JPMorgan Chase & Company (JPM) — Q2 2020 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 $4.7 billion, EPS of $1.38 and record revenue of $33.8 billion with a return on tangible common equity of 9%. Included in these results are a number of significant items. First, a credit reserve build of $8.9 billion, and then approximately $700 million of gain in our bridge book and $500 million of gains in credit adjustments and other, both of which represent reversals of some of the losses we took in the first quarter. As we continue to navigate this challenging and uncertain environment, this quarter's performance once again demonstrates the benefit of the diversification and scale of our platform. So, I'll just touch on a few highlights here. CIB reported its highest quarterly revenue on record with IB fees up 54% and markets revenue up 79% year-on-year, each representing record performances with strength across the board. We saw record consumer deposit growth of 20%, up over $130 billion year-on-year and firm-wide average deposits were $1.9 trillion, up about 25% year-on-year and 16% quarter-on-quarter. Average loans were up 4% year-on-year and quarter-on-quarter, largely reflecting the COVID-related loan growth that we saw in March. However, on an end-of-period basis, loans were down 4% quarter-on-quarter due to revolver pay downs as well as lower balances in Card and Home Lending, partially offset by the impact of $28 billion of PPP loans. And lastly, we increased our CET1 ratio by approximately 90 basis points in the quarter after building approximately $9 billion of reserves and paying nearly $3 billion of common dividends. As you’ll recall, we started the second quarter on the back of unprecedented levels of business activity in March. On the following pages, I'll give you an update on some of those key activity metrics we looked at last quarter and share what we're seeing today. So with that, let's turn to page two. Starting with wholesale on the top of the page, we saw record levels of debt and equity issuance in the quarter as clients bought to pay down the majority of the revolver draws for March and continued to shore up liquidity while market conditions were receptive, supported by extraordinary central bank actions. The surge in investment grade debt issuance seen in March continued throughout the second quarter. And as high yield markets reopened, U.S. issuance volumes increased by 90% compared to the first quarter. In ECM as markets rebounded to pre-COVID levels, May and June together were our two busiest months for equity issuance ever, driven by converts and follow-ons. Moving to consumer spending behavior on the bottom left. Debit and credit sales volume, while overall still down has consistently trended upward since the trough in the second week of April to down just 4% year-on-year in the last two weeks of June. T&E and restaurant spend continued to be down meaningfully but we have seen some improvement, especially on the back of higher levels of restaurant spend. The most significant improvement we saw was in retail with a strong recovery in card-present volume in the second half of the quarter, and consistently strong growth in card-not-present volume throughout the quarter. More recently, we’ve seen the improvement in overall sales growth across the country flatten out, notably in both states with increasing cases and states with decreasing cases. We continued to see larger year-on-year declines in states that remain partially closed, particularly those in the Northeast and Mid-Atlantic regions. In terms of consumers’ demand for credit, we observed similar recovery trends. In auto, April saw the lowest level of loan and lease origination since the financial crisis, but activity rebounded sharply in May and June, and in fact, June ended up the best month for auto originations in our history. And in Home Lending, retail purchase applications after reaching a low in April recovered to well above pre-COVID levels in June, due to a strong and broad market recovery. Continuing on the topic of consumer behavior, let's turn to page three for an update on what we're seeing around our customer assistance programs. Relative to the peak levels we observed at the beginning of April, we've seen a significant decline in new requests for assistance over the quarter. To date, we have provided customer assistance for nearly 1.7 million accounts, representing $79 billion of balances across both our owned and service portfolios, and of those accounts, a large percentage having made at least one payment while in the forbearance period, just over 50% in both Card and Home Lending. In terms of early reenrollment trends, in cards, only a small portion of our customers have completed both the initial 90-day deferral period and reached the payment date, but the majority of those customers resumed payments with less than 20% of accounts requesting additional assistance. And then, in Home Lending, of those whose forbearance period expired in June, most have either been extended at a customer's request or auto-enrolled into new three-month forbearances with approximately 40% of the extensions still current. And so, while we're following this data closely, it's still too early to draw any conclusions. Now, moving on to page four for some more detail about our second quarter results. We recorded revenue of $33.8 billion, which was up $4.3 billion or 15% year-on-year. While net interest income was down approximately $600 million or 4% on lower rates, mostly offset by higher market NII and balance sheet growth, non-interest revenue was up $4.9 billion or 33%, predominantly driven by CIB markets and IB fees. Expenses of $16.9 billion were up approximately $700 million or 4% year-on-year on revenue related expenses, partially offset by continued reduction in structural expenses. This quarter, credit costs were $10.5 billion, including a net reserve build of $8.9 billion and net charge-off of $1.6 billion. Let's turn to page five for more detail on the reserve builds. Our net reserve build of $8.9 billion for the quarter consists of $4.6 billion in wholesale and $4.4 billion in consumer, predominantly card. The reserve increase in the first quarter was predicated on an acute but short-lived downturn with a solid recovery in the second half of the year. And while we have seen some positive momentum in the economy over recent weeks, there does continue to be significant uncertainty around the path of the recovery. At the bottom of the page, you can see our updated base case, but remember this is just one of five scenarios we use to derive our allowance for credit losses. Our build is based on the weighted outcome of these scenarios and assumes a more protracted downturn with a slower GDP recovery and an unemployment rate that remains in the double digits through the first half of 2021. In addition to the obvious impact on consumer, its protracted downturn is expected to have a much more broad-based impact across wholesale sectors that we’ve seen in the first quarter. Given the increased uncertainty of the macroeconomic outlook, how customer payment behavior will play out and the future of government stimulus and its ultimate effectiveness as it relates to both consumers and wholesale clients, we've put more meaningful weight on the downside scenario this quarter. And so therefore, we're prepared and have reserved for something worse than the base case. And given CECL covers life of loan, if our assumptions are realized, we wouldn't expect meaningful additional reserve builds going forward. Now, moving to balance sheet and capital on page six. We ended the quarter with the CET1 ratio of 12.4%, which is over 100 basis points above our new SCB base minimum of 11.3%. And just to touch on SLR, while our reported ratio is 6.8%, it's worth noting that we're not going to rely on temporary relief and so without that our ratio is 5.7%. As we said in late June, unless things change meaningfully, the Board intends to maintain the $0.90 dividend in the third quarter. Given the wide range of potential outcomes going forward, I'd like to spend a few minutes on why we're comfortable saying that including the value of our strong and steady earnings stream as well as how we're managing our capital through this crisis. So, with that, let's go to page seven. It's an obvious point, but it's worth a reminder that since 2018, our average quarterly PPNR of over $13 billion has been generating over 60 basis points of new CET1 capacity per quarter, even after having made meaningful investments in our businesses. This powerful earning stream allows us to grow the franchise and serve our customers and clients when they need it most. And it provides us the capacity to absorb losses and quickly replenish capital in times of stress. While over the last two and a half years, we've paid out approximately 100% of cumulative earnings, distributing nearly $75 billion of excess capital, we're now building a significant amount of capital since we suspended our share repurchases. And we believe our capital base remains strong even in more severe scenarios, which you can see on page eight. Standing here today, we have $34 billion of reserves and $191 billion of CET1 capital, of which $16 billion is excess over and above our regulatory buffers. Our 3.3% SCB translates to $51 billion of capital that is available to free from stress at any time. And on top of that, our 3.5% GSIB surcharge translates to another $54 billion, all that so our $69 billion regulatory minimum is never touched. And as you know, we prepare for and manage our capital to a number of scenarios, and one of them is Extreme Adverse scenario that Jamie discussed in his shareholder letter earlier this year. We've updated this analysis and it now assumes an even deeper contraction to GDP, down nearly 14% at the end of 2020, versus 4Q19 and reported unemployment ending the year at nearly 22%. Even under this scenario, we estimate that we would end the year with a CET1 ratio above 10% and we would be bound by advanced. So, our regulatory minimum would be 10.5%. While we are not likely to voluntarily dip into any of our regulatory buffers, this scenario would require us to do so, but notably only to a small extent. It's also worth noting that based on the limited information provided from the Fed about their U and W scenarios, we believe that our Extreme Adverse scenario simulates an even worse path for the economy over the next 12 months. And even if we get this wrong and our losses are twice as high, we still wouldn't use the entire SCB.

This is Jamie. I’d like to emphasize a couple of points. We are presenting this example based on several assumptions, although we won't go into detail about them. We're simply illustrating that we could take on an additional $20 billion in loan loss reserves. This amount aligns with an Extreme Adverse scenario, which may be similar to U or W scenarios from the Fed. We are going to conduct more analysis on this because we need to be prepared. When we utilize advanced CET1, it is because we are not taking any actions. I've mentioned before that advanced capital is very pro-cyclical. As things get downgraded, the risk-weighted assets (RWA) increase significantly, while the capital base doesn’t change much. There are many actions we could take to prevent this situation. Additionally, this Extreme Adverse scenario is unlikely to occur within a single quarter; it will unfold over several quarters. We have a good sense of what July and August look like, so even if the economy trends that way, it will take a few quarters before we can be certain that it has a 100% likelihood of happening. This indicates that we now believe it’s fully possible. However, things could worsen. We want to demonstrate the capital that the Company possesses. Regarding the dividend, it may seem like I’m contradicting myself, but I’m not. Currently, we have significant pre-provision net revenue and earnings, so it would be unwise to reduce the dividend in anticipation of an Extreme Adverse scenario. We can navigate through tough times without cutting the dividend. However, if we move into an Extreme Adverse situation, new challenging scenarios may arise, which could force the Board to consider reducing the dividend if conditions deteriorate. Our priority as a Company is to serve our clients and community, come what may, so there’s no intention to cut the dividend at this time. But if circumstances worsen significantly, it’s a possibility we need to consider. Additionally, these loan losses reflect our best estimates and are not based on CCAR metrics. Our estimates differ from those predicting DFAST and Fed adverse scenarios; we won’t allocate that level of resources to credit. On the next page, Jen will provide further insights, and I’ll add a few comments. I also want to highlight that while she mentioned we won’t use temporary buffers, I believe that relying on temporary measures during a crisis is not dependable, especially if they disappear after one or two months. In my opinion, we should not count on these kinds of solutions.

And I’ll just add Jamie to the point on advanced RWA. If you look on the slide and you can see we traveled from 13.1% to 10.4%. About half of that is just the RWA increasing and the other half is the change in reserves. So, anyway, as Jamie said, moving on to page nine. All of this is against the backdrop of a capital framework that still has opportunity for recalibration. So, while we talked about this for years, it has perhaps never been more important. I'll start with CCAR and Jamie just made this point. But, it is not predictive of what we actually think would happen. And the best example of this might be the global market shock. It is a significant portion of the SCB, and we've obviously experienced a very different result here in the first half of 2020. So, we continue to believe that there are opportunities to rationalize the overall capital framework, including the points we've repeatedly made about GSIB.

I want to highlight a few key points. The purpose of CCAR is to ensure that banks can withstand extreme stress and adverse conditions. It is not intended to serve as a forecast of future results. Typically, the CCAR tests predict losses of between $25 billion and $30 billion over nine quarters, resembling scenarios like the global financial crisis. However, during the Lehman crisis, we actually made $30 billion and did not report losses in any quarter. We take proactive measures, diversify our operations, and maintain various income streams. We support CCAR because it protects against severe scenarios, but it isn't necessarily predictive of our actual performance. For instance, in the global market shock, they anticipated $25 billion in counterparty losses. To provide some context, during 2008 and 2009, major institutions like Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros., and AIG faced bankruptcy, along with numerous European financial institutions. Despite that turmoil, our combined losses for the worst two quarters were only $4 billion, not $25 billion. We quickly recovered because in challenging conditions, trading spreads widen, which temporarily boosts trading profits as we adjust our positions. The stress capital buffer of 3.3% doesn't accurately reflect potential losses, and we hope to reduce it to around 2.5% through proactive measures. As for GSIB, I have previously stated that while I support the idea of large banks holding more capital, GSIB is fundamentally different from CCAR. CCAR assesses factors like diversification, strength, earnings, and PPNR, which GSIB does not consider. GSIB merely measures size repeatedly without factoring in diversity, margins, or management actions. Therefore, it's not a comprehensive indicator of a company's risk. We maintain enough capital to navigate various challenges, as we have always operated the company with resilience in mind, preparing for potential crises since I've witnessed many throughout my career. While we don't predict them, we are ready to face them.

Okay. Thank you. All right. So, let's go onto the businesses. So, we'll start on page 10 with Consumer & Community Banking. So, CCB reported a net loss of $176 million, including reserved builds of $4.6 billion. Revenue of $12.2 billion was down 9% year-on-year, driven by deposit margin compression, lower transaction activity, and customer relief, partially offset by strong deposit growth and Home Lending margin expansion. The deposit margin was down 108 basis points a year-on-year on a sharp decline in rates, but deposit growth was a record 20% year-on-year, up over $130 billion. We would estimate that approximately 50% of that growth is COVID-related due to government stimulus for consumers and small businesses, lower consumer spending and tax payment delays. Mobile users were up 10% year-on-year. And since the start of the pandemic, we’ve seen increased levels of digital engagement. For example, quick deposit enrollment is up 2 times pre-COVID levels. As I noted earlier for consumer lending, the overall activity for the quarter reflected an environment that continued to evolve. Auto loan and lease originations were down 9% year-on-year due to the exit of the Mazda partnership. Excluding this impact, auto originations were up mid-single-digits. And while the Home Lending market was favorable, Home Lending total originations were down 1% year-on-year, driven by a decline in correspondent volume substantially offset by an increase in retail volume. Total CCB loans were down 7% year-on-year, driven by Home Lending down 14% due to prior loan sales and card down 7% and lower spend, offset by business banking up 59% due to PPP originations. Expenses of $6.6 billion were down 3%, driven by lower travel-related benefit, structural and marketing expenses. And lastly, credit costs included the $4.6 billion reserve builds I mentioned earlier and a net charge-off of $1.3 billion, driven by card. Now, turning to the Corporate & Investment Bank on page 11. CIB reported net income of $5.5 billion and an ROE of 27% on revenue of $15.4 billion. Investment Banking revenue of $3.4 billion was up 91% year-on-year, largely driven by our strong performance in capital markets, as well as the gains on our bridge book, which was primarily a function of improved market conditions. IB fees for the quarter were an all-time record, up 54% year-on-year. We maintained our number one rank and grew market share to the 9.8% for the first half of the year. In advisory, we were up 15%, driven by the closing of a few notable transactions. That underwriting fees were up 55%. We maintained our number one rank in overall wallet and we’re the leaders and the lead left across leveraged finance. In equity underwriting, fees were up 93% and we grew share by approximately 200 basis points relative to the first quarter. With regards to outlook, we expect third quarter IB fees to be down, both sequentially and year-on-year due to the usual seasonal decline and lower M&A announcements year-to-date. And if the economy begins to stabilize, we expect capital markets to revert to normal levels. However, any sustained period of instability could result in additional demand for liquidity, and therefore increase capital markets activity. Moving to markets, total revenue was $9.7 billion, up 79% year-on-year, an all-time record, driven by strong performance throughout the quarter, and it was only later in June that activity began to revert to more normal levels. We saw strength across products and regions for both flow trading and large episodic transactions. While strong line activity was a continuation of the first quarter theme, our market-making activity this quarter benefited from improved market liquidity, and we were able to better monetize flows. Fixed income was up 99% year-on-year or 120%, adjusted for the gain from the IPO of Tradeweb last year, driven by very active primary and secondary markets across products, particularly in macro. Equity was up 38%, largely driven by strong client activity in equity derivatives and cash. Looking forward, we expect the slowdown that we started to see towards the end of June to continue. In addition, the second half of last year was very strong, making any year-on-year comparison difficult. But obviously, the environment makes forecasting markets performance even more challenging than usual. Wholesale payments revenue of $1.4 billion was down 3% year-on-year, primarily driven by our reporting reclassification and merchant services. Security services revenue of $1.1 billion was up 5% year-on-year as continued elevated volatility in the second quarter drove increased transaction volume and higher average deposit balances. Credit adjustments and other was a gain of $510 million, as I mentioned upfront, driven by the tightening of funding spent on derivatives and was a partial reversal of the losses in the first quarter. Expenses of $6.8 billion were up 19% compared to the prior year due to revenue-related expenses. Finally, credit cost of $2 billion reflects the net reserve build I referred to earlier. Now moving on to Commercial Banking on page 12. Commercial Banking reported a net loss of $691 million, which included reserve build of approximately $2.4 billion. Revenue of $2.4 billion was up 5% year-on-year, driven by higher deposits and loans and equity investment gain and higher investment banking revenue, largely offset by lower deposit NII. Record gross investment banking revenues of $851 million were up 44% year-on-year, due to increased bonds and equity underwriting activity. Expenses of $899 million were down 3% year-on-year, driven by lower structural expenses. Deposits of $237 billion were up 41% year-on-year as the increase in balances from March has largely remained on our balance sheet as clients look to remain liquid in this environment. End of period loans were up 7% year-on-year but down 4% quarter-on-quarter. C&I loans were down 7% quarter-on-quarter as revolver utilization while still elevated has declined significantly from the all-time highs in March. However, this is partially offset by the impact of PPP loans. CRE loans were flat with generally lower originations in both commercial term lending and real estate banking. Credit costs for $2.4 billion included the reserve build mentioned earlier and $79 million of net charge-offs, roughly half of which were in oil and gas. Now on to Asset & Wealth Management on page 13. Asset & Wealth Management reported net income of $658 million with pretax margin and ROE of 24%. Revenue of $3.6 billion for the quarter was up 1% year-on-year as growth in average deposit and loan balances along with higher brokerage activity was largely offset by deposit margin compression. Expenses of $2.5 billion were down 3% year-on-year with lower structural as well as volume and revenue-related expenses, partially offset by continued investments in advisors. Credit costs were $223 million, driven by the reserve builds that I mentioned earlier. For the quarter, net long-term inflows were $29 billion, positive across all channels and all regions, led by fixed income and equity. At the same time, we saw net liquidity inflows of $95 billion, making us the number one institutional money manager globally. AUM of $2.5 trillion and overall client assets of $3.4 trillion, up 15% and 12% year-on-year respectively, were driven by cumulative net inflows into liquidity and long-term products. And finally, deposits were up 20% year-on-year on growth in interest-bearing products and loans were up 12% with strength in both wholesale and mortgage lending. Now on to corporate on page 14. Corporate reported a net loss of $568 million. Revenue was a loss of $754 million, down $1.1 billion year-on-year, driven by lower interest income on lower rates, including the impact of faster prepays on mortgage securities. And expenses of $147 million were down $85 million year-on-year. Now, let's turn to page 15 for the outlook. You'll see here that despite the uncertain environment, our latest full year outlook remains largely in line with our previous guidance. Based on the latest insights, we expect net interest income to be approximately $56 billion and adjusted expenses to be approximately $65 billion, which is slightly higher than expected previously, reflecting the outperformance in the second quarter, and will ultimately be an outcome of our performance in the second half of the year. So, to wrap up, against the backdrop of an unprecedented environment, our second quarter performance highlighted the benefits of our diversification and scale and the resulting earnings power of our company. While the range of outcomes is broader than ever before, our priorities remain unchanged. We are focused on supporting our employees, customers, clients, and communities around the globe, and on being good stewards of the capital entrusted to us by our shareholders. I'd like to end by thanking all of those who continue to serve on the frontlines of this crisis and our people here at JPMorgan Chase, who have demonstrated unwavering fortitude and dedication through these times. And with that, operator, please open the line for Q&A.

Good morning, Jen and Jamie. Jen, I was wondering if you could give us some incremental color on your commercial exposures to heavily COVID impacted sectors across CRE and C&I, so thinking oil and gas, travel and retail, just to help us understand the types of areas where your incremental commercial reserve building was directed towards this quarter.

Sure. So, I'll start by saying, the most impacted sectors, like the ones that you mentioned, represent about a third of our overall exposure. More than half of that is investment grade and two thirds of the non-investment grade is secured. And in terms of the second quarter downgrades, well, first I'd say, in the first quarter, when we were really looking at a deep but short-lived downturn, we were really very much focused on the most impacted sectors. And now that we're looking at a more protracted downturn, we're reserved for a much more broad-based impact across sectors. So, just to put that in context, the second quarter reserve build, about 40% of that is in the most impacted sectors versus two thirds of the builds in the first quarter, was the most impacted sectors. And then, in terms of the downgrades that we saw in the second quarter, less than a third of those were in the most impacted sectors.

And just for your definition of most impacted sectors, what would you be including in that?

Consumer and retail, oil and gas, real estate, retail and lodging, and sub-sectors, as you think about real estate.

Okay. Just a quick follow-up question. You maintained the NII outlook for the year, despite a pretty big drop in net interest margin. Could you talk about the dynamics embedded in that second half outlook for NII and maybe how trading NII might play into the thinking?

Yes. It's a great question. And you're spot on, which is markets help NII. So, the outperformance in markets helps NII, but can be a headwind on NIM, just given that the NIM is below average. So, yes, maintaining that outlook did have something to do with the outperformance of markets. You're right.

Hi. Good morning. Thanks. Jennifer, just to kick off with a question, on page three, you went through a lot of detail around the forbearance that you've been given and the percentage that has been paying you at least once during the deferral period. Could you give us a sense on these different asset classes that you've outlined in your base case, what are you assuming those delinquencies end up becoming?

So, I won't go into specific details, but I'll just say a couple of things, which is, it is still too early to really read a whole lot into what we're seeing. The visibility here remains low I would say given the amount of support that is out there. But, you are right that we are considering these customers to be higher risk, given that they are in forbearance program. So, we did account for that as we thought about our reserves.

Okay. Because I'm thinking, all right, you've got the inverse of the right hand column could be construed as what should be expected to become delinquencies over time. And I'm wondering, as a follow-up question, you mentioned during the prepared remarks that if your assumptions are realized that you could be basically close to fully reserved for the cycle. Maybe if you can give us a sense as to which assumptions you are talking about because I know you're expecting an outcome that's worse than your base. So, I was just a little confused about what I should assume your base cases and what assumptions you're pointing to that if realized, you're done on the reserving.

Sure. So, first of all, there are a lot of assumptions, given as I said, the visibility is still quite low. So, assumptions around the economic outlook and I'll come back to that; assumptions around consumer payment behavior; and then assumptions around stimulus. So, going back to the economic outlook, we have five different scenarios. We did lean in more heavily to the downside scenarios, relative to what we would have otherwise done. Even the Fed has put equal weight on downside scenarios and their base case. So, we certainly thought having a conservative bias there was the prudent thing to do. And so, as you look at that slide five, that is just the base case. So, you can see there, exiting this year just under 11%. When you then look at the weighted outcome of unemployment across the five scenarios, we end up with double-digit unemployment through the first half of 2021 versus what you see on page five, there is just the base case, which shows some improvements relative to the fourth quarter getting down to just under 8% by the end of 2021.

Betsy, just to clarify, the base case, if you took Morgan Stanley's estimates or Mike Feroli or JP Morgan or the Fed estimates for their base case, that is basically the base case. Embedded in that are all these assumptions about that stimulus and P2P and all these are things. So, that is the base case, and we're reserved more than that. So, therefore, if the base case happens, we may be over-reserved. I hope the base case happens.

Could you provide a quick follow-up on consumer trends and delinquencies? It seems that the deferral programs had an effect, and notably, 30-day delinquencies have decreased. Can you share your observations regarding the non-deferral programs? It appears that there is minimal stress, even among early-stage delinquencies. What factors do you think are contributing to this? What are your insights on your non-deferral programs?

I mean, simply I would attribute it to the amount of support that is out there in the form of stimulus. And so, as I said, the visibility on what we're dealing with is very, very low, because we're not seeing right now what you would typically expect to see, given a recession. And so, the way we have to think about reserving is all about the outlook, because we're not actually seeing it today. And so, Jamie has said this many times, May and June will prove to be the easy bumps in terms of its recovery. And now we're really hitting the moment of truth, I think in the months ahead.

Yes. And just to amplify, in a normal recession, unemployment goes up, delinquencies go up, charges go up, home prices go down. None of that's true here. Incomes go down, savings go down. Savings are up, incomes are up, home prices are up. So, you will see the effect of this recession. You're not going to see it right away because of all the stimulus and the fact, 60% or 70% of the unemployed are making more money than they were making when they were working. So, it’s just very peculiar times.

Maybe a follow-up on DFAST. Jamie, you mentioned the market shock. We experienced a market shock, and everyone's trading performed quite well. Do you think this will change the Fed's perspective over time regarding how they assess stress losses in the trading book, or do you believe that's too optimistic?

I don't anticipate any changes. As I mentioned, the focus is on ensuring that banks can endure difficult situations as if they were facing the worst scenarios possible. They are not recognizing banks for positive outcomes. I'm not opposed to this idea, but I want to point out that if things go very poorly and mistakes are made, it could impact trading. They are applying similar assumptions regarding outflows. The liquidity outflows they consider are more severe than those of the worst bank during the most significant crisis. Their goal is to ensure that every bank is capable of withstanding such challenges.

Sure. Thanks. Quick question on the balance sheet. I mean, obviously, there's tremendous balance sheet growth as liquidity built up in the quarter. But, how are we thinking about that on a go forward basis? Is that expected to roll off over the next couple quarters? Is that kind of persistent and expected to stick around, and you’re just going to be operating with a much larger balance sheet in near term?

So, I'll start with deposits. I mean, in the first quarter, it was very much a wholesale story. And we said we expected to normalize, and we have seen that. We started to see that. So, looking ahead on wholesale, I think there are puts and takes. We'll continue to see revolvers pay down, security services will likely continue to normalize. I think, tailwinds for deposits Fed balance sheet expansion will be slower but will continue. And we do think we'll continue to see organic growth. On the consumer side, probably down from here on tax payments as well as the pickup in consumer spending. But, in both cases, I think we'll continue to see very, very strong year-on-year growth, both for wholesale and consumer in the latter part of this year. And then, in terms of balance sheet management, I mean, we managed the balance sheet across multiple dimensions, NII, liquidity, capital and interest rate risk. And so, we have had $400 billion of deposit growth since the end of last year. And when you consider, as you know that some of that growth is likely to be transitory and deployment opportunities have been diminished, given the rate environment, we have held a decent amount of that in cash. However, we did add about $88 billion in securities here in the second quarter and on the deposit side, we've been very disciplined on pay rates.

So, if those deposits have grown, we should expect more to migrate from deposits on the asset side into securities? Are you looking to fund loans on those?

As the Fed grows the balance sheet, it’s going to end up in deposits. And for the most part, a lot of deposits are going to be securities. Because the loan growth usually goes down during a recession.

We should expect that as consumer spending recovers, there will be some growth in card usage, which will contribute positively, but we will also start to see the Paycheck Protection Program loans being paid down, and as Jamie mentioned, loan growth will be a bit slower.

I want to emphasize the significant figures. We have over $1 trillion in cash at central banks, which is nearly $400 billion to $500 billion; treasuries amount to about $700 billion; and other highly liquid assets, primarily in quality securities, total $1 trillion. People consider the safety and stability of an institution like this. That is an enormous amount of money. Some of it is required as we need to maintain a lot of liquidity, while other parts are simply because we are investing in a conservative manner.

Good morning. I was just wondering if you could talk a bit about the expected timing of starting to see some charge-offs. Obviously, there's a lot of unknowns with the stimulus and the forbearance, but what are your assumptions in terms of when charge-offs start growing up, maybe where they peak and how long they at that level?

It's really difficult to know. First, we need to start seeing delinquencies. Later this year, but next year will likely see a significant increase in charge-offs as we consider the assumptions we've made in the reserves. The good thing is that CECL is life of loan, so we feel well covered for the scenarios we’re examining.

And then, remind us, you are seeing some creep in the nonperforming assets. Obviously, it's off low levels, but they are starting to go up. And remind us why that's not starting to feed into net charge-offs, or if this is just a timing issue and will in the next quarter or two?

Yes. The increase in non-accruals in wholesale is largely due to one client. Therefore, I wouldn't draw any conclusions from that. As you mentioned, it's rising from a very low level. Again, we are not seeing the typical indicators of a recession.

Hi. Just more on the reserve question. So, if the Fed’s base case is achieved, then you are over reserved. If your base case assumptions....

We hope we’re over-reserved…

And if your base case assumptions, which are more conservative, are realized, then okay, you're done with the reserve building. And if it's worse, then you'll have to add more reserves. But since the end of the quarter, we're seeing an increase in COVID cases in Florida and Texas and California and elsewhere. And isn't there a link between increasing COVID cases with deaths with economic activity, or how do you think about that? And I'm staring at slide two, and I can't get my eyes off that debit and credit card sales volume. And it seems like it's flattening off here in June. So, since the end of the quarter, A, if you were to kind of mark-to-market your thinking as of this second with what's happening, do you feel better, worse or the same versus the end of the quarter, as it relates to your assumptions?

We feel the same today as we did at the end of the quarter. We cannot predict the future, and it's clear that the economic environment will likely be more uncertain than it was in May and June. It's important to be prepared for fluctuations, as concerns about COVID, the economy, small businesses, bankruptcies, and emerging markets may create a murky situation. When looking at the base case, adverse, and extreme adverse scenarios, all are possible, and we are merely estimating the probabilities. We are ready for the worst-case scenario, but we don't have definitive answers. Nobody knows for sure, and the term unprecedented is being accurately applied to the current global situation. COVID is a significant factor in this. The Federal Reserve's W case indicates that a resurgence of COVID in the fall could lead to another economic shutdown. We must exercise caution, but again, we cannot determine the likelihood of this happening, and guessing is not productive.

I would like to clarify that we are prepared for a scenario worse than the base case. For all the reasons mentioned, we decided to take a more cautious approach regarding the potential downside. While there may be a conservative bias in this assessment, it reflects our best estimate based on the information we have, which includes the slowdown you referred to regarding recent activities.

Can you share with us the reclassification of the wholesale portfolio that you talked about? How often do you go through that process where you have to look to reclassify the corporate loans? And second, you touched on earlier in a question about some of the COVID-related sectors that are being impacted because of what we're going through. Can you highlight for us what is the most stressed within that COVID group that you mentioned?

So, first on that reclassification, we mentioned it was a geography issue in Merchant Services. But, it didn't have to…

There was no reclassification of wholesale loans.

Yes, in terms of the most affected sectors, we see significant impacts in travel, oil and gas, real estate, and retail. These are the sectors you would expect. However, it's important to point out that less than a third of the downgrades we saw in the second quarter were from these most affected industries. Overall, we're observing a much broader range of impacts.

They're just not meaningful numbers. We would have included them, had they been? So, I'll just go back to what we said, which is we're just not seeing what you would typically see.

But they end up in non-performing.

Thanks. Good morning. Just a question on the points in slides you made about capital and long-term opportunities for recalibration. First, I guess, will you have any dialogue with the Fed about the 3.3 SCB as some other banks have mentioned? And then, secondly, where do you think we stand on the GSIB recalibration to your points about systemic risk, not that shouldn't impact a bank's balance sheet?

We're not going to go back to the Fed and the 3.3%, but obviously we're looking at why 3.3% and we can try to adjust our plans going forward to try to reduce that number a little bit. Because we have another CCAR coming up in a couple of months, so there's no reason for us to go through extensive work as opposed to fix what's already there. And GSIB, look, I've always thought GSIB needed a lot of recalibration. But, there are things they should have recalibrated for already, which is America gold plated, which I think is wholly unnecessary. They should have taken cash and treasury and a whole bunch of stuff out of the calculation. Because obviously it goes way up when the Fed does things like they’re doing recently and they never adjusted it for growth in the economy or growth in the shadow banking system, which they were supposed to do. So, I'm just hoping they go about and do that at one point. But these things get so wrapped up in political. People politicize very complicated calculations, which I thought kind of peculiar and funny. But my view is that they do the numbers, they should do them right. And they're just not right anymore.

Yes. And the second question is just going back to slide three. You lay out the percent of accounts on this page. Auto seems to be the biggest. And then, in the supplement on page 13, the balances seem to imply a bigger percent on deferral. Just can you talk a little bit about the differences there and then why do you think you're seeing more accounts in auto deferring versus other asset classes? Thank you.

Okay. I don't actually know the answer to reconciling the supplement to slide 3. So, Jason and team can follow up with you on that one.

Could you provide your insight on the trends in auto deferrals and how they compare to other customer segments? Additionally, do you believe this has any implications for future credit trends?

No.

No, yes.

Yes. Good morning. Two questions, one on page six, you give the SLR ratio as adjusted for the temporary relief programs on the capital. I wonder if you had a similar ratio for CET1. And part of that question would also be, which would be the more confined ratio starting next March?

There is no temporary relief in CET1.

Well, CET1 has a phase in that spans many years. I don’t view that as temporary like SLR, which is currently temporary and set to expire in the first quarter of next year. That's why we're focused on managing it without the exclusions.

And they’re both. We manage them both. So, I wouldn't say one is more than the other. We manage something like 20 different capital liquidity ratios.

And Jamie, FSOC is meeting today behind closed doors. If I understand, there are two topics. One that has to do with secondary mortgage market liquidity and the other with the COVID stress test overlay. Do you have any thoughts or insights as to what they may be discussing on either of those?

I don't have insights. Regarding COVID, we plan to conduct a new stress test and examine all scenarios, including underwriting. It’s reasonable for people to reference that type of stress test. The mortgage market presents a different challenge. We have consistently noted that mortgages are significantly more expensive than they should be. Typically, with a 10-year rate around 60 basis points, the mortgage rate would be around 1.6% or 1.8%, not 3.3%. This discrepancy arises from the high costs of servicing and origination, which must be passed along. These costs are inflated due to numerous rules and regulations that do not effectively promote safety and soundness. Achieving safety and soundness essentially requires an 80% loan-to-value ratio, income verification, and ensuring appropriate practices. Furthermore, the lack of a robust securitization market is an issue. This market is critical as it lowers risk-weighted assets and incentivizes banks to retain mortgages on their balance sheets. The securitization market also facilitates the transfer of risk to others. I believe they need to make changes promptly. Such changes will benefit non-agency mortgages, which are currently significantly more expensive than agency mortgages. Establishing a credible securitization market, along with some adjustments to Regulation A and B, could improve the market and lower mortgage costs, particularly for lower-income individuals. This change needs to be implemented quickly.

I have a broader question, and I just want to get your perspectives on public policy and banks and a little bit more broadly than the discussion about capital planning and stress testing. And I know banks are working hard to be part of the solution this time and not part of the problem. But, we're also having more open discussions about things like inequality and social justice, which, in my opinion, are long overdue. But, I worry that fair or not, banks are sort of being depicted as being on the wrong side of some of those issues. And I think you see that in things like the mainstream press’s depiction of big banks in PPP and stuff like that. And I'm just curious if you are concerned at all about populist anti-bank policies gaining traction, however you want to define them, whether it's breaking up the banks, directed lending, rate capture, or whatever, in a pretty polarized political environment, or do you think I'm being too alarmist or overly concerned about stuff that is pretty unlikely in our country? So, just kind of want to get your perspective just generally and how banks fit into the overall policy and political backdrop.

Every day at work, it's essential to do the right thing for the right reasons and to serve our customers. We strive to care for our employees, provide training, and enhance diversity within our company. Of course, we make mistakes, so I understand the frustration that exists. We aim to do our best, engaging in policies, such as improving mortgage opportunities for Americans. We recognize that people want banks to support the nation, and we do just that. Our priority is to remain a healthy and vibrant bank during this crisis while continuing to serve our clients. It's important to remember that responsible lending is beneficial, while irresponsible lending leads to negative consequences. We often hear calls for banks to engage in more lending, but irresponsible actions can result in poor outcomes, as we've seen in the past. We strive to get it right and listen carefully to criticism, which is often valid regarding what we could improve now and in the future.

Okay. That's helpful. I guess as broad as that question was, I am going to ask a very narrow question for Jen and on your NII guidance. I presume that includes gains on PPP fees for unforgiven loans. And have you quantified that or sized that up in terms of where you think the magnitude of those figures could be?

We have been clear about our position on PPP, which is that we do not aim to profit from it. This does not mean there won't be geographical variations. As a result, you may have some revenue along with expenses, leading to a profit that is nearly zero. This quarter, the amount is immaterial since these fees are recognized over the life of the loans, resulting in very little revenue and expenses. Looking ahead, we expect to see more of this in the third and fourth quarters, but it will still result in zero profit overall. Even the gross figures won't be significant in the broader context.

Can you share with us the reclassification of the wholesale portfolio that you talked about? How often do you go through that process where you have to look to reclassify the corporate loans? And second, you touched on earlier in a question about some of the COVID-related sectors that are being impacted because of what we're going through. Can you highlight for us what is the most stressed within that COVID group that you mentioned?

So, first on that reclassification, we mentioned it was a geography issue in Merchant Services. But, it didn't have to….

There was no reclassification of wholesale loans.

Yes. In terms of the most impacted sectors, they are primarily those related to travel, oil and gas, real estate, and retail. These are the sectors you would typically expect to see affected. However, it's important to note that in the second quarter, less than a third of the downgrades occurred within the most impacted industries. Overall, we are observing this as a much broader issue.

They're just not meaningful numbers. We would have included them, had they been? So, I'll just go back to what we said, which is we're just not seeing what you would typically see.

But they end up in non-performing.