JPMorgan Chase & Company (JPM) — Q4 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 1, the firm reported fourth quarter net income of $7.1 billion and EPS of $1.98 on revenue of nearly $27 billion with a return on tangible common equity of 14%. Market impacts aside, underlying business drivers remain solid, increasing core loans and deposit growth, consumer sentiment and spending in a robust holiday season, faster market activity, and the credit performance continuing to be very strong across businesses. For the full year 2018, the firm reported revenue of $111.5 billion and net income was $32.5 billion, both clear records even adjusting for the impacts of tax reform. And so, we’re entering 2019 with good momentum across all businesses. Turning to Page 2 and some more detail about our fourth quarter results. Revenue of $26.8 billion was up $1.1 billion or 4% year-on-year, driven by net interest income. NII was up $1.2 billion or 9% on higher rates and on loan and deposit growth. Non-interest revenue was down slightly, with lower market levels impacting Asset Wealth Management fees and Private Equity losses being offset by higher Card fees and Auto lease growth in CCB. Expense of $15.7 billion was up 6% year-on-year. The increase is related to investments we’re making in technology, marketing, real estate, and front office, as well as revenue-related costs including growth in Auto. This was partially offset by a reduction in FDIC fees. As we had hoped, the incremental surcharge was eliminated effective the end of the third quarter and this is a benefit of a little over $200 million for the quarter across our businesses. Credit trends remained favorable across both Consumer and Wholesale. Credit costs of $1.5 billion were up $240 million year-on-year, driven by changes in reserves. In Consumer, we built reserves of $150 million in Cards on loan growth. In Wholesale, over the last several quarters, we have seen net reserve releases and recoveries. However, this quarter, we had about $200 million of credit costs. Again largely reserve builds on select C&I client downgrades driven by a handful of names across multiple sectors. While we are constantly looking at the granular level, these downgrades are idiosyncratic and do not reflect signs of deterioration in our portfolio. The outlook for credit as we see it remains positive. Shifting for the full year results on Page 3, we have posted net income for the year of $32.5 billion, a return on tangible common equity of 17% and EPS of $9 a share. Net income was a record for the firm, as well as to each of our businesses even exceeding tax reform. Revenue of $111.5 billion is also a record and was up nearly $7 billion or 7% year-on-year, $4.3 billion of which was higher net interest income on higher rates with growth and Card margin expansion being offset by lower markets NII. Non-interest revenues were up $2.5 billion or 5%, driven by CIB Markets and growth in Consumer being offset by Private Equity losses and the impact of spread widening on FCA. At the end of the year, the adjusted expense was $63.3 billion, up 6%, which brings our overhead ratio to 57% for the year even as we continue to make very significant investments across the franchise. And although we are showing modest positive operating leverage on a managed basis, remember our revenues were impacted by lower growth in Cards given tax reform. Adjusted for this or looking on a GAAP basis, we delivered nearly 200 basis points of positive operating leverage for the year and well over 100 basis points for the fourth quarter. On Credit, the environment remained favorable throughout 2018. Credit costs were $4.9 billion, down 8% driven by lower net reserve build in Consumer as well as the impact in 2017 of student loan sales. Moving on to Page 4 on balance sheet and capital. We ended the quarter with a CET1 ratio of 12% flat to last quarter. Risk-weighted assets decreased with loan growth more than offset by derivatives counterparty and trading RWA given a combination of seasonality, market conditions, and all the enhancements. Our net payout ratio for the quarter exceeded 100% and we repurchased $5.7 billion of shares. Moving to Consumer & Community Banking on Page 5. CCB generated net income of $4 billion and an ROE of 30% for the fourth quarter. And for the year, nearly $15 billion of net income and an ROE of 28%. Customer satisfaction remains near all-time highs across our businesses. For the quarter, core loans were up 5% year-on-year, driven by Home Lending up 8%, Card up 6% and Business Banking up 5%. Deposit grew 3%. Growth continues to slow given the rising rate environment, but importantly, we believe we continue to outpace the industry. Of note, this quarter, we opened the first 10 branches in our expansion markets increasing D.C., Boston, and Philadelphia. And although it’s clearly early, perception in the market and the performance of the new branches has been strong. Despite volatile markets, client investment assets were still up 3% and we saw record net new money flows for the year. Card sales were up 10%, debit sales up 11% and merchant processing volume up 17% reflecting a strong and confident consumer during the holiday season. And keeping with our focus on digital everything, of note, active mobile customers were up 3 million users or 11% year-on-year. Revenues of $13.7 billion was up 13%. In Consumer & Business Banking revenue was up 18% on higher deposit NII driven by margin expansion. Home Lending revenue was down 8%, driven by lower net production revenues in a low volume, highly competitive environment. And of note, while not a material driver of overall expense, revenue headwinds here were offset by lower net production expense. And Cards, Merchant Services & Auto revenue was up 14%, driven by higher Card NII, although loan growth and margin expansion, lower card, net acquisition costs, principally Sapphire Reserve and higher Auto lease volumes. Card revenue rate was 11.6% for the quarter and 11.27% for the year as expected. Expense of $7.1 billion was up 6%, driven by investments in technology and marketing and Auto lease appreciation partly offset by lower FDIC charges and other expense efficiencies. On Credit, net charge-offs were down $18 million as modestly higher charge-offs in Card were more than offset by lower charge-offs in Auto and Home Lending. Charge-off rates were down year-on-year across all portfolios. Economic indicators remain upbeat. And given the breadth and depth of our franchise, we have a pretty good barometer. From everything we see, the US Consumer remains very healthy. Now turning to Page 6 on the Corporate & Investment Bank. CIB reported net income of $3 billion and ROE of 10% on revenue of $7.2 billion for the fourth quarter. And for the year, net income was nearly $12 billion and an ROE of 16%. In Banking, it was a record year for both total fees and advisory fees. We ranked number one in Global IB fees for the 10th consecutive year, gaining share across all regions. Fourth quarter IB revenue of $1.7 billion was up 3%. We feel continued momentum in advisory with fees up 38% driven by the closing of several large transactions. For the year, we ranked Number 2 in wallet gaining share. Equity underwriting fees were down 4% but significantly outperforming the market. We ranked Number 1 for the year and the quarter and saw our leadership positions across all products globally with particular strength in IPOs as well as in the technology and healthcare sectors. And debt underwriting fees were down 19% versus a strong prior year and sectors in the market. We maintained our number one brand rank for the year and continued to hold strongly lead-left positions in high-yield bonds and leveraged loans. Moving to markets. Total revenue was $3.2 billion, down 6% reported and down 11% adjusted for the impact of tax reform and Steinhoff margin loan loss last year. A confluence of factors throughout the quarter including trade, concerns around global growth and corporate earnings, fears of lower mortgage fares as well as other negative headlines caused spikes in volatility which were amplified by markets that assets and liquidity. And although we saw decent client flow, rates rallied, spreads widened and energy prices fell significantly, all against general market conviction that was anticipating a stronger end to the year. As a result, fixed income markets in particular were challenging with revenue down 18% adjusted. Weaker performance across rates, credit trading and commodities was partially offset by good momentum in emerging markets. Equities revenue was up 2% adjusted, a solid end to a record year. Client continued to do well but we saw client deleveraging over the course of the quarter and cash derivatives were solid in a tougher environment. Treasury services revenue was $1.2 billion, up 13%, driven by growth in operating deposits as well as higher rates but also benefiting from fee growth on higher volumes. Security services revenue was a $1 billion, up 1%. Underlying this was strong fee growth and a modest benefit from higher rates together being substantially offset by the impact of lower market levels and the business exit. Credit adjustments and other was a loss of $243 million, reflecting higher funding spreads on all derivatives. Finally, expense of $4.7 billion was up slightly with continued investments in technology and bankers and volume-related transaction costs, partly offset by lower FDIC charges and lower performance-based compensation. The comps and revenue ratio for the quarter and for the year was 28%. Moving to commercial banking on page seven. The commercial bank reported net income of $1 billion and an ROE of 20% for the fourth quarter, and for the year $4 billion of net income and a ROE of 20%. Revenue of $2.3 billion for the quarter was down 2%, and for prior year included a tax reform related benefit. Excluding this, revenue was up 3%, driven by higher deposit NII. Gross IB revenue of $600 million was down 1% year-on-year but up 4% sequentially on a strong underlying flow of activity, particularly in M&A. Full-year IB revenue was a record $2.5 billion, up 4% on strong activity across segments, in particular middle market banking which was up 8%. Deposit balances were up 1% sequentially as client cash positions are seasonally highest toward year-end although down 7% year-on-year as we continue to see migration of non-operating deposits to higher yielding alternatives. We believe we are retaining a significant portion of these flows. Expense of $845 million was down 7% year-on-year as the prior year included $100 million of impairment on leased assets. Excluding this, expense was up 5%, driven by continued investment in the business in banker coverage as well as in technology and product initiatives. Loans were up 2% year-on-year and flat sequentially. C&I loans were up 1%, reflecting a decline in our tax-exempt portfolio given tax reform. Adjusting for this, we would have been up 4%, which is still below the industry as we focus on client selection, pricing and credit discipline. But keep in mind, in areas where we have chosen to grow such as in our expansion markets, we are growing at or about industry benchmarks. CRE loans were up 2%, also below the industry as we proactively slowed our growth due to where we are in the cycle, through continued structural and pricing discipline and targeted selections as we build. Underlying credit performance remains strong with credit costs at a $106 million including higher loan loss reserves, largely due to select client downgrades. Moving on to assets and wealth management on page eight. Assets and wealth management reported net income of $604 million with a pretax margin of 23% and an ROE of 26% for the fourth quarter. And for the year, net income was nearly $3 billion pretax margin at 26% and an ROE of 31%. Revenue of $3.4 billion for the quarter was down 5% year-on-year with the impact of current market levels driving lower investment valuations and management fees as well as to a lesser extent, lower performance fees. These were partially offset by strong banking results and the cumulative impact of net inflows. Expense of $2.6 billion was flat, as continued investments in advisors and in technology were offset by lower performance-based compensation and lower revenue-driven external fees. For the quarter, we saw net long-term outflows of $3 billion with strength in fixed income more than offset by outflows from equity and multi-asset products. Additionally, we had net liquidity inflows of $21 billion. For the 10th consecutive year, we saw net long-term inflows of $25 billion this year, driven predominantly by multi-assets and in addition saw $31 billion of net liquidity inflows this year. Assets under management of $2 trillion and overall client assets of $2.7 trillion were both down 2% as the impact of market levels more than offset the benefit of net inflows. Deposits were flat sequentially and down 7% year-on-year, reflecting migration into investments, and we continue to capture the vast majority inflows. Finally, we had record loan balances, up 13% with strength in global wholesale and mortgage lending. Moving to page nine and corporate. Corporate reported a net loss of $577 million. Treasury and CIO net income of $175 million was up year-on-year, primarily driven by higher rates. Other corporate saw a net loss of $752 million, including on a pre-tax basis funding our foundation for corporate philanthropy $200 million this quarter, flat year-on-year, and including a $150 million of markdown on certain legacy private equity investments market related. Remainder is driven by tax-related items, totaling a little over $300 million. And within this are two notable components. The first is regularly tax reserve; and second represents small differences between the effective tax rate for each of our businesses and that for the overall company as we close the year. So, therefore there is an offset across our businesses. Our full-year effective tax rate was just a little over 20%, in line with guidance. Moving to page 10 and outlook. We will give you more full-year outlook and sensitivity information at Investor Day as always. However, for now, I would like to provide some color and reminders about the first quarter. Net interest income will continue to benefit from the impact of higher rates and growth but quarter-over-quarter will be negatively impacted by day count. And we expect the first quarter NII to be relatively flat sequentially. While it’s too early clearly to give guidance on fee revenues, it’s also fair to say that this quarter market is still calmer and more positive and capital market pipelines are strong. So, if the environment remains positive, we would expect normal seasonal strength in the first quarter. But I will remind you that the first quarter of 2018 included a $500 million accounting write off as well as broad strength in performance. Expect expense to be up mid-single-digits year-on-year, obviously market dependent, primarily annualization effects. And finally, as I said, we expect credit to remain favorable across products. So, to close, while the markets in the fourth quarter were more challenging, we should not lose sight to the fact that 2018 was a strong year, indeed a record for revenues, net income, and EPS, both reported and adjusted for tax reform. Fundamental economic data remains supportive of continued growth, and we’re generally constructive on the outlook for 2019. We have good momentum coming into the year and the company and each of our businesses are very well positioned. With that, operator, we can open up the line for Q&A.

Hi. Good morning. So, the way bank stocks have performed, clearly, investors are starting to worry about revenue trends near-term and of course credit, which you addressed. I’m wondering if the revenue trends continue to be weaker than expected, if the overhead ratio of 57% that you posted in ‘17 and ‘18 is something that you could continue to level off to, or will the investment horizon be more of a dominant factor when we’re thinking about the overhead ratio.

Yes. I would like to mention a few points. First, I recommend looking at a GAAP basis for 2017 and 2018 due to adjustments in our revenues from tax reform. That being said, while we do not set specific expense targets or overhead ratio targets, we have provided some guidance indicating that we still believe the combination of revenue growth and expense management will allow our overhead ratio to remain stable or decrease to around the mid-50s, approximately 55%. The timing of this will depend on interest rates, market conditions, and other factors. We expect to continue achieving positive operating leverage from increased net interest income and ongoing solid growth in fees. While individual quarters can exhibit fluctuations based on market conditions, we anticipate these overall trends to persist over time.

And just as a follow-up question, the market is also thinking that the last rate hike from the Fed was December, and I'm wondering how we should think about the dynamics of net interest income and more specifically net interest margin and deposit pricing if December was indeed the last rate hike for some time.

I want to emphasize that we don't believe the recent developments signify an end to the growth cycle. We maintain a strong outlook for the economy, with healthy consumer demand, and we anticipate continued albeit slower global growth ahead. As we've incorporated more benefits from past rate hikes into our earnings forecasts, each subsequent increase has led to diminished incremental net interest income contributions. Additionally, lower front-end rates and a flatter yield curve could have a modestly negative effect overall. However, as the Federal Reserve pauses, there is a possibility for less reprice momentum as market participants analyze the situation. In 2018, we achieved $4.3 billion in net interest income growth, and we expect to continue benefiting in 2019 from the annual effects of higher rates alongside solid growth, suggesting strong year-on-year net interest income growth compared to 2018.

I would say why it’s equally if not more important than it was. So, if it is a pause because you are going to recession, you’re going to do trades that obviously is very different than it’s to pause, economy is strong and they raise rates, you know which one you would choose.

If this were the end of the cycle, it’s a situation we have not encountered before. In that case, if terminal Fed rates are between 2.5% and 5% or higher, we haven't experienced that scenario, but it's not our primary expectation. Additionally, we believe it's necessary to implement an incremental rate hike this year, whether in the first half or the second half.

Maybe a question about the card business. There has been talk about reducing rewards to focus more on profitability. How do you view the current strategy in cards? And I think the revenue yield in the card business was up 7 basis points to 11.57. Can that increase as you reduce rewards?

Yes. When we consider our product range in contrast, rewards play a crucial role in fostering engaged relationships with our customers. They are very aware of rewards and seek value in our products. The key elements we focus on are value, simplicity, and ease of use. Engaged relationships are essential for profitability, and this remains a highly profitable business. While we will continue to make adjustments to our offerings, we are not planning any significant reduction in rewards. For instance, in our banking sector, we aim to integrate the impact of our products while maintaining rewards-based incentives to enhance customer engagement. We believe this strategy is sound and has already shown good returns. It’s worth noting that we have observed an increase in competitive responses and competing products in the market that also offer high rewards, yet this has not diminished our ability to attract new accounts. We are confident in our value proposition, simplicity, and the appealing products we offer. Thus, it remains a very profitable business.

So, we think about still seeing decent growth, how do we think about card losses specifically this year? You seem pretty optimistic on credit. Should we still expect some seasoning or do you think the macro trends are that positive that we hold steady? How do you think about credit and cards?

So, I think the macro trends are definitely positive. So, we are creating tailwinds, but it's also true we talked about the fact that if you go back to 2014-2015 that we had expanded our credit box, we'd expanded it intentionally at higher risk-adjusted margins. But over the course of the last couple of years as we've experienced that performance, we've done sort of surgical risk pullbacks, and we amended our collection strategy, all of which have led to a charge-off rate for the fourth quarter in ‘18 that's down slightly year-on-year and for the year that's a 310 basis points which is reasonably meaningful below our expectations, even as late as the end of last year. So, we feel great that that kind of loss trends at that 310, maybe a little bit higher is something we should look forward to at least into 2019. And it will be helped by a supportive macro environment. And we are seeing, if you unpick all of our trends, you see the phenomenon of three vintages. You see the mature vintages that continue to be stable to grinding lower in terms of delinquencies and loss rates. You see the older expansion vintages that have crossed peak delinquencies and are trending to a more stable level. And then you do have, obviously with new acquisitions, cohorts that are still seasoning. That will continue. But, net-net, we're expecting relatively stable loss rates that level similar to 2018.

Hi. Good morning. Just wondering on the markets commentary, obviously super early in the quarter, but you mentioned things feeling better. Can you just talk about seasonality there but also just what feels better so far? And then, also in the fourth quarter, what you saw in the leverage lending market, how much do you have to take in terms of maybe marks and leveraged loans and the hung deals? A little bit of color there would be helpful.

Absolutely. The fourth quarter presented challenges with significant market fluctuations and widespread concerns regarding trade and global growth data. Many were worried that the Fed would maintain a hawkish stance, which deepened the negativity in the market—perhaps more than warranted. However, there was a noticeable shift when we observed strong unemployment trends, reminding everyone of the gap between 3% growth and an economic contraction. While growth may slow, we still anticipate growth in both the U.S. and globally, along with a more optimistic trade narrative and a potentially softer stance from the Fed regarding interest rates. Additionally, many investors remained sidelined in the fourth quarter, indicating a strong appetite for valuable investments. It's still early in the first quarter, and there are risks to consider, but the overall sentiment is improving, suggesting we might see seasonal strength in January. Regarding leveraged loans, the fourth quarter did experience a significant market correction with widening spreads in high-yield bonds and leveraged loans. While the leveraged finance sector has seen a notable decline in commitments compared to before the crisis, credit fundamentals remain strong. We've chosen to pass on several deals last quarter, maintaining our protective measures in pricing. Though there is potential for some losses after fees, nothing substantial occurred in the fourth quarter. Looking ahead to the first quarter, the market could be supportive for fixed income leading into the third quarter, backed by a more dovish Fed, steady corporate margins, and low default rates. None of our deals need to be rushed to market, and overall market trends are heading in a positive direction.

Thank you for taking my question. I again want to focus a bit on the market's performance. You pretty much mentioned like weakness across the board in credit, in FX, in rates, which I assume is the case. First of all, I want a bit of an outlook on how you think rates will perform now that volatility has picked up. And more importantly, you mentioned strength in emerging markets. Can I ask whether that was primarily in Asia or LatAm? Thank you very much.

So, it’s no good a conserve talking about how we think things are going to pan out in time in the first quarter other than just the general comment I’ve already made, which is the environment should be more constructive and we’re expecting decent volatility in client activity and we will see how that pans out. With respect to emerging markets, Latin America was a big piece but Asia too.

I guess, I’m a little torn between the year and the quarter. So, I’ll just ask it to Jamie. Jamie, it seems like you guys are very happy with the year with all the record revenues and earnings. But, the fourth quarter, are you happy with the fourth quarter, given expenses, credit, fees?

I’m very satisfied with our performance. The franchise is robust, and we are investing in new products and services, although we are still affected by weather, volume fluctuations, and market volatility. We are not insulated from the ups and downs of market prices and asset values. I am pleased to see loans have increased by 6%, assets are rising, and long-term flows are up as well. It's encouraging that credit card spending has grown by 10% and merchant processing has risen by 17%. In nearly every segment, our market shares have improved, which is what I focus on. I don’t worry too much about minor setbacks, like the lower volumes in the last three weeks of December. My priority is the equities market, where we have gained market share and are close to leading the pack. Our teams have performed exceptionally well in areas like cash, derivatives, and prime brokerage. Fixed income has also held its ground, and we are expanding our products and services globally. As for what lies ahead next quarter, I’m indifferent.

And we take the same division, we had strong first half of the year and we said long may it continue but it may not and one quarter doesn’t make a trend. And so, we don’t really react to the sort of micro, even though it was driven by the macro. The really underlying business drivers continue to be strong. And even in those businesses, we are holding leadership positions and gaining share. And so, this too will cost and things will continue to move forward in a constructive manner.

As a follow-up, let’s talk about the weather. So, the weather is lousy at the end of the year and Jamie you were just appointed to your third year as Chairman of the Business Roundtable. So, in that role, what are you doing to help JPMorgan and I guess the other banks in terms of China, the government shutdown, immigration, some of these headline issues that Marianne talked about, having hurt the CIB in the fourth quarter?

December was challenging, but looking at January, there’s a recovery in spreads and markets. As the Business Roundtable, we focus on public policies that foster overall growth in America and intentionally avoid actions that favor banks. The Business Roundtable is engaged in trade, and we recognize the significant challenges with China. We hope to see a trade deal finalized, and it appears progress is being made towards the March 1st deadline, which may lead to an extension and the completion of the deal. We also support immigration reform that includes better border security, pathways for skilled individuals to remain in the U.S., and an emphasis on merit-based immigration. This is our stance. We advocate for greater innovation and aim to reduce regulations at both the local and federal levels that hinder small business development. The Business Roundtable focuses on ten key areas and strives to implement policies that promote America’s growth, as poor policies can impede progress. I have frequently highlighted that obtaining permits for infrastructure projects can take 12 years, while landing a person on the moon took just eight years. We need to reform our approach rather than placing blame for our shortcomings, such as ensuring education equips kids for jobs, addressing the slowdown in innovation, and reversing the decline in government R&D spending. There are many opportunities for improvement in the country that can support long-term growth, and it’s essential to focus on the bigger picture rather than seeking immediate results.

Follow-up on John’s question earlier on leverage lending. On slide 24, you see the balance on loans held for sale go from like $6.5 billion to $15 billion. I heard your comments on marks. I'm assuming that that is just disruption and you go back towards your normal level that's in the pipes and progress, but I just want to make sure that I'm not making that wrong assumption.

Yes. We are not expecting anything to be elevated.

That number fluctuates over time based on what is removed from the books. We are not concerned about our figure.

Understood. Curious on the credit on the couple of marks and C&I, I'm just curious on how much of that is internal versus external rating agency. And I guess, it's a feel for the underlying fundamentals. How do you know we should treat that as idiosyncratic as you go?

It’s internal and involves various sectors. We are aware of the specifics and understand that it can vary by situation. To provide some context, while these factors can influence dollar value, our large portfolio often leads us to downgrade and upgrade hundreds of individual names based on circumstances. When we mention that we are observing idiosyncratic factors, we are not just focusing on the five situations that have the most significant impact; we are also considering the hundreds of downgrades and upgrades to identify any trends or concerns. At this moment, there is nothing to worry about. In fact, we have seen a slightly higher number of upgrades, but overall, there is nothing concerning in our portfolios as we continue to monitor the situation.

We look for reasons to put up reserves, not to take them down.

We are more paranoid than you are.

Last one, obviously markets all went down in the fourth quarter and we had some freeze-ups if you will in high yield first time in like 10 years. But, I'm curious how you all think the markets functioned in general? In other words, things went down, spreads widened out, there was lots of fear but it felt like the plumbing was working. But, I don't want to put words in your mouth.

And half the people weren’t even here the last two weeks in December.

That’s right. The plumbing was working; we didn’t see any sort of technology issues; we didn’t see any volumes that can be coped with. While I said that there was a lack of debt to markets and liquidity, that’s typically the case when you have one way trends in the market and there are people similarly situated. So, I would say they relatively functioned well, but challenging.

I just had a follow-on question from the vesting high yield mark's question. You seem to be getting the impression that there weren’t really much in the way of marks. Is that because you’ve got very strong hedging strategies in place and that the decline in FICC revenues mainly was due to lower volumes?

There were no marks.

There were no marks. Currently, we have a solid cushion and expect to manage pricing effectively in the market. Anything that is even close to being a concern is completely immaterial.

I think there are few marks, if you look at what happened to flex pricing like mid-December when things were the worst, yes, some of these things were very close to the end of their flex pricing. And that means they are very close to have you some kind of mark. Of course, since then, the spreads have come, come back 40%.

Right.

Interesting, thanks. And then, my follow-up question is that obviously that capital markets had a tough time but you are wholesale lending, the growth has accelerated quite nicely. Do you get the impression that corporates had a general shift to seek borrowing from banks such as yourselves because they were shut out of the market?

There was an increase at the end of the year, evident in both industry and our internal data. This growth was mainly due to one investment-grade loan we issued at the end of the quarter, along with a slight increase in acquisition financing and the balance sheet. However, I wouldn't categorize it as unusual or indicative of a trend. We didn't need to reduce positions that would typically be unfavorable in the market.

Good morning. I wanted to circle back on the expense flexibility. I think in your base case, you're pretty clear that you're targeting positive operating leverage and moving down the efficiency ratio to the mid-50s. But, what is some of the expense flexibility and where would it come from, if the revenues slide? I think in 2018, you accelerated some technology spend, given tax reform, you've been opening branches. Some of that stuff obviously can't be pulled back, but you always talk about some areas of flexibility. So, maybe what are those? And if you could kind of size or help quantify some of the flexibility you have, that'd be helpful.

Yes. So, I would say, first of all that you saw that from 2013 through ‘16, we had a pretty structural expense reduction program associated with simplifying our businesses. So, in terms of the low hanging fruit and things like that, we would say largely that’s been harvested. We are always looking to generate core operating efficiencies so that we can absorb growth. And when we are investing in technology and data, one of the reasons to do it, customer satisfaction, product innovation aside is efficiency. So, we are seeing some of that come through. We’ll continue to drive that down.

But the efficiencies and the investments are all in the number that Marianne gives you when she says up 5%.

That’s right. The way I would say it is that we continue to drive for expense discipline. But as long as you feel as we do that the decision criteria that we use to determine the investments we're making which we think are strategically important for long-term growth of the company and the profitability of the company, supporting clients, if those are good decisions for long term growth, while we could obviously make changes, we would not look to do that. And so, marketing expense for example is one area where you would say there's pretty sizeable and immediate flexibility. Nevertheless, when we invest in marketing, we're driving new accounts and engaged customers that drive long-term growth. So, we invested through the cycle. We think it sort of differentiates our long-term performance and we'd like to continue to do that. 2019 over ‘18, you wouldn't expect to see necessarily the same clip up that you saw last year, we did accelerate investments in ‘18 and so more of the growth will be revenue related but still decent investments as the opportunity is still good to do that.

Okay. That's helpful. On a related note regarding the reserve build in relation to credit quality, should we anticipate a consistent reserve build aligned with loan growth each quarter, or was this particular quarter influenced by a few unusual factors? Last quarter, there seemed to be some lumpy loans affecting the reserve build, so I'm wondering if we're at a stage where a few atypical loans would significantly impact the reserve, or if it might still be a bit irregular.

So, first of all, I'd sort of point out that in the cost base we hopefully continue to grow healthy mid-single-digits, the seasonality. There is seasonality to card balances and losses. And so you typically see reserve builds in the second half of the year. That's what we saw this year and actually a little bit lower year-on-year than last. And in the wholesale space you're going to see some things will be a bit lumpier and episodic given the nature of the loans that we have. I wouldn't necessarily say that we expect to see a trend from significant reserves but we've been factored by recoveries and releases over the course of the last couple of years partly or in large part at least earlier releasing reserves we took on energy when the energy went through the downturn. So, we'll have some downgrades. We might have some releases. I would, net-net, think that as we grow, we would build but not this proportionally. We’re obviously at a best point in the cycle. So, Jamie mentioned it earlier, to the degree that we have the flexibility, we’re making sure that we are reserved accordingly.

A lot of talk on macroeconomics and the policy backdrop in volatile markets, but as you mentioned earlier, you guys are in a pretty unique position and that you have pretty consistent dialogue with a lot of economic agents whether it’s corporate, governments, institutional investors and whatnot. But just a sense of what your clients are saying, what are they concerned about? Is there any concern on your part that some of these issues have sort of a self-fulfilling effect and that it does end up leading to actions that precipitate a downturn or recession?

I think that we would look to the sort of macroeconomic data, which is still generally supportive and so I think should be good. But for sure, investments is not immune to external factors. And so manufacturing data has been a little weaker I would say. CapEx is sluggish on sales around global growth. Government shutdown and trade are not particularly helpful, uncertainty is not good to anyone. So, there is no doubt that as things continue, if there is a level of anxiety and uncertainty, it’s just not constructive for confidence and confidence that gets stronger or less strong market. I wouldn’t say that I think it’s clear and present. But I think we should be extremely careful because sentiment particularly consumer sentiment will be incredibly important. And right now it’s good, sentiment in consumer and we just got back some sentiment from I hope small middle market companies that while not at their high, but still very high.

That's helpful. If I could just ask about loan growth and is it just a more-broad question about your ability to continue to outpace the industry? And I suspect we’ll get more color at Investor Day but just want to get your sense of the sustainability of growth and you mentioned on the commercial side, you maybe scale back a little bit, maybe we’re late cycle. But, where do you feel like you can continue to outgrow the industry, where do you feel like maybe it's time to scale back on risk a little bit?

It’s a complex question because the home lending market is facing a challenging backdrop. For us, it’s a tale of two cities. We are performing well and increasing our share in the retail purchase market while maintaining pricing discipline. Despite the tough market, our card segment is doing well due to our investments in digital products and rewards, and we believe we can continue to hold our position there. The auto market is very competitive, especially in the prime and super prime space, and we face competition from various economic drivers like credit unions and captive finance companies. We are willing to concede some market share in order to maintain returns. In commercial and industrial lending, we are growing in line with the best in the industry in the expansion markets where we have made investments and added specialized coverage. However, in mature markets, we are being prudent and selective, not necessarily tightening but being careful in our approach. In commercial real estate, particularly construction lending, we are being cautious and selective about new deals. We are no longer focused on seeking growth; instead, loan growth depends on multiple factors, mainly our strategic dialogues with companies and the current environment, which is quite nuanced. In many of our areas, we prioritize profitability and credit discipline over growth at this time.

So, maybe I’ll just reemphasize that. We tell our management that we have no problem seeing loans books shrink. We’re not going to be sitting here ever in our live to say and you got to grow the loan book, you got to show loan growth. Remember, Warren Buffett used to say in the insurance business and sometime it’s true in the loan business, you’re better off the sales force go play golf than there to make new loans. We’re not going to be stupid. And the other thing you have to always keep in mind, it’s not the loan, it’s the relationships you look at in total. So, when it comes to middle market or all these other things are reasons that we stay in a business knowing there is going to be a cycle and we are not going to be children on this cycle. We know that losses are going to go up.

Hi. Good morning. Are we playing golf all day yet or is that still far away?

Credit quality is strong, mortgage credit is strong, and the middle market remains strong. Underwriting has generally been solid, except for a few minor areas that Marianne has pointed out. We noticed some individuals stretching their finances in auto loans and a bit in credit cards, although we won't be self-funding credit card beyond that. We're not concerned about the entire leverage lending portfolio, as I believe a reasonable discussion can be had. However, there is a segment of nonbank lending that is not our focus. It’s just the current situation we are facing.

I think businesses are becoming less focused on building relationships, particularly in areas like commercial term lending, real estate banking, and to a lesser extent, mortgages. We are experiencing some loss or are seeking market share where it makes strategic sense to do so.

Yes. And competition, we mentioned this before, it’s back everywhere, and that’s a good thing for America. And that means the pricing is a little tough and you have to compete.

Yes. So, we are still off the golf course, which is good. I wanted to understand more about the expenses. Even considering the weather, you managed to achieve a 14% ROTCE, which is clearly top-notch. My question is regarding the expenses; there is some flexibility, but I know you’re projecting an increase in the single digits for the first quarter of 2019. From our earlier discussion, it appears that the first quarter might be an anomaly at mid-single digits, or should I interpret that as the expected rate for the entire year? Why might the first quarter be different?

I wouldn’t fully annualize the first quarter. However, we have added bankers and advisors across our businesses, which will affect annualization, especially from the first quarter to the first quarter. We have continuously added more throughout the year. For example, we significantly grew our auto lease business in 2018, which will be reflected in our run rate for the first quarter. The effects of our front office and technology investments will also be more noticeable when comparing the first quarter to the first quarter rather than the fourth quarter to the fourth quarter, as many of these were already included in our fourth quarter run rate. Additionally, we have made progress in real estate as we implement our head office strategy, and there are timing factors related to marketing and foundation completion. Consequently, the first quarter will likely be higher, but I wouldn’t annualize it. We expect robust year-over-year growth primarily due to revenue increases rather than the same level of corporate investment as last year. We will provide more details and insights at Investor Day.

Just a quick question on the balance sheet; I’m if you gave us already. But just walk through the idea of lowering down the deposit with banks and kind of moving into repo, what you saw in the quarter and then kind of is that just something that was temporary, that’s expected to reverse in the first quarter?

Yes. So, it’s fair to say that money market rates traded above IOER throughout the fourth quarter and more pronounced at the end of the quarter. And so through the quarter and that year-end, we will able to take advantage of the market opportunity to move out of cash into cash alternatives, things, reverse repos and short duration assets. And so, for us, it was yield-enhancing opportunity to redeploy cash and a mix change rather than adding duration. And that continues to be the case into the first quarter. It contributed to our NIM expansion in fourth quarter. We continue to have a bit of that mix shift in the first quarter and it’s a market opportunity.

And then, a separate question on, I know it’s not a big revenue driver anymore but within mortgage banking, you had a negative gain on sale in the quarter. Could you just give us some color there, what drove a negative gain on sale?

In the quarter, while optimizing our balance sheet, we sold about $5 billion in conforming loans to GSE. This resulted in a loss on the sale of the portfolio because these loans were originated at lower rates. As rates have increased, the fair value of the loans has decreased. However, looking at the overall profit and loss statement, there's an advantage in net interest income since the interest rate risk has been transferred to the Treasury Department. Essentially, there's a loss from the portfolio sale, but this is offset by funding breakage in net interest income. It's important to note that our mortgage loans have a risk-weighted asset ratio of 50%, compared to 20% for securities with better liquidity value. We reinvested some of the proceeds into mortgage-backed securities in treasury, which will allow us to recover that amount over time for the company.

Hey, good morning. So, I wanted to start with just a bigger picture question on credit and the impact of normalization. Certainly, the near-term guidance sounds quite encouraging. Jamie, you did make a comment recently at investor conference talking about how the banking industry is over-earning on credit, not particularly a controversial remark. But in the past, you guided to a medium-term loss rate blended basis of roughly 65 bps. That does contemplate continued loan losses in commercial. And just given that we’re late cycle, I was hoping you can maybe speak to your expectation for what a normalized credit loss rate is for JPMorgan, given your current mix and where that might differ from your medium-term loss guidance?

So, we're not talking quarter-over-quarter, we’re just taking in general trends…

I'm talking in bigger picture.

Marianne has indicated that year-over-year, we see normalized losses. For years, we've been performing better than that. In credit cards, middle market, and large corporate mortgages, the numbers have dropped to low levels. At some point, we expect them to rise. Currently, we are not forecasting what will happen next quarter. Right now, the situation appears to be stable. However, we wouldn’t be surprised to see an increase at some point. It's uncertain whether this will happen in the second, third, or fourth quarter, and we aren't sure of our position in the cycle. Therefore, we anticipate a potential increase. If we analyze it by product, the total may fluctuate accordingly.

I hate to say this because I know you don't want to wait a few weeks, but we'll have a more complete conversation about the total outcomes on credit at Investor Day. When we provided our medium-term simulation, we noted that we achieved a 17% return on tangible common equity in 2018 and our medium-term guidance is for 17%. We have underperformed against our guidance during other parts of the cycle. We may overperform in the future. However, net interest income and repo bags are higher, and credit conditions are stable. At some point, we expect both of these factors to normalize, but we will continue to see solid growth in all our drivers. We cannot predict when this will happen and don't see any signals indicating it will occur in the second, third, or fourth quarters. We will have a more comprehensive discussion at Investor Day regarding the range of total outcomes.

Thank you.