JPMorgan Chase & Company (JPM) — Q1 2020 Earnings Call Transcript

Thank you, Operator. Good morning, everyone. As you heard, Jamie is with me on the call. And I know I speak for the entire Company when I say we're just thrilled that he is back. Before we get into the first quarter performance, we want to start by recognizing that this is an extremely challenging time for all of us and our thoughts are with those most affected by COVID-19, particularly those on the front lines of this crisis. The presentation this quarter is slightly longer to address a few key topics as we navigate this environment. And as always, it’s available on our website, and we ask that you please refer to the disclaimer at the back. Starting on page 1, I’d like to highlight some of the ways we’re responding to COVID-19. As a firm, we are focused on being there for our employees, customers, clients, and communities in what is an unprecedented and uncertain environment. And while we don’t know how this will play out, we will be transparent here about our assumptions and what we know today. Our number one priority is to continue to provide our services in an uninterrupted way while also providing a safe work environment for our employees. We’re incredibly proud of all that our firm has been able to do over the past few weeks. So, I’ll just hit on a few examples here. We’ve mobilized our workforce around the globe to work remotely where feasible, including operations and finance teams, portfolio and risk managers, bankers, and traders, ensuring they have the right tools to work effectively. Currently, we have about 70% working from home across the Company and for many groups, that number is well north of 90%. And for those who still need to go into the office or into a branch, we are taking extra precautions and being extremely mindful of their safety. And we’re providing assistance in other ways too. For instance, we’re offering free COVID-related medical treatment to U.S. employees and their dependents. On the consumer side, approximately three quarters of our 5,000 branches have been open, all with heightened safety procedures and many with drive-thru options. And the vast majority of our over 16,000 ATMs remain accessible. And while our call center capacity has been challenged, we quickly activated resiliency plans to address customer calls seeking assistance, and we’ve put in place new digital and self-service solutions in record time. And while wait times have been extended, we’re making good progress reducing them. For our customers who are struggling financially during this time, we’re providing relief such as a 90-day grace period for mortgage, auto, and card payments as well as waiving or refunding certain fees. We continue to support our customers and clients by providing liquidity and advice during this challenging market environment. And in the month of March, we extended more than $100 billion of new credit. In wholesale, clients drew more than $50 billion on their revolvers with us. And we approved over $25 billion of new credit extensions for clients most impacted. And for our small business clients, we’re actively supporting the SBA’s Paycheck Protection Program. The numbers you see on the slide are as of April 12th, and as of this morning, we have more than 300,000 in some stage of the application process, representing $37 billion in loans. And we funded $9.3 billion to businesses with over 700,000 employees. And to help the most vulnerable and hardest hit communities as an initial step, we’ve announced a $150 million loan program to give capital to underserved small businesses and nonprofits as well as a $50 million philanthropic investment. Now, turning to page 2 for highlights on our first quarter financial performance. For the quarter, the firm reported net income of $2.9 billion, EPS of $0.78, and revenue of $29.1 billion with a return on tangible common equity of 5%. While the underlying business fundamentals this quarter performed very well, we reported a number of significant items all due to impacts from COVID-19, which I’ll discuss in more detail later. But at a high level, these items are, a credit reserve build of $6.8 billion; approximately $950 million of losses in CIB, largely due to the widening of funding spreads on derivatives; and a $900 million markdown on our bridge book. It might be an obvious point, but the quarter was really a tale of two cities, January and February, and then March when the crisis started to unfold. And with that, I thought it would be helpful to talk through some key metrics that highlight this dynamic across our businesses. So, let’s go to page 3. Starting with card sales volume on the top left. In March, we saw a rapid decline in spend initially in travel and entertainment, which then spread to restaurants and retail as social distancing protocols were implemented more broadly. While most spend categories were ultimately impacted, we did see an initial boost to supermarkets, wholesale clubs, and discount stores as people stocked up on provisions. But even that is now starting to normalize. And we saw similar trends in merchant services as highlighted in a significant decline in brick-and-mortar spend, excluding supermarkets, whereas e-commerce spend has held up well by comparison. In investment banking, in the middle of the page, there was a surge in debt issuance by investment grade clients as the market remained open, and clients’ desire to shore up liquidity was top of mind. It was the largest quarter ever in terms of investment grade debt issuance, led by JPMorgan. And in markets, volatility drove elevated trading volumes across products, most notably across rates and commodities, which at their peak were more than triple our average January trading volumes. And on the far right, deposit growth accelerated meaningfully in March, most notably driven by wholesale clients as they secured liquidity and held those higher cash balances with us. At the same time, we saw accelerating loan growth, primarily driven by revolver draws. And finally, flows in AWM were meaningfully different in March compared to January and February. Long-term flows through February were strong, positive across all asset classes, but this was more than offset by outflows in March. On the flip side, we saw significant net liquidity inflows into our government funds during March, which more than offset prime money market outflows. Onto page four and some more detail about our first quarter results. Revenue of $29.1 billion was down $782 million or 3% year-on-year, as net interest income was flat to the prior year due to the impact of lower rates, offset by balance sheet growth and mix and higher CIB markets NII. And noninterest revenue was down 5% driven by the significant items I already mentioned, which were largely offset by higher CIB markets revenue. Expenses of $16.9 billion were up 3%, driven by higher volume and revenue-related expenses, continued investments, and higher legal expenses, all of which were largely offset by structural expense efficiencies. This quarter, credit costs were $8.3 billion, including a net reserve build of $6.8 billion, reflecting the impact of COVID-19 and net charge-offs of $1.5 billion, in line with prior expectations. Now, turning to page 5, we’ll have some more detail on the reserve builds. Our net reserve build of $6.8 billion for the quarter consists of $4.4 billion in consumer, predominantly in card, and $2.4 billion in wholesale with builds primarily due to the impact of COVID-19 as well as lower oil prices. This reserve increase assumes in the second quarter that U.S. GDP is down approximately 25% and the unemployment rate rises above 10%, followed by solid recovery over the second half of the year. In addition to these macro assumptions specific to each business, our consumer reserve build reflects our best estimate of the impact of payment relief that we are providing for our customers as well as the federal government stimulus programs. And in wholesale, the majority of the build is in sectors most directly impacted by COVID-19, such as in consumer and retail and also in oil and gas. We expect other sectors to be impacted to a lesser extent if we avoid a prolonged downturn. We have also assumed that the stress in oil and gas continues with WTI remaining below $40 through the end of 2021. After we closed the books for the quarter, our economists updated their outlook, which now reflects a more significant deterioration in U.S. GDP and unemployment. If that scenario were to hold, we would be building in the second quarter and the builds could be meaningfully higher in aggregate over the next several quarters relative to what we took in the first quarter. A primary unknown is the duration of the crisis, which will directly impact losses across our portfolio. But that being said, our consumer portfolio skews more prime than the industry average and the effectiveness of government support, customer relief, and enhanced unemployment benefits, while uncertain, undoubtedly will act as mitigants to the losses. And even though our losses will be material, we will be doing what we can to help our customers recover from this crisis and help our clients stay in business. Now, moving to balance sheet and capital on page six. Our balance sheet capital and liquidity going into this crisis were incredibly strong and importantly allowed us to facilitate client needs in a period of stress. And that combined with our earnings power is an extraordinary base to absorb the inevitable losses to come. For the quarter, we distributed $8.8 billion of capital to shareholders, which includes $6 billion in net share repurchases up to March 15th. Since then, we stopped our buybacks, which was both a prudent decision at the time and consistent with what we always say, which is that we would prefer to use our capital to serve our customers and clients. This capital distribution outweighed our earnings for the quarter. And this coupled with significant RWA growth resulted in a decline in our CET1 ratio to 11.5%. On RWA, which you can see on the bottom right of the page, the key drivers of growth were market volatility which should subside over time, and more importantly, an increase in lending at this critical time for our clients. Going forward, to leverage our balance sheet to serve our clients, we are prepared to use our internal buffers, which may mean our CET1 ratio falls below our target range and if necessary, we can also use regulatory buffers to go below our 10.5% minimum. It’s worth noting here that in an environment like this, it’s precisely why we have the buffers in the first place. We currently also have capacity and intend to continue to pay the $0.90 dividend pending Board approval. And as you can see in the CET1 walk on the bottom left, it is a small claim on our capital base. And before we move on, just a moment on liquidity. Even with everything we facilitated, our liquidity position remains strong. And looking forward, it’s helpful to remember that we have significant liquidity resources beyond HQLA, including the discount window, if need be. And now, turning to businesses starting with consumer and community banking on page 7. CCB reported net income of $191 million, including reserve builds of $4.5 billion. January and February showed a continuation of strength across the business but again, March showed a major shift in trends. And across our consumer segment, we saw a drastic deceleration in spend across all forms of payments, and a decline in origination volumes except in the mortgage refi market. And on the small business side, we saw significantly reduced inflows and merchant processing activities, early signs of pressure on payment and frequency rates as well as line utilization and increased demand for credit. Turning back to the results. Revenue of $13.2 billion was down 2% year-on-year. In consumer and business banking, revenue was down 9%, driven by deposit margin compression, partially offset by strong deposit growth of 8% that accelerated in the quarter. Deposit margin was down 56 basis points year-on-year and we expect it to decline further given the current rate environment. Home lending revenue was down 14%, driven by lower net servicing revenue and lower NII, partially offset by higher net production revenue. And in card and auto, revenue was up 8%, driven by higher card NII on loan growth and margin expansion. Average card loan growth was 8% with sales up 4% over the quarter, driven by January and February activity. Expenses of $7.2 billion were up 3%, driven by revenue-related costs from higher volumes as well as continued investments in the business, partially offset by structural expense efficiencies. And lastly on this slide, credit costs included the $4.5 billion reserve builds I mentioned earlier and net charge-offs of $1.3 billion, driven by card and consistent with prior expectations. Now turning to the corporate and investment bank on page 8. CIB reported net income of $2 billion and an ROE of 9% on revenue of $9.9 billion. Investment banking in the first half of the quarter showed continued momentum from last year, but as the market environment shifted, we saw delays in M&A announcements and completions, postponements of new equity issuance and increased draws on existing lines of credit. At the same time, the investment grade debt market remained open and we helped our investment grade clients raise approximately $380 billion of debt in the quarter across a wide range of sectors. By contrast, the high yield market was effectively closed and high yield spreads widened significantly. As a result, our bridge book commitments were marked down by $820 million. And here, it’s worth noting, our bridge book exposure is about a quarter of what it was entering the 2008 crisis and is a higher quality portfolio. As a result of this backdrop, IB revenue of $886 million was down 49% year-on-year, largely driven by the bridge book markdown. IB fees were up 3% year-on-year and we maintained our number one rank with a 9.1% wallet share. Advisory was down 22%, not only due to a tough compare but also reflecting delays in regulatory approvals, pushing out the closing of certain large deals. We did however complete more deals than any other banks this quarter. Equity underwriting was up 25% versus a challenged first quarter last year and we saw strong activity in January and February before the market effectively closed in March. And debt underwriting was up 15% and an all-time record. We maintained our number one rank with a 9.5% share, up 90 basis points from 2019. Lending revenue was up 36% year-on-year, driven by the impact of spread widening on loan hedges. Looking forward, while a rapid recovery in the economy could produce the corresponding rebound in activity, we could also see significant downside risk to our forward-looking pipeline if the downturn is protracted. Now, moving to markets. Here, total revenue was $7.2 billion, up 32% year-on-year. It’s worth noting that even before the crisis, as we said at Investor Day, markets performance was strong for the quarter. Then, the growing COVID-19 concerns triggered a major correction in equity markets, significant widening of spreads, and a spike in volatility, leading to extraordinary government intervention and a substantial change in monetary policy followed by a sharp decline in treasury yields. Simultaneously, we also saw a drop in oil prices. This unique combination of events led to further increased client participation and record trading volumes in several products. Fixed income was up 34%, driven by strong client activity, most notably in rates and currencies and emerging markets. Equity markets were up 28% on strength in equity derivatives, driven by increased client activity. In terms of outlook, it goes without saying that it’s too early to project this performance going forward. In fact, low rates and low economic activity may even be a headwind. However, we are in a strong position to continue playing an essential role in ensuring the orderly functioning of markets and serving our clients’ needs. And now, on to wholesale payments, the new business unit we’re recording this quarter, comprised of treasury services, trade finance, and the merchant services business, which was previously part of CCB. Wholesale payments revenue of $1.4 billion was down 4% year-on-year driven by reporting re-classification in merchant services. As clients focused on preserving liquidity, we experienced higher deposit levels in wholesale payments throughout the quarter, offsetting revenue headwinds from lower rates and payments activity. In security services, revenue was $1.1 billion, up 6% year-on-year. Market volatility drove increased transaction volumes and deposit balances, which offset the impact of the market correction on asset balances. In wholesale payments and security services, tailwinds from this quarter, like elevated deposit balances, may be relatively short-lived and more than offset by the impact of low rates and potentially lower transaction volumes if the crisis is elongated. Credit adjustments and others was a loss of $951 million, which was one of the significant items that I mentioned upfront. Credit costs were $1.4 billion, driven by the net reserve builds I referred to earlier. And finally, expenses of $5.9 billion were up 5%, driven by higher legal and volume-related expenses and continued investments. Now, moving onto commercial banking on page 9. Commercial banking reported net income of $147 million including reserve builds of approximately $900 million. Revenue of $2.2 billion was down 10% year-on-year with lower deposit NII on lower rates and the $76 million markdown on the bridge book, partially offset by higher deposit balances. Gross investment banking revenues were $686 million, down 16% year-on-year compared to a record prior year. While we remain confident in our long-term target, we expect some softness in our pipeline, specifically related to M&A and equity underwriting. Expenses of $988 million were up 5% year-on-year, consistent with the ongoing investments we discussed at Investor Day. Deposits were up 39% year-on-year on a spot basis and increased about $40 billion during the month of March with about half of that coming from clients drawing on their credit lines and holding their cash with us as they look to secure liquidity. End of period loans were up 14% year-on-year, mainly driven by increases in C&I loans in March. C&I loans were up 26% as revolver utilization increased to 44%, which is an all-time high. CRE loans were up 3%. And here, the story remains largely unchanged. Higher originations and commercial term lending driven by the low rate environment were partially offset by declines in real estate lending as we remain selective. Credit costs of $1 billion included the reserve builds I mentioned and $100 million of net charge-offs, largely driven by oil and gas. Now on to asset and wealth management on page 10. Asset and wealth management reported net income of $664 million with a pretax margin of 24% and ROE of 25%. Revenue of $3.6 billion was up 3% year-on-year, driven by higher management fees on higher average market levels and net inflows over the past year. And then, in addition, we saw record brokerage activity in March related to the recent market volatility. These increases were largely offset by lower investment valuations. Expenses of $2.7 billion were flat year-on-year with higher investments in the business as well as increased volume and revenue-related expenses offset by lower structural expenses. Credit costs were $94 million, driven by reserve builds and the impact of COVID-19 as well as loan growth. Net long-term outflows were $2 billion as the strength we saw in January and February was more than offset in March. At the same time, we saw $75 billion of net liquidity inflows driven by significant inflows into our industry-leading government funds in March, as I mentioned earlier. AUM of $2.2 trillion and overall client assets of $3 trillion, up 7% and 4% respectively, were driven by cumulative net inflows, partially offset by lower market levels. Deposits were up 9% year-on-year on growth in interest-bearing products. And finally, loan balances were up 11% with strength in both wholesale and mortgage lending. Now on to corporate page 11. Corporate reported a net loss of $125 million. Revenue was $166 million, a decline of $259 million year-on-year, primarily due to lower net interest income on lower rates, partially offset by higher net gains on investment securities. Expenses of $146 million were down $65 million year-on-year. And now, let’s turn to page 12 for the outlook. At Investor Day, we showed you a path to 2020 where we expected net interest income to be slightly down from 2019. And obviously, since then, the backdrop has changed significantly. Based on the latest advice and what we know today, we expect to see further pressure from rates, partially offset by balance sheet growth in CIB markets and NII, which results in NII of about $55.5 billion for the full year. And to give you an idea for the second quarter, we expect NII to be $13.7 billion. On noninterest revenue, it’s always difficult to provide meaningful guidance and even more so given the current heightened level of uncertainty. But based on our best estimates today, we do expect to see headwinds in 2020 compared to 2019. In addition to the two significant items in the first quarter, these headwinds include a $3.5 billion decrease in noninterest revenue, all else equal, which is also due to the impact of rates and is the offset to higher CIB markets NII and therefore revenue neutral. We also expect to see pressure on AWM and investment banking fees. And we now expect adjusted expenses for 2020 to be approximately $65 billion, largely due to lower volume and revenue-related expenses versus the outlook we provided at Investor Day. It goes without saying all of this is market dependent and we’ll keep you updated at future earnings calls. So, to wrap up, the challenges we are all facing as the COVID-19 crisis continues to unfold around the globe are unprecedented. Although we don’t quite know what the path will look like going forward, what we do know is that we will continue to be there for our employees, clients, customers, and communities, as we always have been. And we have the talent, resources, and operational resiliency to do so. Our employees have proven that being resilient is not just about maintaining operations; it’s also about culture. And that feels stronger than ever with our teams around the world working harder than ever to continue to serve our clients, customers, and communities. We’ve never been more proud of our people, and we simply can’t thank them enough. And with that, operator, please open the line for Q&A.

Hi. Good morning. And Jamie, we’re glad that you could join us and that you’re well enough to join us. My first question is on the forbearance activity. Jen, if you could give us a sense of by product, how many of your clients for example in card and auto, home lending, are in a forbearance state, so they started to defer the payments to the percentage of your clients? And how we should think about the significant government intervention relative to the severely adverse scenarios? I believe for total losses, it’s 5.9% over nine quarters for the Fed and 4.1% for company-run.

Sure. So, first of all, I’ll start with that payment relief and forbearance there. I’ll start by saying that we have already refunded millions of dollars in fees. We’ve approved payment relief for hundreds of thousands of accounts across consumer lending. And we obviously expect that to be meaningfully higher through time. We’ve paused foreclosures and auto repossessions. And importantly, we’ve made the process easier for our customers through digital and self-service options that we’ve built in record time. But, in terms of what we’re seeing, those are the numbers, they’re still, as I said, relatively small compared to what we think we’ll ultimately see. In mortgage, just to give you context outside of customers asking for forbearance, which is just a little over 4% of our service book at this time, the April 1st payments seem BAU. In card, we’re seeing payment rates down a bit but still strong. And we’ve seen a slight uptick in late payments in auto. But the quality of these portfolios looks strong coming in as we’ve done surgical risk management over the last few years. And that has made these portfolios more resilient. And then, in terms of how we think about significant government intervention, I mean, I think the ultimate effectiveness of these programs, which are extraordinary in terms of the direct payments or the enhanced unemployment insurance, the ultimate effectiveness is I think, the biggest unknown. The key obviously is being able to bridge people back to employment. And so, we have assumed, as we could, for our first quarter results, the impact of those programs as well as the ultimate impact on payment relief that we’ll be providing for our customers. But that is for sure an unknown, and we certainly expect to learn a lot more about that in the second quarter.

Thank you. My second question, you mentioned that you’re prepared to go below 10.5% CET1 to help your clients. Going below 10.5% is also when the automatic restrictions start kicking in from the Fed in terms of payout. So, if I understand it, it would be a 60% payout restriction on eligible net income. And I just wanted to understand your thoughts on balancing, servicing your clients and also thinking about your capital levels relative to those automatic restrictions from the regulators.

Sure. So, as you probably know, Erika, that the Fed made some changes there recently, which, as you say, puts us in a 60% bucket as we go below 10.5%. And we have a reasonable amount of room below 10.5% to remain in the 60% bucket. I would say that that was very helpful clarification from the regulators in terms of how we should think about using regulatory buffers. So, that was particularly helpful. And right now, we are focused on serving our clients and customers. And we’ve looked at a range of scenarios, so we can ensure that we’re managing our capital quite carefully. Jamie talked about an extreme adverse scenario in his Chairman’s letter that we’ve looked at assuming large parts of the economy remaining in lockdown through the end of this year. And in that scenario, our CET1 drops to about 9.5%. And so, we think we have significant room to continue to serve our customers and clients through this crisis, but we are managing it quite carefully and looking at a range of scenarios. So, we make sure that we’re prepared.

Hi. And welcome back, Jamie. Questions for you. How do you thread the needle between supporting your customers and the country and doing all those things that you want to do while still protecting the resiliency of the balance sheet and not getting hit with unexpected litigation costs, as you mentioned in your CEO letter?

Yes, it’s a very important question. In times of need, banks have historically been the last resort for their customers. It’s essential to be a responsible provider of capital because irresponsible lending can lead to negative outcomes. We are making additional loans while being aware that if the economy deteriorates, we may incur further losses. However, we prepare for such scenarios and are confident in our ability to manage severe challenges. There may come a time when our CET1 ratio drops below 10%, even though we will have nearly $200 billion in capital and $1 trillion in liquidity. At that point, various constraints will come into play, such as the SLR and G-SIFI requirements, as well as advanced risk-weighted assets that could limit our actions. We remain committed to our mission and recognize that helping the country through tough times ultimately benefits everyone. If it means sacrificing a bit more profit for now, we’re willing to accept that. Of course, we will prioritize the protection of our company, balance sheet, and growth, while maintaining close dialogues with regulators. It’s also important to consider the extraordinary measures the government has implemented, including income support for individuals, the PPP, and all the initiatives from the Federal Reserve.

So, also in your CEO letter, you talk about the economy coming back online. And I guess with your reserve build, you’re assuming, what 10% unemployment, and then the economy improves in the second half of the year. So, what is your base case for how people come back to work that’s behind those assumptions? And I know you have a lot of scenarios too but just a base case.

Yes. I’ll let Jen talk about the base case. But, I think the back to work, we shouldn’t think of as a binary thing that after the CDC and we all get instructions from the government after there’s enough capacity in the hospitals, after there is proper amount of testing. Remember, a lot of people are going to work today in farms, factories, food production, retail, pharmacies, hospitals. It isn’t like no one’s going to work and you can hope that you can turn it back on where it’s very safe. There’s plenty of capacity. You’re not worried that you can’t give every American who does get sick, the best possible medical advice. And the turn-on will be regional by company, all following standards of best health practices. And in some ways, you need to get that done because the bad economy has very adverse consequences, way beyond just the economy. In terms of mental health, domestic abuse, substance abuse, etc. So, a rational plan to get back to work is a good thing to do. And hopefully it’ll be sooner rather than later, but it won’t be May. We are talking about June, July, August, something like that. So, I don’t know if that answers your whole question. And then, Jen, you give the base case.

Sure. So, Mike, as we closed the books for the first quarter, just to give a context, we were looking at an economic outlook that had GDP down 25% in the second quarter and unemployment above 10%. It’s just important to note that that kind of gives you a frame of how to think about it. But, there’s a lot more that goes into our reserving including management judgment of some like world-class risk management and finance people, and also other analytics. And so, that just kind of gives you a frame of reference. But there, we did think about a number of other scenarios that we should contemplate in reserving. And we also thought about the impacts, what’s our best estimate of the impact of these extraordinary government programs as well as our own payment relief program. Since then, as I noted in my prepared remarks, our economists have updated their outlook and now have GDP down 40% in the second quarter and unemployment at 20%. That’s obviously materially different. Both scenarios, though, do include a recovery in the back half of the year. And so, all else equal and of course, the one thing probably the only thing we know for sure, Mike, is that all else won’t be equal when we close the books for the second quarter. But all else equal, given the deteriorated macroeconomic outlook, we would expect to build reserves in the second quarter. But again, a lot will depend on the ultimate effect of these extraordinary programs and how effective they can be in bridging people back to employment. And we’re going to still have a number of unknowns, I would say at the end of the second quarter, but we’re going to learn a lot through these next few months that will inform our judgment for second quarter reserves.

Hey. Good morning. And Jamie, nice to have you back. So, I wanted to ask a question on some of the remarks relating to capital. Carl has actually made some comments on Friday, alluding to efforts by the Fed to incorporate real-life COVID stress in the upcoming CCAR cycle. We haven’t gotten much color since then. I’m wondering whether you received any guidance from the Fed on which changes if any they plan on contemplating for this year’s test. And maybe just bigger picture, how are you thinking about the potential impact that could have on SCB and potentially raise some of your capital requirements?

Sure. Thanks, Steven. So, we haven’t gotten specific guidance, but it certainly makes sense that the Fed would want to look at a scenario like that. We have been, as you might imagine, staying very close to our regulators through this crisis. So, they can have a very good understanding of how we are managing things. And then, in terms of the potential impact, we’ll learn more about that in June. We’ve given our best estimates of SCB and the impact it will have on our minimums. And that is absolutely incorporated into our thinking about how we’ll manage capital through a range of scenarios here, but we’ll learn more from the Fed in June.

I’ve always tried to avoid doing one stress test, which will not be the stress you go through. JPMorgan does 100 a week. And we’re always looking at potential outcomes. And obviously we’re doing our own COVID-related type of stress testing, including extreme, and we’ll always be updating them, talking to regulators about it, because that’s what we have to deal with this time, not what I would consider a traditional stress test.

Yes, we are considering a wide range of outcomes. As Jamie mentioned, CCAR has provided a good foundation for one scenario. However, we have explored various other scenarios for how things might unfold. Jamie also outlined a potential extreme adverse scenario, and we are ready for that as well. The key takeaway is that we are prepared for multiple outcomes, and we will gain more insights about SCB in June.

Got it. And just a follow-up on the securities book. Just given some of the significant declines at the long end of the curve, Jen, I was hoping you could help us think about where reinvestment levels are today, just compared with the 2.48% yield on the blended securities book? And then just separately, given the larger impact of QE driven deposit growth, how you’re deploying some of that excess liquidity in this environment?

Sure. So, on the investment securities portfolio, managing the balance sheet in this rate environment is obviously a different dynamic. And with lower rates, as low as the deposit growth that with the Fed balance sheet expansion, you do see a large increase in our investment securities portfolio this quarter, which makes a lot of sense. Right now, in terms of balance sheet management, we are completely focused on supporting client activity. Our balance sheet is harder to predict right now, but we are prepared for a range of outcomes.

Good morning. I wanted to follow up on the CECL related question. Jen, you gave us a good amount of color on what the underlying economic assumptions that were used to build the reserves and in where Bruce Kasman and your economics team is now for the second quarter? But maybe thinking about it a little bit differently in terms of how to attribute them to CECL reserve build? I’m not looking for specific numbers, more just directional. How do we think about it in terms of how much is attributed to sort of mechanistic model related changes, where you calibrate your model for new economic scenario versus actual signs of stress that you’re seeing your book that maybe aren’t showing up in credit measures, but that you do think will show up in a reasonably short time period, call it within the next few quarters, how much of its growth, how much of its mix, just if you can talk to that? And I guess, what I’m trying to get at is, how much of it is more mechanistic, and how much of it is actual tangible signs that you’re seeing that of financial stress in your borrower base that could emerge in a reasonably near future as credit losses?

Sure. So, it’s a great question, Saul. So, I would start by saying that we haven’t actually seen the stress emerge as of yet. So, I wouldn’t necessarily use the term mechanistic. But I would say that what we took in the first quarter is our best estimate of future losses. It’s also important to note that we don’t reserve for future growth. And so, future growth with all else being equal the reserve build. So, I wouldn’t necessarily think of this as materially different because of CECL. We didn’t actually really think about the impact of CECL relative to the incurred model. I mean, the regulators have given their point of view on that, given the change in the capital rules where 25% is assumed to be the difference. But that’s their view. And like I said, we did spend a lot of time thinking about it. And I would say that it is our best estimate of the losses that will inevitably emerge through this crisis. And it is life of loan, which of course is different under CECL.

Okay. That’s helpful. And Jen, regarding growth, I want to shift the focus a bit. There's clearly significant pressure in CET1 due to the increase in risk-weighted assets and the draw-downs on commitments. What is your perspective on where we currently stand with those draw-downs? I believe there is still around $350 billion in unfunded wholesale commitments. How should we view this situation and the potential impact it may have on the evolution of risk-weighted assets?

Yes. So, like so many other things, it is difficult to predict. I will say that early here in the second quarter, we have seen a pause on revolver draws. But, it could very well just be a pause. And so, we’re assuming as we think about our own capital plans that we will see revolver draws continue in the second quarter, albeit at lower level than the first quarter. And then, of course, the timing and the pace of the pay-downs will depend upon the ultimate path of the virus and the economic recovery.

Thanks very much. I appreciate the limited sight we all have. Maybe we could, let’s assume, hopefully sooner than later, we get past the bulk of the credit impact. On the other side of this, have you thought about lending spreads, underwriting criteria and how much terms need to tighten, given what we’ve learned or on a scenario that we didn’t capture under its previous underwriting? In other words, does lending spreads widen? And do you get paid enough for your balance sheet? I’m just curious on how you’re thinking about risk management on a go forward basis?

Sure. I would say that we always take a long-term view on matters like this, and our philosophy remains unchanged. However, it is true that the marginal cost of new activity is currently higher for us, which is a consideration. In terms of risk management, we continue to do what we have always done, which is to manage carefully within our risk appetite. This approach has served us well during this crisis, and we will continue to stay close to our clients and manage the situation carefully.

I’d just add, on the consumer side, the forward-looking view of risk, on the wholesale side, the revolvers are taken down, which is like $50 billion, our existing spreads. The bilateral stuff is being done by new credits. They’re being done at slightly different spreads and stuff like that are higher. And then trading, obviously you’re actually getting higher spreads and a lot of things you do, and train your finance people and do things and stuff like that. And then you will see a tightening of credit in the market. Think of leverage lending, certain underwriting, sort of non-bank lenders who are no longer there. So, you will see an eventual tightening and eventual increase in spreads. What you won’t see banks do is price gouge, which you see in other industries. Banks are very careful to support their clients in times like this.

Okay. And then one more impossible question, Jen, maybe. Could you help qualify? I know you can’t quantify, but exit rate revenues that you’ve kind of alluded to in some of the things like underwriting falling off. So, a tale of two quarters, the quarter itself has learned for the ginormous credit issue that we’re facing. It would have been like, revenues down a little bit, expense is up a drop, okay, but how much of the exit rate revenues are we looking at second quarter, third quarter versus the full first quarter? And that’s a hard one.

Glenn, I appreciate your acknowledgment that this is a challenging question. There is a reason we provided directional guidance regarding potential headwinds, but it is difficult to make accurate predictions at this time. However, it's important to note that we cannot confidently state exit rates for 2021. Based on the latest implications, there could be growth in net interest income due to balance sheet growth in 2021. Net interest revenue will heavily rely on the trajectory of the virus, the pace of economic recovery, and when we return to work. We have also provided expense guidance for your consideration. From a credit standpoint, we may see continued build in the coming quarters, but theoretically, according to CECL, this could be resolved by the end of the year. We expect to have reserves set aside to cover the losses that will inevitably arise in the latter half of this year and into 2021.

Can you provide your outlook on the recovery in the second half of the year following the downturn in the second quarter? What kind of recovery are you anticipating in that period as it relates to the CECL reserve building?

Sure. I don’t have the numbers on hand, Gerard, but they’re publicly available. It was based on our economists’ outlook at the end of March, which indicated a recovery. I don’t have the GDP numbers or unemployment figures available, but what’s important to note is that, based on our analysis, there is a recovery anticipated in the latter half of the year. However, it still places GDP levels below our initial launch point and unemployment levels above it. So, while it is a recovery, based on our latest outlook, we recognize that it will likely change over time. This recovery in the latter half of the year does not bring us back to our starting point. Importantly, we are prepared for a variety of scenarios, and while this is the basis for our reserve levels, it is not the only scenario we are planning for. And then, just as a follow-up, on the bridge book, and I apologize if you addressed this and I missed it. I know you guys mentioned the losses in the bridge book. Could you share with us the size of the book, and then some more color on what triggered the losses in the bridge book? Sure. I mentioned this in the prepared remarks, but it’s important to reiterate. Our bridge book is about a quarter of what it was during the financial crisis, totaling around $13 billion. It's slightly decreased since year-end. Importantly, we do not face any imminent closing deadlines, and market conditions are performing a bit better in the second quarter. We'll see where we finish at the end of the quarter, but so far...

Just basically marking the positions to market…

Yes. And the good news is we’ve built in…

Fees.

And with no imminent closing deadlines, it’s not necessarily the case that we’ll realize those losses. But as Jamie said, they’re mark to market at the end of the quarter.

I want to put this into perspective. We are aware that we have a bridge loan book, knowing that there will be quarters where things may not go well and we might face some losses. We are leaders in leverage lending, high yield, and loans, and we plan to keep that standing. Occasionally, we may experience a less favorable quarter, but we don’t find this concerning. As Jen mentioned, if we examine the spreads, it looks like there’s likely a recovery this quarter.

Hi, Jen. Regarding credit cards, just based on payment rates that you’ve seen so far, and maybe the draws on revolvers, how are you expecting card spending and card balances to trend over the next few quarters this year?

Yes. Hi, John. So, based upon what we’re looking at right now, spend was down. We talked about different categories, but spend in aggregate was down 13% in the month of March, year-over-year, and we’re seeing trends like that continue here in April. And so, with that, I would say that we would, given what we know today, expect outstandings to trend down from here.

And then, can you help us think about how you do the accounting for the consumer deferrals? You keep accruing. But, do you add some kind of haircut for NII in suppression in terms of what might not be collectible, even though technically you’re allowed to accrue while you defer?

Yes, you got it, John. So, we do continue to accrue, but it is a lower yield over the life of the loan.

Hi. Good morning.

Hi, Betsy.

I wanted to ask two questions. First, I'm curious about the outlook for the next few quarters. You mentioned that your economics team updated their estimates. Could you clarify when you adjust your reserves in relation to those estimate changes? I'm asking because I've noticed the reserve ratio changes between the fourth quarter of 2019 and the first quarter of 2020 across various segments. In particular, the reserve ratios for the CIB and the commercial bank have decreased since the fourth quarter of 2019. I'm trying to understand how the next adjustment in reserving might unfold across different asset classes. As you transition from an adverse scenario to a severely adverse scenario, are there specific asset classes that might see a more significant increase in reserve ratios that we should anticipate?

On the wholesale side, the reason for the observed dynamic is due to CECL, which is outlined in the presentation. The effect of CECL adoption in wholesale resulted in a net release, and we have now accounted for that. This explains the current situation. Regarding the reserving, when we finalize our books in early April, we have to set the numbers at some point. Therefore, we want to be very open about our approach to reserving moving forward. Given the macroeconomic outlook, we anticipate an increase in the second quarter and possibly beyond, as everything is very fluid. We need time to understand the ultimate impact of these programs since they are significant and should have a major effect.

And also just on the wholesale side, kind of at one point you have an overlay about what you expect in terms of migration downward and downgrades and stuff like that. It will also be name by name, company by company, name by name, reserve by reserve, so a real detailed review of that.

As we consider the potential for a severely adverse scenario, we can reference past Federal Reserve stress tests to gauge the anticipated impact on credit losses. Jamie, could you share how your economists' outlook compares to previous severe stress scenarios you have conducted for your bank? Is it appropriate to assess the severely adverse stress cases based on the bank-specific models we have access to, and does this align with the level of severity we're discussing, or is this situation even more challenging, particularly regarding commercial real estate? While I understand your corporate assessments are highly detailed and granular, I'm curious if there are any significant differences on the commercial real estate front compared to what previous Fed stress tests may have indicated.

I believe that in commercial real estate, the assessment will ultimately occur on a loan-by-loan and name-by-name basis. If there's a reason to suspect a loan is problematic, it will be written down and a reserve will be set aside. This represents a significant shift in events. Current models have never dealt with a GDP decline of 40% or such a rapid increase in unemployment. Additionally, there are no existing models that account for government programs like the PPP, which may total between $350 billion and $550 billion. We are seeing that 30% to 40% of unemployed individuals may be receiving higher incomes than they had before losing their jobs. This raises questions for credit cards and suggests that the government is likely to make direct payments to individuals. All of this is unfolding right now. The Company is in a strong position, capable of serving our clients, and we will provide more information as developments occur. I believe it's a mistake to rely too heavily on models at this time. By the end of the second quarter, we will have a clearer understanding of the situation. We expect to see increases in credit card delinquencies and charge-offs, which we have only begun to observe. In the second quarter, we will have more data, and if there is a fourth round of government stimulus, that will inform our reporting. We remain optimistic for a recovery while preparing for the worst to ensure we can manage any challenges that arise.

And then, in terms of planning for the worst, Betsy, maybe it’d be helpful. The extreme adverse scenario that Jamie referenced in his Chairman’s letter had 2020 credit costs of more than $45 billion. So, clearly that is not our central case, but that’s the kind of scenario that we are making sure that we’re prepared for. And then, just coincidentally, if you look at our credit costs from the fourth quarter of ‘08 to the fourth quarter of ‘09 across those five quarters, we had credit costs of $47 billion.

I’ve noted the reserve changes from approximately $7 billion to $35 billion and then down to $14 billion. Reserves are inherently counter-cyclical and can often be inaccurate. While we are mandated to hold reserves, they don't align well with revenues and expenses. Therefore, we aim to be conservative in our reserving practices, but I must emphasize the shortcomings of this approach.

Just a couple of questions, again one on CECL maybe to start with. Can you just maybe give a little bit more qualitative disclosure on how this payment relief factors in? I mean, are you assuming some amount of government programs get used and that’s included or that’s just payment relief that you’re directly giving to consumers and corporate? Just trying to get a sense of how all these government programs going to flow through the model.

Sure, Brian. You can consider the government stimulus as part of the broader economic factors, along with the payment relief, which refers to our own programs. Based on our judgment and past experience, we estimated a certain percentage of individuals in our portfolio who will receive payment relief and evaluated the potential impact of that. I’d say while we have estimates for the first quarter, we will have much clearer insights into both aspects for the second quarter.

And Jen remind me, when we do the 10-Q for the quarter, we’re going to lay out lots of these various assumptions about CECL. And one of the problems with CECL is this precisely. We’re going to spend all day on CECL, which was $4 billion and it’s kind of a drop in the bucket, but it’s a lot of data. It’s like all the data we did after the last crisis we give you on level three, and all these assumptions and stuff like that. No one ever looks at it anymore.

That’s right.

In the quarter, you mentioned the marks on the bridge loan. Is there a way to express what the total marks were, assuming there is a significant tightening in credit spreads after the quarter ends? It seems like that would lead to a reversal of some of those initial marks.

Yes, there could be. But that’s only where we are at this point in the quarter. And so, it’ll obviously all depend on the market from now until the end of the quarter. But right now, the market is performing a bit better and spreads have come in, as you mentioned.

A couple of deals may be syndicated, but hopefully, might be syndicated at the end of the second or third quarter.

Earnings are pre-provision earnings minus net charge-offs.

I don’t know about you guys. We can’t understand a word you are saying.

Yes. Chris, this is unfortunately part of our new reality as we all work remotely. We couldn’t hear you.

Sorry. Is this better?

Yes.

Okay. My apologies. At Investor Day, Jamie mentioned that real economic earnings are pre-provision earnings minus net charge-offs, which I agree with. If we set aside the CECL reserving noise, I’m curious if the customer relief, specifically the 90-day grace period, alters the historic charge-off assumptions. For instance, credit cards have typically followed a pattern where delinquencies are charged off after 180 days, and I wonder if the customer relief periods will also affect the charge-off timeline for auto loans.

It may, because as long as the customer is performing under the forbearance program, they are not delinquent. But of course, it will all depend on whether these programs ultimately are able to bridge people back to employment.

We’ll clearly know a lot more in 90 days about how this effect is, what we would have expected?

To Jamie’s point, what we may learn over the next 90 days is whether the programs have been effective or if they simply postponed losses. With CECL considering the life of the loan, if they are just postponed losses, you can anticipate that we would need to reserve for that.

Hi. Good morning. Thanks for taking my questions. So, firstly, on government guarantee loans. These are 0% risk-weighted. And I’m wondering, to what extent you’re using them to refinance existing loans on your portfolios. And if you are, to what extent risk-weighted assets have gone through, if you do this?

Yes. And that’s just specifically what program you’re referring to. I would just say, broadly speaking, on the Fed facilities, there are obviously very large programs rolled out very quickly and just an extraordinary response to unprecedented market conditions. Here, we are happy to leverage facilities to intermediate these programs for our clients. But, we are only using them where it makes sense to ensure the credit and liquidity is flowing to where it’s needed.

So, I mean, just to maybe elaborate on that. Is there maybe some part where there’s a bit of a capital uplift, if you use government-guaranteed loans to represent risk-weighting where previously you’ve...

What uplift?

A capital uplift, so, your risk-weighted assets go down, say for something like government guaranteed...

We’ll incorporate all of that into our operations as we aim to serve clients effectively. There are certain elements, such as the PPP on your balance sheet, which carries zero risk-weighted assets but impacts various other factors, including SLR and G-SIFI. If you sell it to the government, those concerns are alleviated. We will navigate this as we understand how these programs function and what actions we want to take.

Thanks, everyone.

Thank you for spending time with us.