JPMorgan Chase & Company (JPM) — Q1 2021 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 $14.3 billion, EPS of $4.50, on revenue of $33.1 billion and delivered a return on tangible common equity of 29%. Included in these results are two significant items: $5.2 billion of net credit reserve releases, which I'll cover in more detail shortly, and a $550 million contribution to the Firm's Foundation in the form of equity investments. Touching on a few highlights, we saw another strong quarter in CIB. In fact, net income was an all-time record with IB fees up 57% year-on-year, reflecting continued robust activity, and markets up 25% year-on-year as the environment remained favorable in January and February, although it did start to normalize in March. In AWM, we had record net long-term inflows of $48 billion this quarter and deposits of $2.2 trillion were up 36% year-on-year and 5% sequentially, as the Fed balance sheet continues to expand. But loan growth remains muted, up 1% year-on-year and 2% quarter-on-quarter, with the bright spots being AWM and secured lending in CIB. Onto Page 2 for more detail on our results. When looking at this quarter's performance, there's a lot of noise in the year-on-year comparisons, particularly given what happened in March of last year. And so it's important to remember a few key points here about March 2020. Effectively, investment banking activity stopped or got delayed except for investment-grade debt issuance. We recorded $950 million of losses in credit adjustments and other in CIB as well as a $900 million markdown on our bridge book. And in credit, we built $6.8 billion of reserves relative to this quarter's release of $5.2 billion. So with that in mind, revenue of $33.1 billion was up $4.1 billion or 14% year-on-year. Net interest income was down $1.6 billion, or 11%, primarily driven by lower rates. And noninterest revenue was up $5.7 billion, or 39%. While this comparison is in part impacted by several of the items I just mentioned, in absolute terms, we saw strong fee generation across the franchise including in investment banking, AWM and home lending, as well as a strong performance in markets. Expenses of $18.7 billion were up 12% year-on-year on higher volume and revenue-related expenses. The contribution to the Foundation that I just mentioned, as well as continued investments. And credit costs were a net benefit of $4.2 billion driven by reserve releases. And here it's worth noting that charge-offs were down about $400 million year-on-year or 28%, and continue to trend near historical lows. Turning to Page 3 for more detail on our reserves. We released approximately $5.2 billion of reserves this quarter as recent economic data has been consistently positive, indicating that the recovery may be accelerating faster than we would have thought just a few months ago. Starting with consumer, in card, we released $3.5 billion as the employment picture has continued to improve. The round three stimulus has provided another level of support and early stage delinquencies remain very low. In home lending, we released $625 million primarily driven by continued improvement in HPI expectations and to a lesser extent, portfolio runoff. And then in wholesale, we released approximately $700 million. While strong recovery seems in motion, we're also prepared for more adverse outcomes given remaining uncertainties around the impact of new virus strains and the health of the underlying labor markets. So for now, we remain cautious and are still weighted to our downside scenarios, and at about $26 billion, we are reserved at approximately $7 billion above the current base case. However, it's worth noting that even in a more normalized environment, we wouldn't expect to be 100% weighted to the base case, as we'll always have some weighting on alternative scenarios. Now moving to balance sheet and capital on Page 4; we ended the quarter with a CET1 ratio of 13.1% flat versus the prior quarter as net growth and retained earnings was offset by lower AOCI and higher RWA. Perhaps a more interesting ratio right now is SLR which is at 5.5% excluding the temporary relief that just expired. As we said all along, we were never going to rely on short-term temporary relief as a long-term planning matter. And this is evidenced by actions we've taken. We've already engaged with our wholesale deposit clients to explore solutions, and we issued $1.5 billion of preferred stock in the first quarter. Having said that, it's worth reinforcing a few points here. First, it's important to remember that the SLR is a leverage-based requirement, not a risk-based requirement. The growth in bank leverage has been driven by deposits and therefore cannot be cured by reducing lending. In fact, the opposite would be true. If we had more loan growth, it would help because it would absorb excess risk-based capital. The issue is that we've had muted loan demands to date. And even if it starts to pick up, it's hard to envision that organic loan growth could keep pace with further QE. And therefore we expect this leverage issue to persist for some time. And finally, when a bank is leverage constrained, this lowers the marginal value of any deposits regardless if it is wholesale or retail, operational or non-operational and regulators to consider whether requiring banks to hold additional capital for further deposit growth is the right outcome. As we told you last quarter, we have levers to manage SLR and we will; however, raising capital against deposits and/or turning away deposits are unnatural actions for banks and cannot be good for the system in the long run. And then just to wrap up on capital regarding distribution, the limitations were extended another quarter. So based on our income that corresponds to buyback capacity of about $7.4 billion in the second quarter after paying our $0.90 dividend. Given the preferred, we plan to issue and the work underway around excess client deposits, while of course this could become more challenging, we believe that we should be able to buy back most if not all of that capacity. Now let's go to our businesses starting with consumer and community banking on page 5. CCB reported net income of $6.7 billion including reserve releases of $4.6 billion. Starting with the key drivers of year-on-year financial performance, which I'll just note have generally been consistent over the last few quarters against the backdrop of strong consumer balance sheets, with higher savings rates and investments as well as healthy deleveraging. Deposit growth was 32% or $240 billion as existing customer balances remain elevated. And we also continue to acquire new customers. Client investment assets were up 44% driven by market appreciation and positive net flows across our advisor and digital channels. Home lending originations were $39 billion, up 40% and an overall larger market. And auto loan and lease originations were $11.2 billion, up 35%, with March being the best month on record. However, loans were down 7% as outstandings in card remain lower even as spend is recovering to pre-COVID levels. This is in addition to the continued runoff of the mortgage portfolio and partially offset by PPP additions. Mobile users grew 9% to nearly $42 million, and the customer migration to digital continued with brands transactions still down double digits. In consumer banking, approximately 50% of new checking and savings accounts were opened digitally. And that's up more than 10 percentage points year-on-year. Notably, we're also seeing a few emerging trends worth covering. Consumer sentiment has returned to more normalized levels reflecting increased optimism. We've seen debit and credit cards return to pre-pandemic levels, up 9% year-on-year and 14% versus Q1 2019 despite T&E remaining significantly lower. That said we are seeing strong momentum in T&E with spend up more than 50% in March compared to February, and similar growth across CX loyalty and ultimate reward travel bookings. With higher rates, mortgage lock margins have tightened and refi applications have slowed but the overall market is still robust. And on credit, government's stimulus and industry forbearance programs have provided confidence that the bridge is likely going to be long enough and strong enough. Taken together with the pace of the vaccine rollout, we believe there's some permanency to the loss mitigation. And while Q1 2021 card losses are higher quarter-on-quarter, we do expect losses to decrease in the second and third quarters. In summary, revenue of $12.5 billion was down 6% year-on-year driven by deposit margin compression and lower card NII and lower balances largely offset by strong deposit growth and higher home lending production revenue. Expenses of $7.2 billion were down 1% as we self-fund our investment. And credit costs were a net benefit of $3.6 billion driven by the $4.6 billion of reserve releases I previously mentioned; partially offset by net charge-offs of $1 billion. Now turning to the corporate and investment bank on Page 6. CIB reported net income of $5.7 billion and an ROE of 27% on record first-quarter revenue of $14.6 billion. Investment banking revenue of $2.9 billion was up 67% year-on-year excluding the impact of the bridge markdown last year. IB fees of $3 billion were up 57% and while we ranked number two largely due to SPAC IPOs, we maintained our global IB wallet share of 9%. The quarter's performance was an all-time record driven by the continued momentum in the equity issuance markets, as well as robust activity in M&A and DCM. In advisory, we were up 35% benefiting from the surge in announcement activity in the second half of 2020. Debt underwriting fees were up 17% driven by leveraged finance activity, and here we maintained our number one rank and lead left position. And in equity underwriting fees were up more than 200% primarily driven by IPOs, as clients continue to take advantage of strong market conditions. Looking forward, the IPO calendar is expected to remain active with M&A momentum likely to continue. And while the pipeline is higher than it's ever been, the number of flow deals outside of the pipeline both this year and last year make it difficult to predict the second quarter. So at this point, I'd say we expect IB fees to be about flat year-on-year. Moving to markets, total revenue was $9.1 billion, up 25% against a strong prior year quarter. In January and February, we saw a robust trading environment and client activity remained elevated with the positive momentum from the end of 2020 carrying through to the start of the year. In March, our performance started to normalize but remained above pre-COVID levels. Fixed Income was up 15% with outperformance in securitized products and credit supported by active primary and secondary markets, partially offset by lower revenues in rates and currency and emerging markets against a tough compare in March of last year. Equity markets was up 47% and an all-time record driven by a favorable trading environment and equity derivatives as well as strong client activity across products. In terms of outlook based on recent weeks, we would expect this quarter to be closer to the second quarter of 2019 as 2Q 2020 was the best quarter on record for our markets franchise, but obviously it's still early. Wholesale payments and security services revenues were $1.4 billion and $1.1 billion respectively, both down 2% year-on-year with higher deposit balances more than offset by deposit margin compression. Expenses of $7.1 billion were up 19% year-on-year on higher revenue-related compensation, partially offset by lower legal expense. And credit costs were a net benefit of $331 million driven by the reserve releases I discussed earlier. Now let's go to commercial banking on page 7. Commercial Banking reported net income of $1.2 billion and an ROE of 19%. Revenue of $2.4 billion was up 11% year-on-year with higher lending in investment banking revenue and the absence of a prior year markdown in the bridge book partially offset by lower deposit revenue. Record gross investment banking revenue of $1.1 billion was up 65% with broad-based strength as market conditions remain favorable. Expenses of $969 million were down 2% driven by lower structural expenses. Deposits of $291 billion were up 54% year-on-year and 5% quarter-on-quarter as client balances remain elevated. And loans were down 2% year-on-year and 3% sequentially. C&I loans were down 4% from the prior quarter on lower revolver balances as clients continue to access capital markets for liquidity, partially offset by additional PPP funding. And CRE loans were down 1% with continued low origination volumes in commercial term lending, partially offset by increased affordable housing activity. Finally, credit costs were a net benefit of $118 million driven by reserve releases with net charge-offs of $29 million driven by oil and gas. Now on to asset and wealth management on page 8. Asset and wealth management generated record net income of $1.2 billion with pretax margin of 40% and ROE of 35%. For the quarter, revenue of $4.1 billion was up 20% year-on-year, as higher management fees, growth in deposit and loan balances, as well as investment valuation gains were partially offset by deposit margin compression. Expenses of $2.6 billion were up 6% with higher volume and revenue related expenses, partially offset by lower structural expense. And credit costs were a net benefit of $121 million primarily due to reserve releases. For the quarter, record net long-term inflows of $48 billion were again positive across all channels, asset classes and regions with particular strength in equities. And in liquidity, we saw net inflows of $44 billion as banks encourage clients to move excess deposits away from them. AUM of $2.8 trillion and overall client assets of $3.8 trillion, up 28% and 32% year-on-year respectively, were driven by higher market levels as well as strong net inflows. And finally, deposits were up 43% and loans were up 18% with strength in security-based lending, custom lending, and mortgages. Now onto corporate on page 9. Corporate reported a net loss of $580 million. Revenue was a loss of $473 million, down $639 million year-on-year. Net interest income was down nearly $700 million on lower rates as well as limited deployment opportunities on the back of continued deposit growth. And expenses of $876 million were up $730 million year-on-year, primarily driven by the contribution to the Foundation I mentioned earlier. The results for the quarter also include a tax benefit related to the impact of the Firm's expected full-year tax rate relative to the level of pretax income this quarter. So with that, moving to the outlook on page 10. You'll see here that our 2021 NII outlook have around $55 billion remains in line with our previous guidance, as the benefits of the steepening yield curve are being offset by customer behavior in card. It's worth noting that forecasting NII is perhaps more challenging than it's been in a long time, as many of the key inputs market, implied rates, deposit forecast, securities reinvestment, and customer behavior in card are all quite fluid. And as a reminder, while customer de-leveraging in higher payment rates in card is a headwind for NII, it's a tailwind for credit. And we now expect our card net charge-off rate to be around 250 basis points for the year. And then on expenses, we've increased our guidance to approximately $70 billion with the largest driver being higher volume and revenue-related expenses, which importantly have offsets in revenue. So to wrap up, the year has gotten off to a strong start and a robust economic recovery seems underway. Of course, there are still risks and uncertainties ahead that we're preparing for, as well as specific issues that we're facing, including the balance sheet dynamics. I mentioned the rate environment and tough year-over-year comparisons, among other things. Having said that, the earnings power of the franchise remains evident, and we'll continue to use our resources to serve our clients, customers, and communities. And with that, operator, please open the line for Q&A.

Hi, good morning. My first question is for Jamie. Jamie, you noted during a December conference that you believe that normalized ROTC for JPMorgan would be about 17%. And investors are wondering as we think about JPMorgan, perhaps cementing a higher GSIB surcharge at 4% this year, is 17% still achievable under that context or constraint?

So, yes, Erika, I'll start. So just a couple of things to think about on capital. So while we're, we ended the year in the 4% bucket for GSIB, and it's probably worth mentioning, given the continued expansion of the system through the Fed's balance sheet, even staying in four could become challenging for us. But just a couple of things to keep in mind there is we believe that, like we do have offsets in the stress capital buffer, and we do believe that it's very possible that we'll see those come through in this round. Of course, it's dependent upon the Fed models, not our models, but we've talked about things that actions that we've taken sort of mechanical in nature in addition to moving investment securities into held to maturity that should give us some benefit on the SCB. Of course, that's scenario dependent, but we do expect some benefit there that could offset. It's also important to remember that we still are waiting for the Basel III endgame. And the indication from the Fed is that they will address GSIB recalibration as part of that. And so it's quite possible that we see GSIB recalibration but perhaps another constraint that we will be managing. So there is a lot that we will learn over probably the next year or two. And of course, the higher GSIB doesn’t come into effect until the first quarter of 2023. So we do think we have offsets, we're still thinking about 12% as being a target CET1 for us, of course, given what we know today. But we are still waiting for that Basel III endgame to really understand what we're dealing with. And at that 12% in a more normalized environment, which wouldn't just be about rates, it would also be about loan demand, 17% still feels achievable for us.

Thank you for discussing the leverage constraint now that the SLR exemption has expired. Investors are curious about your ability to support global economic recovery. Does the SLR constraint and the changes related to GSIB impact your priorities regarding the timing or size of the $30 billion buyback or any inorganic growth opportunities you have previously mentioned?

I would say broadly speaking, no, but an important point there on SLR, we obviously, the levers we have are issuing preferred, we can retain more common, but we're also working closely with wholesale clients in a very selective way, as I mentioned, to find alternatives for excess deposits. So it is true that common is one of the levers although I will say that while it might give us more flexibility, it comes at a much greater cost. So at this point, given what we know and what we expect, we don't expect that we would have to retain more common. We think we can manage this through issuing more preferred and working closely with our clients to find alternatives. So I would say broadly speaking, no, the GSIB constraints, as we've been saying for years now is one that will become increasingly challenging for us and now particularly with the expansion of the system it's even more challenging than perhaps it was just a few years ago, but we're managing through that as well.

Hey, good morning, Jen. I want to ask about expenses. Obviously, you've raised the outlook by a billion dollars a few times, the last couple of times you spoke. I guess in terms of the increase that you've announced today to the outlook, can you give a little more color on how much of that is volume and revenue-related, as opposed to the other buckets you talked about in January, which were investments and structural?

Sure. So the increase from the $69 billion, which was the guidance we gave in the K, is almost entirely volume and revenue-related. And so there, I'll just make an important point that it's volume and revenue related. So as an example, volumes in CCB, just given the environment, they are very valuable for long-term franchise revenue growth, but we may not see that revenue growth in the near term. But as we always say, we don't manage this place for one quarter or even one year. So there are expenses associated with volume growth that may not have the revenue growth, you would anticipate over the long run, but it's almost entirely volume and revenue-related. There are a few other things like marketing expense that given the strength of the recovery that we expect, we now expect to lean more in on marketing expense in the second half of the year.

Okay, and I guess the follow up would be, is that necessarily mean that it's more concentrated the increase in the first quarter because you had such a big quarter? And are there COVID-related costs that you have in your numbers this year that might come out over time?

Obviously, some of it is in the first quarter, but things like further volume-related expenses, like I talked about or marketing, they're less so in the first quarter. And then what was your other question?

COVID.

Oh, those numbers are lower than they were even last year and yes included in the outlook but not material in the grand scheme of things.

Hello there. So, if you're right on the economy, which I think a lot of us think you are, we're starting to see the spend part of the pickup now, as you mentioned, across credit and debit, and some of the T&E. So my question is, how do you think about the staging of the lend part? Both consumer corporates are so flush with all that liquidity. Have you think about the timing for loan growth? And if I could get a consumer versus wholesale comment that would be great.

Sure, so you use the right word, which is demand. And it really is all about demand, which of course is quite healthy, particularly as it relates to the consumer, when you think about the amount of deleveraging that we've seen through this process. So there we do expect a second half pickup because as you say, we first have to see spend recover before we see re-levering on the consumer side. So and then it is also true even for small business, which is obviously part of CCB, their demand has been very low, given the support that's available through PPP. And so that will likely pick up in the second half as well. And then elsewhere, AWM has been strong throughout, and we see that continuing. And then on the CIB side, I mean, that's always lumpy and deal dependent. But that's active as well. And we do see within secured lending opportunities there across asset classes, again, that's a bit more opportunistic. And then in the commercial bank, given the level of support, the amount of liquidity in the markets, as well as the amount of cash on balance sheets, loan growth has been muted and probably will be for some time, but again, that's incredibly healthy ultimately for their recovery. And so whether we see that pickup later this year, or next year, remains to be seen, but it's all for good reasons.

I appreciate that. And maybe I'll just ask one follow up on the deposit side, obviously, deposit growth has been incredibly strong. So the two-parter is what do you think happens on the deposit side as the economy goes down the path that you've outlined, and what do you do with the deposit money in the meantime because I saw a loud and clear Jamie comments on it's hard to justify the price of US debt. So what we're doing with all that liquidity in the meantime?

First of all, I believe that deposits will primarily be influenced by the Fed's balance sheet, along with some impact from bank lending. Given the current demand landscape, you can expect this to be largely driven by the expansion of the Fed's balance sheet in the near term. Therefore, we anticipate significant deposit growth, which is why we've been emphasizing this point. Regarding our deployment strategy, you may have noticed that our cash balances have increased from the previous quarter. It's important to highlight that we are indeed taking a patient approach with our investment securities portfolio. Additionally, due to the steepening of the yield curve, we are less exposed to short-term fluctuations, and banks generally tend to hold longer positions during market sell-offs. This has contributed to our current dynamics, and our short-term cash deployment also plays a role here. Specifically, when repo markets dip below the interest on excess reserves, we plan to keep our short-term cash deployment in the interest on excess reserves in relation to the repo market. This will be reflected in our balance sheet as well.

Hey, Jen thanks. Good morning. Just wanted to elaborate on that. You mentioned the record investment banking pipeline, and flattish year-over-year is the best guess. So I was just wondering if you could talk about the mix dynamics there. Obviously, the first quarter was just ridiculously great in terms of the ECM markets. And can you just give us a flavor of just where you see activity? And how much is that underwriting activity, potentially dampening what might be happening on the commercial loan side?

Well, I'll start with the latter, which is, it's absolutely been very, very supportive of corporates, and therefore it has a lot to do with what we're seeing in terms of the muted loan demand from corporates. And then in terms of the mix, we expect ECM and M&A to continue. But on DCM there's a lot of flow activity that doesn't necessarily get represented in a pipeline because it's high velocity type activity. We saw that in the second quarter of last year. We continue to see that now, which is why I said it makes it a little bit difficult to predict the second quarter so that while the pipeline is higher than it's ever been, there is still a lot of high velocity activity. And so that's why we think that the quarter will be flattish year-over-year despite the very high pipeline.

Do you guys hear me?

Yes.

Because we can't hear you anymore. Oh. And I'm gonna put you on mute for a minute.

Okay. Jamie's traveling, so we have him on Zoom. I know everybody can appreciate technology challenges, because we've all had them over the last year.

Okay, great, Jen. My follow-up is regarding that topic.

Jen, just keep on going because I can't hear the questions. I can't hear you. But you're doing a great job, and you don't really need me.

Well, thank you. I'm sure I'll need you at some point. So hope they're on that. Anyway, go ahead. I'm sorry.

Yes, no problem, Jen. Okay, so the second one is just with regards to the comments that you guys have made for a while about looking at acquisition opportunities. Just wondering just how is the interplay between everything you've talked about already on balance sheet capacity, and ongoing deposit growth and limitations on CET1 and SLR versus how you make potential decisions around usage of capital and an acquisition capacity?

Yes, it's a great question. Interestingly, the issue is not that we don't have capital available to make those types of decisions. The issue is that we have the wrong binding constraints. So the binding constraint is leverage, not risk-based. And so it doesn't change the way we think about acquisitions at all. In fact, acquisitions and/or increased loan growth would help to kind of normalize the constraints between leverage and risk-based. And so we would love to be able to absorb some of our CET1 through acquisitions, because as I said, it sort of just brings the balance back into focus. The issue is that it's leverage-based constraint that is the constraint and we're in a low rate environment with low loan demand and very strong deposit growth. So it's the combination of all those things that make leverage the binding constraint. But it doesn't change the way we're thinking about acquisitions.

Hey, Jen. Hey, thanks for the time. Jen, a question on card and looking at the net charge-off. You've given us the full year of 2.5% and I know you spent a lot of time in card earlier in your career. So maybe you could give us some sense on how you're thinking about the quote unquote normalization of that loss content over time. When I think back to the bankruptcy changes in the 00's, it took many years for consumers to relapse. And I'm wondering, given your background there, could you give us a sense as to what is different this time? And are there timeframes historically we should look at or what a normal course like re-leveraging back to normal of that card loss content should be? How do you think about that?

Sure, I would say this; first of all, it's difficult to find a historical comparison that's totally relevant here. Because I don't think we've ever seen this amount of support in the system, which came, of course, on top of an already reasonably healthy consumer. So it's difficult to find the historical perspective, but I will say the 2.5%, I mean, pre-COVID, we would have thought that our loss rate in card this year would have been 3.3%, 3.5%. So it just gives you a sense there of that tailwind on credit is significant. And in terms of what it's going to take for consumers to re-lever, I mean, we do expect there to be significant economic activity in the second half. And so that could come quite naturally. But it could come a little bit later, given the amount of deleveraging we've seen. But the fact that we already see spend above pre-COVID levels, and obviously, we still have restrictions in place, particularly around T&E on consumers ability to spend. When that comes back, we do think that we'll see spend tick even higher. And that will be a point where perhaps we'll start to see that re-levering. But it is difficult to know, it's a great question.

Okay. And then the follow up I have on your comments around the NII guide. And the fact that it's hard to forecast. I got a couple of questions in this morning just on hey, why do you think it's flat versus prior guide given the curve has steepened? And also, deposit growth should continue to be up significantly given QE is continuing this full year? So is there some spread angle that you're kind of thinking about that keeps you a little bit more muted? Is it more the loan growth? Maybe you could talk a little bit about those piece parts that you identified?

Sure, I think all those factors play a role. Starting with the steepening of the yield curve, we've observed a benefit that aligns with our earnings at risk disclosure. Since our last guidance on net interest income, the curve has steepened by about 25-30 basis points, which is included in our outlook. However, this is entirely offset by ongoing consumer behavior in card payments, which shows higher payment rates, and we have yet to see a return to increased borrowing despite recovery in spending. The effects of card payments negate the advantages of the steepening yield curve. Additionally, loan growth is crucial for capitalizing on the benefits of the steepening curve. It's also important to note that we have taken a cautious approach to deploying our deposit growth into the securities portfolio regarding duration. Lastly, the marginal benefit of further deposit growth is relatively small, as deployment opportunities are limited, translating to something less than 10 basis points. Therefore, any additional deposit growth in this environment does not significantly contribute.

Hey, Jennifer. My question is for Jamie. And Jamie, your philosophy is to invest through a downturn, and you're increasing your investments by one fourth year-over-year, you already said that. But what's your philosophy about investing through a boom as you expect over the next three years? I mean, if the pie is growing, do your investments go higher? It looks like that's not the case with the guidance you guys gave.

I believe, Mike, that the impact of economic fluctuations might not be as significant as one might assume. We are focusing on opportunities, such as hiring 300 black financial advisors, an initiative we will pursue regardless of the economic climate. We are also expanding our data centers and transitioning to the cloud. Over time, our investments are likely to increase rather than decrease. We have ample organic growth opportunities that we intend to invest in.

How much are you spending on climate initiatives? Your lengthy CEO letter contained significant information about climate risk and the necessary actions to be taken. Can you specify how much you're actually investing and what the expected returns on that investment are for shareholders? Or is your focus primarily on gaining ESG reputational benefits?

So I'll start there, Mike, and then Jamie, you can chime in. But climate is a long game, obviously. And we're investing a lot of effort in our ESG initiatives, not only because they have a positive impact on society and communities, but because they're also important to our clients, customers, and our shareholders. So we don't exactly think about it that way, Mike. But we've also invested in multiple teams to help clients through the transition. And we do recognize it's a transition and clients appreciate that. We've also made the Paris aligned financing commitment last year, and we're going to release our annual ESG report next month. So you'll see more there. And then we also committed to finance $200 billion towards climate action and sustainable development. And we're continuing to grow those efforts as well. And in fact, your questions are quite timely, because we're planning to make an ambitious announcement tomorrow about long-term scaling of our financing efforts here. So much more detail to come shortly on that. But Jamie, I don't know if you want to add anything.

Hey, good morning. Maybe just maybe a question on the bank SLR which I think was a bit more of a constraint even than the Firmwide SLR? Just I guess, two questions related to that. What kind of flexibility do you have to kind of manage the difference between the two moving assets out of the bank perhaps? And then just if you have any updates or thoughts on potential changes that regulators are discussing to kind of give maybe relief 2.0 in a more permanent sense on the SLR?

The bank's SLR will generally involve the same factors, but we do have a bit more flexibility since we can move assets and inject capital into the bank from the holding company. Overall, the constraints and factors remain similar. Regarding changes, we understand the same things you do and are eager to share our proposal. It's worth noting the distinction between the US and Europe in terms of Basel relating to SLR, where Europe has a 3% plus half-year GSIB, whereas we have a constant 2% buffer. This allows for the flexibility, in a Basel-compliant manner, to exclude central bank deposits for a specific time. While it's possible that our approach might resemble this, the specifics are still undecided.

Okay, thanks.

So I think there is too much focus there. We run the business, do a great job servicing clients over time, we manage 20 years. If I, God knows how many different capital liquidity contexts. We have multiple levers to pull all the time to do that while serving our clients. If we've got to adjust our strategy going forward, so be it, we'll probably be fine. I think the question you should be asking isn't what it means for us, is what it means for the marketplace. I've already mentioned several times we have $1.5 trillion of cash and marketable securities, which we cannot deploy in a whole bunch of different ways into the marketplace with repo or just financing positions or helping people because of these constraints. So the constraints are more of a constraint on the economy than they are on JPMorgan Chase. We will find a way regardless of any constraints to do things. The other thing GSIB SLR, they're always bubble thing. They need to be recalibrated. And I think people have been asking why how would you recalibrate to do the best job for the United States and the people of United States not for JPMorgan? JPMorgan is going to be fine either way.

Hi, Jen, how are you? I apologize if you've already covered this, but could you provide some insights on the mortgage servicing business? It appears there was a small loss this quarter, similar to the fourth quarter. Can you share some metrics that contributed to the small loss in the servicing business?

Oh, gosh, Gerard. Not even sure. But Reggie and the team can follow up with you.

Okay, very good. The second question has to do with when we go back to the day one, loan loss reserves, established on January 1, 2020 for you and your peers under CECL accounting. If I recall, I think your loan loss reserves to total loans at the time were approximately 1.87%. Today, they're approximately 2.42%. I know you guys gave some color on your outlook for what you think credit will look like you being a little more conservative. But can you share with us what would it take to bring the reserves back down to the day one levels that we saw in January 1, 2020?

Well, it's very difficult to try to compare today to just taking our balance sheet today, taking the profile of our portfolio today and compare it to CECL day one, because we are very far away from that, in fact, in a very healthy way. So that's very difficult to do. What I will say is that it is true that things have continued to improve even since we closed our process in the first quarter. And we obviously expect things to be, we expect the recovery to be robust in the second half of the year. And so if we continue to see that, if we continue to see labor markets recover, if we continue to see the vaccine rollout be successful, we would have future releases from here. And but I would note importantly that the $7 billion that is the distance between our reserve and the base case is just for context, we will always have weightings on alternative scenarios. And so all else equal, which is there's a lot in the all else equal bucket. But we would release something less than $7 billion so difficult to compare back to CECL day one, but there could be further releases ahead.

Yes. One of the negatives to CECL, which I pointed out right in the beginning that we spend a lot of time on these calls describing something which is virtually irrelevant for the bank, which is these are multiple scenarios, hypothetical probability based, and obviously, the more volatile environments and more volatile these numbers, if a base case was $20 billion, and we now have something like $30 billion, we're not going to be taking down a lot of reserves now, because you're always, As Jen said, you are always going to have extreme adverse cases. Think of it like kind CCAR test, you always have a percentage of reserves up for that permanently. And so always and hopefully, I mean, my view is we should waste a lot less time on CECL that makes almost no difference to the company in general.

And then back on your servicing point, I got the answer. It's updates to the MSR model. So HPI updates, prepay updates. So it's less about the operation and more about the MSR model update.

Good morning, I wanted to ask about the CEO letter where there was talk about being open to FinTech deals, which is something you've talked about in the past. But what type of deals would you be interested in? And I guess it could be material to JPMorgan as we think about whether it's a strategy or financial impact?

We are committed to maintaining a stable dividend, but you may prefer to see us invest in organic growth and acquisitions rather than buying back shares. We are repurchasing stock because we have ample capital available. Our capital ratio stands at 13.6% in relation to risk-weighted assets, and we are generating significant profits. We are open to various opportunities that make sense for us. Recently, we acquired InstaMed, a digital payment platform for healthcare transactions, and we implemented a tax-efficient management strategy with 55 IP. We are exploring numerous opportunities, some of which we are pursuing ourselves like Dynamo, while others will involve partnerships. We have investments in around 100 companies and are open to partnerships in various areas, including payments, asset management, agency services, and data solutions. However, we are not considering anything related to US Bank. If you have any great ideas for us, please reach out.

And as the mentality in FinTech specifically is that to potentially accelerate some of the investments that you would have done on your own or to add capabilities, or maybe to protect what you already have?

We are incorporating a wide range of features like Chase My Plan, Chase My Loan, and competing with buy now pay later options. We're also enhancing Chase Offers and Zelle payments, with many exciting developments on the horizon. A couple of years back, we made investments that yielded strong results, and we are just starting to phase out Robo investing. We're broadening our capabilities comprehensively and will be introducing more personalized applications. In the payment sector, we are launching global wallets and much more. The FinTech sector has made great strides in addressing pain points, automating processes, and utilizing the cloud effectively. It's crucial for us to accelerate our cloud initiatives; currently, we have 115 significant AI projects underway, and I anticipate that number will reach 1,000 in the next five years. We're doing our best to serve our customers well. FinTech does present challenges as it attracts considerable investment and talent. I want to emphasize that I’m not advocating for increased regulations on them, as that would be detrimental to America. However, I do hope for a fair playing field regarding certain products and services. I find it unfair that a neo bank can earn significantly more from Durbin fees on small checking accounts than we do. While there are many areas of inequity, I’ll leave it to the regulators to address those issues. We are not expecting any changes, and we will adjust our strategies as needed.

Hey, Good morning. I just have a quick question. I mean, as we start to look out to forward rates and market kind of implying Fed moving somewhat in the near term or intermediate term? I mean how are you guys thinking about the positive beta this cycle and kind of what's included in your NII sensitivity both on the consumer and commercial deposits? Thanks.

So I think the way to answer is the betas have gamma mean, they change over time. And we have our best guess and numbers that Jen gave you. So obviously, the beta is going up all the time. And then it levels off.

That's right. And so the betas have gamma. Like, I'd say that if you can think of it as being nonlinear, meaning the beta for the first 100 basis points will be lower than the beta for the second and third increments of 100 basis points. And so from here, on the retail side, specifically, the first 100 basis points will be very valuable, because there is a lower beta associated with it. So that's really where we see the benefit in NII with short rates in an environment with low loan growth.

Hello, can you hear me?

Yes, we can hear you go ahead.

I have a question about the effects of negative rates at the short end of the yield curve on your entity. You briefly mentioned the IOR rate and the increase in the overnight repo rate. Would this influence your market-related net interest income, especially considering we had to raise it by five basis points? Additionally, if we see negative rates at the short end, is that already factored into your $55 billion net interest income guidance? Lastly, if negative rates at the short end occur, how might that affect loan demand? Thank you.

Sure. So I'll just start by saying while we have seen repo go negative at times, it's been orderly and so we don't expect short rates to be negative for any longer period of time or and we certainly haven't seen spikes, which is something you would worry about more. I think with the amount of capacity in the money market complex and the fact that the Fed increased their RRP facility. Now that facility is at zero, so that certainly is supportive of ensuring short rates don't go negative for any meaningful period of time, they also obviously could increase that. And then for us, I would say not a meaningful impact because obviously we have 10 basis points of IOER as an option for us. But we do trade around it.

And I would just add, the why is far more important than the number like NII, obviously, like in trading, it goes in and out, the whole thing have been equal, no, it just shows up in a different place. But if you go negative in NII because you're going back into recession, because there's a negative variance, that's a whole different issue, than if it's a temporary timing thing, I will tell you, we would expect rates moving up over time, and we expect a rather healthy and very strong economy.

Yes. And what we've seen so far on the short end is not unhealthy or something we're worried about. It's a dynamic of so much cash chasing the supply.

Hi, Jen, Jamie, morning. So just circling back to the SLR. Despite issuing $1.5 billion preferred, you saw last about 30 basis points on your SLR. I am just wondering how you think about the ratio to three quarters out from now. Whether issuing preferred and having a discussion with wholesale depositors is going to be enough to put a flow on that SLR at 5.5% or whether you can have to pull harder on those levers or have to pull hard on other levers?

Yes. So the minimum is 5%. So we have some room, naturally, we will have a buffer above the minimum as you always need to when you have binary consequences of going. So you can think about some management buffer above that. But we do still have room at 5.5%. And we do think that we can manage this at this point through issuing will be in the market again, with preferred, as well as the conversations that we've had with clients. So far, they have not been disruptive. We're hopeful that remains the case and that we can manage this.

Okay, so what's your level of concept for the buffer above the 5%? And that's my follow up. And then just another question. You gave an update, a couple of quarters ago saying that you had a buffer of, or let's say excess proficiency of about $10 billion versus your best-case scenario, economic outlook. Obviously, you've released a lot of provisions since then. Can you give an update on what that figure is now?

You can consider a buffer on the SLR of around 25 basis points. It's crucial to take into account that AOCI is something we need to consider, and its effect is that it contributes to Tier 1 capital. Therefore, having a buffer is necessary to navigate any fluctuations we may encounter. A 25 basis point buffer seems reasonable. Regarding reserves, the current distance from our base case is $7 billion. Notably, this has changed from $10 billion to $9 billion, and we've released $8 billion while still maintaining $7 billion. All scenarios are in motion. There are various factors influencing our reserves, and we've always aimed to provide context for everyone, especially during last year's uncertainty around reserve inputs. Thus, I would advise against placing too much emphasis on the $7 billion figure, as it shouldn't be viewed as available for release since we will consistently account for alternative scenarios. Even if everything unfolds as anticipated, based on the first quarter's closing numbers, it would amount to less than $7 billion.

Hi, I'm still wrestling with the deposit conundrum. So I guess your national deposit share is something like 12%. And over the last year, I think your incremental deposit share gain is 20%. And in others, the industry deposits are up around $3 trillion and your deposits are up to $600 billion. So I'm just wondering how much of that was due to QE and how much of that is due to organic growth. And maybe you can fill us in because you're building out the branches in the lower 48 states. And you're expanding commercial bankers and trying to build up all this organic growth at a time when you can't really monetize those deposits. Thanks.

Sure. So first of all, as we always say, we're running the place for the long term. And we don't expect this challenge to be a long-term challenge, maybe a short to medium term, but not a long term. And then I'll just say that, yes, there was certainly some organic growth, but it is Fed balance sheets and bank lending that create deposits. And so that's what we are focused on. And we do think given what we expect here that we can manage it. So and it certainly isn't going to change the way we think about market expansion or otherwise, is that is long-term franchise value.

I think we're observing growth in our market share across nearly all of our deposit businesses. However, the Fed's balance sheet, which increased from $500 billion to $600 billion, has a significant impact on us as a large wholesale and consumer bank. A notable part of that increase is reflected in our operations. While our new branch is performing well, its effect on overall deposits won't be as substantial as the Fed's contribution of $3 trillion to the system.

That's right.

And just a quick update on the build-out into the 48 lower states branches, you said by the middle of this year.

Yes. So we'll be in all lower 48 by the end of July. Is that right? Yes, Reggie is confirming for me. We will be in all lower 48 by the end of July. We opened about 75 branches in market expansion last year; we got a little bit slowed down by COVID. But that's going to be about 150 this year. So remain super excited about that. And all the opportunities that bring across the company not just in deposits, of course, because it brings incredible value to the commercial bank and into the private bank. And so the business case there, if you will, is not just about deposits.

Hi. Apologies for prolonging the call. I just got this question a lot on Bloomberg from investors. Just wanted to react the first question another way, it seems like we have been waiting for recalibration on the GSIB for some time now. On the other hand, clearly, the expansion of your balance sheet comes with additional revenue generation and market share taking in some opportunities. And so investors are wondering, if we don't get any sort of calibration that's meaningful, and that CET1 floor does have to move up from 12%. What is the sensitivity of the normalized, what's the outlook, if any at all if that 12% does have to move up in 50 basis points increment?

If the 12% needs to increase, it will have an impact. However, there are many factors to consider, and we can't comment definitively at this point. We have been waiting for GSIB recalibration for a long time, and it's clear that it will be part of the Basel III endgame, which we are also anticipating. There will likely be offsets that we cannot manage yet because we don't have the details. We continue to await the Basel III endgame. We believe we can handle the stress capital buffer, which is dependent on the scenario, and we aim to bring it closer to 2.5%. This would significantly help offset GSIB constraints. So, our focus is on the 12% figure until we receive more information.

And I would just add, we're going to finally try to keep at 12% and we're pretty sure we can do it. So I'm not that worried about it. But I don't know what the confusion is. If it did go up, like if we're earning 20% tangible equity, and our capital goes up by 5%. And we get no return on the 5%; our ROE goes to 19%. So I don't understand the confusion. The underlying results are still fabulous and great and you have slight low returns. But I even think that will be temporary, we will over time find strategies and tactics to get referred to the federal shareholders. But the most importantly about those returns we have a great business. Great branches, great products, great services, good margins, good service, good app, the control is good. And that's what we really build all the time. It is other stuff just managing around capitals and franchise. It's a shame that this, I mean, this is not the way to run a railroad anymore. We are spending time and are calling CECL and SLR and it's a shame and it does distract from growing the American economy. I've mentioned over and over we have $2.2 trillion deposits, $1 trillion loans, $1.5 trillion cash and marketable securities. Much of it cannot be deployed intermediate or lend. How conservative do you want to get?

No, I agree. I think the market needed to hear that. Thank you.

Thank you. Thanks everyone. Thanks, operator.

Thank you.