JPMorgan Chase & Company (JPM) — Q1 2019 Earnings Call Transcript

Thank you, operator. Good morning, everybody. I’m going to take you through the earnings presentation which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on page one, the firm reported record net income of $9.2 billion and EPS of $2.65, with record revenue of nearly $30 billion and a return on tangible common equity of 19%. The results this quarter were strong and broad-based. The highlights include core loan growth ex-CIB at 5%, with loan trends continuing to progress as expected. Credit performance remained strong across businesses. We saw record client investment assets in consumer of over $300 billion and record new money flows this quarter, as well as double-digit growth in both card sales and merchant processing volumes, up 10% and 13% respectively. We ranked number one in Global IB fees and gained meaningful share, which were well above 9% this quarter. In the commercial bank, we had record growth in IB revenue, with record AUM and client assets in asset and wealth management, and the firm delivered another quarter of strong positive operating leverage. Turning to page two and talking in more detail about the third quarter, revenue of $29.9 billion was up $1.3 billion or 5% year-on-year, driven by net interest income which was up $1.1 billion or 8% on higher rates, as well as balance sheet growth and mix. Non-interest revenue was up slightly as reported, but excluding fair value gains from the implementation of a new accounting standard last year, NII would have been up 5%, reflecting auto lease growth and strong investment banking fees, and while market revenue was lower, there were other items more than offsetting. Expenses of $16.4 billion were up 2%, relating to the continued investments we are making in technology, real estate, marketing, and front office, partially offset by a reduction in FDIC fee charges of a little over $200 million. Credit remained favorable across both Consumer and Wholesale. Credit costs of $1.5 billion were up $330 million year-on-year, driven by changes in wholesale reserves. In Consumer, charge-offs were in line with expectations and there were no changes to reserves this quarter. In Wholesale, we had about $180 million of credit costs driven by reserve sales on select C&I client downgrades; recall that there was a net release last year related to energy. Once again these downgrades were idiosyncratic. It was a handful of names across sectors. Net reserve sales of this order of magnitude are extremely modest given the size of our portfolio and we are not seeing signs of deterioration. Moving on to page three, on the balance sheet and capitals, we ended the quarter with a CET1 ratio of 12.1%, up modestly from last quarter, with the benefit of strong earnings and the AOCI gains, given rallying rates, being partially offset by slightly higher risk-weighted assets. RWA is up primarily due to high account costs of credit on trading activity, but notably this quarter being offset by lower loans across businesses on a spot basis. Quarter-on-quarter loans were down in Home Lending as a result of a loan sale transaction in the CIB due to a large syndication, and in Card and Asset & Wealth Management seasoning. Also on the page, total assets are up over $100 billion quarter-on-quarter, driven mainly by higher CIB trading assets in part and normalization from lower levels at the end of the year given market conditions. Lower end-of-period loans are partially offset by treasury balances, including higher securities. In the quarter, the firm distributed $7.4 billion to shareholders, including $4.7 billion of share repurchases, and we pre-submitted our 2019 CCAR capital plan for the Federal Reserve. Moving to Consumer & Community Banking on page four, CCB generated net income of $4 billion and an ROE of 30%, with consumers remaining strong and confident. Core loans were up 4% year-on-year, driven by Home Lending and Products both up 6%, and business banking up 3%. Deposits grew 3%, in line with our expectations, and we believe we continue to outperform. Client investment assets were up 13%, driven by record new money flows reflecting contribution across both physical and digital channels, including new invest. We also announced plans to open 90 branches this year in new markets. Revenues of $13.8 billion were up 9%; Consumer & Business Banking revenue was up 15% on higher deposit NII driven by continued margin expansion. Home Lending revenue was down 11%, driven by net servicing revenue on both lower operating revenue and MSR, but notably while volumes are down, production revenue is up nicely year-on-year on disciplined pricing. Merchant Services & Auto revenue was up 9%, driven by higher Card NII on loan growth and margin expansion and higher auto lease volumes. Expenses of $7.2 billion were up 4%, driven by investments in the business and also lease depreciation, partly offset by expense efficiencies and lower FDIC charges. On Credit, net charge-offs were flat as lower charge-offs in Home Lending and Auto were offset by higher charge-offs in Card on loan growth. Charge-off rates were down year-on-year across lending portfolios. Now turning to page five under Corporate & Investment Bank, CIB reported net income of $3.3 billion and an ROE of 16% on strong revenue performance of nearly $10 billion. For the quarter, IB revenues of $1.7 billion were up 10% year-on-year and outside of an accounting nuance, all of advisory, DTM, and total IB fees would have been record for our first quarter. Advisory fees were up 12% in a market that was down, benefiting from a number of larger deals closing this quarter. We ranked number one in announced dollar volumes and gained nearly 100 basis points of wallet share. Debt underwriting fees were up 21%, also outperforming a market that was down, driven by large acquisition financing deals and our continued strong lead-left positions in leverage finance. We maintained our number one rank and gained well over 100 basis points of share. Equity underwriting fees were down 23%, but in a market that was down more, as a combination of the government shutdown, uncertainty around Brexit, and the residual impact from December volatility weighed on issuance activity across the regions in the first quarter. But already in the second quarter, we’ve seen a major recovery in US IPO volumes back to normalized levels, and we are benefiting from our leadership in the technology and Healthcare sectors, which again dominate the calendar. Moving to markets, total revenue was $5.5 billion, down 17% as reported and down 10% adjusted to the impact of the accounting standards from last year that I referred to. Big picture, on a year-on-year basis we are challenged by a tough comparison. Backlog in the first quarter of ‘18 was reported, clients were active, and we saw broad-based strength in performance, which was a clear record in equity last year. In contrast, this quarter started relatively slowly and overhanging uncertainties kept flying from the sidelines despite improving in more favorable environments. With that in mind, I would characterize the results as solid and a little better than we thought at Investor Day just a few weeks ago, largely due to a better second half of March. For what it’s worth, so far in April, conditions have generally been constructed, but it’s too early to draw any conclusion in terms of P&L. Fixed income markets revenue was down 8% adjusted, driven by lower activity, particularly in rates and in current fees, and emerging markets, which normalized following a strong prior year. However, we did see relative strengths in credit trading and strong flow, as well as in commodity. Equities revenue was down 13% adjusted, reflecting more of the record prior year quarter, and this quarter’s performance was still generally strong across products. Although it got off to a somewhat slower start, cash in particular nearly matched last year’s exceptional results. Treasury services revenue was $1.1 billion, up 3% year-on-year, benefiting from higher balances and payments volume, being partially offset by deposit margin compression. Security services revenue was $1 billion, down 4% as organic growth was more than offset by fee and deposit margin compression, lower market levels, and the impact of the business exit. Of note, deposit margin in both treasury services and security services is impacted by funding basis compression rather than client basis; at the firm-wide level, there is an offset. Finally, expenses of $5.5 billion were down 4%, driven by lower performance-based compensation and lower FDIC charges, partially offset by continued investments in the business. The comps and revenue ratio for the quarter was 30%. Moving to commercial banking on page 6, it was a strong quarter for the commercial bank with net income of $1.1 billion and an ROE of 19%. Revenue of $2.3 billion was up 8% year-on-year, driven by strong investment banking performance and higher deposit NII. Record Gross IB revenue of over $800 million was up more than 40% year-on-year due to several large transactions, and the pipeline continues to stay robust and active. Deposit balances were down 5% year-on-year and 1% sequentially, as the migration of non-operating deposits to higher yielding alternatives has decelerated, and we believe it’s largely behind us. From here we expect deposits to stabilize given the benign rate outlook. Expenses of $873 million were up 3% year-on-year, as we continue to invest in the business and in banker coverage and technology. Loans were up 2% year-on-year and flat sequentially. C&I loans were up 2% or up 5% adjusted for the continued runoff in our tax-exempt portfolio. We continue to see solid growth across expansion market and specialized industries. CRE loans were up 1% as competition remained elevated, and we continued to maintain discipline given where we are in the cycle. Finally, credit costs of $90 million were predominantly driven by higher reserves from select client downgrades, and net charge-offs were only 2 basis points on strong underlying performance. Before we go on, I want to address the perceived gap between our reported C&I growth statistics and those we all see in the Fed weekly data. If we look across all of our hotel business, we also show strong growth year-on-year at about 8%, but there are three comments I would make; first, there can be reasonable noise in the Fed weekly data; second, CIB is a big contributor for us, and CIB loan growth this quarter was supported by robust acquisition financing and higher market loans; and third, as previously noted, the definition of C&I for the Feds does not include our tax reform portfolio, which has seen significant year-on-year declines due to tax reforms. While it’s true that the Fed base was showing strong year-on-year growth and apples-to-apples ROE, in the domain stream middle market lending phase, we are seeing good mid-single digit demand in line with our expectations. Moving on to assets and Wealth Management on page seven, Assets and Wealth Management reported net income of $661 million with a pretax margin of 24% and an ROE of 25%. Revenue of $3.5 billion for the quarter was flat year-on-year as lower management fees on average market levels, as well as lower growth brokerage activity were offset by higher investment valuation gains. Expenses of $2.6 billion were up 3% year-on-year, but the continued investment in our business, as well as other headcount-related expenses were partially offset by lower external fees. For the quarter, we saw net long-term inflows of $10 billion with strength in fixed income, partially offset by outflows from other asset classes. Additionally, we have net liquidity outflows of $5 billion. AUM of $2.1 trillion and overall client assets of $2.9 trillion were both records, up 4%, driven by cumulative net inflows into liquidity and long-term products, and with third-quarter market performance nearly offsetting fourth-quarter declines. Deposits were up 4% sequentially on seasonality and down 4% year-on-year, reflecting continued migration into investments, although this is decelerating as we continue to capture the vast majority of inflows. Finally, we had record loan balances up 10% with strength in both wholesale and mortgage lending. Moving to page eight in corporate, Corporate reported a net income of $251 million with net revenue of $425 million, compared to a net loss of over $200 million last year. The increase was driven by higher NII on higher rates, as well as cash deploying opportunities in the treasury. Recall last year we had nearly $250 million of net losses on security sales relative to a small net gain this quarter. Expenses of $211 million are up year-on-year and include the contributions to the foundation of $100 million this quarter. Concluding on page nine, to wrap up, this is a quarter that really showcases the strengths of the firm's operating model, benefiting from diversification and scale and our consistent investment agenda. We delivered record revenue and net income in a clean first quarter performance despite some hangover from the fourth quarter. Underlying drives across our businesses continue to propel us forward, and in March and coming into April, the economic backdrop feels increasingly constructive; client sentiment has recovered, and recent global data shows encouraging momentum. Deposits grew just six weeks behind us, so our guidance for the full year hasn’t changed. We do remain well-positioned and optimistic about the firm’s performance. With that, operator, we’ll take questions.

Hi, good morning. Marianne, you had good expense control this quarter and in Jamie's letter you show goals of improving the efficiency ratio in each of the main business units for the next few years. Just kind of wondering what's driving that? Is there any kind of cresting of investment spend that's going to occur in 2020 or is this just kind of positive operating leverage carrying through?

Hey John. So I would say just big picture it’s a combination of both, obviously. We told at Investor Day about the fact that you know we're always going to make the net investment, the net incremental investment decision based on its own merits, but in total the amount we’re spending now and the amount of dollars that roll off every year get repositioned for investment. We feel like we should see our net investment spend reach a reasonable plateau over the course of the next several years, and so that is positive. Obviously, a lot of the investments that we've been making in technology, you know, are not only to do with customer service and risk management and revenue generation, but also relates to operating efficiency. We would also expect to start to see some of that drive, you know, operating leverage. But it’s also the case that we are looking for revenue growth, so it’s a combination of both.

Okay, and then just on the NII outlook. It's reassuring to be able to hold the Investor Day outlook of the $58 billion for this year, even though your curves flattened; there were some concerns there. What are the dynamics that enable you to keep the guidance even with the change in curve that we are seeing?

Yeah, so I mean the first thing I would say is that you know, we probably said it before and we’ve seen these periods where you get kind of short-term fluctuations in the curve that it's dangerous to chase it up and down every month or so. So in the big picture, we said, you know, $58 billion plus. Yes, it’s true that a persistent flattening of the curve would have a small net drag on Carry, and we are not immune to that. So there is a little bit of pressure as a result of that, if it is persistent at this level throughout the year. However, we continue to grow our loans and our deposits, and against that, there is a mixed bag of lower for longer. So while we may not have a tailwind of higher rates, we also may not face the same kinds of pressures that we would see on a basis necessarily. While on longer-end rates, maybe a net small drag in the short term on earnings, that’s a credit on the balance sheet; you could argue a patient FED and lower rates for longer may elongate the cycle. So net-net, there are pluses and minuses. I would say there may be some pressure as a result, but it's modest.

Hi! You mentioned consumer deposit growth is outperforming, with average consumer deposits up over $20 billion year-over-year. Just hoping for a little more on the why, and to what degree does that reflect your build-out of branches? How is that deposit growth going? How much of this is related to digital banking and then how much would be due to simply a perception that you have superior strength? I know that came up during the CEO hearing, the IMS study saying that you get a benefit due to a perception of being too big to fail.

Yeah, so look, I will say there are lots of different opportunities for people to get insured deposits. So you know, we’ll come back to the other point, but all of that plays a piece. Just so you recall, we built a large number of branches following the financial crisis as we densified our position in new markets like California and Florida and Nevada. So we do have a decent portion of our branches that are still in their maturation phase, and we are definitely seeing some growth in deposits there. But I also firmly believe—we talked about it many, many times—that we’ve been investing consistently over the last decade in customer experience. Customer satisfaction in our consumer bank is at an all-time high and continues to increase consecutively. Digital products, new products and services, value propositions to our customers, and convenience in new markets, all of which I think are increasingly important to our customers, as well as, obviously, a number of other factors. So you know, to me it’s a combination of all of the above and less so—it’s not a point of perception of a flight to quality; the people have a lot of choices. Year-over-year, I would say we are seeing deposit growth grow exactly in line with our expectations, but this year the slowdown speaks a little bit more, as far as we can see, to higher consumer spend and less to do with deposit flows out to rate-seeking alternatives. So customers are voting with their business; they are bringing deposits to us, and I think it speaks to a combination of the investments we are making and the overall build out of branches.

So how much of that deposit growth is due to digital banking? Can you quantify that or give us a ballpark figure?

Well, I can tell you that – and so it’s not just about deposit growth, as well. Remember, it’s also about investment assets and we talked about our digital offerings providing headwinds there. So I don’t have a breakout for you; we can follow up. You know, it deepens at our branch; both the reason why we continue to believe in a physical and digital combined channel presence, both are important, but we can get back to you.

Hi, thanks very much. On sec services, I heard you loud and clear about the funding basis compression being part of the answer on revenues down. Could you talk about the business exit? I wasn't aware of that and how big that is? And then flip to the better side, you also did mention that organic growth. We haven’t heard too much since the big trillion-dollar win, but I know there is stuff going on underneath the covers. Talk about what type of business you are winning there?

Yeah, so on the business aspect, this is a feature of always talking about year-over-year. To me this feels like really old news. It was a U.S. broker-dealer exit that we talked about many quarters ago, but obviously we are still seeing the impact of that on our revenues on a year-over-year basis for another couple of quarters; it’s about just over $20 million year-on-year revenues negative impact, but it's, you know, relatively speaking old news in terms of the exit that took place last year. Lower market levels were about an equivalent drag on the revenues. And then we are seeing solid underlying growth, but this is a very competitive environment, and as we are growing our assets from—you know our custody asset and as we are winning new mandates, these are under competitive pressures and it also depends on mix. And so there are a bunch of factors going on. What we are focused on is that both of these businesses have long-term growth opportunities that are very big and the organic growth and the underlying businesses are performing well. Even with these revenue pressures, we are focused on continuing to drive efficiencies, and these are good ROE businesses, you know, above mid-teens. I’m sorry, can I just make one more comment? I didn’t say this on the digital space, but it’s important as we think going forward that not just about our digital assets, the digital account openings, and that is a feature of how we are attracting new accounts—25% of checking production, 40% of savings production, now able to be opened digitally. So increasingly digital will be a driver, but we will get back to you with that.

Marianne, just one quick qualifier on the seven-hour marathon the other day in DC. Besides finding out Jamie's a capitalist, that’s shocking news, one of the risks that I think that the group talked about was in the private credit markets and non-bank lending. I just wanted to get a little qualifier of that – I'm pretty sure you didn't mean the exposure JP Morgan has to those, it’s just more risk being taken, but if you can just expand on that, that would be helpful.

Yeah, and for sure, the comment is more about the overall risk in the environment and not about our risk to those sectors. Our risks are all the things that we’ve always told you about, which are relatively modest, relatively senior, well secured, well diversified. We look at losses under a variety of scenarios, and they are manageable. The comments are really about the percentage of leverage lending or the percentage of some of our businesses that have now been taken outside of the banking market. While we wouldn't say necessarily that that's systemic, being not systemic, and suggesting that there won't be problems are two different things. Not all non-banks are situated similarly, so there are some healthy and well-capitalized, well-responsibly run companies, and there are some others who may not be standing at the end of another downturn. The real question is for all of this business that has migrated outside of banks, how much of it will be unable to be rolled over or refinanced on the same terms and with the same prices as it is now? So it's not about us, but it's about understanding that we would want to be able to support and intermediate within these markets going forward. For a variety of reasons, whether it's structure or capital liquidity pricing, that may not be as easy as it sounds in a downturn for portions of that market.

Yeah, so can I just take the big numbers to put those into perspective? Obviously, regulators keep an eye on it, and we are not particularly worried about it, but just to give you some facts; there’s about $2.3 trillion for the banks. The banks generally have the senior piece or the A piece of about $800 billion or $900 billion. Institutional investors, some of them, are quite right, these are life insurance companies, funds, etc., and own BPs about $900 billion, and there's about $500 billion which they call direct, and think of these as large funds. For the most part, these are large funds; many are very capable, very bright, and have long-term capital. In the institutional piece that I mentioned, a lot of them are CLOs. I know that people are worried about CLOs, but if you actually look at them, there’s more equity in those CLOs; they are more funded, and both the direct piece and the CLO piece have more capital, permanent capital. The system is okay; it's just getting bigger as it moves outside of regulated judgment. It should be something that should be watched, but it's not a systemic issue at this point.

Hi, good morning.

Good morning.

I had a question for Jamie. Jamie, in the shareholder letter, you mentioned because of some significant issues around mortgage, that you are intensely reviewing your role in origination, servicing, and holding mortgages, and the odds are increasing that we will need to materially change our mortgage strategy going forward. Could you give us some color and context for that statement and what kind of things you're thinking about there?

Yeah. So if you look at the business, I mean it is just costly. You have 3,000 federal and state origination and servicing requirements; it is litigious. Just look at history, you can see that. Moreover, non-banks are becoming competitors, and they don't have the same regulations or requirements in servicing or production. You're having that issue of servicing itself is a hard asset. We just want to— we know it’s important for a bank. We also want to— we standardized capital, since a lot of banks are constrained by generalized capital; it's just a capital pod. Far more than it should be if you look at it relative to the real risk embedded in holding mortgages. We just want to have our eyes open, look at that, go through every piece, and structure it in a way that we are very happy going forward. We don't mind volatility; we don't mind staying in the business, but you got to look at that and ask a lot of questions about whether banks should even be in it.

Okay. And then, separate topic, but just a question I wanted to ask because I got a couple of questions on it yesterday. The whole group of CEOs was asked, who do you think could succeed you? Would a woman or would a person of color succeed you? I don’t think you raised your hand. I just wanted to understand why and just hear from you, why you answered the question that way?

Yeah. So what I should have said is that we don't comment on or speculate on succession plans. It’s a Board-level issue; it's not something you do in Congress where you play your hand out in Congress. I was confused by the question likely without a timetable. We have exceptional women, and my successor may very well be a woman, or it may not; it really depends on the circumstances of time, and it might differ if it's one year from now versus five years from now. So that’s all that was. I think a bunch of people were kind of confused, saying what you would likely mean was stuff like that. So I mean, still go and work in other several people on the operating committee who can succeed me.

Thanks, I appreciate that. That's the answer I expected you were going to give, but wanted to hear it from you, so I appreciate that. Thanks.

You're welcome.

Hi. I just wanted to follow up on the remarks on the mortgage business. We did see a healthy decline in resi mortgage loans, and Marianne, I know you spoke at Investor Day about the balance sheet optimization strategy which could drive more growth in securities versus loans. I'm wondering, is that what's really driving the slowdown that we saw in resi loan growth? And maybe more broadly, how should we think about core loan growth or a sustainable pace of core loan growth in 2019?

Yeah. So mortgages in 2018-2019 are the epicenter of it. The market itself is about 15% smaller, notwithstanding all of the discussion about lower rates and still higher year-on-year than they were this time last year. That obviously is having an impact, and as we've been—we're down similarly. We added about $6 billion of core mortgage loans to our portfolios. Against that, as you saw last year, we did a number of loan sales, and we did another sale again in the first quarter, and that speaks to optimizing the balance sheet. We're trying to take loans off of our balance sheet, core loans of our balance sheet, and sell them if we can reinvest in agency MBS and non-residential assets that have better capital and liquidity characteristics. So it's going to be a little bit harder to look at the trend; you're going to need to look at things grow. We are originating high-quality loans, we are adding a number of loans to our portfolio, and we're distributing based on better execution as that goes, but we will continue to optimize our balance sheet.

Very helpful, and just a follow-up for me on CCAR. The Fed released a document recently highlighting the changes to the loss models this year, including some higher Card and Auto losses in the upcoming exam. I'm just wondering, how does that inform the way you're thinking about capital return capacity? And are you still confident in that sustainability of 75% to 100% net payout as well as the 11% to 12% CET1 target?

Yeah. So I didn't hear the second part of the question on losses, which losses were up this year that you were mentioning, but here is what I would say. The Card and Auto losses? Yeah. So I applaud transparency for sure, and we love to get more detail as we think about the way that the Fed model losses for our portfolios. We've been observing that over time. Necessarily, it's the case that the Federal Reserve models are typically less granular and less tied to our specific risks necessarily because they are industry-wide. Net-net, it doesn't change our point of view that as we're at 12.1% CET1 right now, arguably a little bit above the high end of our range, and continuing to grow earnings, we ought to be able to distribute a significant portion of earnings, but we always invest in our businesses first. So we are growing our businesses responsibly. Every time we add branches, we are adding customers, we are adding advisors across our businesses. To the degree that we have excess earnings, we'll continue to distribute them and the ranges that we gave you at the end of February, nothing has changed.

Hi. Good morning, Marianne. A quick question – I know you mentioned that the increase in NPLs within Wholesale was again idiosyncratic, but last quarter there was also an increase and it was five credits last quarter. Is there a way you can give more color as to the specific drivers in there? I know you said in the past that you expect to normalize, that you are off a low base. I got that, but I mean just a little bit of additional color perhaps?

Yeah. So the color is, there is really no color, which is to say, if you were to go back over the course of the last eight quarters and take oil, gas, energy releases out, you would've seen, you know, quarters where reserve builds were close to those and other quarters where there were $100 million in between. So there's always been the propensity for there to be one or two, three, or four downgrades. The thing we look for is whether we are seeing pressure on corporate margins and free cash flow and whether we see that broadly across the sectors and companies we're banking, and we're just not. So it's not to say that we aren't paying close attention to real estate given where we are in the cycle. It’s not to say we're paying close attention to retail, but the color is there is no real color—that these are genuinely a handful of names across a handful of sectors, as was true last quarter.

Okay. And then a separate question in the mortgage banking; it looks like gain-on-sale margins were at a high point over the last five years this quarter. Was that something in the market? Something with the rates or was there a one-off impacting that number this quarter?

So you may recall that we did a mortgage loan sale last quarter and realized — and as geography. In the Home Lending business when we do these mortgage loan sales because we're match funded, net-net there's very little P&L. But last quarter, there was a loss in NII and an offset in rate funding in NII; this quarter there's a gain. So you've got a loss quarter, gain this quarter, both small, but nevertheless, that's driving the majority of the production margin going up. But in addition, if you strip all that noise out, which is not material but nevertheless significant quarter-over-quarter, we are seeing better revenue margins on better pricing.

Okay. Great, thank you.

Good morning, Marianne.

Good morning.

Can you share with us your de novo branching strategy moving forward? What have you discovered, and how long does it take for the branches to reach breakeven and eventually achieve your desired return on investment numbers?

Yeah. So we're really, really excited to be able to open these branches in these markets and serve more customers across the United States. When you talk about branches, you are talking about investment for the long-term, and when I say long-term, I mean multiple years, decades. With respect to the new markets that we're entering, these are extremely nascent investments; the branches, in many cases, we haven’t even broken ground. However, that said, early indications, very, very early indications are strongly positive. We're seeing a lot of excitement in the market. We're seeing new accounts in production, a little better than we would have expected at this very early stage. On the whole, you see branches break even over several years and mature in terms of deposit and investments and relationships closer to 10 years or below.

Very good, and then following up on some comments you made at Investor Day, and I believe touched on today about technology spending. If I recall correctly, next year technology spending should be self-funding and stabilized at just about where you are today. When you compare it to the past five years, what has changed with the growth trajectory of technology? Nominal dollars have now kind of stabilized versus what it was like again in the past five years?

I want to emphasize that we believe, given our spending levels and the efficiency we’re achieving with each dollar, our net investment will be more stable moving forward than it has been historically. We will assess each investment based on its individual merits. That said, we are increasing our technology spending, particularly in areas aimed at transforming the bank. This encompasses platform modernization, cloud services, controls, security, customer experience, digital initiatives, R&D, and more. While we are investing a significant amount, each year many of the funds we allocate roll off, allowing us to reassess and reinvest. We will continue to invest heavily in our agenda, especially in technology. It's simply that we believe our investments will be flatter going forward than they have been.

Thank you.

And we're getting more efficient. In the past, the way the technology was delivered was very different. The more that we're in our modern virtualized, cloud-ready way with new technology, each dollar of technology is more productive.

Great, thank you.

Hi. I've got a quick question and a follow-up, basically. My question is on the Treasury Services; year-on-year the growth going from double-digit to just 3% where apparently the volumes remained healthy, but the margins started to deteriorate. I wonder how you feel going into 2019, especially given that trade talks are still ongoing, and therefore volumes could actually be a bit more problematic. Do you still believe that we can go back to kind of double-digit growth year-on-year for the remaining quarters? And my follow-up question is, we talked about change the bank versus run the bank for the IT budget. Can you give us a number just to get the indication of how much you're spending on innovation? Thank you.

Yes. Okay, so first point on Treasury Services, last year's revenue growth was in double digits. You're right; this quarter fixed year-on-year. I mentioned earlier that for both of our wholesale businesses, we happen to have basis compression between the funding spreads that we provide to the businesses and pricing declines. So that is just given where rates have moved, it may be a headwind this year as the segment results are reported, but for the company it's obviously net zero. The more important point is that organic growth underlying all of that balances and payments is holding up very well, and we do expect that to continue. You will see margins really compressed on that; it's not speaking to deposit flows, it's not speaking to volumes, and it's not speaking to escalating payouts at this point. So we feel good about the underlying organic growth in the business. With respect to technology spend, you'll recall last year we were kind of 60-40 run the bank, change the bank, and it's more 50-50 this year, so $11.5 billion of spend about half and half.

Thank you very much.

Remember, in the change of the bank, it runs the whole gamut from platforms and controls to customer experience, digital, data, R&D; so it's the whole spectrum.

Good morning. I just wanted to follow up on the net interest income, and it came in a lot better than expected this quarter. Is there anything that's lumpy or one-time that you'd flag? Because if you annualize it, you're already above the full-year target of $58 billion plus, and obviously there's day count drag this quarter and really just puts and takes with rates and balance sheet growth, but it seems like the guidance is conservative versus where you're at right now.

Okay, so we did slightly better in the first quarter, two things driving it. One is small but nevertheless arguably a non-recurring, which we talked about the fact that overall, in the company when we do these loan sales, there may be a small residual gain or loss that resides in Treasury, and it was a small gain in the first quarter, call it $50 million approximately. In addition, we talked in the fourth quarter about the fact that we were seeing the opportunity to deploy cash in short-duration liquid investments that were high-yielding than IOER; that continued into the first quarter. So we did benefit from that, and it may or may not continue, but we're not necessarily expecting that to continue all the way through. I would say that day count was a drag. As you look forward with some opportunities, honestly, obviously I do see that there is a risk associated with the flat yield curve, not big, but nevertheless net neutral to downward pressure, or downward pressure if long-end rates stay lower for longer. As we don't have the tailwind anymore from higher rates, and we continue to process the December rate hike, you could see more rates paid to a little more into the second quarter, so there are risks and opportunities. But we still think it's a decent outlook; I don't think it's conservative. I think $58 billion is straight down the middle at this point. The trouble with the yield curve is it can fluctuate dramatically over the short term, and we shouldn't over-interpret or over chase it. At this point, I think it's a decent estimate and we'll continue to update you.

Okay. And then just on the repositioning of the balance sheet and the approach to adding securities. Are you thinking any differently going forward than you were six weeks ago? You clearly seem more positive on the macro, and obviously, things can change there, but are you approaching from the balance sheet management a little bit differently, given the more positive macro outlook?

Well, I mean we only spoke to you most recently about six weeks ago. So the sort of overall answer is, no, not really. We expected at that point that we would have a patient Fed. It turns out that all the central banks are pointing to being a little bit more dovish, which could be generally constructive for the environment and for credit risk on the balance sheet. Obviously the curve being flatter is not a compelling situation to add more duration, but there's natural drift in our balance sheet there. So overall very little; we feel good about the credit. The curve is flat, and we'll continue to manage the overall environment and company as we see the economy unfold.

Okay, thank you.

Yes, hi, good morning. I just wanted to follow up, Marianne, on the comments. In the backdrop for lower rates for longer, could you give us a sense of how you're thinking about your deposit strategy in retail and wholesale? In other words, I know you discussed some dynamics on pricing for the first quarter, but when do you expect competition to taper off, and do banks have room to actually lower deposit costs if the rate curve stays this way for a prolonged period of time?

So, I’ll just put the big contextual answer; it will always be the same, which is when we think about our strategy around deposits and deposit pricing, it is 100% driven by what we're observing in our consumer behavior than what we're seeing in deposit flows. That’s the environment that we look at to determine what's happening. You've seen naturally over the course of the last couple of years, as rates have risen, that we have seen flows of deposits to higher yielding alternatives, whether it's investments or more recently in CDs, and that may continue; we'll continue to watch that. It is our expectation that rates will be relatively stable from here in terms of the short end, and it's the short end that predominantly drives the sort of deposit pricing agenda. The curve is flatter, as long as it's because the front end is stable, I don't necessarily see deposit costs going down, but we're going to continue to watch our customer behaviors and deposit flows and respond accordingly.

Thank you. My follow-up question is, we heard you loud and clear during your prepared remarks that the increase in wholesale non-accruals was idiosyncratic, and I'm wondering as we look at a tick-up in non-accrual loans in the Corporate & Investment Bank for the past two quarters, are we just in the part of the cycle where we're just growing from a low base or should we expect a step down in the second quarter in non-accruals similar to how we saw last year?

There are a couple of situations that we would expect to maybe not be present in the second quarter, but I would say it's more a feature of an extremely low base, and so from that, any movement, whether they are up or down, it's somewhat exaggerated. However, we would continue to call the credit environment benign.

Thanks. Marianne, just if I could ask you, you mentioned that there are some signs that the economy is strengthening, and I wanted to just ask you to – can you split that between just what you're seeing on the consumer side versus the wholesale corporate side? The spend numbers are obviously still double-digit year-over-year; some others have talked about a little bit of a slowdown; you are still saying quite good. And then there is this unevenness about just CapEx and spending on the corporate side. Can you walk us through where you're seeing pockets of relative strength and improvement?

Yeah, I mean I think that as it relates to U.S. and particularly looking at the U.S. consumer, you've got jobs more recently, Auto, Housing, spend, all generally encouraging and holding up well, robust, and whether it's double-digits or whether it's not, we're continuing to see that - and can see the confidence, by the way, which is still very high and has recovered from any sort of hangout by the equity market actions over the four quarters. For us, the U.S. consumer has always been strong and confident, and even if we're not at all-time highs, confidence is still very high. Generally, the beta is - and even some like housing has not necessarily been super strong, is looking encouraging. On the global front, it is a little harder, but as you look at some areas that have been struggling a bit, and Europe would be a good example, we think that in the first quarter, the transitory factors around social unrest and politics in Brexit seem to be fading a little. Business confidence has recovered a little; businesses are still spending on labor, so generally a good sign of the underlying confidence notwithstanding kind of sentiment numbers. Even there, there's job growth, wage growth, helped by dovish monetary policy and general financial conditions having increased and eased. We feel optimistic across the Consumer and the rest of the sector, albeit there's sort of green shoots on the wholesale side. It's early, but what we were expecting to see, so it will continue.

Yeah, and one follow-up just on Investment Banking business. You had mentioned that the pipelines look good and obviously we've seen the reopening of the ECM market. Your general outlook is again on that global point about the bit unevenness between US and global. Just how do you feel about the advisory backdrop? There have been some big deals on the tape again today, but has it been a little bit of an air pocket here partially probably because of the soft fourth quarter? How is that side of the business you're feeling and sounding from a backlog perspective?

Yeah, so I would say that a couple of things. Obviously there were some deals that moved into the first quarter out of the second half of 2018, and we did benefit from that. Just as a general market matter, M&A is still attractive in a low growth environment. Investors are still constructive. North America, which is by far the biggest market for M&A, is still healthy. Europe was a big driver last year and has seen a sharp drop-off in volumes and wallet, so that may continue, although we have a pretty good position there. I would say that the pipeline is down, but still, M&A is attractive, and people are looking for synergistic growth.

Hey, good morning. Maybe just a follow-up on the NII outlook. We talked about a flat curve. What kind of levers do you have to pull if we were to see what some are speculating? It doesn't sound like you're in that camp, but if you were to get a rate cut, how do you manage that? How do you think the balance sheet reacts and NII reacts to a potential for a rate cut over the next 12 months?

Right, so the market which is usually more—I would say pessimistic, but more in that camp, they are still only expecting an ease at the end of the year, so we are not, by the way, as you point out. For 2019's NII outlook, it's not a clear and present danger and there will be a need. Obviously, we have on the way up on rates been over-indexed to total end rates and so clearly if we were to have any, it would have an impact on our NII. If we felt generally that that was the direction the economy and rates were going in, it might change our view on how we position the balance sheet. But right now, the Fed is on course. That’s constructive for corporate deposit margins, constructive for credit, and generally constructive for how we're positioned on the balance sheet.

It's still you like you have room to, I guess, extend duration to kind of protect NII and NIM if that would happen?

Yes, yes, we do.

Hi, good morning. I wanted to follow up on Matt's question on sort of idiosyncratic items in the quarter and lumpiness. This is obviously a pretty strong quarter from an earnings standpoint, earnings well ahead of my estimates and consensus, especially in CCB, but there weren't a lot of obvious non-core items really called out. Marianne, can you just comment on the sustainability of the results and whether there are some idiosyncratic things that weren't necessarily called out during the call? You mentioned corporate, cash deployment revenues really high relative to historical levels there. Are there any sort of idiosyncratic items that call into question how sustainable the results are?

So, first of all, just sort of big pic, first of all really high I think is a bit of an overstatement – higher I think is fair. No, not really if there were, you know, we would have called them out. There are a few little things so I'm just going to call out a few of the items we have mentioned. We contributed $100 million to the foundation this quarter; net-net legal was very, very small, but nevertheless positive this quarter. So, there's a few little bits and pieces like that. But if you look at revenue performance, we did a little better across the board than you all were expecting. We did better in IBCs, and we gained a lot of share; we did a little better in markets; we did a little better in NII, so we just got a little bit of a wind on our backs sort of phenomenon. Probably my best answer to you is, as happy as we are with the performance—and we are gaining share and continuing to see our underlying drivers propel us forward, and the momentum we got in our businesses—we are not making material changes to our full-year outlook. We still expect, as Dimon mentioned at Investor Day, that while we feel great about our positioning in investment banking in the first quarter, Coalition is still expecting the wallet to be down between 5% and 10% year-on-year. So, we do expect to gain share to help offset that, but last year was a record. We haven't changed our full-year guidance at all yet. We'll take this as a very good down payment to that. If markets are constructive and wallet expands, we’ll benefit from that, but we're not leading it across and changing everything.

Okay. No, that's...

We're not leading it across and changing everything.

That's helpful. Any update on distressed capital buffer? What's the fed thinking there, and when do you think we could see a little bit more detail or clarity on the proposal?

The best I know, there is a chance, but not necessarily a probability that there could be an SCB proposal for 2020 CCAR. There’s a set of meetings or a meeting that’s coming up sometime in the summer that I think might be an important moment. We continue to work as constructively as we can to help understand the better way to bridge growth capital together with point-in-time capital; but it's complicated. You know, as we said, the most important thing is not to issue an SCB proposal; it doesn't deal with the entire landscape of capital and look at it cohesively. So we're talking about GSIB; we're talking about minimums; we're talking about Basel; we're talking about SCB; it's complicated. I'd say there's a chance but not a probability that we might have something in time for 2020 CCAR.

Got it. Thanks a lot.

Good morning, Marty.

Thanks for taking the questions. Hey, good morning. First I want to ask, as going into CCAR—we're getting into that season again, one of the things that I think has an impact is that what we had was a significant 30% plus growth in earnings last year. So if you look at your capital going forward, and you think of holding payout ratios, it presumes that you have kind of some wind behind the sails just to increase fairly significantly just off the increase in earnings last year?

I mean yes, yes. If you look at payout ratios, it's sort of described as a percentage. Then we said over the longer-term, we expect to payout in a benign environment between 75% and 100%, and analysts have estimates of 90% plus. As earnings grow, that would be a bigger dollar number. But again, we'll always calibrate that relative to our opportunity to invest in our businesses, and it’s a capacity, not a promise. So, we’ll continue to see how the whole environment unfolds. But you're right, as earnings continue to grow, a strong payout ratio, we’re above the top end of our capital range. So we’re starting at a robust level, it would be a higher dollar number, yes.

And then, Jamie, I was just curious. I think one of the issues facing the industry, and just we get pushed from the outside, is that the cycle is 10 years old, and my thought is that that internal time clock is just off this time. If we look at it, there are things you're seeing or Marianne that you see inside the company that probably dispel that a recession is kind of on the horizon. So just wanted to get your comment on that as well? That's my follow-up question. Thanks.

Yeah, Marty, go ahead Jamie.

Yes, some sort of number that’s out there—in Australia, they had growth for 28 years. I’m just saying in notional; but you have to have a recession. Now they've had a lot of back winds; there's growth in Asia and stuff like that, but if you look at the American economy, the consumer is in good shape, the balance sheet is in good shape, people are going back to the workforce. Companies have plenty of capital, and capital expenditure is still up year-on-year. A little bit less this quarter than last quarter. Our capital is being retained in the United States. Business confidence and consumer confidence are both relatively high; they are not all-time peaks, but rather high. You can't easily say it can go on for years. There is no law that says it has to stop. We do make a list and look at all the other things: geopolitical issues, lower liquidity. There may be a confluence of events that somehow cause a recession, but it may not be in 2019, 2020, or 2021. Obviously, at one point, though, there will probably be something. I think the bigger short-term risk would be something going wrong in China with the trade issues. I wouldn't count on having a recession in the short run, several couple of years.

I agree, thanks.

Hi, morning! Thanks for taking my questions. My first question is on end-of-period loans. If we look across the board, it looks like there is some contraction there on a quarter-to-quarter basis of about 3% to 4%. I was just wondering if you saw that as a one-quarter issue relating to what happened in the fourth quarter '18, and if you can give some color on the quarters ahead speaking to company CEOs where you see it re-emerging again.

Yes. So quarter-on-quarter, I think I mentioned a couple of these things, but across our businesses for a variety of reasons on an end-of-period basis loans are down. The first one I would point out is mortgage, and we just talked about that I think earlier in the call, which is we continue to originate mortgage loans and continue to distribute them on the portfolio. We did do a loan sale, which is part of the discussion we've been having with you about optimizing our balance sheet. We did a sale at the end of the quarter, so that's impacting mortgage loans. In the CIB, one of the reasons we call out core loan growth ex-CIB is because we don't consider CIB loans core, they are just by their nature oftentimes more episodic and lumpy. We did see a large funded syndication loan at the end of last quarter which was fully syndicated into the first quarter. In our other businesses in Asset & Wealth Management, there was a bit of seasonality and a few pay-downs in Card seasonality. So it's just a combination of factors, but I would say two drivers: CIB and Home Lending—CIB on sort of a large syndication, Home Lending on the loan sale. Going forward, we'll continue to optimize the loan versus security part of our balance sheet as best we can for cash and liquidity purposes. But just underlying core business demand for bank balance sheet lending, you know, I look in the middle-market space and say we’re still seeing solid demand. In our investment areas and our expansion markets and specialized industries, we're still growing that portion of our loans in the mid-single digits year-on-year.

Yes, great, thanks. So my following question is on CLOs. Some Japanese institutions are big buyers of U.S. highly rated CLOs, but a few weeks ago the Japanese FSA introduced some new rules saying there had to be 5% risk retention by U.S. issuers in order for the Japanese institutions to buy them. I'm just wondering if you're seeing yet any change in demand from Japanese institutions and likewise on the other side if there is any change in behavior from U.S. CLO issuers in terms of trying to integrate 5% risk retention.

It’s a great question. The answer I'm going to give you is not that I'm aware of at this time, but I’ll have to follow up with you. Jamie, are you aware? No? Sorry Andrew, we'll come back to you. Not that I'm aware of, but it's a good, nevertheless quite detailed question.

Okay, thanks.

Thanks.

Thank you everyone.