets being in great shape and having low debt service burden. The 10-year is up a modest 35 basis points since then and the world is freaking out that it’s the end of the cycle and that’s going to choke off the recovery. Your results are your results but some will say backward looking. Are you seeing any impact, A, at the modest increase in the curve now? And B, I’ll ask again, is there a level of rates where you would start to see an impact of slowdown in what you’re willing to lend, rising in credit costs, things like that? Thank you.

Yes, I would agree with the tone of your question regarding the current high level of rates. From our perspective, we aren’t observing anything in our discussions or in credit trends that would indicate this is a significant issue. With higher rates, we consistently assess our portfolio against potential shocks of up to 100 or even 200 basis points. While risks are more balanced now, there doesn’t seem to be any extraordinary stress evident. Although there may be more margin, it doesn’t appear to be overwhelming, likely due to the long period of low rates which has allowed people to prepare. There is ample liquidity, particularly in the corporate sector, where entities have managed to hedge. While there may be a certain rate level that could become problematic in the future, we don’t believe we’re approaching that point yet. I’m not suggesting there won’t be some selective downgrades or slight additional stress if rates rise significantly, but that’s not the situation we’re facing at the moment.

Okay. Thanks very much, Marianne.

So, I wanted to start with the question on the You Invest launch. As we think about the strategy for the business, I want to understand, is the goal to compete with the incumbents to win new clients or are you simply trying to augment the existing offerings for JPMorgan clients? And it’s really just our effort to understand the long-term strategy, given that the pricing is quite competitive but at the same time, the marketing effort has been fairly minimal so far?

Yes. I mean, remember, You Invest, it’s early. Jamie just said, I don’t know if you heard it. Yes and yes. Clearly, we are trying to add products and capabilities and value to our existing clients in an effort to continue to drive loyalty and engagement, and also earn more share of their wallet. But, we do think that the proposition is compelling and that the pricing is disruptive. And we should also expect over time to be able to attract new accounts. So, yes and yes, but it’s early days. We’re going to continue to develop You Invest, its capabilities to iterate it and improve it. So far, it’s early but good.

And just one follow-up for me relating to the commentary on the deposit side. You spoke of some of the headwinds to the deposit growth and these are more industry trends, including yield-seeking behavior on both the commercial and asset management side. I know you’ve given some helpful guidance in terms of the impact of Fed QE unwind as well, in the past. I’m just wondering, is the yield-seeking behavior you’ve seen so far consistent with your expectation, do you still expect to grow deposits as we look out for the next couple of years?

Yes, the answer is generally yes, as we expected. Of course, we cannot predict the timing and various aspects of these developments. However, it is taking a bit longer to materialize than we anticipated, though in line with our expectations. I would also say that we expect deposit growth to be slower, but still positive.

So, first question just on the rate question that you got earlier. But, I wanted to understand how you’re thinking about the impact on the outlook for your asset yields, in particular the securities portfolio. I know you’ve given guidance on that before, but given the sharp backup that we’ve got over the last couple of weeks, how is that impacting your forward look on that?

Yes. On the asset side of the balance sheet, generally speaking, a little less than half of our loans are variable, indexed to prime and LIBOR. Typically, in any quarter, there can be fluctuations due to one-time items. However, for every rate hike we observe at the front end, our assets are repricing at about half of that, which aligns with our expectations. If we experience sustained increases at the lower end of the curve, we would expect that to be reflected in the yield on our investment securities. This quarter, while there was a significant increase on a spot basis, the average did not reflect that, especially for mortgages, leading to a modest impact on investment security yields. Nevertheless, if these conditions were to be sustained and more pronounced, we would see a gradual shift of assets into higher book yields over time.

Okay. And then, my follow-up question has to do with a blockchain that you launched this quarter. I think, it was on September 25th, you launched a blockchain for international payments. And I know at Investor Day, you talked a lot about the investments you were making on that side. Should we be viewing this as a competitor to SWIFT? Is that how the vision is for this blockchain?

So, this is the Interbank Information Network which we talked at Investor Day. And now, we have I think 75 banks and growing signed up to it. I wouldn’t necessarily look at it exactly like that. I would say, this use case at least for now is very much around reducing the friction in the wholesale payment space in terms of inquiry and information sharing and not at this point about processing payments. So, we are still exploring use cases across the board on blockchain. I’m very excited about this and the uptake; it will be I think meaningful. But, I wouldn’t think of it that way, not yet.

My first question expands on what Glenn had asked. So, clearly, the bank stocks have been hit along with the broad market. And I guess, you’re telling us one of two things. One, either the economy is slowing down or the relationship between bank revenue growth and solid economic growth in the U.S. is broken or not somehow is correlated as expected. And I’m wondering, given your fairly strong results across the board, where is the market wrong in terms of how they’re thinking about either the economy or bank revenues related to a strong economy?

I think there is a lot of macro uncertainty and noise affecting the market recently, so it might be challenging to focus on any single driver or point of confusion. Looking at the economy, we don’t see any signs of a slowdown; it seems to be growing steadily. There is divergence globally, led by U.S. strength, but we expect more convergence ahead. Overall, our outlook on the global economy remains optimistic, although there are some risks present. Regarding monetary policy, given the growth outlook, things are aligning for a rate hike in December and possibly more hikes into 2019, which should support a steeper yield curve and be beneficial for bank stocks. As we’ve discussed over the years, with the Fed reducing its balance sheet and liquidity being withdrawn from the system, we are indeed seeing a slowdown in deposit growth. There is a natural feedback loop where repricing liabilities will affect the asset base, possibly leading to slower asset-side growth compared to the past, but this should occur at higher spreads. Thus, I don't foresee any change in our expectations regarding the drivers.

That’s helpful. And just as a follow-up, and I picked up in part of your response to an earlier question Marianne. As we think about your wholesale loan trends year-over-year which continues to outpace the banking industry. Could you tell us a little bit more about the dynamics in terms of competition from non-banks, particularly in private middle market lending? And I guess, we’re really wondering what you’re observing in terms of competition more in structure rather than rates? And whether or not some of the liquidity that you noted could be drained out of the system, would change the competitive dynamics near term? And sort of what is JPMorgan’s indirect exposure that remains on balance sheet on the sponsor-backed transactions. Sorry, I know that is a lot.

Yes. I’ll try to remember all of that. First of all, I would just clarify that when you say wholesale loan growth has been outpacing the industry, I would say that from my recollection, over the course of the last several quarters, we’ve basically been saying in line with, if not maybe even slightly less than in line with the industry, but it is nuance, you need to get beneath it. There are areas where we would fully expect to be growing more strongly than the industry, and those are in our newer expansion markets where we’ve been investing, we’re reaping the benefits of those investments, and we’re growing from a smaller base and deepening into the market. In our core markets, the mature markets, in line to maybe not even quite as we are being cautious given where we are in the cycle. So, I just want to clarify that…

We haven’t changed our standards.

We haven’t materially changed our underwriting standards, no. And if anything, I would say, we’re just being cautious of the margin. And with respect to competition outside of banks, it’s definitely true that non-banks are gaining share. And it’s also true that they are structure-wise going to be willing to do and are willing to do things that we are not. And so, for our best clients, we aren’t largely going to lose on price, we would be willing to work on price. But we would walk away on structure.

And we don’t have a lot of residual exposure to sponsors doing that kind of lending.

So, Marianne, look, I mean ROTCE of 17%, you seem to have some deposit market share gains, but year-over-year for the third quarter, expenses are up more than revenues. So, can you highlight the dollar amount of investment spending and how that’s changed and where you are in that progression?

Yes. Before discussing expenses, I want to highlight that it's important to consider the entire year when thinking about operating leverage, rather than focusing on any single quarter due to seasonality or other factors. Looking at the year-to-date figures on a reported basis, we see about 200 basis points of positive leverage year-over-year. Tax reform has played a significant role in this. Additionally, we experienced some private equity losses that affected this quarter's revenue. Overall, there is strong growth across our businesses. Our expenses have increased by over $1 billion year-on-year, in line with our guidance from Investor Day, excluding FDIC and revenue-related costs. We expect around $2.7 billion in year-over-year investments, and we are making progress on that. While expenses are more linear compared to revenues, they are in line with our expectations, and I believe the positive leverage is quite strong.

I have a separate question for you, Jamie. Your CEO letter mentions the expectation that interest rates will rise significantly, which aligns with the long-term strategy you outlined. However, it appears that the market is not reacting to this information as positively as you might have anticipated. Could you explain the difference between your expectations and the recent market reactions?

I noted that the market may react negatively if interest rates increase, and it might surprise some people, although they shouldn't be taken off guard. We've encountered significant changes before, including in monetary policy, liquidity ratios, and capital ratios. I pointed out the likelihood of rates going higher, and people should prepare for that and not be surprised. I'm often taken aback by people's surprise regarding this issue. The reasoning is crucial; the economy is growing, and rates are rising. Most of us view this as a healthy normalization, moving towards a more free market regarding asset pricing and interest rates, which we need. Overall, I believe this is positive, especially in light of a strong economy, and I anticipate that rates will rise. While we don't base our entire strategy on this outlook, that's my personal expectation. I think there's a higher chance we could see rates at 4%, in line with many people's views, but again, the economy is robust. As long as we have a strong, normalized economy, that's beneficial. The strength of the economy could persist for some time. As Marianne highlighted, wages are increasing, participation rates are climbing, credit quality is high, housing is scarce, and confidence among small businesses and consumers is exceptionally strong. This could foster significant growth for a while, despite some external challenges.

I believe that if you look back a couple of years, the 2-year forward 10-year rate would have appeared similar to this. The covers are struggling to push up, which is why people are now paying more attention to it, but this is what we would have anticipated and should continue to expect at higher levels.

Good morning. I have a quick question about deposits. We are beginning to observe a slowdown in growth, and perhaps even some outflows in certain areas as interest rates rise. However, you still maintain a loan to deposit ratio in the mid-60s and have been gaining market share in retail. What is your perspective on the competition for deposits and pricing, particularly in the core retail banking sector?

Yes. When we consider the deposit base and the relationship with retail consumers, while deposits and the rates we pay are important, their significance is decreasing. The value we offer our customers encompasses more than rates; it includes our customer experience initiatives, convenience, digital mobile capabilities, launching new products and services, and simplifying their experience. We are making various investments that could make this normalization cycle appear different. We carefully analyze the spectrum of deposits, both retail and wholesale, looking at flows, balances, and our customers' elasticity on our balance sheet. This informs our deposit reprice strategy, which is performing largely as we anticipated.

I’ll just make a macro point too. As the Fed reduces its balance sheet by $1 trillion over the next 18 months or so, as they've indicated they will, that’s $1 trillion out of deposits. This will have a macro competitive impact and we try to estimate the big points, whether it’s coming from wholesale or retail. It’s hard to determine, but this will slightly alter the competition for deposits.

Okay, fair enough. Regarding the investment spending, it obviously increased due to the Tax Cut which helped accelerate some investments. Should we expect it to stabilize at these high levels going forward, or is this just a one-time increase and we might see it decrease, or will we continue to see increases? How should we approach our investment spending needs in the near future?

Yes, I would say that we will provide more insights on forward-looking guidance at a later time. Generally speaking, I don't consider tax reform as a primary driver of our investment decisions. Instead, we've recognized the opportunity to enhance our capabilities in line with our clients' long-term strategic goals, and we've been focusing on that this year. This year, we made a significant investment, although we don't expect this level of spending to continue. However, we will continue to invest in technology, expand our team of bankers, open new branches, and introduce new products to support the company's long-term growth and profitability. While I can't provide specific guidance, I want to emphasize that we anticipate our overhead ratio to remain around the mid-50s in the medium term. This suggests we will keep investing, which also means there will be associated volume-related costs.

Hi. Good morning. Marianne, I was wondering on the regulatory front, do you have any visibility into the future interaction of CCAR process with the new loan loss accounting rules, CECL, particularly in the context of the stress capital buffer potentially being implemented? Because it seems like we could have some overlapping procyclicality and then the potential to freeze that into the run rate capital. So, I was just kind of wondering, is there any visibility yet on that and is that a big area of uncertainty for you?

You accurately identified the core issue with your question and its implications. This is a significant area of uncertainty for us. We lack clarity on capital in relation to CECL, including whether there will be any permanent capital relief and how that might affect CCAR. It's one of the key unresolved questions we have. Currently, we understand that we don’t have to account for the CECL impact in CCAR until 2020. Therefore, while it’s not an immediate concern, it remains an important question, and we do not know the answer at this time.

It seems to me that every single time there’s a chance to make things more procyclical or less, we make it more procyclical.

That’s the data for sure. So, we would encourage the dialogue on clarifying capital treatments with large to be at the forefront of standard set of mind.

This also won’t change our strategy. That’s just accounting.

Got it. And then just as a follow-up. I was wondering how rising rates are affecting competition and capacity in the mortgage business, and whether the regulations in mortgage have made you open to reconsidering getting back into some areas that you exited after the crisis.

So, mortgage being a cyclical business as it is, we are, on higher rates, expecting the overall market to be down about 10% year-on-year. We are down in line maybe or more than that, but for us, it’s a tale of two channels. We are flat year-on-year in the consumer channel, so decent consumer engagement and purchase market share. And we’re down meaningfully in correspondent because we are pricing for some risk and higher rates. With respect to whether we would be willing to reconsider our position on mortgage, the narrative, the dialogue is constructive, but there hasn’t actually been any resolution to the bigger challenges. So, if we can get that resolution, then, I think the answer would be largely, yes. Jamie?

I would just add that the mortgage company is performing well and generating profits. Delinquencies have significantly decreased, and we remain competitive. We launched Chase My Home, allowing customers to track their mortgage process digitally. There are many positive developments on the horizon. Overall, the situation looks promising. Of course, refinancing and new home sales are likely down a bit due to interest rates.

You are correct. There is currently excess capacity in the market, but it will resolve itself over the next few months. Our focus is on building relationships rather than just increasing volume. While margins are experiencing pressure as a consequence, we expect them to stabilize.

I would like to ask a question on the CIB. Especially, I would like to focus more on the outlook that you gave that the spreads are getting tighter. And I would like to know regarding the credit and securitization business where we’ve seen issuance being quite slow during the summer, then continuing like that in September. Do you see that there is a risk-off mode in the market? And how would you believe that the revenues would actually move going in Q4 and then in the New Year? Do you think that generally fixed-income wallet would actually be going down?

A risk of what? Sorry.

The risk of wallet will go down.

Yes. So, I’d say, on the margin point, it’s been the case that for particularly in the sort of more liquid space, you’ve seen margins coming down consistently over the years. So, it’s not necessarily that this is some sort of step change or new phenomenon, but it’s competitive. So, that’s what we’re seeing. On the SPG side, pipelines aren’t strong at this point. So, we expect the fourth quarter to go much like the third.

I’ll just make a long-term point here too. In the next 20 years or so, the total fixed-income markets around the world are going to double. And that is just an important thing to keep back in mind. So, when you run the business, you run the business to capture your share of that doubling, and of course, margins over time will come down, and the way you do it is being transformed by electronics, et cetera, but it’s a pretty good future outlook.

Marianne, regarding consumer credit, you mentioned that card losses remain low and are at the lower end of your expectations for the year. However, I also noticed that you increased the card reserve and indicated that losses are higher. Can you provide some insight into what you're observing regarding card performance and loss trends? Thank you.

Sure. We have been discussing for the past couple of years that we initiated some targeted credit expansion in the card segment a few years back. As this portfolio matures, we expect healthy risk-adjusted returns, but we're underwriting loans with higher potential loss rates. This means that as the portfolio ages, the overall loss rate will naturally rise; the higher the percentage of newer vintages, the higher the loss rate will be, aligning with our underwriting standards and expected risk-adjusted returns. We have been monitoring this situation and providing guidance accordingly. The growth this quarter was primarily driven by loan expansion rather than the seasoning of the charge-off rate, though both factors were involved. Regarding performance, if we had analyzed the 2018 card loss rate as we did at the start of the year, we would have anticipated it to be around 3.25%. However, three factors have contributed to it being slightly better. Firstly, the earlier vintages, particularly those before 2015, are performing very well. Secondly, we have been diligent in managing newer vintages by implementing risk pullbacks when necessary to ensure performance remains strong. Finally, we have made improvements to our collection strategy. These combined factors have enabled us to achieve a charge-off rate that is slightly better than our initial expectations for the year.

Yes. Great color. Thank you. Can I…

You should explain that to them too.

Yes. As we progress through the cycle, we anticipate that charge-off rates will continue to increase. This is one reason I highlighted that the pre-expansion vintages are important; we previously reached a 2.5% charge-off rate, which is remarkably low for this type of portfolio, and we are still maintaining that rate for those pre-expansion vintages. Naturally, as the cycle advances, we expect to see an increase, but we have not observed it yet.

Yes, makes sense. And can I ask you just on the other side, can you talk a little bit of auto in the same context too where the losses have been flat as a pancake? Can you talk about that, and also just that leasing side of the book, which we more see in the other income? Are you still seeing the same potential for growth in both the on-balance sheet and the leases?

In the auto loan sector, we are experiencing a reduction in market share due to competition from credit unions and captive financing companies that may operate under different economic conditions than we do. We will not pursue volume at any cost; instead, we aim to achieve suitable returns for the risks involved. Our credit approach showcases our commitment to disciplined pricing and underwriting standards, which remain stable or slightly improved. On the leasing side, we work closely with our manufacturing partners and are witnessing significant growth. We are cautious in evaluating residual risks and reserving for that portfolio, but the growth we are seeing is of very high quality and appears likely to continue.

I just wanted to follow up on the question on operating leverage. And how should we think about the outlook for positive operating leverage, just more philosophically? Your efficiency ratio is currently not materially above the 55% through the cycle expectation. So, should we be thinking of positive operating leverage as part of the investment narrative, or is the goal really to invest in favorable business outcomes, operating leverage does what it does and really doesn’t drive business decisions?

More the latter than the former. So, obviously, we have a view of what we think the right return profile for these businesses should look like. And we’re investing to deliver those returns through the cycle and over the long term. So, we don’t have an operating leverage target in mind when we set our investment strategy, nor do we for that matter have an expense target in mind either. So, again, we saw a reasonable step up year-on-year this year because we saw the opportunity to do that well. I wouldn’t necessarily expect to see that kind of growth. But, again, operating leverage is more of an outcome, not entirely, but more of an outcome than an input.

And mix.

And, if I could just ask a quick follow-up on CECL, I know you don’t manage the accounting outcomes. And I think, Marianne, you mentioned that a number of areas last quarter where CECL could have an impact. But, any update just on CECL preparations and when you think you might have an estimate of what the effects could be?

So, I appreciate that you guys have been asking about this now for a while. And I hate to tell you that the modeling, the data, the methodologies are complicated. So, operationally, we are working through that across all of our businesses. We continue to expect to be running in parallel through some parts of 2019 across some of our portfolios so that we can make sure that we fully understand the potential implications. We don’t have a number for you. But, I will tell you this, same as I said last time. The biggest driver is likely to be card because of the size of the portfolio and the 12-month incurred loss model today. So, the weighted average life of the portfolio driven by revolvers would be longer than that most likely. There will be some other impacts, pluses and minuses. Research reports have been written. I think on average for those that have been written have suggested that not just for us, but across others that the reserve increase could be 20% to 30%. And while I don’t have a number for you, it’s not implausible.

I wanted to follow up on the discussion about increased competition in FICC. And I guess the language in the release kind of implied there was some increase in competition. Your comments on the call here say it’s been competitive for some time. And I guess, I was trying to square those two. And I would just add that coming into this year, you had the Number one FICC share, and incredibly, you’ve been the biggest FICC share gainer year to date when we look on a global basis. So, you’ve been building on top of that share. And I’m just trying to gauge if there’s been a change among competition trying to get some of that share back and maybe if that’s just started to accelerate.

If you reflect on the past few years, we had significant discussions about whether to modify our FICC operating model. We committed to a comprehensive platform. By 2016, we saw strong performance in fixed income, and many had adjusted their operating models. However, competition intensified in 2017, and the market conditions were not favorable, with lower volatility and volumes compared to 2016. Despite this, competition has remained fierce. People are eager to participate in the fixed income market, as Jamie mentioned, with expectations that the market will grow significantly. The competitive landscape has been challenging for some time and shows no signs of easing, especially when volatility is relatively low, leading to intense competition for smaller margins.

And then, just broadly speaking, if we look at both FICC and equity trading, obviously, you’ve had the leadership position with FICC; you’ve been gaining a lot of share in equity, including this year. What do you think the biggest driver of that is? It doesn’t feel like it’s the capital or liquidity advantage. Is it all the technology spend that you’ve been doing? What are a couple reasons you’d just chalk it up to high level?

We are gaining market share, particularly in cash and prime. A few years ago, we acknowledged that we needed to improve in these areas. Since then, we have been consistently investing in our platform and technology. The development of the prime platform, especially internationally, has made a significant impact. Over the past couple of years, we have offered a top-tier competitive solution, and we are now experiencing the momentum in delivering it to clients. We have also made investments in the cash side. Overall, we are reaping the results of our investments. Additionally, having our equities business integrated with our private and commercial banks creates a strong feedback loop, which is beneficial. This is also tied to our operating model and overall company platform.

And really great research.

Thanks. I had a quick follow-up question on the securities services. You mentioned that there was a decline sequentially based on seasonality and the exit of the business, but is there any way to size that to get to what the underlying growth trends were in that segment?

From an underlying growth trend perspective, I would look year-on-year rather than sequentially. I sort of point out the sequential points because of seasonality, we also exited the U.S. broker/dealer business. So, that obviously has an impact. It is also the case. So, if you think about the year-on-year growth of 5%, we have been growing more than that, led by very strong growth in NII. For this business, this is a wholesale business where deposit bases are high. So, we would expect that growth to level off, and in this quarter in particular, just the specifics of our internal transfer pricing is that LIBOR OAS narrowed and it just had an impact. Year-over-year, continue to expect us to grow assets, asset-based fees, NII solidly but not as strongly, and transactions. So, I don’t know whether it’s going to be high single digit or mid single digit growth year-on-year.

Okay, thanks. And then, just one separate question on the non-interest bearing deposits, I mean it came down in the quarter. Was that mostly just on the corporate side, or was there also some pickup in the deposit gammas on the retail side as well?

Not on the retail side, not yet. There’s not a sufficiently compelling rate differential to be driving into product migration on the retail side yet, but we are seeing it on the wholesale side.

I apologize if you’ve already addressed this, but can you give us the outlook for the pipeline for commercial loan growth or commercial loans in investment banking? I know it’s very early in the quarter. But with the trading volatility we’ve seen, any color that you can share with us on that as well?

Okay. So, commercial loans, we’re 4% up year-on-year, flat to 1% up sequentially. At this point, as we look forward over the near term, it feels like that kind of steady growth GDP plus, GDP is what we’re going to get. And remember, everybody has a different mix, but one of the things that happened quickly with tax reform is that the government healthcare hospital not-for-profit space was less compelling from a loan sense, and now are going to be more compelling in the capital markets. So, we’re seeing that impact our growth down. So, I would say that not quite mid-single digit growth feels like a decent outlook, all other things being equal. In terms of the capital markets, well, I would say that the third-quarter pipelines coming out into fourth quarter and momentum sets us up for a decent fourth quarter honestly, across products. Clearly, volatility depending upon how long it stays around and what the drivers are can impact business confidence. We’re not necessarily expecting that. So, I would still say the outlook across products is good with ECM obviously being the one that would most likely impacted. But even there, I think it might be more of a sort of temporary set of pauses as people see how everything is digested. And honestly, on market, no good ever comes of trying to predict what a course will look like after a couple of weeks. And volatility is not necessarily a bad thing. It can be constructive in some ways and less in others. So, there’s no good coming of a prediction at this point. I will say one thing about markets, just to give you guys a tiny view, which I know you now, but just because of tax reform and another one-off item in the fourth quarter, flat year-on-year comparably would be up.

Very good; I appreciate that. The second question is, when we look at the weekly H.8 data on Fridays, the smaller banks in this country are growing their loan books much faster than the larger banks. You obviously had good loan growth this quarter, but it doesn’t match up to what the smaller banks are producing. So, the question is what impact do you think the CCAR process has had on you when you compare your underwriting pre-financial crisis? I know you’re not changing your underwriting standards, but do you think the larger banks are more conservative as a general statement? And it’s reflected in these very strong credit quality numbers you and your peers are posting today.

So, it’s difficult to generalize. And obviously, everybody has sort of a different risk appetite. It might be fine if you’re getting properly paid to grow more quickly. We are sticking with our guns in terms of our underwriting and risk appetite on credit. The other thing I think you have to bear in mind and again, it depends on the particular situation of any competitor is that we are materially and increasingly bound by standardized risk-weighted assets. And so, while we don’t overthink that and we do honestly think about economic capital, at some level, we have to generate a positive return for shareholders and shareholder value. And it’s on these very high credit quality loans that we’re producing, it’s expensive.

I wanted to take a little bit different slant on deposit betas, just ask a three-part question. One, is the increase in deposit betas that we’ve seen over the last couple of Fed moves, surprising at all or abnormal in your opinion to normal historical trends?

So, I would say, if you look at the first four hikes, it was relatively muted deposit reprice across the complex. It accelerated for the last three hikes, I’m excluding September, given obviously, when it happened. So, we are seeing an acceleration in betas. And it started at the top end of wholesale and it will migrate through the complex over time. I would say it’s in line to arguably better than we would have modeled, but remember that this cycle did start in a very different place. So, in a while if we looked at history, we might have seen reprice in totality having been higher at this point, we started at 100 basis points of rates, not 25. So, I think that plays into it too. So, generally in line with expectations is what I would say.

Okay. That’s what I would say. So, let’s go to the next question. Given that rates have been low for so long going up until we started increasing rates, we’ve repriced almost every security and loan we had on the books. So, the actual upward potential to reprice portfolio yields to current market rates has got to be larger than what we typically have seen historically. Do you agree or disagree with that idea?

I would say, yes. Obviously, it depends on how you position the company over that period. But we talked about it before we were and have consistently been relatively short the market. We’ve been keeping dry powder so we could invest as long as rates go up. And we still are looking at that. But obviously, there’s convexity in the portfolio too, so, paying attention to that. Yes, I agree.

Yes. So, the stretch between this portfolio yield, so, asset yields can actually reprice faster than what we’ve seen historically. So, the combination of those two things in our estimation gives us a threshold. So, if we saw backwards for deposit betas, it gives us a threshold if we estimate for JPMorgan of somewhere between 80% to 90% deposit betas before you actually break through and start eroding net interest margin. Currently, you had about a 40% deposit beta this quarter. So, you had a lot of headroom still to go before margins start to really erode, given deposit pricing. So, I just wanted to get a feel for that estimate of 80% to 90%, given where you’re at today.

I’m not entirely sure of your thought process, but I’ll share my perspective. You're correct about net interest margin despite not knowing the exact percentages. We anticipate that our firmwide and core net interest margin will gradually trend higher over time. However, this depends on how quickly we reprice. If deposit betas remain low or lower than expected, margins will increase, though they might compress as they return to target. Nonetheless, in the long run, net interest margins are expected to be higher, primarily driven by balance sheet growth, mix, and long-term rates. At Investor Day, we mentioned that after 2018, there was little room for rate increases, and the focus would shift more towards balance sheet dynamics, mix, and growth, along with some compounding from long-term rates. The pace of repricing is crucial, and core net interest margin will be particularly sensitive to it.

Thank you, everyone.

Thank you.