JPMorgan Chase & Company (JPM) — Q3 2019 Earnings Call Transcript

Thank you, Operator. Good morning, everyone. I'll take you through the presentation, which, as always, is available on our website, and we ask that you please refer to the disclaimer at the back. Starting on Page 1, the firm reported net income of $9.1 billion and EPS of $2.68 on record revenue of $30.1 billion with a return on tangible common equity of 18%. Underlying performance continues to be strong with highlights including client investment assets in Consumer Banking, up 13%; strength in our consumer lending businesses, particularly on higher origination volume in Home Lending and Auto; and healthy growth in sales and outstandings in Card; number one in global IB fees year-to-date with over 9% wallet share and record growth IB revenues in middle market; and in Asset & Wealth Management, we saw record AUM and client assets. Overall, for the firm, total loans were flat year-on-year, which includes continued mortgage loan sales. SC sales loans were up 3% on healthy growth in Card and AUM. Total deposits were up 5%, with strength across wholesale and retail. And credit performance remained strong across the business. On to Page 2 and some more detail about our third quarter results. Record revenue of $30.1 billion was up $2.2 billion or 8% year-on-year as net interest income was up $293 million or 2% on balance sheet growth and mix, partially offset by higher deposit pay rates. Noninterest revenue was up $1.9 billion year-on-year or 14%, driven by strong performance across Fixed Income Markets and consumer lending, which included a gain on mortgage loan sales of approximately $350 million. Expenses of $16.4 billion were up 5% on volume and revenue-related expenses as well as continued investments, partially offset by lower FDIC charges. Credit remains favorable with credit costs of $1.5 billion, reflecting modest net reserve build and charge-offs in line with expectations. And as we mentioned last quarter, we do not see any signs of broad-based deterioration across our portfolios, both consumer and wholesale. Now on the balance sheet and capital on Page 3. We ended the third quarter with a CET1 ratio of 12.3%, up about 10 basis points versus last quarter. The firm distributed $9.6 billion of capital to shareholders in the quarter, including $6.7 billion of net repurchases and a common dividend of $0.90 per share. Now on to Page 4 for a look at our businesses, starting with Consumer & Community Banking. CCB generated net income of $4.3 billion and an ROE of 32% with continued deposit growth and total loans down 4% year-on-year. Revenue of $14.3 billion was up 7% year-on-year. In Consumer & Business Banking, we saw strong deposit and investment growth year-on-year with deposits up 3% and client investment assets up 13%, reflecting continued growth across both physical and digital channels. Revenue was up 5%, driven by higher NII on deposit growth and margin expansion as well as higher noninterest revenue on higher transaction volumes. And even though the deposit margin is higher year-on-year, not surprisingly, it is down 13 basis points quarter-on-quarter given the current rate environment. Home Lending revenue was up 12% on higher production volumes and margins, partially offset by lower NII on lower balances, which were down 12%, reflecting loan sales. With regards to these loan sales, it's important to note the net impact to Home Lending revenue is minimal with the gain on sale being offset by a funding charge from Corporate. And in Card, Merchant Services & Auto, revenue was up 9%, driven by higher card NII on loan growth and margin expansion as well as the impact of higher auto lease volumes. Card loan growth was 8% with sales up 10%, and merchant processing volume was up 11%. Expenses of $7.3 billion were up 4% year-on-year, driven by continued investments and higher auto lease depreciation, partially offset by expense efficiencies and lower FDIC charges. On credit, starting with reserves, this quarter, CCB had a net reserve build of $50 million, which included a build in card of $200 million, largely offset by releases of $100 million in Home Lending and $50 million in Business Banking. The build in Cards is primarily driven by mix as the newer vintages naturally season and become a larger part of the portfolio. Net charge-offs were $1.3 billion, largely driven by Card and consistent with expectations. Now turning to the Corporate & Investment Bank on Page 5. CIB reported net income of $2.8 billion and an ROE of 13% on revenue of $9.3 billion. Investment Banking revenue of $1.9 billion was up 8% year-on-year in a market that was down. It was a record third quarter for investment banking fees, driven by strong performances in debt and equity underwriting, partially offset by lower advisory. Year-to-date, we continue to rank number one in overall IB wallet and gain share across products and regions, benefiting from our leadership position in technology and health care sectors. In advisory, we were down 13% year-on-year, reflecting lower deal activity compared to a strong prior year. However, we continue to gain wallet share, driven by our strategic investments. In debt underwriting, we were up 17% year-on-year in a market that was down. Here, we benefited from our participation in some large transactions and increased activity in investment-grade bonds. In equity underwriting, we were up 22% year-on-year, significantly outperforming the market, driven by our strong performance in IPOs and convertibles. And for both the quarter and on a year-to-date basis, we ranked number one in wallet share for overall ECM and IPOs. We expect fourth quarter IBCs to be down both sequentially and year-on-year driven by strong performances in the third quarter and prior year. However, the pipeline remains healthy as strategic dialogue with clients is constructive, equity markets remain receptive to new issuance, and the lower rate environment has made debt issuance more attractive. Moving to Markets, total revenue was $5.1 billion, up 14% year-on-year. Fixed Income Markets was up 25%, a good result, which also benefited from a comparison to a somewhat quiet quarter in the prior year. This quarter was characterized by strong client activities across the board with outperformance in agency mortgage trading and improved flows in rates and commodities. Equity Markets was down 5% against a very strong third quarter last year. Equity derivatives performance was challenged by lower client activity and unfavorable market conditions, but prime remained strong and cash outperformed relative to the prior year. Treasury Services and Securities Services revenues were $1.1 billion and $1 billion, down 7% and 2% year-on-year, respectively. The rate environment remains a relative headwind, primarily from the funding basis compression we've been talking about, which is largely firm-wide neutral, and to a lesser extent, client-specific repricing in Treasury Services. But importantly, the organic growth in fees and balances continues to be strong. Expenses of $5.3 billion were up 3% compared to the prior year with investments and higher revenue-related expenses partially offset by lower litigation and FDIC charges. And finally, credit costs were $92 million, driven largely by reserve builds on select emerging market client downgrades. Now moving on to Commercial Banking on Page 6. Commercial Banking reported net income of $937 million and an ROE of 16%. Revenue of $2.2 billion was down 3% year-on-year with lower NII, driven by lower deposit margin, partially offset by higher noninterest revenue due to strong investment banking performance. Gross Investment Banking revenues were $700 million, up 20% year-on-year on increased M&A and equity underwriting activity, and we saw revenues increase for both large deals and flow business with a record quarter in middle market. Expenses of $881 million were up 3% year-on-year as investments in the business were largely offset by lower FDIC charges. Deposit balances were up 3% year-on-year on strong client flows. Loan balances were flat year-on-year across both C&I and CRE. In C&I, while we are seeing pockets of growth in select industries, like financial institutions, technology and energy, there does continue to be significant runoff in our tax-exempt portfolio. And in CRE, although there was higher origination activity in Commercial Term Lending, it was largely offset by declines in real estate banking as we remain selective given where we are in the cycle. Finally, credit costs were $67 million with a net charge-off rate of 9 basis points. Now on to Asset & Wealth Management on Page 7. Asset & Wealth Management reported net income of $668 million with pretax margin of 25% and ROE of 24%. Revenue of $3.6 billion for the quarter was flat year-on-year as the impact of higher average market levels as well as deposit and loan growth were offset by deposit margin compression. Expenses of $2.6 billion were up 1% year-on-year on continued investments in technology and advisers, partially offset by lower distribution and legal fees. Credit costs were $44 million, driven by net charge-offs as well as reserve builds on loan growth. For the quarter, we saw net long-term inflows of $40 billion, driven by fixed income, and net liquidity inflows of $24 billion. AUM of $2.2 trillion and overall client assets was $3.1 trillion, both record, were up 8% and 7%, respectively, driven by cumulative net inflows into long-term and liquidity products as well as higher market levels. Deposits were up 4% year-on-year, driven by growth in interest-bearing products. Finally, we had record loan balances, up 7% with strength in both wholesale and mortgage lending. Now on to Corporate on Page 8. Corporate reported net income of $393 million. Revenue was $692 million, up $795 million year-on-year, primarily due to higher net interest income driven by higher balances and balance sheet mix as well as the funding offset from the lower mortgage loan sale that I mentioned earlier, all of which was partially offset by lower rates. This quarter also included small net gains in certain legacy private equity investments compared to approximately $200 million of net losses in the prior year. And expenses of $281 million were up $253 million year-on-year, primarily due to higher investments in technology and a prior year net legal benefit. Finally, turning to Page 9 and the outlook. Our full year outlook remains in line with previous guidance. We expect net interest income to come in slightly below $57.5 billion, based on the latest implieds; and adjusted expenses to be approximately $65.5 billion. So to wrap up, the U.S. economy is on solid footing. And while global growth is slowing, the U.S. consumer remains healthy. Despite continued macro uncertainty and headwinds from the rate environment, this quarter showcases the diversification and scale of our business model. We remain well positioned to outperform in any environment, and we'll continue to strategically invest in our businesses. And with that, operator, please open the line for Q&A.

Curious your take on everything that went on in the repo markets during the quarter, and I would love it if you could put it in the context of maybe the fourth quarter of last year. If I remember correctly, you stepped in, in the fourth quarter. So higher rates, threw money at it, made some more money, and it calmed the markets down. I'm curious what's different this quarter that, that did not happen. And curious if you think we need changes in the structure of the market to function better on a go-forward basis.

If I recall correctly, we need to consider that we have a checking account at the Fed with a certain amount of cash in it. Last year, we had more cash than we needed for regulatory requirements, which caused repo rates to rise. We utilized the checking account that paid interest on excess reserves into repo, which made financial sense. Currently, our cash balance, which remains substantial, fluctuates from $120 billion in the morning down to $60 billion during the day, only to return to $120 billion by the end of the day. This cash is essential for compliance with resolution, recovery, and liquidity stress testing, preventing us from reinvesting it into the repo market, which we would have preferred. Ultimately, it is up to the regulators to reassess the liquidity expectations for that account. This situation is technical and there are various reasons for those balance changes. Many banks find themselves in a similar situation. The critical question is whether this indicates unhealthy markets, as it reaches a limit in our checking account. The same applies to the liquidity coverage ratio, where high-quality liquid assets cannot be redeployed either. Therefore, this will be the key issue in the future, and it's not just about JPMorgan. The focus should be on how regulators choose to manage the overall system and whom they prefer to have act as intermediaries when required.

And it's worth noting, Glenn, that the overall impact to JPMorgan from the events in mid-September was not material one way or another to our third quarter results.

Yes. I feel sorry for anyone who borrowed at 10%. Regarding net interest income, I heard your comments about the full year 2019, and I don't find that surprising, maybe even a little better. Have you made any significant adjustments to the balance sheet as we look ahead to 2020, especially with the anticipated lower interest rate environment? I'm interested in your thoughts on net interest income for 2020, but I know you might not share that information.

Well, I'll try. So in terms of balance sheet positioning, as you know, we have a negatively convex balance sheet. We manage it in both directions. Some moves in interest rates are hedge-able and some are not. In a quarter like we just had, with the rally that we had, you would expect us to buy duration and we did. But in terms of 2020, the way I think you can think about it is we've given you full year 2019, which implies a fourth quarter just under $14 billion. Frankly, that's not a bad place to start. There will be some puts and takes. Obviously, you would have to get the full run rate of the October cut because, of course, they're developing from the implieds, and then there's one more cut next year. But an offset to that, at least a partial offset to that, would be balance sheet growth and mix. So we'll give you more color on Investor Day, as we always do, and we'll be in a better position then. But the fourth quarter of '19 in terms of run rate is not a bad place to start.

A couple of questions, one on your GSIB bucket. I know, as of the end of June, it showed that you had bumped up into the next GSIB bucket, and I wanted to understand how you're thinking about managing that as we go into year-end. And is there a plan to get back down? And how would you effect that?

Sure. So as it relates to GSIB, we fully intend to be in the 3.5% bucket for year-end. As you know, most aspects of GSIB are on a spot basis, so we will manage it like we do any scarce resource and fully intend to be in the 3.5% bucket for year-end.

But does that impact your overall market position? Is there anything you plan to do to reach that goal that might affect your standing in some of the businesses you're involved in, such as derivatives? Or is it something that won't significantly influence your revenues because it’s too minor?

I couldn't say.

Yes. What we need to do across the various GSIB buckets will not be obvious in our fourth quarter results. But like I said, we will be managing and fully intend to be in the 3.5% bucket. It's more than just leverage.

My first question is a follow-up to Glenn's question. As you consider the various factors of resolution planning, LCR, and liquidity stress testing, could you provide insights on the level of excess deployable cash at JPMorgan?

I said we have $120 billion in our checking accounts with the Fed, and it goes down to $60 billion and then back to $120 during the average day. But we believe the requirement under CLAR and resolution recovery is that when we'd opened that account such that if there's extreme stress, during the course of day, it doesn't go below 0. You go back to before the crisis you go below 0 all the time during the day. So the question is, how far is that as a red line was the intent to regulate to a CLAR resolution to lock up that much of reserves in account of Fed. And that will be up for regulators to decide. But right now, we have to meet those rules. And we don't want to violate anything we told them we're going to do.

Got it. As a follow-up, Jen, you mentioned that the offset to the two Fed cuts in the forward curve would be balance sheet growth and mix. Could you provide more details on how you expect those dynamics to unfold, especially considering the slightly lower core loan growth this quarter and the 22% increase in investment securities balances?

Sure. Well, I'll come back to investment securities balances. But in terms of balance sheet growth in 2020, you can think about largely in deposits. And just as one example, obviously, the rate environment and the economy will matter a whole lot. But just in a declining rate environment, the higher-yielding alternatives for consumers are less attractive. And so we do expect to continue to grow the franchise. And we could see healthy growth in the deposit base. So that's what I was referring to. In terms of investment securities, when you look at the increase this quarter, there's a few things going on. As I said earlier, we did buy duration. But importantly, what you see in investment securities are also cash deployment strategies as well as actions we took on the back of the mortgage loan sales. So there's a few things going on in investment securities this quarter.

In some cases, securities at a higher return on standardized capital than certain mortgage loans did.

So you, I guess, lowered your guidance for NII, but also lowered your guidance for expenses. So how much of that lower expense guidance is due to the deployment of technology? Or just more generally, at every Investor Day, you tell us you're going to spend, what, $12 billion on technology. And we don't really have a lot of insight into the traction that those technology investments are getting. So what's working technology-wise? What's not working? And how much of that can contribute to your improved expense guidance?

Sure, I’ll start, and feel free to add. Mike, the net interest income guidance remains unchanged. In the second quarter, we indicated $57.5 billion, plus or minus. At that time, expectations included three rate cuts in July, September, and December. We mentioned that if there were two or more cuts, it would be $57.5 billion minus, and if there were fewer, perhaps $57.5 billion plus. We are essentially where we anticipated. We're slightly above what we reported earlier in September at Barclays, primarily due to a favorable shift in the 10-year yield, some balanced growth, and one less cut in December. Therefore, the net interest income guidance is broadly in alignment. Regarding expenses in technology, there are several key points. Overall, we remain committed to what we stated at Investor Day regarding flattening the cost curve from here on out. However, it’s important to consider the underlying narrative. There are expenses tied to volume or revenue, and we're always seeking improvements in productivity there. These expenses will correspond to top line growth. On investments, we will maintain our disciplined approach concerning business cases, net present value, and payback periods. Nonetheless, we will continue to invest in areas we believe are essential, even for minor enhancements. Regarding productivity, we are realizing gains in our investments and see further opportunities ahead. Although we haven’t quantified these yet, some initiatives include using robotics to replace repetitive tasks and leveraging machine learning or AI in fraud detection to aid decision-making processes. Our call centers are continuously improving productivity. As Gordon mentioned at Investor Day, our cost to serve in consumer businesses has decreased by 15%. Additionally, the digital capabilities we are introducing for customer self-service not only enhance their experience but also improve our efficiency. We have achieved significant productivity gains so far in our technology and other investments, and we believe there’s still potential for more advancements.

As you said, in our merchant processing systems, and API store for the CIB. The stuff we built to hooking all that into our custody business. So you can go business-by-business and see the extensive amount of stuff we're rolling out. And it's pretty good.

All right. Let me have one follow-up then. So I mean how many call center personnel do you have? Or how many data centers do you have? And how does that compare to the peak?

We're building many data centers as we speak. I forgot the total number, but it's quite a few. The new ones will be better, more efficient and more expandable and safe and more secure, all that kind of stuff. And we have to build that infrastructure. We have the best in the world. So we're not going to ever scrimp on something like that. And maybe at Investor Day, we can go a little bit more into how we try to manage the technology budget.

Yes. I would like to mention that when it comes to our call centers, we don't just focus on the number of staff. Our emphasis is on their productivity. While the number of agents may increase due to higher call volume, this is beneficial as it indicates healthy growth. We're consistently ensuring that the productivity of our call center team is on the rise.

Yes. And with all the cyber stuff you read about, our fraud in cards and consumers come down, not gone up because of some of these deployed technologies in call centers. I would take you through all of them, but then we're telling them bad guys our secrets. But there are a lot of ways to stop some of the bad guys now.

I'll start off with a broader question about the macro outlook. Jen, you mentioned that you feel the U.S. economy is on solid ground, and the consumer is obviously strong, but we are observing some softening in the economic data. What feedback are you receiving from clients? Are they expressing concerns or increasing worry about policy and macro uncertainties? How are you approaching this moving forward?

Sure. So on client sentiment, I think it's fair to say that perhaps the marginal investment is being impacted by trade fatigue in terms of the uncertainty. But broadly speaking, while it's slower growth, it's still growth. As I said, the U.S. consumer is incredibly strong. Consumer spending is strong. Sentiment is strong, so the consumer credit is good. And it is true that if you look at the ISM surveys, both manufacturing and nonmanufacturing, they were recently disappointing. So I would say, no doubt, cautionary signs, but credit remains very good, and there's still very healthy business activity.

Okay. Great. That's helpful. On NII, just going back to NII, specifically in the CCB, if you adjust for the $350 million, actually, grew sequentially, which was a pretty strong result. And I know guidance is at the consolidated level. But how do we think about the glide path in that business going forward and some of the puts and takes? Deposit pricing came in a little bit at the consolidated level. I suspect some of that is commercial. But how do we think about that business and the NII trajectory? And is it possible that you can continue to grow that?

So I mean there's no doubt that the business will be impacted by rate headwinds, as the implieds play out. We're not immune to that. But as I said earlier, there is at least a partial offset to that in growth. And so we still feel very good about the underlying growth that we're seeing there. And then just in terms of reprice, obviously, there's very little movement on the back of the SEBIs, given there's very little movement on the way up. And in fact, quarter-over-quarter, we saw rates paid in the consumer businesses tick up a little bit on slight migration that we continue to see into interest-bearing. But we love the platform. The branch expansion is going very, very well. And so we feel great about the continued growth there, but we won't be immune to rate headwinds.

Can you guys give us some additional color on the Investment Banking backlog that you may have at the end of the third quarter? And then second, if you take a look at the success that you had Investment Banking grabbing more wallet share, is it coming here in North America or in Asia? Can you give us some color there as well?

Sure. So on the IB pipeline, I would say it's healthy, although we do expect to be down in the fourth quarter, both sequentially and year-on-year, on very strong performances in the third quarter as well as the fourth quarter of last year. But overall, it feels healthy. And I would say, geographically, largely some strength in the U.S.

And then following up in the Markets business, again, you had good numbers. How important is the technology spending that you've been doing in Markets leading to grabbing more wallet share in both equity and FICC?

I think it's critical. If you walk on the trading floor today, the deployment of technology in automated trading algorithms in swaps and FX and equities, it's making its way into corporate buying. But I think it's critical you keep up with the technology in a very competitive business where market share matters.

I want to take a moment to look at the overall situation. We're starting to see some pressure on net interest income, and it's clear that banks are facing challenges across the board. It's important to manage expenses, yet you are still achieving an 18% return on tangible equity. If we consider the long-term goal of 17%, you have a couple of billion available before reaching that threshold. What concerns you about potentially falling below that 17% level? Despite the industry pressures, you are still maintaining a strong performance. Outside of one-time credit events, what are your main concerns about pushing the bank toward or beneath that level?

I believe you're overemphasizing the challenges facing the banking industry. We've experienced growth in the United States for nearly a decade, and the credit situation is extremely favorable. When you examine consumer credit, commercial credit, and wholesale credit, the conditions are very strong. The situation may worsen if we enter a cycle downturn. Our current 17% performance is reflective of the peak phase in the credit cycle. Eventually, we will experience a downturn in credit performance. A recession could impact volumes and related factors, but that 17% figure is averaged through the cycle and is honestly not that concerning.

I wanted to ask you two different types of questions. First, looking at the balance sheet, security yields decreased significantly this quarter. I was curious about how much premium amortization was included in that. Secondly, regarding the interest-bearing deposit cost, we didn't see much movement with the initial reduction. Did you achieve any additional progress in lowering those rates as we approached the fourth quarter?

Okay. Sure. So first, on securities yield. So that did play a role, Marty. But more importantly, the impact on securities yields came from mix and just lower rates overall. So predominantly, mix and lower rates, and then to a lesser extent, your point on prepaid as well as a little bit of day counts. And then on betas, broadly speaking, we'd say betas are symmetric. And so if you look at the retail side, as I said before, very little movement on SEBI. And we did see rates paid even tick up a little bit there quarter-on-quarter. Wholesale, there's obviously more opportunity to reprice, but we do that client by client. And we're not going to lose valuable client relationships over a few ticks of beta. And so what we saw there, as you might expect, in CIB, rates paid down quarter-over-quarter. And then we also saw rates pay down in both AWM and the Commercial Bank, but a little bit less so.

And then would you see retail improving next quarter? And then Jamie, I wanted to talk to you about liquidity. Two things. One, we saw the repo market. And as you looked at Volcker and the liquidity coverage ratios, you've kind of taken the big banks out of participating and being able to solve for some of those liquidity issues. So the Fed has kind of put a ring-fence around this, putting that all on their shoulders versus letting JPMorgan or Goldman Sachs or Bank of America jump in and help in those processes. And then when you sold the loans this quarter, those mortgage loans, and replaced them with securities, was that related to liquidity or just the decisioning process on that?

The loan decision is influenced by our current standardized capital situation. The importance of the advance should be highlighted, as it's at 13%. However, when constrained by standardized capital, there are times when putting mortgages on the balance sheet yields a very low return. There's also a portfolio decision to consider; you can either sell it or hold it on your balance sheet. If you choose to sell, you will likely reinvest in securities, making it an economic calculation of what provides a better return. Therefore, we need improvements in the mortgage market regarding securitizations. If securitizations were properly structured, there would be a healthy mortgage market, allowing us to keep some on our balance sheet while selling off some of the risk without having to dispose of the mortgages entirely. Additionally, we've been concentrating on liquidity at the Fed account, which holds approximately $450 billion in cash, T-bills, repo, and deposits at the Fed, despite various constraints. Proper liquidity management is essential, and these figures factor into multiple GSIB and other calculations, necessitating careful calibration and optimization. You are right that while banks are deploying funds now, they won't be able to redeploy a significant portion of the $500 billion available across all markets when needed. This situation isn't exactly comparable to Volcker's era, as that context differs.

And then, Marty, I think you asked about fourth quarter. We do think we'll continue to see deposit margin compression there on the retail side. We have come off the peaks in terms of CD pricing, but you still have slight migration there into interest-bearing products.

Jen, you had mentioned earlier just the point about that next year's earning asset growth will be led largely through deposits. But with all this mixing into your last point there about where the deposit margin pressure comes in, do you expect the constitution of deposit growth to change at all, whether it comes from the consumer business, wholesale or the Wealth Management complex?

Sure. Look, I think it's difficult to know. I think, in a declining rate environment, as I said, I think the higher-yielding alternatives are obviously less attractive for consumers. We do still see good organic growth in wholesale as well in both Treasury Services and Securities Services. So I think it's difficult to know. The macro environment will be a big determinant.

Got it. Understood. Regarding the card revenue margin you mentioned, it has flattened out. Can you first explain the net interest income versus fee components there? Is this partly due to the noticeable net interest income challenge? Are there also any changes related to the underlying card fee activity?

Yes. There is really just timing. There's just seasonality there. So at Investor Day, we said that the card revenue rate would be 11 50%, plus or minus. But fourth quarter is a seasonally high quarter for us, and so we still expect to hit that 11 50%, plus or minus, for the full year guidance, so just seasonality.

And the thing I'd add here, it doesn't have the same compression that it does in deposits.

Yes. Very different dynamic there.

I just want to follow up on your comment about the fourth quarter net interest coming in just under $14 billion, which seems like a solid starting point for next year. You mentioned balance sheet growth and some variability, but it may not be as concerning as some might believe. Consider that $14 billion as a potential run rate, give or take. I'm trying to understand what your rate assumptions are and how much impact the duration change from the third quarter is having on that.

So I mean we're doing that based on the latest implieds. And it's obviously early days. We're working through our budget process as we speak. So it's based on the latest implieds, which have a cut in October and a cut in April. And 10-year, call it, 1.70% plus or minus. So relative to where we might have been just a couple of months ago, or even weeks ago, it might have been a different outlook. So I think it's important to take it with a health warning that's on the latest implied because that is, of course, what we know.

And it's assuming some balance sheet growth, as opposed to all things being equal. That would be worse.

That's right. It would be worse. The balance sheet growth, that will partial offset to larger impacts from just rates.

But Jamie, this is the first earnings call we’ve had since the Business Roundtable released a new statement emphasizing that it's not just about shareholder-driven capitalism, but rather stakeholder-driven capitalism. I was at the New Yorker Festival over the weekend where your name came up, and at least one author mentioned speaking to you. The main question is what the political and regulatory risks are to JPMorgan's earnings as we look ahead over the next year. With the presidential debates ongoing, people have discussed the wealth tax, transaction tax, changes in corporate tax, and personal tax, essentially flattening the financial pyramid. It appears that many are directing their concerns at the banks, including JPMorgan. So my question to you is what actions are you taking...

They're pointing their fingers as based on what? Point their fingers as a base for what?

I believe one of the contributing factors to inequality in America is that banks need to do more to address the situation. This is just one example, Mike. At the New Yorker Festival, I noticed that many of the policies being proposed today have intellectual foundations in these discussions. You can see this reflected in politicians' comments regarding wealth taxes, modifications to banking business models, and excessive deregulation. It's clear that, ten years after the financial crisis, the sentiment is very anti-bank. While JPMorgan has put forth proposals aimed at progressing both the company and the nation, how do you, as the head of the Business Roundtable, assist the industry and corporate America in navigating concerns about income inequality and other issues that arise during presidential debates? I realize this is a broad question, but it's relevant to your position with the Business Roundtable.

The Business Roundtable has shifted its focus away from solely shareholder value to include customers, employees, and communities, which is how many banks have operated for years. The perception of shareholder value often implies a focus on profit at all costs, but many CEOs are actually focused on long-term development, taking care of their employees and customers. We emphasize our commitment to employees through extensive training, health initiatives, wellness programs, retirement benefits, and internal wealth sharing. Most large companies engage in community support as well. At JPMorgan, we will continue to grow our business and serve our clients to the best of our ability, regardless of the changing political, economic, or geopolitical environments. We strive to support our communities because there are individuals who have been left behind. Issues in inner city schools and infrastructure are not caused by banks. We can contribute to building infrastructure, training people, and improving education systems, as many of us do in cities like Detroit. It's beneficial for society when we all thrive together. History shows that countries struggling under poor conditions do not prosper. Therefore, it’s important to share wealth and contribute positively. While I won’t address specific political statements, we will fulfill our role as a responsible community member while also serving our shareholders.

So can I put words in your mouth? I mean doing well for communities and employees and all the other stakeholders is good for the shareholders long term. Is that...

Yes. I provided examples during the crisis of the number of people we financed at significantly below market prices. Were we doing that to seek excessive profit? No. This included states, cities, hospitals, businesses, and consumers. Our focus was on helping our clients navigate this difficult period, not on our own profitability, which fell significantly, yet we were okay with that. It reflected our long-term approach, even though it’s a risk to not pursue immediate profit. We also invest continuously in our employees, branches, jobs, and training. These investments will pay off in 3, 5, 10, or even 20 years.

Quick question on equity trading. I know you gave an update on where you thought the revenues would come in, in mid-September. Looks like it came in worse than what you were looking for. Is there a way to kind of break out what was the impact of the potential marks on investments versus true equity trading revenues?

Sure. In equity derivatives, it was a combination of weaker client activity and some losses on inventory, but it wasn't meaningful. Those losses were certainly not meaningful in the grand scheme of things, but they were part of the equity derivatives story.

But there wasn't any other additional investments in there that had marks on them impacting the numbers?

No.

Okay. And then separately on CECL. I know you've been doing parallel runs, as all banks have been. Are you at the point now where you can kind of give what the pro forma provision will be for CECL? Or do you plan on doing that prior to the adoption date?

Well, as we said at Investor Day, the range is $4 billion to $6 billion. We've done a ton of work, as you say, and a lot of modeling. The range is still between $4 billion and $6 billion. And we'll be able to be more precise, obviously, as we prepare for the January 1 implementation.

One follow-up on the equity. I mean I know DB books were in the market, and I believe that you were a winner of some of that. Is that in these numbers in 3Q or that comes in, in 4Q?

There was some fine balance I think you're referring to. I don't know the answer to that.

It was not meaningful whatever it is.

Okay. All right. And then separately, there's been some news obviously on discount brokers cutting commissions to 0. I know you have You Invest and that that's a recent launch. But how do you think about how that impacts your business model? Is that just something that you would consider is specific to You Invest? Or do you think that that's something that would have a bigger impact and potentially more optionality for your clients across your wealth spectrum?

So majority of our customers in You Invest already trade for free, and so we're pleased to see the market moving toward us. As we think about You Invest, it is one component of our broader investment strategy. And as I said, we're really proud of this quarter's results with client investment assets being up 13%. It was an important product launch for us in terms of meeting an unmet need with our existing customers, but we're pleased to see the market moving toward us.

Yes. And there's strength in You Invest. We still are improving the products over time. We haven't done a tremendous amount of marketing. Kind of want to get it all right both You Invest and You Invest Portfolios, and then we'll figure out all the exact specific pricing around it.

Thank you.

Thank you.