JPMorgan Chase & Company (JPM) — Q2 2022 Earnings Call Transcript

Thanks, operator. Good morning, everyone. The presentation is available on our website, and please refer to the disclaimer in the back. Starting on page 1. The Firm reported net income of $8.6 billion, EPS of $2.76 on revenue of $31.6 billion and delivered an ROTCE of 17%. Touching on a few highlights. We had another quarter of strong performance in Markets, which generated revenue of nearly $8 billion. Credit is still quite healthy, and net charge-offs remain historically low. There continue to be positive trends in loan growth across our businesses, with average loans up 7% year-on-year and 2% quarter-on-quarter. On page 2, we have some more detail. Revenue of $31.6 billion was up $235 million or 1% year-on-year. NII ex Markets was up $2.8 billion or 26%, driven by higher rates and balance sheet growth. NIR ex Markets was down $3.6 billion or 26%, largely driven by lower IB fees and higher card acquisition costs, and Markets revenue was up $1 billion or 15% year-on-year. Expenses of $18.7 billion were up $1.1 billion or 6% year-on-year, predominantly on higher investments and structural expenses, partially offset by lower volume and revenue-related expenses. Credit costs were $1.1 billion, which included net charge-offs of $657 million and reserve builds of $428 million, reflecting loan growth as well as a modest deterioration in the economic outlook. On to balance sheet and capital on page 3. Let's start by talking about our plans for capital management over the coming quarters. The new 4% SCB will raise our standardized CET1 requirement to 12% effective in the fourth quarter, and the 4% G-SIB effective in 1Q ‘23 further raises this requirement to 12.5%. At Investor Day, we said that we expected SCB to be higher and made it clear that in the near term, share buybacks would be significantly reduced in order to build capital for the increased requirements. In light of the SCB coming in even higher than expected, we have paused buybacks for the near term. As we discussed at Investor Day and as we show at the bottom of this presentation page, our organic capital generation allows us to rapidly build capital in excess of future requirements with a current target of roughly 12.5% in the fourth quarter. Any excess over the regulatory requirements offers us protection against a range of economic scenarios with room to deploy capital in line with our strategic priorities. We have a long established track record of balance sheet discipline across the Company, and this quarter’s RWA reduction shows evidence of this discipline. Turning to this quarter’s results, you can see that our CET1 ratio of 12.2% is up 30 basis points from the prior quarter. Our RWA was down approximately $44 billion with growth in franchise lending being more than offset by the combination of active balance sheet management and the normalization of market risk RWA from the first quarter. CET1 capital was slightly down as earnings were offset by distributions and the impact of AOCI drawdowns in our AFS portfolio. Now let’s go to our businesses, starting with Consumer & Community Banking on page 4. Before I review CCB’s performance, let me touch on what we’re seeing in our data regarding the health of the U.S. consumer. Spend is still healthy with combined debit and credit spend up 15% year-on-year. We see the impact of inflation and higher nondiscretionary spend across income segments. Notably, the average consumer is spending 35% more year-on-year on gas and approximately 6% more on recurring bills and other nondiscretionary categories. At the same time, we have yet to observe a pullback in discretionary spending, including in the lower income segments, with travel and dining growing a robust 34% year-on-year overall. And with spending growing faster than incomes, median deposit balances are down across income segments for the first time since the pandemic started, though cash buffers still remain elevated. With that as a backdrop, this quarter, CCB reported net income of $3.1 billion on revenue of $12.6 billion, which was down 1% year-on-year. In Consumer and Business Banking, revenue was up 9% year-on-year, driven by growth in deposits. Deposits were up 13% year-on-year and 2% quarter-on-quarter. Client investment assets were down 7% year-on-year, driven by market performance, partially offset by flows. Home Lending revenue was down 26% year-on-year as the rate environment drove both lower production revenue and tighter spreads, partially offset by higher net servicing revenue. Mortgage origination volume of $22 billion was down 45%. Moving to Card & Auto, revenue was down 6% year-on-year, reflecting higher acquisition costs on strong new card account originations and lower auto lease income, largely offset by higher card NII. Card outstandings were up 16%, and revolving balances were up 9%. In auto, originations were $7 billion, down 44% from record levels a year ago due to continued lack of vehicle supply and rising rates, while loans were up 2%. Expenses of $7.7 billion were up 9% year-on-year driven by higher investments and structural expenses, partially offset by lower volume and revenue-related expenses. In terms of actual credit performance this quarter, credit costs were $761 million, reflecting net charge-offs of $611 million, down $121 million year-on-year, driven by card and a reserve build of $150 million in card driven by loan growth. Next to CIB on page 5. CIB reported net income of $3.7 billion on revenue of $11.9 billion. There were a number of notable items this quarter, including net markdowns on certain equity investments of approximately $370 million with about $345 million reflected in payments, and markdowns on the bridge book of approximately $250 million in IB revenue. Investment Banking revenue of $1.4 billion was down 61% year-on-year or down 53%, excluding the bridge book markdowns. IB fees were down 54% versus an all-time record quarter last year. We maintained our number one rank with a year-to-date wallet share of 8.1%. In advisory, fees were down 28%, reflecting a decline in announced activity, which started in the first quarter. The volatile market resulted in muted issuance in our underwriting businesses. Underwriting fees were down 53% for debt and down 77% for equity. In terms of outlook, while our existing pipeline remains healthy, conversion of the deal backlog may be challenging if the current headwinds continue. Lending revenue of $410 million was up 79% versus the prior year, driven by gains on mark-to-market hedges as well as higher loan balances. Moving to Markets. Total revenue was $7.8 billion, up 15% year-on-year in both fixed income and equities against a strong quarter last year. In fixed income, elevated volatility drove both increased client flows and robust trading results in the macro franchise, most notably in currencies and emerging markets. This was partially offset by Credit and Securitized Products in a challenging spread environment. In Equity Markets, we had a strong second quarter, and again, increased volatility produced a strong performance in derivatives. Credit Adjustments & Other was a loss of $218 million, largely driven by funding spread widening. Payments revenue was $1.5 billion, up 1% year-on-year or up 25%, excluding the markdowns on equity investments. The year-on-year growth was primarily driven by higher rates. Security Services revenue of $1.2 billion was up 6% year-on-year, with growth in fees and higher rates more than offsetting the impact of lower market levels. Expenses of $6.7 billion were up 3% year-on-year, predominantly driven by higher structural expenses and investments, largely offset by lower revenue-related compensation. Moving to Commercial Banking on page 6. The Commercial Banking reported net income of $1 billion. Revenue of $2.7 billion was up 8% year-on-year, driven by higher deposit margins, partially offset by lower Investment Banking revenue. Gross Investment Banking revenue of $788 million was down 32%, driven by lower debt and equity underwriting activity. Expenses of $1.2 billion were up 18% year-on-year, predominantly driven by higher structural and volume and revenue-related expenses. Deposits were down 5% quarter-on-quarter, driven by migration of non-operating deposits into higher-yielding alternatives, which we expect to continue given the current rate environment. Loans were up 4% sequentially. C&I loans were up 6%, reflecting higher revolver utilization and originations across Middle Market and Corporate Client Banking. CRE loans were up 3%, driven by strong loan originations and funding in commercial term lending and real estate banking. Finally, Credit costs of $209 million were largely driven by loan growth, while net charge-offs remain historically low. And then, to complete our lines of business, AWM on page 7. Asset & Wealth Management reported net income of $1 billion with pretax margin of 31%. For the quarter, revenue of $4.3 billion was up 5% year-on-year, driven by growth in deposits and loans as well as higher margins, partially offset by investment valuation losses versus gains in the prior year. In addition, reductions in management fees linked to this year’s market declines have been almost entirely offset by the removal of most money market fund fee waivers. Expenses of $2.9 billion were up 13% year-on-year, largely driven by investments in our private banking advisory teams, technology and asset management as well as higher volume and revenue-related expenses. For the quarter, net long-term inflows of $6 billion were driven by equities. AUM of $2.7 trillion and overall client assets of $3.8 trillion, down 8% and 6% year-on-year, respectively, were predominantly driven by lower market levels, partially offset by net long-term inflows. And finally, loans were up 1% quarter-on-quarter, while deposits were down 7% sequentially, driven by seasonal client tax payments. Turning to Corporate on page 8. Corporate reported a net loss of $174 million. Revenue was $80 million versus a loss in the prior year. NII was $324 million, up $1.3 billion, predominantly due to the impact of higher rates. And expenses of $206 million were lower by $309 million year-on-year. Next, the outlook on page 9. You will recall that at Investor Day, we expected NII ex Markets for 2022 to be in excess of $56 billion. We now expect it to be in excess of $58 billion, reflecting Fed funds reaching 3.5% by year-end. We still expect adjusted expense to be approximately $77 billion and the Card net charge-off rate to be less than 2% for 2022. So to wrap up, the Company's performance was strong again this quarter in what was a complex operating environment. As we look forward, we are mindful of the elevated uncertainty in the global economy, but we feel confident that we are prepared and well positioned for a broad range of outcomes.

Hey. Good morning, Jeremy. Good morning, Jamie. I wanted to start off with a question on capital targets. I don’t believe you’ve provided an update on your firm-wide CET1 target of 12.5% to 13%. And given the new higher SCB, future increases in your G-SIB surcharge to 4.5%, your regulatory minimum is slated to increase beyond 13% by 2024, which is also beyond the horizon reflected on slide 3. And just given that high regulatory minimum, elevated SCB volatility in recent years, what do you believe is an appropriate capital target for you to manage to from here over the long term?

Yes, Steve, good question. So, obviously, you’re right in the sense that we didn’t talk about 2024 on the slide. And as you note, we have two G-SIB bucket increases coming, one in the first quarter of ‘23 and the other one in the first quarter of ‘24. So, we had worked all that out on Investor Day and talked about a 12.5% to 13% target, which implies sort of a modest buffer to be used flexibly based on what we expected would be some increase in SCB. Obviously, the increase came in a bit higher than expected. So, for now, we’re really focused on 1Q ‘23. Of course, all else equal, you would assume that that 12.5% to 13% for 2024 would be a little bit higher. But there is another round of SCB, and that’s a long way away. And as you know, and as you can see, there’s a lot of organic capital generation. So, we’ll kind of cross that bridge when we come to it.

We intend to drive that SCB down by reducing the things that created it.

Fair enough. And just for my follow-up on the loan growth outlook. Loan growth continues to surprise positively. Certainly, the tone, Jeremy, that you conveyed was quite constructive, despite the challenging macro backdrop. But with companies just citing higher inventory levels, declining personal savings rates, growing inflationary pressures, a whole list of potential headwinds that could negatively impact loan growth from here, I was hoping you could just speak to the outlook for loan growth across some of the different businesses? And what do you see as a sustainable run rate of loan growth over the medium term?

Yes. So, we’ve talked, as you know, Steve, about sort of a mid-high single digits loan growth expectation for this year. And that outlook is more or less still in place. Obviously, we only have half the year left. We continue to see quite robust C&I growth, both higher revolver utilization and new account origination. We’re also seeing good growth in CRE. And of course, we continue to see very robust card loan growth, which is nice to see. Outlook beyond this year, I’m not going to give now. And obviously, as you know, it’s going to be very much a function of the economic environment, so.

Yes. The only thing I would like to add is that certain loan growth is discretionary and portfolio-based, think of mortgages, and there’s a good chance we’re going to drive it down substantially.

I wonder if you could just talk to how you balance it all. Meaning JPMorgan is always growth-minded. You underwrite for returns over the cycle. I get that. But given some of the potential bad stuff going on in the world that you’ve noted in some of the articles you’ve been in and at the conference, is there any point where that rougher outlook has you tightened the underwriting box to build capital and liquidity faster, or do you think you can get there just through what you’ve laid out today on the buyback pause?

Yes. No. So, I mean, look, I think all of these things are true at the same time, right? So, first of all, as you can see on page 3, the organic capital generation enables us to build very quickly to get to where we need to be with a nice appropriate buffer on time, if not early. At the same time, as Jamie has noted, in this moment, we’re going to scrutinize even more aggressively than we always do, elements of lending, which are either low returning or have a low client nexus or both. We do that all the time anyway. But of course, in this moment, we’re going to turn up the heat on that a little bit. In terms of underwriting, as you say, we do underwrite through the cycle. I think we feel comfortable with our risk appetite and our credit box. And I don’t think we expect any particular change there.

And the only thing I would add is that certain, obviously, risks that we take kind of price themselves. So, if you look at our bridge book, it’s smaller than it was because we price ourselves out of the market. And that was a good thing because a lot of people can lose a lot of money there, and we lost a little. And so, we are very conscious of that kind of thing all the time.

I appreciate that. And did you all consider a CECL reserve and increasing the probability to the poor scenario in this quarter? And just curious on how you thought about that. Thanks.

Yes, but we didn’t do it. And obviously, what we do in the future quarters will remain to be seen.

Yes. And Glenn, just remember that we did do that last quarter, right? So, we already introduced a sort of skew to the outlook beyond what’s implied by the market to reflect our own slightly more negative view. And in a sense, arguably, we were sort of early on that. So, it really wasn’t necessary this quarter.

Jeremy, I was wondering if you could talk about the deposit trends you’re seeing, the differences between commercial deposits, wealth management and retail in terms of flows and repricing pressures.

Yes, great question, John. And I think you’re right to break it down by the different segments because we are seeing different dynamics there. So, on the wholesale side, you do see some lower deposits, some deposit attrition, and that is entirely expected and part of the plan in the sense that for client reasons, we had slightly higher appetite, especially in parts of the commercial bank for non-operating deposits, knowing fully that our pricing strategy, as rates went up, was going to be to not pay up. Therefore, we expected the attrition from that client base. And so, we’re seeing that, and that’s actually something that we want, all else equal. And it’s playing out in line with expectations. You do see a little bit of a decline or a little bit of a headwind in wealth management. I think that’s just seasonal tax payments being a little bit higher than usual. And then, on the consumer side, we’re really not seeing much at all. So, that remains strong, not seeing any attrition there. And it’s early in the cycle to really be observing much, one way or the other from a pricing perspective.

Okay. And then, as a follow-up, in terms of the updated NII outlook, you had talked about an exit rate in the fourth quarter of about $66 billion at Investor Day. Just kind of wondering what that looks like and what kind of fading benefit from rate ex you have assumed in your outlook?

Yes. So, the 66 number, if you want kind of to put a number in, you can use something like 68, 68 plus, something like that. Obviously, we’re annualizing one quarter. So, there can always be noise in there, but that seems like a good number to us. That’s consistent with the increase for the full year. And sorry, John, can you repeat your other question?

For ‘23.

Yes, there is a deposit.

Yes, yes, yes. So, in terms of ‘23, we had talked at Investor Day about how we saw upside into 2023 from that fourth quarter run rate. And that more or less remains true. There is some upside. Obviously, we’re starting from a higher launch point, higher rates and less so after the CPI trend, but there have been moments where there were cuts in the 2023 Fed expectations. So, that could have some impact on the dynamic. Obviously, this is all in an environment very volatile implied, but the core view of some upside from that fourth quarter run rate into 2023 is still in place.

Jamie, you mentioned just on the SCB earlier that you intended to reduce it by reducing the things that caused it to rise. Could you give us a sense as to what you saw in the results that drove that SCB up? Because I talked to folks that say it’s a black box. So, it would be helpful to understand what you see as what the drivers were to that SCB increase.

First of all, it’s public. So, you can actually go see what drives it, the global market shock and credit loss and stuff like that. And we don’t agree with the stress test. It’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious and arbitrary. We do 100 a week. This is one. And I need to drive capital up and down by 80 basis points. So, we’ll work on it. We haven’t made definitive decisions. But I’ve already mentioned about we dramatically reduced RWA this quarter. We may do that again next quarter. We’re probably going to drive down mortgages, and we’ll probably drive down other credit too that creates SCB. So, I could go into specifics on that. It’s easy for us to do. You’ve seen us do it before. We’re going to drive out non-operating deposits. It creates no risk to us, but as the G-SIFI and all various things. And so, we’re going to manage the balance sheet, get good returns, have great clients and not worry about it. We just want to get there right away. I don’t want to sit there and dawdle. That’s the rule. They gave it to us. We’re going.

Hey Betsy. Maybe I’ll just jump in a little bit on the black box.

There’s another very important point for shareholders. That number does not accurately reflect what would happen in that scenario. I’m not saying the Fed should or shouldn’t think that way, but I can assure you we would profit in that scenario rather than incur a loss. They projected a loss of $44 billion, which is highly unlikely. I feel for the shareholders who might be concerned about that. Historically, we managed to avoid losses after Lehman Brothers and during the recent financial crisis. The Company has significant underlying earnings power and stable revenues from CCB, asset management, custody, and payment services. We also have some revenues that can be quite volatile. Additionally, there’s the CECL, which can vary considerably, but that is simply an accounting adjustment. Overall, we feel confident about our position. We just need to maintain a higher threshold now, and we’re on our way to achieving that.

Betsy, I’d like to briefly address the black box issue. As Jamie mentioned, the SCB is quite volatile, which is evident throughout the industry. We are confident in our ability to scale quickly enough to meet the increased requirements, but there are significant changes implemented quickly for banks, which may not be healthy. There is a considerable amount of information being released, as Jamie pointed out. However, since the SCB is measured during peak drawdown periods and that specific information isn't disclosed, it becomes challenging to understand the underlying factors at any moment. Our main concern is this lack of transparency combined with high volatility. That said, we are generating capital effectively.

This has negative effects for the economy because we are going to reduce this further, which is not beneficial for the United States economy. The mortgage sector, in particular, is detrimental to lower income mortgages, impacting lower income individuals and minorities because we haven't resolved the issues within the mortgage sector, and now we are exacerbating them. There is no real risk in this for JPMorgan, but it harms the country, which is quite unfortunate.

I hear you on all that. And the mortgage comment you made earlier was about shrinking mortgage growth rates or shrinking the balances of mortgages that you have on the books?

We will continue to originate, but the balances on our books will likely decrease. We reserve the right to adjust that, as it is a portfolio decision. If owning mortgages does not make sense, we won’t hold onto them.

Yes. And would you reduce the buffer? I mean, in the past, Jamie, you’ve talked about, hey, as these required capital ratios increase relative to the risk in your business, staying more consistent than you’ve said before that you may operate with less of a buffer. Could you unpack that a little bit?

We’re going to maintain a buffer, although I'm uncertain about the SCB at this stage. We won't fall below any regulatory minimum. If necessary, we will reduce credit to create what we need. Operating this way is not ideal for the financial system. We owe you more insight on what we believe that buffer should be, given our significant excess capital. This situation leads to confusion regarding capital management. However, it's important to note that we are earning 70% of tangible equity and can sustain that. The Company is performing well, and we are focused on serving our clients and effectively managing the rest. We still believe in our strong businesses, and that will be our approach. Overall, these decisions do not add significant risk; they simply result in more capital.

Maybe just on expenses. If I kind of look at the first half with the slowdown in investment banking, I think you’re annualized less than $76 billion, but you’re still targeting $77 billion. Is that implication of just higher investment spend in the second half or just uncertainty around getting the pipeline completed or not and just assuming it might get done until we know better?

Yes, Jim, good question. We’ve looked at that, too. It’s definitely more of the former than the latter. In other words, $77 billion is the number that we see right now and the number that we believe. We can see in our outlook a bunch of factors driving up second half expense, including deals, M&A closing and adding to the run rate as well as continued execution of our investment plans, resulting in increased headcount, probably at a faster pace as we kind of have ramped up our hiring capacity and so on. So, I wouldn’t draw any conclusions about lower than $77 billion based on the first half numbers.

Okay, great. And then, just maybe on credit. It continues to look, I guess, very good, whether it’s on the consumer side or commercial side. We don’t really see it, but are you starting to see any initial cracks in credit or strains in the system?

Look, I think the short answer to that question is no, certainly not in any of our reported actual results for this quarter.

Excellent.

Right, exactly. Obviously, running still well below normal levels from the pre-pandemic period. But if you really want to kind of turn up the magnification of the microscope and look really, really, really closely, if you look at cash buffers in the lower income segments and early delinquency roll rates in those segments, you can maybe see a little bit of an early warning signal to the effect that the burn down of excess cash is a little bit faster there, buffers are still above what they were pre-pandemic, but coming down, and that absolute numbers for the typical customer are not that high. And you do see those early delinquency buckets still below pre-pandemic levels, but getting closer in the lower income segment. So, if you wanted to try to look for early warning signals, that’s where you would see it. But I think there’s really still a big question about whether that’s simply normalization or whether it’s actually an early warning sign of deterioration. And for us, as you know, our portfolio is really not very exposed to that segment of the market. So, not really very significant for us.

Right. So, prime is still holding up quite well? Thanks.

Yes.

Even better.

Just a follow-up on the point about managing the balance sheet and capital and RWAs. How do you think about your ability to manage the RWA output and dimensionalizing how, if at all, it might impact either the net income outcome or the ROTCE outcome as you look forward?

Just very roughly, we have a tremendous ability to manage it. I think we do it without affecting our ROTCE targets and stuff like that. Obviously, it will affect NII a little bit and capital generation a little bit and stuff like that. But all told, we’re going to imagine how it will be fine.

Got it. Okay. That’s a fair point. And then just second one on cards. Card revenue rate continues to slip even with the NII benefit. Obviously, you’ve got the denominator increase in there too and spend versus lend. Can you just help us understand the dynamics underneath card revenue rate and where you expect it to go from here? Thanks.

Yes, we believed a 10% card revenue rate was reasonable for the full year, but it's currently a bit lower. I think around 9.6% is probably more accurate for the full year at this stage. The main reason for this difference is that while growth in revolving balances is still occurring, we expected normalization to happen early next year, but that has been slightly delayed by Omicron by about six weeks. This slight delay will create a bit of a headwind for net interest income compared to our expectations, but the overall situation remains very strong.

Can I just add a little bit because I know I’m focusing on mortgage here, but I want to explain it. If you go to Europe, the capital held against mortgage is about one-fifth of what we have to hold here. We can manage that, and standardized risk-weighted assets do not reflect returns or risk. There are many ways to manage it. Currently, there’s no securitization market, so our perspective might change if such a market existed. We might act differently. However, by not owning, buying, signing, hedging, or swapping it, there are countless ways to manage it without significantly impacting your risk of returns. It’s unfortunate because I feel this is a waste of time in serving our clients. Our responsibility is to serve clients through thick or thin, good or bad, with what they need and how they need it. Yet, we spend so much time discussing these unreasonable regulatory requirements.

Right. So, yes, and just to finish on card. So, slightly lower NII just from the Omicron delay. And that slightly better-than-expected new client acquisition is a driver there. And then there’s some subtle kind of funding effects from the higher rate environment contributing to it as well.

Could you help me reconcile your words with your actions? After Investor Day, Jamie, you said a hurricane is on the horizon. But today, you’re holding firm, which you’re sending $7 billion expense guidance for 2022. I mean, it’s like you’re acting like there’s sunny skies ahead. You’re out buying kayaks, surfboards, wave runners just before the storm. So, is it tough times or not?

We have always managed the company by consistently investing and operating through challenges. We don’t fluctuate in and out of markets during difficult times. You have seen this approach since I joined Bank One. We invest, grow, and expand while navigating through difficulties. Currently, there are positive trends in the economy. Consumers are in good shape, have more disposable income, and are spending significantly more than last year, as well as compared to pre-COVID levels. Businesses also report strong conditions, with business credit at an unprecedented high. Looking ahead, we anticipate rising interest rates, possibly more than expected due to inflation, and we recognize the potential for various economic outcomes, ranging from a soft landing to a harder landing. This variability is influenced by interest rate hikes, quantitative tightening, volatile markets, and the ongoing humanitarian crisis in Ukraine, which affects food and energy prices. These factors may alter the probabilities of future scenarios, but they will not change our operational strategies. We expect the economy will be larger in ten years, and we will continue to serve more clients, open new branches, and make investments. We are managing our risk carefully, as evidenced by a significant reduction in our bridge book and our avoidance of subprime exposure. If necessary, we would adjust our strategy, but we believe in the strong growth potential of our business. Difficult times can also present us with new opportunities. I remind myself that the economy will be much larger in ten years, and we are committed to serving our clients regardless of the circumstances.

So clearly running the Company for the next 5 to 10 years. If we have a recession in the next 5 to 10 months, how does technology help you manage through that better, whether it’s credit losses, managing for less credit losses, expenses, more flexibility or revenues may be gaining market share? What’s the benefit of all these technology investments if we have a recession over the next...

Mike, we provided examples at Investor Day about our significant investment in AI. For instance, we allocated $100 million to develop risk and fraud systems, which have helped reduce payment processing losses by $100 million to $200 million, while volumes have increased substantially. This is a major advantage, and there's no intention to halt these efforts even if a recession occurs. In fact, certain costs become more manageable during a recession, and banks often gain opportunities. We will continue these initiatives and have successfully navigated past recessions. I'm confident in our ability to do so again. Halting recruitment, training, technology enhancements, or branch developments would be illogical, and we have never taken such actions in previous downturns.

The only other thing is just market revenue is a lot weaker, right? I mean the market outlook is worse. And so, we know you’ve had a structural spending. So when all else equal, that would be a little bit less then.

But that's very performance-based too. The way I see it is that in 15 to 20 years, global GDP, global financial assets, and companies with over $1 billion will all double. That’s what we’re building for, not just for the next 18 months.

Jeremy, you mentioned the deposit situation earlier. Can you provide more details on quantitative tightening and the effects you've observed? I understand that June didn't reflect the full $95 billion per month in quantitative tightening. Could you share your insights? Jamie, I believe you indicated that there could be an outflow of $300 billion to $400 billion in deposits over time, presumably due to quantitative tightening. Can you clarify what you experienced in June? Is the trend aligning with your expectations? Additionally, what is your outlook for deposit changes in the next 12 months as a result of quantitative tightening?

Yes. Hey Gerard. So, as you know, QT just started. So, I think it’s not the sort of thing where you can say I expect this exact outcome and then sort of track it sector by sector, because you can see the clear impact on system-wide deposits, but that also interacts with RP and TGA and stuff like that. And so how that flows into the banking system and then to any individual bank across the wholesale and consumer segments is kind of a tricky thing. So, it’s early on that. But, at a high level, and your comments to what Jamie said before are right. The story remains true, which is that depending on how QT interacts with RRP and loan growth, in particular, you could see some decline in deposits in the banking system, and we would see our share of that. But we would expect that to primarily come out of wholesale and primarily come out of the non-operating and sort of less valuable portions of our deposit base. While in consumer, while you could, in theory, have a little bit of a headwind there, we feel pretty good about our ability to keep those levels pretty steady based on the strength of the franchise and the ability to take share.

Very good. And then, as a follow-up, I don’t believe you guys disclosed the outstandings in the bridge book. But two questions. And Jamie, you’ve been very clear about this for the last 10 years, how you’ve derisked that balance sheet, and you mentioned that already today. Can you just give us some color on how different it is today from ‘08, ‘09, just so investors know that it is meaningfully different. And second, what caused the write-down in the bridge book this quarter?

So, if you go back to ‘07, I think the whole Street bridge book was $480 billion. I think the whole Street bridge book today is 100 or under 100.

Yes. It’s like 20%.

Our percentage of the bridge book has decreased significantly over the past year. This is really based on individual loans, where you experience gains and losses. If you look at high-yield spreads, bonds are down 6%. So, there are times when you have some flexibility and times when you don't. We understand this well, and there have been write-downs on a few bridge loans, but they are not substantial. I believe they were related to the investment banking sector.

Yes. It’s in the IB revenue line, and there’s a small amount in the commercial bank as well. But as you said, Jamie, and as Daniel also mentioned at Investor Day, I think we made conscious choices here to dial back our risk appetite here and accepted some share losses in leveraged finance. So, we feel good about where we are. We’re still open for business with the right deals at the right risk appetite upside on the right terms, absolutely, but we’ve been careful.

I just had a few follow-up questions. The first is on balance sheet management. Jeremy, the illustrative path that you set forth on slide 3, did that include RWA mitigation? And as we think about the $58 billion-plus in updated NII guide, what kind of deposit growth does that assume? You noted that part of the SCB mitigation is to drive out non-operating deposits. Just wanted to understand what the assumption was there as well, please.

Yes, hey Erika, sure. So first point, you have to turn over your magnifying glass. But if you look at Footnote 5 on page 3, you can see that right at the end of there, it says, assumes flat RWA in the projection, so. And I think within that, who knows what the exact mix will be, and you’ve heard Jamie’s comments on that. But if you look at the table above, you see that you’ve got the usual moving parts. We’ve got organic loan growth that we want, that’s been profitable on its own or part of important relationships that we’d like to see continue to happen. Some of it is a little bit passive. We can’t really control it. It moves up and down as a function of factors like war. And then there’s the mitigation piece of it, which we’re going to turn up the scrutiny quite intensely, as I said before, on lower returning, lower client nexus or both. So across those three bits, we’ll see how it goes. But as Jamie said, we feel pretty confident here. In terms of deposits, at this point, deposit growth is probably less of a driver overall looking forward of the NII outlook. Our deposit outlook remains more or less the same that I said before and that we’ve talked about at Investor Day, which is we do expect to see some attrition in wholesale. We expect consumer to be relatively stable, and we’ll see how it goes.

Got it. And my follow-up question is for Jamie. Jamie, we’ve heard your caution about the economy. And I think there’s a bigger debate on how the U.S. consumer is going to be impacted in light or in context of a downturn. The statistics that Jeremy laid out imply a pretty healthy starting point for the consumer that you bank. And the reserve build for loan growth in card and the less than 2% loss rate in card lead us to believe that your consumer is still okay. As you think about the various scenarios and you think about the realistic range of outcomes, how does the U.S. consumer perform? Because it feels like that’s the big wildcard, and we’ve seen the journal term a job for recession. I just wanted to get your thoughts there.

I want to clarify that the chart is not a prediction for the end of the quarter. If you're adjusting your models, expect it to be 12.5% on December 31, and likely 13% by the end of the first quarter. We utilize capital for various reasons, and the consumer is currently in a strong position. Even if a recession occurs, they are entering it with less debt and in much better condition than during the crises in 2008 and 2009, and even better than in 2020. Job opportunities are abundant. While jobs can diminish, the current consumer health is positive. Recessions typically impact income and credit, but our credit card portfolio remains strong and prime quality. We acknowledge that losses could increase during a recession, but we prepare for those scenarios and are ready to manage them as we continue to grow our business. It's promising that consumers are in a good position, and it's encouraging to see wages rising for those at the lower end of the pay scale. The availability of jobs is beneficial for the average American, and we should recognize that. Overall, consumers are in a solid state right now.

The next question is coming from Ebrahim Poonawala from Bank of America Merrill Lynch. Please proceed.

I have a couple of follow-up questions, Jeremy. The markets have quickly shifted from anticipating numerous rate hikes to possibly considering rate cuts next year. Could you discuss how this is affecting your ALCO balance sheet management as you plan for hedging against the risk of lower rates in the next 12 to 18 months? Should we expect you to increase duration or take any synthetic measures to guard against lower rates?

We’re going to keep that to ourselves.

Yes. I can provide some general insight into how we’re thinking about the portfolio. At this level of rates, with cash yields being quite similar to 10-year yields, the relevance of duration for us is diminishing. Additionally, we are considering the possibility of investing cash into non-HQLA securities, particularly in spread products, which are currently more appealing. However, as we've emphasized during this call, our main focus at the moment is on building capital, so any actions in that direction will be deferred for now.

And I should just point out, the forward curve has been consistently wrong in my whole lifetime. We don’t necessarily make investments based on the forward curve. And second, we’ve always told you that we use the portfolio and other things to manage the broad range of outcomes, not just to try to add NII. So, if you said add NII next quarter, yes, we could do that. That would be managing the broad outcome of potential outcomes here, which is to protect the Company through all possible outcomes.

That’s helpful. And just one follow-up on credit. I heard your comments on the consumer if we enter some version of a mild recession, like if you had to pick one or two areas, where do you think losses would be driven by? Is it on the commercial side? Is it CRE? Like, how do you expect that downturn to kind of play out?

I think at Investor Day, you had a chart that showed through-the-cycle losses?

Yes.

Yes. I would just refer back to our thoughts on through-the-cycle losses for credit cards, commercial and industrial loans, and various other aspects. As you know, through-the-cycle is an average, and you can essentially double that from...

Yes. And that showed exceptionally low losses in wholesale.

Hi. Sorry about that. I got disconnected. Sorry if I missed this, but if we think about provisioning or reserving for a moderate recession, what’s the best guess on how much that might be? I think for COVID, it was around $14 billion ex CECL. But obviously, you alluded to the consumer being better. The loan mix has changed. There’s lots of puts and takes. But, how would you frame kind of total reserve build…

Let me put this simply. During COVID, we saw unemployment reach 15% in just three months. In two quarters, we added $15 billion, which is manageable for us. This situation is not expected to be as severe. You can see that for every 5% change, it translates to about $500 million in adjustments.

Yes. I mean, we think the current reserve, the current allowance, we think, is conservatively appropriate for a range of scenarios. And as you know, it’s already kind of skewed to the downside and there are probably some other elements of slight conservatism in there. So, we’ll see how it goes. We feel that it’s just appropriate and conservative at this point.

Okay. And then, separately, you’ve got about $14 billion of losses in OCI. Obviously, most of that flows back to capital as the bonds mature. What’s kind of some good rule of thumb in terms of how quickly that comes back if rates stabilize here?

10 basis points a year.

Of CET1, yes.

Right, 10 basis points, you said?

10 basis points of CET1 a year.

Basically five years. It kind of bleeds back in over 5 years.

Weighted average life of four or five years, yes. So, the good rule of thumb on constant rates is about 10 basis points of CET1 accretion a year.

Folks, everybody, thank you very much. And we’ll be talking to you in a quarter.