JPMorgan Chase & Company (JPM) — Q2 2021 Earnings Call Transcript

Thanks, operator. Good morning, everyone. Before we get going, I’d just like to say how honored I am to be on my first earnings call following the footsteps of Marianne and Jen, both of whom taught me so much during my time working for them and whose shoes will be very difficult to fill, but I'm going to try. So with that, this presentation is available on our website, and please refer to the disclaimer in the back. Starting on page one. The Firm reported net income of $11.9 billion, EPS of $3.78 on revenue of $31.4 billion and delivered a return on tangible common equity of 23%. These results include $3 billion of credit reserve releases, which I'll cover in more detail shortly. Touching on a few highlights. Combined debit and credit spend was up 45% year on year and more importantly up 22% versus the more normal pre-COVID second quarter of 2019. It was an all-time record for IB fees, up 25% year on year, driven by advisory and debt underwriting. We saw particularly strong growth in AWM with record long-term flows as well as record revenue. And finally, credit continues to be quite healthy as evidenced by our exceptionally low net charge-offs across the board. Regarding our balance sheet, the trends from recent quarters have largely continued. Deposits are up 23% year on year and 4% sequentially, and loan growth remains low, flat year-on-year and up 1% quarter-on-quarter, although we have bright spots in certain pockets, and the consumer spend trends are encouraging. So, now turning to page 2 for more detail. As I go through this page, I'm going to provide you some context about the prior-year quarter because the year-on-year comparisons are a bit noisy. So, with respect to revenue, the second quarter of 2020 was an all-time record for markets with revenue of over $9.7 billion, and we recorded approximately $700 million of gains in our bridge book. With that in mind, revenue of $31.4 billion was down $2.4 billion or 7% year-on-year. Non-interest revenue was down $1.3 billion or 7% due to the prior year items I just mentioned, partially offset by strong fee generation in Investment Banking and AWM as well as from card-related fees on higher spend. And net interest income was down $1.1 billion or 8%, driven by lower markets NII and lower balances in card. Expenses of $17.7 billion were up 4% year-on-year, largely on continued investments. And then on credit costs, going back to last year again, you will recall, in last year's second quarter, we built $8.9 billion in credit reserves during the height of the pandemic, whereas this year, we released $3 billion. So in this quarter, credit costs were a net benefit of $2.3 billion. And setting aside the reserve release, it's also worth noting that net charge-offs of just over $700 million were half of last year's second quarter number and continue to trend near historical lows. On the next page, let's go over the reserves. We released $3 billion this quarter as we grow increasingly confident about the economy in light of continued improvement in COVID, especially in the U.S. In Consumer, we released $2.6 billion, including $1.8 billion in Card and $600 million in Home Lending. And in Wholesale, we released nearly $450 million. So, this leaves us with reserves of $22.6 billion, which as a result of elevated remaining uncertainty about COVID and the shape of the economic recovery are higher than would otherwise be implied by our central economic forecasts. Now, moving to balance sheet and capital on page 4. We ended the quarter with a CET1 ratio of 13%, down slightly versus the prior quarter as net growth in retained earnings was more than offset by higher RWA across both retail and wholesale lending. This quarter also reflects the expiration of the temporary SLR exclusions. And as we anticipated, leverage is now a binding constraint. As you know, we finished CCAR a couple of weeks ago and our SCB will be 3.2%, which reflects the Board's intention to increase the dividend to $1 per share in the third quarter. Okay, now let's go to our businesses starting with Consumer & Community Banking on page 5. CCB reported net income of $5.6 billion, including reserve releases of $2.6 billion on revenue of $12.8 billion, up 3% year-on-year. Of particular note this quarter is the acceleration of card spend. And so, while card outstandings remained lower than pre-pandemic levels, this quarter's trends made us optimistic. Total debit and credit spend was up 45% year-on-year, and more importantly, up 22% versus the second quarter of '19. And within that, compared to 2019, June total spend was up 24%, indicating some healthy acceleration throughout the quarter. And travel and entertainment has really turned the corner with spend flat versus the second quarter of '19, accelerating from down 11% in April to actually up 13% in June. The rest of the CCB story remains consistent with prior quarters. Consumer and small business cash balances remain elevated, resulting in depressed loan growth. Overall loans were down 3% year-on-year from continued elevated prepayments in mortgage and on lower card outstandings, partially offset by strong growth in Auto and the impact of PPP. Home Lending and Auto continued to have strong originations with Home Lending up 64% to $40 billion, the highest quarterly figure since the third quarter of 2013, and Auto up 61% to a record $12.4 billion. Deposits were up 25% year-on-year or approximately $200 billion, and client investment assets were up 36%, driven by market appreciation and positive net flows across our advisor and digital channels. And our omnichannel strategy continues to deliver. We are more than halfway through our initial market expansion commitment as we have opened more than 200 new branches out of our goal of 400, which have exceeded our expectations by generating $7 billion in deposits and investments. And we are planning to be in all 48 contiguous states by the end of the summer. Digital trends continue to be strong as retail mobility recovers at a faster pace than branch transactions, which are still down more than 20% versus 2019. Active mobile users grew 10% year-on-year to over 42 million, and total digital transactions per engaged customer were up 12%. Expenses of $7.1 billion were up 4% year-on-year, driven by continued investments and higher volume and revenue-related expenses. Looking forward, the obvious question is the outlook for loan growth, especially in card. And we are quite optimistic that the current spend trends will convert into a resumption of loan growth through the end of this year and into next. And while we wait, the exceptionally low level of net charge-offs provides a substantial offset to the NII headwind. Next, the Corporate & Investment Bank on page 6. CIB reported net income of $5 billion and an ROE of 23% on revenue of $13.2 billion. IB fees of $3.6 billion were up 25% year-on-year and up 20% quarter-on-quarter, an all-time record, driven by advisory and debt underwriting, leading to a year-to-date global IB wallet share of 9.4% and a number 1 ranking. In advisory, we were up 52% year-on-year, benefiting from the surge in announcement activity that has continued into the second quarter. Debt underwriting fees were up 26%, driven by an active acquisition finance market, offset by lower investment-grade issuance. And in equity underwriting, fees were up 9%, primarily driven by a strong performance in IPOs. The resulting Investment Banking revenue of $3.4 billion was roughly flat year-on-year due to the headwind of the prior year's markup in the bridge book. Looking ahead to the third quarter, the pipeline remains very strong. We expect M&A activity and the IPO market to remain active. And while IB fees are likely to be down sequentially, we still expect them to be up year-on-year. Moving to markets. Total revenue was $6.8 billion, down 30% compared to an all-time record quarter last year. While normalization has been more prevalent in macro, overall, we ran above 2019 levels throughout the quarter on the back of strong client activity, outperforming our own expectations from earlier in the year. Fixed income was down 44% compared to last year's exceptional results, but up 11% compared to the second quarter of '19. Equity markets were up 13%, driven by record balances in prime as well as strong performance in cash and equity derivatives, where we matched last year's great results. Looking forward, while we expect normalization to continue across both Investment Banking and markets, and most notably in fixed income, the timing and the extent of the normalization is obviously hard to predict. Wholesale Payments revenue was $1.5 billion, up 5% driven by higher deposits and fees, largely offset by deposit margin compression. And security services revenue was $1.1 billion, down 1%, as deposit margin compression was predominantly offset by growth in deposits and fees. Expenses of $6.5 billion were down 4% year-on-year, driven by lower performance-related compensation, partially offset by higher volume-related expense. Moving to Commercial Banking on Page 7. Commercial Banking reported net income of $1.4 billion and an ROE of 23%. Revenue of $2.5 billion was up 3% year-on-year with higher Investment Banking, Lending and Wholesale Payments revenue, largely offset by lower deposit revenue and the absence of a prior year equity investment gain. Record gross Investment Banking revenue of $1.2 billion was up 37% on increased M&A and acquisition-related financing activity compared to prior year lows. Expenses of $981 million were up 10% year-on-year, driven by higher volume and revenue-related expenses and investments. Deposits of $290 billion were up 22% year-on-year as client balances remain elevated. Loans of $2.5 billion were down 12% year-on-year, driven by lower revolver utilization compared to the prior year quarter and down 1% sequentially. C&I loans were down 1% quarter-on-quarter with lower utilization, partially offset by new loan activity in the middle market. And CRE loans were down 1%, but we saw pockets of growth in affordable housing activity. Finally, credit costs were a net benefit of $377 million, driven by reserve releases with net charge-offs of only 1 basis point. And to complete our lines of business, on to Asset & Wealth Management on page 8. Asset & Wealth Management reported net income of $1.2 billion with pretax margin of 37% and an ROE of 32%. Record revenue of $4.1 billion was up 20% year-on-year as higher management fees and growth in deposit and loan balances were partially offset by deposit margin compression. Expenses of $2.6 billion were up 11% year-on-year driven by higher performance-related compensation and distribution expenses. For the quarter, net long-term inflows of $49 billion continued to be positive across all channels, with notable strength in equities, fixed income and alternatives. AUM was $3 trillion. And for the first time, overall client assets were over $4 trillion, up 21% and 25% year-on-year, respectively, driven by higher market levels and strong net inflows. And finally, loans were up 21% year-on-year, with continued strength in securities-based lending, custom lending and mortgages, while deposits were up 37%. Turning to Corporate on page 9. Corporate reported a net loss of $1.2 billion. Revenue was a loss of $1.2 billion, down $415 million year-on-year. NII was down $274 million primarily on limited deployment opportunities as deposit growth continued, and we realized $155 million of net investment securities losses in the quarter. Expenses of $515 million were up $368 million year-on-year. So with that, on page 10, the outlook. Our 2021 NII outlook of around $52.5 billion remains in line with the updated guidance we provided last month. But, as you'll note, we've also lowered our outlook for the card net charge-off rate to less than 250 basis points, which, as I mentioned in CCB, provides a meaningful offset to the NII headwind. And it's worth mentioning that the current environment makes forecasting NII even in the near term unusually challenging. So, while $52.5 billion remains our current central case, you should expect some elevated uncertainty around that number, not only because of the ongoing impact of stimulus on consumer balance sheets, but also due to volatility coming from markets, among other things. And as a reminder, most of any fluctuation in markets NII, whether up or down, is likely to be offset in NIR. On expenses, we've increased our guidance to approximately $71 billion, driven by higher volume and revenue-related expenses. So, to wrap up, we are encouraged by the continued progress against the virus and the economic recovery that is underway, especially in the United States. Although we want to acknowledge the challenges that much of the rest of the world is facing and we're hopeful that a global recovery will follow closely behind. Our performance this quarter once again showcases the power of our diversified business model as headwinds in NII from consumer delevering are offset by strong fee generation across AWM and CIB, and exceptionally low net charge-offs across the board. While we're proud of the performance of the Company and of our people through the crisis, the competition in every business from banks, fintechs and others is as intense as ever. So, as we look forward to an increasingly normal environment, we are enthusiastically focused on competing for every piece of share in every market, product and business where we operate and making the necessary investments to win. With that, operator, please open the line for Q&A.

Hi Glenn.

Hi there. Hi Jeremy. Welcome. Welcome to the party.

Thank you very much.

Question on NII if I could, and I apologize if it's a little multifaceted. But so even though we're getting some inflationary data and you're possibly inclined on economy as it might, rates fell. I'm not sure you want to opine on why, but let's talk about you kept the NII guide, I'm assuming, because deposit growth is strong. Curious your thoughts on consumer payment rates staying at this elevated level, deposit growth staying at this elevated level? And then most importantly, if you're managing the balance sheet any differently, meaning you had been slow playing putting money to work, rates are even lower now, are you still slow playing putting money to work? I appreciate it. Thanks.

Yes. Thanks, Glenn. All right. So, let's sort of take that in parts. So, in terms of our NII guidance, so yes, so we're reiterating $52.5 billion for the full year. So, just to take your deployment point first, obviously, rates are a little bit lower, long-end rates are a bit lower. The curve has flattened a little bit since we provided that guidance. But when we provided that guidance, we were reasonably conservative in our deployment assumptions through the rest of the year. So, as a result of that, it's not really a meaningful factor sort of at the level of precision that we’re talking about here. In terms of the consumer side, as you say, obviously it's really card is really going to be the big driver. So, you heard us talking about payment rates, and you see the sequential growth in card loans. So, we do believe that the sort of acceleration in the pickup in spend is going to translate to, as I say, a resumption of loan growth in card. But, we do think that pay rates are going to remain quite elevated at a minimum through the end of this year. So, as a result, we don't really see revolving interest-bearing balances increasing meaningfully this year. And so, as a result, that remains a headwind for the overall NII for this year, which is incorporated in the outlook.

Okay. And then, in terms of managing the balance sheet any differently in terms of putting money to work, are you still conservative on that front?

Yes, I think we've discussed this before. Our primary outlook from an economic standpoint anticipates a strong recovery, which aligns with the consensus view shared by our team, the Fed, and others. This perspective suggests higher inflation, in line with the Fed's targets for inflation. Together, these factors indicate a trend toward increased rates, all else being equal. Given this, we are committed to maintaining our patience. Regarding our EIR disclosure, although it won't be available until the Q report, some of you have reported on it recently, and our overall sensitivities align with industry standards. When considering the various complex factors related to our balance sheet, we still believe that exercising patience is the right approach.

Okay. And just one quickie on the recent both acquisitions and investments, and you or Jamie could feel free to take it. I'm curious on A, big picture, is it just coincidence that there's been five things within a very short period of time? And maybe if you want to expand on maybe net mix specifically and why the change in terms of shying away from international expansion in the past and now making a little bit better move in. I appreciate it. Thanks.

Sure, Glenn. So, let me start with the international expansion point on the consumer side because that's interesting. You've heard Jamie over the years talk about why it wouldn't really make sense to do international expansion in consumer when you think about that through the lens of branch-based strategy. So, if you imagine, going outside of the U.S. and opening branches in other countries and competing with the incumbents, just from a branding perspective, from an operating leverage perspective, we've never felt that, that was likely to be a successful strategy for us, and that hasn't really changed. The difference right now is the ability to do that digitally. So, what's really particularly exciting about the international expansion narrative both in the UK and now with our recent investment in C6 in Brazil, is the ability to kind of experiment a little bit. Obviously, it's a strategically compelling opportunity. Brazil, as you probably know, is like the third biggest consumer banking market in the world, but it's kind of fun to be the disruptor. And so, I think for us, given our position in consumer banking in the United States, being in a place where we are actually the outsider disrupting through these kind of digital channels, we see it among other things, in addition to being compelling financially, as a really good opportunity to learn and to challenge ourselves a little bit from the inside. So, we're very excited about that stuff.

Good morning, Jeremy. I wanted to ask you about capital. You mentioned leverage is now the binding constraint. And Jen has previously talked about a 12% CET1 target. I guess, could you talk about the multiple variables that you're balancing as you guys decide what capital levels to run at? You've got a rising G-SIB score, an SLR cushion that's shrinking, but maybe the rules get revised. And obviously, in SCB, that came down a little bit, but maybe you're hoping for more. How are you wrapping that all together into what kind of capital levels to target?

Yes, that's a good question, and there are many factors to consider. Regarding the 12% target, it's not completely off the table, indicating that we might not necessarily need to aim higher. However, the timing is also crucial, so let's break down a few elements. You're aware of the GSIB point. As of last year, we are in the 4% category, which comes into effect in 2023, and we're currently operating at 4.5. That's a seasonal figure, so it's still feasible to drop below 4.5 by year-end, but we should recognize a higher likelihood of finishing at 4.5 this year. This level will be binding in 2024. In the meantime, we are subject to the SLR regulations. We've been transparent about our views, especially regarding how our capital requirements are increasingly influenced by non-risk sensitive size-based measures intended as backstops, as acknowledged by the Fed. Currently, our priority is to remain flexible while waiting for updates on conditions like SLR, which we expect some information on, and also regarding possible adjustments to the G-SIB as part of the Basel III final implementation. A lot will unfold before those minimums become enforced. For now, we anticipate operating above 12% mainly due to the leverage limit. We're managing various factors and will aim to stay adaptable as more details emerge in the upcoming quarters.

If I could make a further point, we have tons of capital, $200 billion of CET1, $35 billion of preferred, $300 billion of long-term debt, only $1 trillion of loans, which is the riskiest asset we have, and $1.5 trillion of cash and marketable securities. So, the underlying thing is there's just tons of capital in the system. And I think one day, if you’re going to look at and say, why so much, to the liquid side.

Yes. And then, a quick follow-up, Jeremy, on expenses. You revised the fiscal year '21 outlook upward a few times now. Could you give a little more detail on the business volumes and revenues that are driving this? And also, we hear a lot about inflation across the economy. Are we seeing broader inflation play a role in your Company's expenses and outlook?

Yes. So, a couple of things there. We have revised up from 70 to 71, with the biggest driver being volume and revenue-related expenses. It's challenging, but we will remain competitive in compensation regardless of the circumstances. It is a little bit of comp. It's also transaction-related volumes. It's also marketing expense in certain pockets. So, it's all the stuff that fits in the category of volume and revenue-related. And I think the point is obviously, we're all a little bit focused on the NII headwinds right now. But from an NIR perspective, across markets, AWM, IB, CIB in general and even pockets, wealth management and CCB, we're actually outperforming the revenue expectations that were built into our prior expense guidance. So that's kind of the dynamic there. In terms of inflation, I would say that we're not seeing inflation in our actuals. But obviously, your guess is as good as mine in terms of the future, but it would be reasonable to assume that that's going to be a little bit of a challenge to a greater or lesser degree if the economy as a whole is in a slightly higher inflationary environment. And we did probably include a little bit of that expectation in the 71 for this year.

Jeremy, I want to follow up on your comments about capital. You provided clarity on the dividend, and we are aware of the $30 billion open authorization for the buyback. How do you plan to balance the size of the buyback moving forward with the ongoing growth in our balance sheet, considering the limitations you mentioned? Thank you.

Yes. So I mean the answer to how we balance it is we talk about it a lot. We have a lot of smart people looking at it, trying to balance all the different constraints that we're managing. And I think Jen talked before, especially when it comes to the balance between our risk-based minimums and the SLR constraint, which, as you know, we can address with pref, so about kind of the mixture of prefs and common. So, we're looking at that. I think RRP is helping a little bit on the deposit growth side, which helps a little bit with the management of SLR. But, as I said previously, we're going to stay nimble there and use the tools at our disposal to try to strike the right balance between buybacks and pref issuance, recognizing that overissuing prefs potentially locks us into high-cost prefs with low flexibility because of the five-year lockout. So, there's a lot of balancing there, and we're just staying nimble as information potentially trickles out on the evolution of the rules.

Okay. And then, just so then as far as how you guys will communicate, we'll just find out about the buyback on a quarterly basis as opposed to you giving a more broad outlook of your expectations around buybacks as it happened more in the past. Is that fair?

Yes. I think that's right, especially in the new environment that we're operating in from a buyback perspective, now that it's not sort of an approved plan through CCAR, but it’s rather than just the overall $30 billion Board authorization. Given what I just talked about in terms of the need to stay nimble across multiple constraints, we wouldn't want to box ourselves in by speaking publicly ahead of time in terms of what we're going to do, so. And you know, obviously, our normal capital here. At the end of the day, we're always going to invest first and look at interesting acquisitions and pay a sustainable dividend. And at the end of that, we'll look at buybacks in the context of all the other factors.

Yes. We can probably give you a more definitive thing after they finish Basel III, which is now 10 years in the making and SLR and all the updates, and then you'll have more certainty about how this is going to operate going forward.

Maybe just a follow-up on the card business. You had 7% quarter-over-quarter growth in balances, but I think your guidance was still a little cautious. Is that just being conservative, you're still not sure about the relationship between spend and balance growth, or how do we think about the good quarter and sort of that cautious outlook?

Yes. So, I wouldn't use the word conservative. We've tried very hard in our outlook to give you central case numbers. So, we're going to be wrong, but hopefully, it will be wrong symmetrically. So, we really want to try hard to give you central case numbers that don't have baseless optimism or unnecessary conservatism in them. So, the point that you highlight, the sort of apparent disconnect between the sequential increase in card loans and the relatively muted NII outlook is really just about pay rates. So, we continue to see very elevated pay rates by historical standards really highly unusual as a result of some of the themes that we've called out in terms of the strength of the consumer balance sheet. So, as long as that's true, and we're seeing sort of unusually low conversion of spend into revolving balances, that's going to be a little bit of an NII headwind until the consumer starts to re-lever, which we do think will happen. We just don't think it's likely to be a meaningful effect this year.

That's fair. And then, on the charge-offs, that's obviously been a big benefit. I think if we look at delinquencies, both early stage and later stage, they kept falling throughout the quarter. Is there anything unusual this quarter where we saw a pretty big drop? Should we expect further declines in NCOs as the year progresses, given delinquency trends?

Yes. So, I think on charge-offs, I would just stick to the updated card guidance that we gave, which is lower, just saying there's going to be below 2.5. But again, it's the same themes, right? Like elevated cash buffers in consumers are resulting in exceptionally strong NCO performance and sort of upside surprises in terms of people paying. So, there's sort of two sides of the same coin right now, lower revolving balances, better NCOS. And then, as we continue returning to normal, presumably in 2022, we should see both of those come back slightly to historical trends.

Hey, Jeremy, welcome. I want to follow up on a question that Glenn asked Jamie. I'm going to try again. I’ve counted eight acquisitions since December. Jamie, what is the strategy behind these acquisitions? Is it to tap into new markets as Jeremy mentioned, to reduce costs, to scale across millions of customers, or are you aiming to connect some of these acquisitions like Nutmeg with Kraft Analytics, MaxX, C6 Bank, OpenInvest, and 55ip? Are you trying to make 1 plus 1 plus 1 equal more than 3 by introducing these companies and people to each other, creating a modern digital banking experience, or is that too ambitious? What is the overall plan here?

There's a smart analyst who referred to it as a string of pearls, and I agree with that perspective. In asset management, Campbell is focusing on managing lumber assets, which will be beneficial for this sector. The tax-efficient management provided by 55ip is noteworthy. Additionally, Nutmeg and our initiatives in the UK will be connected, allowing us to offer consumers a comprehensive digital product range that includes deposits, small business services, and eventually lending and investment opportunities on a global scale. C6 is another important player, as Jeremy highlighted its significant market potential. We are exploring opportunities in adjacent areas, whether that's data or management. Some of these ventures may have a lower valuation for us. In terms of retail and international digital expansion, we are taking a measured approach and are committed to developing something unique compared to our operations in the United States. We are also looking into cxLoyalty and its travel services, and it's important to note our existing size in the travel sector. We aim to enhance our offerings and capabilities for our clients with travel packages, among other services, as we are already among the largest travel companies in the United States. Overall, we are constantly seeking new opportunities, and while some initiatives may not succeed, that is part of the process.

Mike, the only thing I would add is there's a couple of themes that to me come through some of the things that we've done recently. One of them is ESG. You see that especially in the AWM deals. And the other is just improving the customer experience, whether it's through various fintech deals or cxLoyalty, customer experience is a key priority for us. And we want to have all the tools necessary to deliver that.

We are investing significantly in building new products and services that will be launched across the Company in each quarter over the next two years. I believe these offerings are exciting, highly effective, increasingly integrated, user-friendly, and geared towards enhancing the customer experience. We are engaged in various initiatives, and we encourage you to proceed with your questions.

Go ahead, Mike.

As a follow-up to your comments about disruption, it's intriguing to note the increasing competition in the UK from fintech, big tech, and retail companies since your CEO letter, Jamie. This is a concern that likely arises for everyone on this call. Are you facing potential disintermediation over the next five years given the ramp-up of these competitors? Also, with the executive order from the White House possibly requiring data sharing, what is your current assessment of the threat from outside the banking sector to your business?

Yes, I don’t notice anything different since I wrote the letter. We face significant competition in banking, shadow banking, fintech, big tech, and even from Walmart. The landscape is always shifting, but we possess strong brands, capabilities, products, services, market share, and profitability. I believe some of these competitors will perform well, and many will be successful over time. This is simply part of American capitalism, and I am confident we will do well. I also think there will always be a substantial number of people in the banking sector, looking ahead over the next 5, 10, or 15 years. One day, we'll witness cases where shadow banks might eventually become just shadows themselves.

We're working hard to make sure that we're offering services that are not disruptible because they're good. So if our clients are happy, and we're providing them a great experience, then there's nothing to disrupt.

I guess just sticking with the digital strategy. We heard Jamie talk about multiple times around the lack of imagination that cost the banking industry in terms of either payments or buy now pay later, and you talked about your international expansion. But again, going back to Mike's point, as shareholders of banks in the U.S., should the expectation be that banks will be fast followers of what fintech comes up with and replicating that, given the risk of cannibalizing your own sort of revenue set, or do we expect or do you think we should expect more disruptive innovation coming from banks in the United States on consumer banking?

I think it's both. It's not an either/or question. A lot of these banks, including Bank of America, have performed well with digital products. When I mention a lack of imagination, I’m referring to the entire Company. We could have envisioned more of why they might become competitors in the future. Some of these competitors are quite strong. Companies like Bobby and Eaton start with a single product or service, gain customers, and find ways to monetize their offerings. We need to adopt a more forward-looking approach regarding active participants in the market. In our case, it will encompass a bit of everything.

Yes, I would say that we've moved beyond the idea of cannibalization and fast following. There are times when we will have the initial idea and be eager to innovate, and there are times when someone else may have the initial idea and we will be quick to adopt it. However, avoiding actions that make sense for the customer due to concerns about cannibalizing our own revenue can lead to becoming irrelevant.

We don't enjoy taking away from our own revenue. Keep that in mind. We'll make the right decisions when necessary. Occasionally, we may fall short in our day-to-day operations, but we'll ensure we do what's right. If you consider the company, especially the shifts we've seen with SLR and CS, and examine the flows through our operations—debit and credit cards, trading activities, market share—this is why I focus more on the overall health rather than the fluctuations in this quarter's earnings due to CECL. I believe this does not reflect the company's future. Our bankers, traders, credit card services, debit card operations, merchant services, auto sector, and digital platforms are performing well. Based on what I read, the company is doing quite well. While we strive to be self-critical, I think it's essential for companies to assess their shortcomings alongside competitors' successes. We're prepared, and we have a realistic view of the competitive landscape. It is extensive and will be challenging. This doesn't guarantee victory for JPMorgan; we remain aware of that.

And I agree and I think banks don't do talk enough about client acquisitions and market share. So, I agree with you there. Just as a follow-up, Jamie, very quickly. There's some questions around like peak inflation, peak growth. I know you guys are very bullish. Compare and contrast how the world looks to you today versus back in 2011 when we came out of the financial crisis and the risk of GDP growth disappointing over the next few years?

I believe the current situation is fundamentally different. Following the financial crisis of 2009, the world was severely overleveraged, with some investment banks at 40 times leverage, unlike JPMorgan, which didn't require assistance or any form of help. Many banks, including Lehman Brothers, Baird, Goldman Sachs, Morgan Stanley, and several overseas banks like Dexia, went bankrupt. Hedge funds were continuously deleveraging, and there were significant mortgage losses ranging from $0.5 trillion to $1 trillion recognized across balance sheets and derivatives. The entire financial landscape was steeped in deleveraging; consumers and companies were both heavily leveraged. The bridge loan market on Wall Street stood at $400 billion then compared to around $60 billion today. In the current climate, much of the talk regarding declining loans relates to consumer behavior. Consumers are in a better position now; their home values, stock prices, incomes, savings, and confidence have all increased. The pandemic seems to be receding, and consumers are eager to engage in the market, as reflected in rising home prices and auto purchases, despite some supply constraints. Businesses are also in good standing, no longer overleveraged. While corporate debt levels are higher than before, so is corporate cash, and middle-market losses are nearly nonexistent, with significant unused revolving credit available. Once the economy begins to grow, I expect to see an increase in lending due to rising inventory, receivables, and capital expenditures. The current environment is entirely different, with fiscal policy essentially on autopilot; much funding remains unspent, and additional stimulus measures are anticipated. So far, quantitative easing has been modest at around $220 million a month, but I am optimistic that this could lead to a robust economy. While we are uncertain about the duration of this growth, there are inflationary pressures to consider. I envision a scenario where inflation rises, bond yields increase, yet growth remains strong. The latter half of the year could experience remarkable growth, perhaps even stronger than ever for the U.S., while Europe's growth may lag by about six months. The economy could continue this upward trend into next year, potentially elevating 10-year bond yields to 3%, and significant growth despite these rates is possible. Job availability is high, wages are increasing, and those are all positive indicators. Although inflation may exceed expectations and not be entirely temporary, strong growth could still prevail despite these challenges.

Yes. There are always risks in any environment, but the risks in this one I think are quite different from the ones that we had coming out of the global financial crisis.

So, I wanted to start off with just a follow-up question on card NII. Jeremy, you did strike an optimistic tone on the higher spend trends and the potential for future NII tailwind as payment rates start to normalize. And just looking at the card revenue rate, given there are another of inputs in that metric, I was hoping you could just help us isolate the potential NII benefit versus the current baseline from a normalization in payment rate. So, just the payment rate normalizing, what would be the incremental step-up in the quarterly NII run rate?

Okay. So, there's a lot of pieces in that question. So first, let's talk about the revenue rate. So, a couple of things. So, in terms of the NII, we don't really see a meaningful uptick in card NII happening this year. Like you might maybe see a tiny bit of it sequentially fourth quarter versus third quarter, but I think it's going to be pretty hard to see. So, I think you want to be thinking about that as a 2022 effect. I'm not going to get into guiding on revenue rate for 2022. And I will actually point out that we're in the market right now competing aggressively with some great offers, and I'm happy to say actually the client acquisition in card is going great and we're seeing great uptake on the offers. But that comes with a bit of elevated marketing expense. So, as I look out to next quarter, you might actually see a bit of a dip in the revenue rate just because of the way the accounting works there.

Okay. And for my follow-up, Jeremy, I just wanted to ask or at least hone in on one comment you made, where you said you could potentially still manage to a 12% capital target. I was just trying to better understand how much capital cushion you are looking to manage to under the SEB? And if the G-SIB surcharge is not recalibrated, where do you think you'll have to run on a steady-state basis just because it feels like waiting for to go, we haven't seen any changes on the recalibration front, specifically with the G-SIB surcharge.

Yes. Okay. So basically, that's a question about the management buffer and a question about what we would do in a world where G-SIB doesn't get recalibrated. And a world where GSIB doesn't get recalibrated is a world where our capital minimums are quite a bit higher, starting in 2023. We obviously disagree with that. We don't think it makes any sense at all, given that a big part of the driver of that increase in the amount of capital that we would have. And as Jamie pointed out earlier, both we and the system are really flushed with capital, and the regulators have been pretty clear that there's enough capital in the system right now, and that growth would increase that amount quite a bit for us and for everyone else. So, that's a big part of the reason why we've been so vocal for so long about the need to recalibrate that. And I think we see some of our competitors making those points, too, as they start to creep up into higher buckets. And to be fair, the Fed has acknowledged that this is a thing that used to get fixed. It's just that they're kind of busy trying to get the Basel III end game put in place in the U.S. rules, which brings particular complexities in light of the Collins floor.

Can I just add to this? I've always thought that the G-SIB calculation is one of the most absurd things I've ever encountered. Now we've doubled it. European banks have many disadvantages; for instance, they can't have the regulators expand across Europe. However, they do have the benefit of having about half the G-SIB. Still, I believe that it's not right for America to double what I see as an artificially inflated number in the long run. Let's wait to see what the new rules are before we answer that question. There's no need to guess what will happen.

Yes. The key point is that in the short term, we are constrained by leverage, which is our current focus. This is the main issue we want to resolve, as it impacts our management of the balance sheet in a way that seems illogical and will ultimately lead to increased costs that affect the broader economy. Regarding buffers, once everything settles and we return to risk-based constraints, we can better discuss the appropriate management buffers in a system we believe is essential. We've discussed the need to destigmatize the use of buffers, particularly in the money market sector, where guidelines suggest buffers are available for use, but they are often treated as minimums. This treatment creates brittleness in the system, making it more procyclical than desired. In the future, when stability is restored, the conversation around buffers may become more relevant, but for now, the focus is primarily on the SLR.

And remember, there's a significant buffer of $40 billion in pretax earnings each year. It's a substantial cushion that allows flexibility in future capital decisions, whether it's stock buybacks or not. We have many options, and no matter what occurs, we will find a way to perform well for our shareholders.

I want to circle back on costs. Obviously, this year, some of it is driven by the stronger-than-expected fees. Some of it is the inflationary pressures you mentioned. Some is I think discretionary, as you pointed out in the past, accelerating some investment spend. But, the question is, as we exit this year, when we look back on costs from 2021 and say they're a little bloated because of all those factors, or is this going to be a good base year to grow off of going forward?

Okay. So, there are a few points to address. Let's talk about the term bloated. You've heard Jamie discuss costs before, right? We consistently target everything. We seek out waste and strive to avoid being burdened and wasting resources. This is an ongoing commitment that requires effort. We look for inefficiencies everywhere. Therefore, I want to emphasize that bloated is not an appropriate term for us. We've invested considerable time analyzing the workings of this organization, and I firmly believe that assertion is inaccurate. I don't think any of our spending this year can be deemed wasteful. In fact, the major driver behind our spending patterns is the investments we are making, particularly in technology, customer experience, and enhancing the overall efficiency of the company, including technology modernization and data center improvements. As we think about 2022, I prefer not to provide specific expense guidance at this moment. It’s important to differentiate between the cost components that are tied to volume and revenue and those that relate to structural and investment costs, as we've discussed previously. Thus, unpacking this year’s components to project into the future is somewhat complex.

If we can find more good money to spend, we're going to spend it. I mentioned that there are useful expenses. When it comes to credit card spending, we invest significantly in marketing, and the returns are very positive. If we can hire excellent bankers, we will invest in that as well. We've spent $200 million on new data centers, which will greatly benefit us in the future. Our management approach isn't about providing analysts with a fixed expense number; that would be an ineffective way to run a company. Similarly, revenue can be unpredictable. We are aware of the risks associated with our businesses. Therefore, we focus considerable time on distinguishing between good and bad revenue, as well as good expenses and debt expenses. This understanding will drive the franchise for the next 5 to 10 years.

Understood. And then separately, as we think about capital allocation kind of longer-term, is there a thought to more meaningfully increase the dividend payout? I mean, as you saw at the beginning of the COVID crisis, buybacks were suspended, after stocks dropped sharply, banks couldn't repurchase until they roughly doubled. But dividends were maintained. And obviously, your pretax earnings power that you alluded to is very strong. It seems like that soft 30% cap has gone, obviously. So, just thoughts, it's not going to happen all in maybe one CCAR cycle, but if we do get a multiyear economic recovery, is your thoughts of pushing the dividend higher maybe closer to like a 50% payout?

Probably not. Firstly, we aimed for a dividend that remains sustainable even during tough times, and we really want to achieve that. This situation kind of demonstrates that. It was a very minor issue compared to capital retention. However, we are focused on investing in our future and growth. We don't want to raise the dividend so high that it limits our ability to pursue other priorities.

Yes. The way the capital buffer connects to this matter is clear. One reason we're at 3.2 instead of 3.1 is the $0.10 increase that the Board has announced its intention to implement.

And if I owned 100% of the Company, there would be no dividend.

Can you share with us your thoughts on the net interest margin in the quarter? It clearly faced some pressure. Assuming rates remain unchanged over the next 6 to 12 months, with the long end staying where it is, when do you think the average yield on your interest-earning assets will begin to stabilize or potentially increase? This would be related to new business volume matching or surpassing the interest rates of products that are exiting the balance sheet.

Yes. Good question, Gerard. So, I mean, I guess one way to think about your question is whether we basically think that NIM has hit the bottom in this quarter. And I think we've all learned the lesson that calling the bottom is a very dangerous thing. And I would also point out, and I would direct you to like the last page of our supplement, I'm not going to give you a big speech on markets NII, which is my favorite topic and why that is really a sort of a distraction that we shouldn't look at, maybe a little bit about next quarter. But we do have that disclosure where we split out total NII and markets NII as well as NIM excluding markets. And the reason I raised that is that, yes, your overall mental model is not wrong. It's reasonable to think that NIM might stabilize around these levels. But it's noisy, and the markets numbers in there, and that's going to add noise. And also, I would say right now, there's an unusual amount of numerator, denominator type effects. So whatever winds up being true about the numerator, you also have quite a bit of volatility in the denominator there, which is one of the reasons that we obviously don't manage to that number as you've heard us say before. But your overall frame, it sounds reasonable to me.

Very good. And then, as a follow-up, and I may have misheard you, so correct me if I'm wrong. But I think you said that the higher level of noninterest expense, the outlook that is, was really driven by the improved outlook for noninterest income. Can you give us any color on that part of it, the outlook for noninterest income improvement?

Some of the information is based on actual results and some is part of the outlook. However, at a high level, the key point to note is the current mix of revenue within the company has some offsetting factors. We are facing headwinds in net interest income due to consumer deleveraging, as previously mentioned. Nonetheless, this quarter's results in corporate investment banking and asset and wealth management showed outstanding performance in banking and wealth management. Although market results are down compared to last year, they are actually significantly higher than our expectations for increased expense guidance. That summarizes how everything fits together.

I appreciate it. Thank you.

You want some of these expenses to go up because that means that good revenues are going up.

Indeed.

I had a couple of questions. One was regarding the outlook for net interest income, which you indicated is $52.5 billion, dependent on market conditions. Can you provide some insight into how you are assessing those market conditions? What would be the indicators for potentially exceeding expectations versus a decline? I ask this in light of your recent shift in the securities book from available-for-sale to held-to-maturity, which suggests you may be waiting for a significant increase in rates before engaging in that yield curve strategy. Could you clarify your comments about market conditions and your perspective on that?

Sure. So, let's go through that for a second. So, I said I wasn't going to give my big markets NII speech until next quarter, but I can't resist. So, you talk about market conditions, the markets NII component of that NII outlook includes things like the extent to which we have spec pools versus TBA, is the extent to which we have futures versus cash and high rate countries like Brazil, the growth in prime brokerage balances. The common theme across all of these is there are situations where you're deploying balance sheet in the markets business to serve clients. And that's profitable deployment on a spread basis, but there's quite a bit of gross up between the kind of non-derivative piece of it and a derivative or derivative-like piece of it, where the derivative piece of it doesn't have any NII, and the non-derivative piece of it does. So, every unit of that sort of activity that you do creates a significant swing in the NII number, either up or down, with very little impact to the bottom line. Now that's not the entirety of the market story. There are parts of the markets business where we're actually doing more...

The market, not the market...

No, I understand. However, part of the market-dependent comment is that I don't have markets. I'll address the other point shortly, and I'm almost finished with my remarks. You get the idea. So, that's one aspect of fluctuation. Moving to your other question regarding AFS and HTM, which essentially asks what would lead us to invest more in a higher rate environment. The AFS and HTM changes you've noticed are mainly about managing capital within various constraints while retaining the necessary flexibility for deployment. Currently, due to the cash balances, AFS and HTM remain limited regarding duration purchases. We have enough flexibility for tactical short-term cash deployment, as we always do. To summarize, as we've mentioned before, we're optimistic about the economy, anticipating higher inflation and consequently higher rates. With that in mind, we are prepared to be patient for now. When the situation changes and we choose to invest more, you'll see that reflected in the future.

And just a simple way to think about it, the 52.5 other than the markets business, which goes up or down, if rates go up, you do see our earnings at risk disclosure, we will earn more NII, all things being equal, which of course they never are, but all the deal. And in addition to that, we can make decisions to deploy more money for more NII.

It's interesting versus when you were at our conference, Jamie, but it seems like the 52.5 is more a function of the curve, given the fact that card did, it looks like better than you had thought at that time in the middle of June, based on your comments about spend being up so much. But, the...

Betsy, I apologize for interrupting, but I want to address that point for a moment because I believe someone else has a similar query. I want to remind you that we are witnessing significant sequential growth in card loans driven by increased spending. However, the main concern is the revolving behavior. Our perspective on this hasn't changed, and we are observing higher pay rates due to cash buffers, which continues to be the consistent reason for our cautious outlook this year.

Yes. No, I totally get that.

I don't want to correct anyone here, but I personally think you'll see it go up by the end of the year, okay? I think, we'll be a little conservative on that because of all the spend and stuff like that. But we hate guessing. What I look at much more is how many cards you have? How much spend do you have? How many happy customers do you have? NII will take care of itself.

And on that front, your card fees were quite good, right? You mentioned that in your press release. Maybe you can give us a sense as to the drivers? Is that new openings? Is that basically what it is? How sustainable is that? Because that was a bit of an upside surprise in this result, the card fees?

Yes, I think it really comes down to spending. We can provide more details if needed, and Reggie can follow up. But overall, the card fee figures are mainly influenced by the terms of spending.

Okay. And then, just one last if I can squeeze it in. Your VAR came down significantly. Can you give us a sense as to what's going on there?

Yes. I mean, that's just the volatility of last year's prior quarter coming out of the time series, right, if you think about it.

At the end, I just wanted to thank Jen Piepszak for her excellent work as CFO. You'll also know she's excited about her new job in Wisconsin. Jeremy, many of you are familiar with him, but he has been the CFO of Investment Banking for about eight years, making him a seasoned professional. So, Jeremy, welcome to your first call, and congratulations.

Thank you, Jamie.

Also talk to you all soon. Thank you.

Well, I survived it.