JPMorgan Chase & Company (JPM) — Q3 2022 Earnings Call Transcript

Thank you very much. Good morning, everyone. As always, 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 $9.7 billion, EPS of $3.12 on revenue of $33.5 billion and delivered an ROTCE of 18%. The only significant item this quarter was discretionary net investment securities losses in Corporate of $959 million as a result of repositioning the portfolio by selling U.S. Treasuries and mortgages. Our strong results this quarter reflect the resilience of the franchise in a dynamic environment. Touching on a few highlights. We had a record third quarter revenue in Markets of $6.8 billion, we ranked number one in retail deposit share based on FDIC data, and credit is still healthy with net charge-offs remaining low. On page 2, we have more detail. Revenue of $33.5 billion was up $3.1 billion or 10% year-on-year. Excluding the net investment securities losses, it was up 13%. NII ex Markets was up $5.7 billion or 51%, driven by higher rates. NIR ex Markets was down $3.2 billion or 24%, largely driven by lower IB fees and the securities losses. And Markets revenue was up $502 million or 8% year-on-year. Expenses of $19.2 billion were up $2.1 billion or 12% year-on-year, driven by higher structural costs and investments. And credit costs of $1.5 billion included net charge-offs of $727 million. The net reserve build of $808 million included a $937 million build in Wholesale, reflecting loan growth and updates to the Firm’s macroeconomic scenarios, partially offset by a $150 million release in Home Lending. On the balance sheet and capital on page 3. We ended the quarter with a CET1 ratio of 12.5%, up 30 basis points versus the prior quarter, which was primarily driven by the benefit of net income less distributions, partially offset by the impact of AOCI. RWA was down approximately $23 billion quarter-on-quarter, with growth in lending more than offset by continued active balance sheet management and lower market risk RWA. Given our results this quarter, we are well positioned to meet our CET1 targets of 12.5% in the fourth quarter and 13% in the first quarter of 2023. These current targets include a 50 basis-point buffer over the growing regulatory requirements, which provides flexibility over the coming quarters. To conclude on capital, with the future increases in our risk-based requirements, SLR will no longer be our binding capital constraint. So, we announced the call of $5.4 billion in press this quarter and issued $3.5 billion in sub debt to rebalance our capital stack. Now, let’s go to our businesses, starting on page 4. Before I review CCB’s performance, let me provide you with an update on the health of U.S. consumers and small businesses based on our data. Nominal spend is still strong across both discretionary and nondiscretionary categories, with combined debit and credit spend up 13% year-on-year. Cash buffers remain elevated across all income segments. However, with spending growing faster than income, we are seeing a continued decrease in median deposits year-on-year, particularly in the lower income segments. And not surprisingly, small business owners are increasingly focused on the risks and the economic outlook. Now, moving to financial results. This quarter, CCB reported net income of $4.3 billion on revenue of $14.3 billion, which was up 14% year-on-year. In Consumer & Business Banking, revenue was up 30% year-on-year, driven by higher NII on higher rates. Deposits were up 10% year-on-year and down 1% quarter-on-quarter. We ranked number one in retail deposit share based on FDIC data, up 60% year-on-year, making us the fastest-growing among the top 20 banks. And we are now number one in L.A., in addition to New York and Chicago, making us top-ranked in the three largest markets. Client investment assets were down 10% year-on-year, driven by market performance, partially offset by flows, while lending revenue was down 34% year-on-year on lower production margins and volume. Moving to Card & Auto. Revenue was up 9% year-on-year, driven by higher card NII, partially offset by lower auto lease income. Card outstandings were up 18%. And while revolving balances were up 15%, driven by strong net new account originations and growth in revolving balances per account, they still remain slightly below pre-pandemic levels. And in Auto, originations were $7.5 billion, down 35%, due to lack of vehicle supply and rising rates. Expenses of $8 billion were up 11% year-on-year, driven by the investments we’re making in technology, travel, marketing and branches. In terms of actual credit performance this quarter, credit costs were $529 million, reflecting net charge-offs of $679 million, which were up $188 million year-on-year, largely driven by loan growth in card as well as a reserve release of $150 million in Home Lending. Card delinquencies remain well below pre-pandemic levels, though we continue to see gradual normalization. Next, the CIB on page 5. CIB reported net income of $3.5 billion on revenue of $11.9 billion. Investment Banking revenue of $1.7 billion was down 43% year-on-year. IB fees were down 47% versus a strong third quarter last year. We maintained our number one rank with a year-to-date wallet share of 8.1%. In Advisory, fees were down 31%, reflecting lower announced activity this year. Underwriting businesses continued to be affected by market volatility, resulting in fees down 40% for debt and down 72% for equity. In terms of the fourth quarter outlook, we expect to be down versus a very strong prior year. And while our existing pipeline is healthy, conversion will, of course, depend on market conditions. Lending revenue of $323 million was up 32% versus the prior year, driven by higher NII on loan growth. Moving to Markets. Revenue was $6.8 billion, up 8% year-on-year. Fixed income was up 22%, as elevated volatility drove strong client activity in the macro franchise, partially offset by a less favorable environment in securitized products. Equity Markets were down 11% against a record third quarter last year. This quarter saw relative strength in derivatives, lower balances in prime and lower cash revenues on lower block activity. Payments revenue was $2 billion, up 22% year-on-year. Excluding the net impact of equity investments, it was up 41%, and the year-on-year growth was driven by higher rates and growth in fees. Securities Services revenue of $1.1 billion was relatively flat year-on-year. Expenses of $6.6 billion were up 13% year-on-year, largely driven by compensation. Credit costs were $513 million, driven by a net reserve build of $486 million. Moving to Commercial Banking on page 6. Commercial Banking reported net income of $946 million. Record revenue of $3 billion was up 21% year-on-year, driven by higher deposit margins, partially offset by lower Investment Banking revenue. Gross Investment Banking revenue of $761 million was down 43% year-on-year, driven by reduced capital markets activity. Expenses of $1.2 billion were up 14% year-on-year. Deposits were down 6% year-on-year and quarter-on-quarter, primarily driven by attrition of non-operating balances, while our core operating balances have shown stability as payment volumes continue to be robust. Loans were up 13% year-on-year and 4% sequentially. C&I loans were up 7% sequentially, reflecting continued strength in originations and revolver utilization. CRE loans were up 2% sequentially, driven by lower prepayment activity in commercial term lending and real estate banking. Finally, credit costs were $618 million, predominantly driven by a net reserve build of $587 million, while net charge-offs remained low. And then to complete our lines of business, AWM on page 7. Asset & Wealth Management reported net income of $1.2 billion, with pretax margin of 36%. For the quarter, revenue of $4.5 billion was up 6% year-on-year, predominantly driven by deposits and loans on higher margins and balances, largely offset by reductions in management fees linked to this year’s market declines. Expenses of $3 billion were up 10% year-on-year, driven by compensation, including investments in our private banking advisory teams, technology and asset management initiatives. For the quarter, net long-term inflows were $12 billion across fixed income, equities and alternatives. AUM of $2.6 trillion and overall client assets of $3.8 trillion were down 13% and 7% year-on-year, respectively, driven by lower market levels, partially offset by continued net inflows. And finally, loans were flat quarter-on-quarter, while deposits were down 6% sequentially, driven by migration to investments, partially offset by client flows. Turning to Corporate on page 8. Corporate reported a net loss of $294 million. Revenue was a net loss of $302 million compared to a net loss of $1.3 billion last year. NII was $792 million, up $1.8 billion year-on-year, driven by the impact of higher rates. NIR was a loss of $1.1 billion, down $852 million, primarily due to the securities losses I mentioned upfront. And expenses of $305 million were higher by $125 million year-on-year. Next, the outlook on page 9. Going forward, we will also provide guidance for total firm-wide NII. For the fourth quarter, we expect it to be approximately $19 billion, implying full year 2022 NII of approximately $66 billion. And we expect NII ex Markets for the fourth quarter to also be about $19 billion, implying that we expect Markets NII to be around zero, which brings the full year to about $61.5 billion. While we’re not giving 2023 NII guidance today, you will recall that at Investor Day, we talked about a fourth quarter 2022 NII ex Markets run rate of $66 billion, with potential upside for the full year 2023. Today’s guidance for the fourth quarter of this year implies an approximate run rate of $76 billion. And from this much higher level, we would now expect some modest decline for the full year 2023. In addition, there’s quite a bit of uncertainty surrounding the trajectory of key drivers, including rates, deposit reprice and loan growth. So, keep both of those things in mind as you update the 2023 estimates in your models. Moving to expenses. Our outlook remains unchanged. And as it relates to the card net charge-off rate, we now expect the full year rate to be approximately 1.5%, below our previous expectations. So to wrap up, we are happy with the strong diversified performance of the quarter as we continue to navigate an environment of elevated uncertainty. With that, I will turn it over to Jamie for some additional remarks.

Thank you, Jeremy. Hello, everyone. I wanted to share some thoughts on our capital planning and interest rates. We are very confident in the company's earnings potential, which is substantial, along with our margins and returns. More importantly, we are increasing our franchise value across the Firm. In most areas, we’ve gained market share, although there are a few where we haven’t, which is disappointing. Nonetheless, our earnings strength gives us confidence that we will exceed 13% in the first quarter. We must remain mindful of volatility and other factors. We are aware of the implications of Basel IV, though the timing and nature of its impact is uncertain, and we are also considering the uncertainty related to GSIB. Regarding AOCI, while it has been traditionally countercyclical, the current environment is more pro-cyclical. If interest rates rise by another 100 basis points, that would result in $4 billion, which we can easily manage. For CECL, we have already considered some adverse consequences, but if conditions worsen, we will need to increase our reserves. Additionally, if our outlook changes toward expecting more adverse events, we will adjust our reserves accordingly. If unemployment reaches 5% or 6%, we could be looking at $5 billion to $6 billion in reserves over a few quarters, but this is manageable and not a significant concern. As for RWA management, we are demonstrating our ability to effectively manage RWA by reducing it in some areas while increasing it in others. We believe in serving our clients as always, reflected in our growing loan book, although there are some discretionary actions that barely affect us. We are choosing not to add conforming mortgages to our balance sheet due to their minimal impact, and we have various strategies to manage our portfolio. With increasing capital requirements, we’ll strategically reduce RWA over the years without undermining our core franchises. On interest rates, we are currently neutral, whether they rise or fall. Please do not annualize the $19 billion mentioned, as there are many uncertainties to consider. We are not overly worried about these uncertainties, but they will have some impact. We are curious about the effects of quantitative tightening on deposits and how deposit migration will occur in this evolving technological landscape. We also anticipate delays in consumer spending, treasury services, and commercial banking. I also want to highlight that taking investment securities losses might involve selling our higher-value securities to acquire cheaper ones, as we aim to avoid being tied to assets that may decline in value while seizing the opportunity to invest in those with better prospects. This may lead to some securities losses in the future, which we can manage. We don’t necessarily need to rely on this for interest rate exposure management; we have swaps and other methods at our disposal, which we will employ efficiently and effectively. I want the team managing these portfolios to feel empowered to sell assets we no longer wish to hold and invest in those we prefer. Overall, we had a strong quarter across the board. Now, I’ll open the floor for questions.

Yes. Thanks, Jamie. Let’s go ahead and open up for questions.

Hi, thanks a lot. Good morning. I just wanted to follow up on the NII and the deposit side to Jamie’s comments there. Obviously, one of the toughest uncertainties is to understand how we think about flows and mix and beta. So just starting to see it, it looks like in terms of deposit costs starting to increase. So, how do you think about it now in this new environment, where we might go to 4.5, maybe higher in terms of how betas might act over the course of this cycle as compared to any prior cycles and previous thoughts? Thanks.

Yes. Thanks, Ken. Good morning. Okay. So, at Investor Day, you’ll recall that Jen said that we expected betas to be low this cycle as they were in the prior cycle, which was a low beta cycle by historical standards. And what we’re now seeing, as we see the rate hikes come through and we see the deposit rate paid develop, is that we’re seeing realized betas being even lower than the prior cycle, just through the actuals. And the question was why is that? And it’s, of course, we don’t really know, but plausible theories include the speed of the hikes, which probably means that some of this is lagged, but also the fact that the system is positioned better from a liquidity perspective than in prior cycles. So, as we look forward, we know that lags are significant right now. We know that at some point, that will start to come out. Obviously, in wholesale, they come out much faster. That’s probably starting to happen now. But the exact timing of how that develops is going to be very much a function of the competitive environment in the marketplace for deposits, and we’ll see how that plays out.

Understood. Regarding the concerns about potential challenges ahead, could you clarify your current scenario planning? It seems optimistic now, but there’s uncertainty for the future. How do you assess the potential changes in your allowance for credit losses? How does this compare to the peak during the pandemic or the initial CECL implementation? It’s challenging for all of us to grasp this fully.

Yes. As you know, I believe CECL has been a detrimental accounting policy. Honestly, I wouldn’t focus too much on it because it’s not a real number; it’s a hypothetical, probability-based figure. To simplify, during the pandemic, we set aside $15 billion over two quarters, which we then reduced over the next three to four quarters. This fluctuation affected our numbers but did not result in significant changes. To give you a rough estimate, if unemployment reaches 60%, which would be our central scenario, we might need to add around $5 billion to $6 billion in reserves, likely spread over two or three quarters. That’s as straightforward as I can make it. Currently, we already have a percentage set aside for severe adverse scenarios. If we decide to adjust that next quarter, it will factor into the $6 billion I mentioned.

I guess just following up, Jamie. So I appreciate CECL and the model-based approach. I think you were quoted in the press talking about the potential for a recession in the next 6 to 9 months. Would appreciate any perspective in terms of are you beginning to see cracks, either be it commercial real estate or consumer, where it feels like the economic pain from inflation and higher rates is beginning to filter through to your clients? I would appreciate any insights there.

Yes. I’ll take that, Ebrahim. Thanks. The short answer to that question is just no. We just don’t see anything that you could realistically describe as a crack in any of our actual credit performance. I made some comments about this in the prepared remarks on the consumer side. But we’ve done some fairly detailed analysis about different cohorts and early delinquency bucket entry rates and stuff like that. And we do see in some cases, some tiny increases. But generally, in almost all cases, we think that’s normalization, and it’s even slower than we expect, so.

Yes, we're currently in a unique environment characterized by strong consumer spending. This is evident in our numbers as well as those of others, showing a 10% increase compared to last year and a 35% increase compared to pre-COVID times. Consumers have solid balance sheets, and credit card borrowing is returning to normal levels without worsening. As we head into a recession, we have a resilient consumer base. However, their spending habits and inflation trends are somewhat predictable. With inflation at 10%, it effectively reduces consumers' purchasing power. The extra cash in checking accounts is likely to diminish by mid-next year. Additionally, we face challenges from inflation, rising interest rates, high mortgage rates, and oil price volatility due to geopolitical tensions. While these factors are concerning, they do not indicate an immediate issue in our current performance; they are predictable and may impact future results.

And just tied to that, I think the other thing that investors from the outside worry about is the interconnectedness of the systems, be it the UK gilts market or LBOs. How much are you worried about that part of the business in terms of having a meaningful impact in terms of a capital shock at some point over the next year, just given all the QT happening around the world?

I mentioned quantitative tightening as one of the uncertainties because it significantly alters the flow of funds globally, impacting the buyers and sellers of sovereign debt. There is a substantial amount of sovereign debt involved. However, if you look at the changes alone, they represent minor fluctuations; they won’t fundamentally change our approach or operations. We will experience fluctuations like this due to various factors I've already discussed. It's unavoidable. Whether these fluctuations pose systemic risks is uncertain. I've noted that it's becoming more challenging for banks to act as intermediaries, which adds some fragility to the system. That doesn’t imply we will encounter a major breakdown, but it’s nearly impossible to avoid real volatility considering the situation I mentioned. These are significant uncertainties we are aware of today and moving forward.

Hey, Jeremy, during the Investor Day, you mentioned that expense growth in 2023 would slow compared to this year's level and might be slightly above consensus expectations at that time. Now that we're approaching next year, does that still apply? And if the economy deteriorates more than anticipated, do you have some levers to pull, or will you continue to invest heavily regardless?

Yes. Thanks, Jim. So broadly, yes, it still holds. No real change on the outlook. Just to remind everyone, at Investor Day, I think the consensus was 79.5 for 2023. We said you were a little low. I think it got revised up to sort of the 80.5 or something like that. And that’s still roughly in the right ballpark. Obviously, we’re going through our budget cycle. We’re looking at the opportunity side and the environment set for next year. So it’s not in stone. But broadly, on the question of investment, and I’m sure Jamie will agree here, that our investment decisions are very much through the cycle decisions. And so, we’re not going to tend to change those just because of a sort of difference in the short-term economic environment. Of course, the volume and revenue-related expense can fluctuate as a function of the environment, as you would expect.

Now, I would just like to add. Obviously, compensations go up or down dramatically. So, you’ll have different estimates about investment banking revenues and markets revenues, and we can’t really adjust for your numbers for that. But I just want to point out the other side of this; we’re making heavy investments, and we have among the best margins in the business. I think that’s a very good thing.

Right. Were there any leverage loan write-downs this quarter? Is the market beginning to clear, or are there still overhangs?

There are no significant loan write-downs this quarter, and the market is still unclear. Our portion of it is very small, so we feel confident.

Jeremy, I wanted to ask about your EAR disclosures, what we call your rate sensitivity disclosures. They look a little different than peers. And when we look at the sensitivity to 100 basis points of higher rates beyond the forward curve, it looks like you’re liability-sensitive. Can you give us some context of maybe the limitations of that disclosure and how we should put that in context of the assumptions behind it?

Yes. Thanks, John. And I’d love to have a very long conversation with you about this, but I’m going to keep it short here. It’s really all about lags. So, as our disclosure says, we do not include the impact of reprice lags in our EAR calculation. So, as a result of that, the entire calculation is based on modeled rates paid in the terminal state. As you well know, right now, we’re in the middle of some very significant lags, which are affecting the numbers quite a bit and which we expect to persist for some time. So, as a result of that, what I would expect in the near term is something quite similar to what we’ve experienced this year. As you know, this year, as rates have gone up, we’ve revised our NII outlook from 50 at the beginning of the year to now 61.5. So, as we look forward in the near term from here, I would expect similar type sensitivities or rate fluctuations given the lag environment that we’re in.

To follow up on Jamie’s comments regarding the fourth quarter, could you clarify where the risks are in annualizing that period? What are some factors that might lead to a slight decrease from the fourth quarter annualized figures?

I've already mentioned that there's a rapidly changing yield curve regarding deposit migration, and everyone calculates it differently. Some people lag, while others don’t account for deposit migration. Our ECR is included, but that isn’t the case for everyone. For your models, considering these variations, I suggest using a figure slightly lower than the annualized rate of 19. Instead of 76, consider 74. Let's keep it straightforward, and although we hope to exceed that, given the current circumstances, it's best to remain cautious and conservative.

I agree with Ebrahim that your presentation this morning was quite crisp and impactful. I’m going to ask the question that I think has been a key debate regarding the stock all year. At Investor Day in May, you mentioned a ROTCE target of 17%, and that was before we learned that the SCB would be higher in June. Considering that your capital build is progressing faster than expected and the revenue potential that is evident in this firm, alongside what may happen with CECL, do you think you can achieve a 17% ROTCE next year?

Yes, that’s a good question. The answer is yes. We always analyze normalized ROTCE. We are transparent about our earnings; we aren't significantly over-earning in net interest income, maybe a bit due to delays, but it’s not substantial. We are, however, over-earning on credit, particularly with credit cards. The 1.5% figure is quite low risk, and we are aware of that. We’re not boasting about the 19% for this quarter; we expect that level won't continue. While we might adjust the 17% target slightly, it won’t be a significant change. We're confident in our team's ability to optimize various factors, including the Comprehensive Capital Analysis and Review and some asset liquidation while tweaking business models. Our acquisitions have been focused on non-G-SIFI, non-capital services. This approach will help us achieve solid returns over time. Next year will be influenced by certain factors, but it’s also important to consider what our earnings might look like during a recession, and I believe we'd perform well in that scenario.

And this is a super micro question as a follow-up for Jeremy. Why would Markets NII be zero next quarter? And should we expect that to be zero next year?

Yes. Thanks, Erika.

We’re advancing the Markets businesses at the yield curve. So, you’re earning this, and you’re paying to finance the trading book.

Yes, Erika. I mean, basically, as rates go up, the funding cost goes up. And the offsets on the other side, in many cases, work through derivatives or derivatives-like instruments, so it goes through NIR. Fundamentally, we believe the Markets business revenue is rate insensitive. You can see that history through our disclosures this year. So, as you look out to next year with the forward curve implying a much less biased evolution of Fed funds, you shouldn’t expect to see as many changes at least from rates. Of course, we can sometimes see somewhat more unpredictable changes from balances, but that should be unbiased, one way or the other.

Jamie, once again, I’m trying to reconcile your actions with your words. You’ve said publicly, you mentioned the hurricane. You mentioned a recession. You mentioned look out, and there are all sorts of risks. I don’t think anyone disagrees with that. On the other hand, your reserves to loans are still well below CECL day one. So, your actions with the reserving don’t seem to reflect your more pessimistic comments about the economy. So, how do I reconcile the two?

Yes. The way we approach this is through our CECL reserves, where we currently account for a significant probability of adverse and severe adverse scenarios. This consideration is already integrated into our reserves, with input from our economists and other team members. It's not solely my decision because I recognize that different perspectives exist regarding the odds. However, I share Jeremy's outlook that the numbers remain solid. I want to be transparent about what an escalation in conditions could mean for our reserves, although these calculations fluctuate frequently. Furthermore, the timing of events is crucial; for instance, a recession predicted for the fourth quarter of next year would yield different implications compared to one anticipated in the first quarter.

Yes, I just understood it as the lifetime losses on the loans as opposed to that...

It is true that some loans have a short life while others have a long life.

Let's get straight to the point. How do your current circumstances compare to three months ago? You've certainly made headlines with your comments on the hurricane. As you mentioned, we have the Federal Reserve's tightening measures, quantitative tightening, and stricter capital regulations for banks. This combination of factors from the Fed, along with ongoing conflicts and other issues, suggests heightened risks. So, considering this, are conditions better, worse, or about the same as they were three months ago?

They’re roughly the same. We’re just getting closer to what might be considered bad events. In terms of my outlook, I’ve maintained a consistent perspective, but I’m analyzing probabilities and possibilities. For example, there is still a chance of a soft landing. We may disagree on what that probability is, but a mild recession is also a possibility. Consumers are in good shape, and companies are performing well. However, there is a risk of something worse, primarily due to the war in Ukraine and oil price fluctuations. I wouldn’t change my views on these possibilities and probabilities this quarter compared to the last quarter. That’s a relatively different point.

Yes, last follow-up. I know your investor cycles. You’ve always done that. You’re consistent. But I mean, your headcount increase is probably going to be the highest in the industry. I mean, headcount from 266,000 to 288,000, your CIB, you’re adding headcount. I mean, you did expect weakness in nine months from now, wouldn’t you wait to hire people, maybe get them a little cheaper?

No.

A couple of questions. One, just on the investment spend, could you give us a sense as to the areas that you’re leaning in the most, as we should be thinking about into next year? Because you’ve obviously done a lot this year with regard to technology advancement, companies that you’re buying to enhance your digital capabilities and international expansion, in particular on the consumer side. So, just thinking through is this continuation on those themes, or is there something else we should be looking for?

Betsy, it’s exactly what we showed you at Investor Day, almost no change. So, take out that deck, we broke out by business kind of investment. Investment spend in tech is pretty much on track for that.

And the inflation that drives some of that cost structure, you can deal with through just efficiencies elsewhere. Is that fair?

Believe it or not, that was in the numbers we gave you in May.

Okay. And then separately on the bond restructuring that you did this quarter and the comments around, look, we don’t need to hold stuff we don’t need to hold, we don’t want to hold with that. That kind of suggests to me that there’ll be more bond restructuring as we go through the next quarter. Is there a reason why you didn’t clean the whole thing up this quarter?

No, I mentioned that we sell expensive securities and buy inexpensive ones. If you observed the movements in mortgage spreads, they widened and then narrowed; we bought when they narrowed and sold when they widened, which yields returns of around 2 to 2.5 percent. There can be varying opinions on this, but I do anticipate bond losses in the future. However, I don't consider those to be real earnings. I want our investment experts to understand that if they strongly believe in selling something, we will proceed and sell it. We won't hesitate to divest from securities that have become quite expensive just because we are concerned about incurring a bond loss. It's important to note that this does not impact our capital. In fact, when we reinvest, as we typically do, it can lead to increased earnings in the future.

Okay, thank you. So, it’s Glenn. So look, from time to time, where things happen in the market, we get these losses like Archegos and now this UK pension LDI issue. So, my question for you is, besides that, do you have risk in the derivatives book? And is the situation done? It’s more of when you meet with the Risk Committee, are there pockets of leverage that you’re considering on these big market moves, whether it be the dollar or rates where we are not thinking of like us, or do you view the LDI issue as an isolated event?

I’ll mention that the LDI situation is more of a temporary setback. The Bank of England appears to be navigating this without altering monetary policy or quantitative tightening. I was surprised by the amount of leverage present in some pension plans. In my experience, during times like these, we can expect other surprises, and there may be companies that find themselves in difficult positions. While we don’t perceive any systemic risks, certain credit portfolios and companies do exhibit leverage. As a result, we can anticipate seeing some of that play out. The markets are volatile, and liquidity is very low right now. This LDI issue could lead to greater problems in the future if such situations become frequent. However, for now, it remains a minor obstacle. The banking system itself remains exceptionally robust.

Would the dollar qualify as one of those super strong moves that could put people offsides? And if so, how do you make sure you protect JPMorgan against that?

We generally do not take risks with major currencies as we tend to hedge against them. Yes, dollar flows, quantitative tightening, emerging markets, and hedge funds are areas where something could occur. However, it shouldn't significantly impact JPMorgan. In fact, it often presents an opportunity for JPMorgan.

Yes, I'm not going to discuss what has traditionally been the case that emerging markets and sovereigns struggle with the kind of dollar strength we are experiencing right now, but our emerging market team has dealt with these cycles before. So, we manage through it.

Thank you, both. I appreciate it.

To emphasize the strength of our franchise, I recall reviewing our emerging markets performance on a quarterly basis over the past decade; it was surprising to see how few quarters and how few countries we ever reported losses. While we may have experienced low returns in certain quarters, it was remarkable. We have been profitable in Argentina almost every year for the last 20 years. There was only one quarter when we set aside reserves for one of the oil companies and later reversed that, but overall, the stability is impressive.

You have been discussing system liquidity, and Jamie mentioned quantitative tightening and the fragility of the system. Can you share the metrics you are monitoring to assess if there are liquidity issues within the system? This week, the Swiss National Bank increased its reserve currency swap lines to $6.3 billion. What specific indicators do you focus on to identify potential liquidity issues that could escalate into more significant problems?

Yes. I mean, Gerard, broadly, if you just look at standard regulatory reporting of LCR ratios in the U.S. banking system, everyone just has very significant surpluses. And of course, we can go into the question of as QT plays through and how that interacts with RPM loan growth, whether that puts some pressure on banking system deposits, but that’s starting from a very, very strong position. So, there’s a lot of cushions there for that to come down before you start to have a real challenge from a liquidity perspective.

Yes. We are considering various factors including the Federal Reserve's repo operations, deposit tightening, the net issuance of treasuries, the net issuance of mortgages, treasury market volatility, and bid-ask spreads. We are monitoring all of these aspects. The banking sector itself is exceptionally strong. What you will witness is not related to the banking sector. Issues may arise elsewhere, potentially in credit, emerging markets, or foreign exchange, but it is likely that we will see events similar to those we have discussed.

Very good. And then, in terms of the investment banking and capital markets businesses, can you guys give us any color into pipelines, how they stood at the end of the third quarter? And as you’re going into the fourth quarter, what you’re seeing in terms of those business lines?

Yes. And I’ve always pointed out to you all, the pipelines come and go, okay? You’ve seen that the size; there has never been before. So the pipeline is not necessarily to see. I would put in your model lower IB revenues next quarter than this quarter based on what we see today. Markets, we have no idea. Seasonally, it’s generally a low quarter, the fourth quarter, but we don’t know this quarter because there’s so much activity taking place, and your guess is as good as ours.

Can you guys talk about the outlook for loan growth the next few quarters? And besides some of the obvious areas like leverage lending and correspondent mortgage you already talked about, any areas that you’re tightening around the edges?

Sure. In response to your last question, we generally maintain our underwriting standards throughout different market cycles. We did not loosen our standards when conditions were favorable, and we see no reason to tighten them now; there is a consistent approach being applied. Regarding our loan growth outlook, we expect high single-digit growth for this year, with only one quarter remaining. While we anticipate some challenges due to interest rates and certain mortgage optimizations, we are still optimistic about growth in the card sector, particularly in terms of outstanding balances and balance normalization. However, the overall loan growth environment will likely be influenced significantly by macroeconomic conditions, especially in wholesale lending, as we typically experience reduced loan demand during recessions. Despite this, we have several positive initiatives in place and are engaging with clients effectively, so we will monitor how this develops in the coming year.

And I guess, when we read headlines about home prices going down in some markets and car prices starting to roll, I mean, why doesn’t that drive some tightening in those businesses?

Well, it has. I mean, look at the volumes and mortgage have dropped and cars, the quota have dropped and stuff like that. And that’s already in our numbers, and we would expect that to continue that way.

Yes. I’m just curious in your guidance on NII where you kind of implied fourth quarter would be peak run rate. Next year, do you factor in any impact from a possible treasury buyback program, which could redirect liquidity out of the money market system into the banking system, and therefore, keep your deposit betas lower? Do you think about that at all as a possibility?

Yes, I’m not sure if you heard my earlier comments. Quantitative tightening and net issuance in mortgages and treasuries worldwide will likely lead to a reduction in deposits and introduce some volatility. We have taken that into account in our considerations, including delays, changes in the yield curve, and spreads, which are reflected in the numbers we provided. This is why we are being conservative with our guidance on net interest income. While you could annualize the range from 19 to 76, we have settled on 74, which accommodates all these factors.

Well, thank you very much, and we’ll talk to you all next quarter.

Thank you.