JPMorgan Chase & Company (JPM) — Q3 2023 Earnings Call Transcript

Hey, good morning, everybody. Before we start the actual call, I want to repeat something we just said on the press call. So before we get into the discussion about third-quarter earnings, I just want to say how deeply saddened that we all are about the recent horrific attacks on Israel and the resulting bloodshed and more. Terrorism and hatred have no place in our civilized world and all of our hearts here at JPMorgan Chase go out to all who are suffering.

Thanks, Jamie, and, of course, I very much echo this sentiment. Now, let's turn to our first-quarter earnings results. 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 $13.2 billion, EPS of $4.33, and revenue of $40.7 billion, and delivered an ROTCE of 22%. These results included $669 million of net investment securities losses in Corporate and $665 million of Firmwide legal expense. On Page 2, we have some more detail. Similar to last quarter, we have called out the impact of First Republic where relevant. For this quarter, First Republic contributed $2.2 billion of revenue, $858 million of expense, and $1.1 billion of net income. Now, focusing on the Firmwide results, excluding First Republic, revenue of $38.5 billion was up $5 billion or 15% year-on-year. NII, ex-Markets, was up $4.8 billion or 28%, driven by higher rates and higher revolving balances in Card, partially offset by lower deposit balances. NIR, ex-Markets, was up $374 million or 4%, which included lower net investment securities losses than the prior year. And Markets revenue was down $190 million or 3% year-on-year. Expenses of $20.9 billion were up $1.7 billion or 9% year-on-year, primarily driven by ongoing growth and front office and technology staffing, as well as wage inflation and higher legal expense. And credit costs were $1.4 billion, predominantly driven by net charge-offs in Card, and included a $102 million net reserve release, driven by changes in the central scenario, primarily offset by card loan growth. On to balance sheet and capital on Page 3. We ended the quarter with a CET1 ratio of 14.3%, up about 50 basis points versus the prior quarter as the benefit of net income less capital distributions was partially offset by AOCI. We had $2 billion of net share repurchases this quarter and the pace of buybacks will likely remain modest in light of the Basel III endgame proposal. In line with our capital hierarchy, we will continue to reassess the buyback trajectory as circumstances evolve or opportunities emerge. And on the topic of the Basel III endgame, you'll see that we added a couple of pages on it. So, let's cover that now, starting on Page 4. Given the significance of this proposal for us, the broader industry as well as households and businesses as end users, we thought it was important to spend time discussing it. And while we know there is interest in having us quantify the expected impact of this proposal in a lot of granular detail, it's important to start by asking why the proposed increase is so large given the repeated statement over time by policymakers that banks are well-capitalized and well-positioned to deal with stress. Given that context, the absence of detailed analysis supporting a capital increase of this magnitude is disconcerting and there's a lot that does not make sense to us. Starting with RWA, we've already said we expect the firm's RWA to increase by around 30% or $500 billion, which results in capital requirements increasing by about 25% or $50 billion. One immediate thing to point out is that at 4.5% GSIB, a $500 billion increase in RWA requires $22.5 billion of additional capital with no change in our systemic risk footprint. We've been on the record for a long time that GSIB was conceptually flawed and miscalibrated originally. Since implementation, the failure to address economic growth despite the Fed themselves acknowledging this problem at the outset has made matters worse. And now all of those problems are being applied to an additional $500 billion of RWA. Our view is that the combined proposals could have adjusted the surcharge levels to keep dollars of capital associated with the GSIB buffer constant, rather than simply multiplying the RWA increase by the existing surcharges. Another lens on the proposed increases is the introduction of RWA for operational risk and its clear overlap with op risk losses already capitalized through the stress capital buffer. Although there is limited disclosure from the Fed on this point, we have estimated that we have about $15 billion of operational risk capital embedded in the SCB based on the information the Fed does disclose. Once we capitalize for this new op risk RWA, our required capital will go up by around $30 billion without any change to our portfolio. Now let's turn to Page 5, which shows the impact of the actual and proposed capital rules over the last few years. Zooming out from the details of this most recent proposal, this page reminds us of what's happened since 2017. Since then, SA-CCR and the stress capital buffer have been adopted and our GSIB surcharge will increase to 4.5%. So assuming the Basel III endgame and GSIB proposals are finalized in their current form, we would see a 45% increase in our capital requirements relative to that 2017 starting point. This illustrates again how overcalibrated these proposals are and it's not done yet. We still expect the Fed to incorporate CECL into CCAR, which will likely increase the SCB. And of course, given the absence of a fix to the GSIB clause, it continues to present a headwind into the indefinite future. And aside from those dynamics, there remains the long-standing issue of procyclicality in the overall capital landscape. We think it's also important to point out that the agencies did actually have a choice here. While it may technically be true that the proposal is Basel compliant, Basel compliant does not mandate a 25% increase in capital requirements. Implementing the Basel III endgame consistently with how the Europeans have by retaining credit risk modeling and also addressing the compounding effects of GSIB and SCB would have achieved Basel compliance without creating this unnecessary increase in capital requirements. As you would expect, we will continue to engage and forcefully advocate during the comment period and beyond in a great deal of technical detail. For the purposes of this call, we wanted to make the equally important broader plans about both the level of capital increase and the flaws in the construct of the framework itself since coherent design is critical to the framework's durability over time. The current proposal exacerbates existing features that discourage beneficial scale and diversification. If it goes through as written, there will likely be significant impacts on pricing and availability of credit for businesses and consumers. In addition, the ongoing and persistent increase in the regulatory cost of market-making for banks suggests that the regulators want dramatic changes to the current operation of the US capital markets. We believe that well-regulated market makers that are committed to deploying capital to clients on a principal basis are a critical building block supporting the breadth, depth, and resilience of the American capital markets, which is vital to the US economy. So, caution is warranted when proposing changes of this magnitude. With that, let’s go to our businesses, starting with CCB on Page 6. Consumer spend growth has now reverted to pre-pandemic trends with nominal spend per customer stable and relatively flat year-on-year. Cash buffers continue to normalize to pre-pandemic levels with lower-income groups normalizing faster. Turning now to the financial results, excluding First Republic. CCB reported net income of $5.3 billion on revenue of $17 billion, which was up 19% year-on-year. In Banking & Wealth Management, revenue was up 30% year-on-year, driven by higher NII on higher rates. End-of-period deposits were down 3% quarter-on-quarter. We ranked number one in retail deposit share based on FDIC data and continue to solidify our leadership position in key markets. Client investment assets were up 21% year-on-year, driven by market performance and strong net inflows as we continue to capture yield-seeking flows from our consumer banking customers. In Home Lending, revenue was down 2% year-on-year given a smaller market. Originations of $10.3 billion were up slightly quarter-on-quarter, but they remain down 15% year-on-year. Moving to Card Services & Auto, revenue was up 7% year-on-year, driven by higher Card Services NII on higher revolving balances, partially offset by lower Auto lease income. Card outstandings were up 16% year-on-year due to strong account acquisition and continued normalization. And in Auto, originations were $10.2 billion, up 36% year-on-year as we saw competitors pull back and regained market share. Expenses of $8.5 billion were up 7% year-on-year, largely driven by continued investments in staffing, primarily in front office and technology. In terms of credit performance this quarter, credit costs were $1.4 billion, driven by net charge-offs, which were up $720 million year-on-year, predominantly due to continued normalization in Card. The net reserve build of $49 million reflected a $301 million build in Card services, primarily offset by a $250 million release in Home Lending. Next to CIB on page seven. CIB reported net income of $3.1 billion and revenue of $11.7 billion. Investment Banking revenue of $1.6 billion was down 6% year-on-year. IB fees were down 3% year-on-year and ranked number one with a year-to-date wallet share of 8.6%. In advisory, fees were down 10%. Underwriting fees were up 8% for debt and down 6% directly. In terms of the outlook, we're encouraged by the level of capital markets activity in September, and we have a healthy pipeline going into the fourth quarter. Advisory has also picked up compared to the first half, but year-to-date announced M&A remains down significantly, which will continue to be a headwind. Payments revenue was $2.1 billion, up 3% year-on-year. Excluding equity investments, it was up 12%, driven by higher rates, partially offset by lower deposit balances. Moving to Markets. Total revenue was $6.6 billion, down 3% year-on-year against a very strong third quarter last year. Fixed income was up 1%, driven by an increase in financing and trading activity and securitized products, as well as improved performance in credit. This was predominantly offset by currencies in emerging markets coming off a very strong quarter last year. Equity Markets was down 10%, reflecting lower revenues across products compared to a strong prior-year quarter as activity was challenged by lower volatility. Securities Services revenue of $1.2 billion was up 9% year-on-year, driven by higher rates, partially offset by lower deposit balances. Expenses of $7.4 billion were up 11% year-on-year, predominantly driven by higher legal expense and wage inflation. Credit costs were a net benefit of $185 million, driven by a net reserve release of $230 million, reflecting the impact of net lending activity and net charge-offs of $45 million. Moving to the Commercial Bank on Page 8. Commercial Banking reported net income of $1.7 billion. Revenue of $3.7 billion was up 20% year-on-year with payments revenue of $2 billion, up 30% year-on-year, driven by higher rates, and gross Investment Banking and Markets revenue of $821 million was up 8% year-on-year, reflecting increased M&A volume. Expenses of $1.4 billion were up 15% year-on-year, largely driven by an increase in headcount including front-office and technology investments, as well as higher-volume related expense, including the impact of new client acquisition. Average deposits were down 7% year-on-year, 5% quarter-on-quarter, primarily driven by lower non-operating deposits as clients opt for higher-yielding alternatives. Loans were up 1% quarter-on-quarter. C&I loans were flat, reflecting continued stabilization in new loan demand and revolver utilization. And CRE loans were up 1%, reflecting funding of prior year originations of real-estate banking as well as lower pay-off activity. Finally, credit costs were $64 million, including net charge-offs of $50 million and a net reserve build of $14 million. Then to complete our lines of business, AWM, on Page 9. Asset & Wealth Management reported net income of $1.1 billion with pretax margin of 31%. Revenue of $4.6 billion was relatively flat year-on-year as higher management fees on strong net inflows and higher average market levels were offset by lower performance fees and lower NII deposits. Expenses of $3.1 billion were up 3% year-on-year, driven by continued growth in our private banking advisor teams and the impact of closing the JPMorgan Asset Management China and Global Shares acquisitions. For the quarter, net long-term inflows were $20 billion, positive across all asset classes led by equities. And in liquidity, we saw net inflows of $40 billion. AUM of $3.2 trillion was up 22% year-on-year, and client assets of $4.6 trillion were up 21% year-on-year, driven by continued net inflows and higher market levels. Finally, loans were flat quarter-on-quarter, while deposits were down 5%, driven by migration to investments, partially offset by client inflows. Turning to Corporate on Page 10. Corporate reported net income of $911 million. Revenue was $1.5 billion, up $1.8 billion compared to last year. NII was $2 billion, up $1.2 billion year-on-year due to the impact of higher rates, and NIR was a net loss of $506 million and included the net investment securities losses I mentioned upfront. Expenses of $456 million were up $151 million year-on-year. To finish, we have the outlook on Page 11. We now expect 2023 NII and NII ex-Markets to be approximately $88.5 billion and $89 billion, respectively, with the increase driven by slower repricing than previously assumed. Consistent with what we've been saying throughout the year, while we don't know when it will normalize, we do not consider this level of NII to be sustainable. Our outlook for 2023 adjusted expense is now approximately $84 billion. And as a reminder, this is on an adjusted basis, which excludes legal expense. Also, remember, this outlook excludes the pending FDIC special assessment. And on Credit, we now expect the 2023 Card net charge-off rate to be approximately 2.5%, mostly driven by denominator effects due to recent balanced growth. So to wrap up, we're pleased with another quarter of strong operating results. Throughout the year, we've been pointing out the various sources of significant uncertainty in all of those, including the geopolitical situation, economic outlook, rate environment, deposit reprice and the impact of the Basel III endgame proposal are as prominent now as they have been in the recent past. But as always, we continue to prepare for a range of scenarios and are focused on being there for our clients and customers when they need us most. And with that, let's open the line for Q&A.

Hi, good morning. Jeremy, I was wondering if you could give us a little more color on what you're seeing so far on deposit reprice and migration, what's been better than expected so far on that front? And how do you see higher for longer rates potentially impacting deposit reprice pressure?

Sure. Thanks, John. The trends we're observing are quite similar to what we've noted in previous quarters. As mentioned during the press call, we are being cautious because we don't believe the current levels are sustainable. We anticipate that at some point, we may need to adjust our pricing in certain areas, potentially through tiering or other methods. However, that adjustment hasn't occurred yet this year. Meanwhile, our CD strategy is performing well; we continue to receive positive feedback from the field, and we're effectively capturing funds that are shifting. We're noticing some internal migration and a gradual increase in the deposit rates due to the CD transition, which is unfolding as we planned. Regarding the expectation of rates remaining high for an extended period, it suggests sustained upward pressure on deposit pricing, driven by internal migration and possibly other factors. Ultimately, we will adjust our product pricing based on the competitive market conditions.

And just as a follow-up, it seems like you've done some securities repositioning in the last couple of quarters. How are you positioning the balance sheet in terms of cash in the securities portfolio, given your outlook for rates?

Yeah. I think I would say that while we're not predicting higher rates, I'm sure Jamie will have something to say here, we believe in being prepared for it. And that's been our position for some time. And of course, that's produced good results, and we continue to try to position ourselves. So neither significantly higher rates nor significantly lower rates present a particularly large challenge to the company. So probably at the margin, we're still a little bit biased for slightly higher rates. But do keep in mind that when modeling the duration of the balance sheet, higher rates do extend the duration or rather shorten the duration on the deposit side. So that can be a factor as well.

Okay. Thanks.

Hey, good morning.

Hey, Steve.

Jeremy, I was hoping to just inquire about capital market outlook. You cited improved activity levels in September. But given persistently higher rates, geopolitical tensions, and just poor performance of recent IPOs, how you're thinking about the outlook over the near to medium term? And how are you thinking about just the timing of an inflection in activity?

Yeah, good question. I mean, as you know, obviously, the current levels in Investment Banking remain quite depressed, certainly relative to the very elevated levels that we saw during the pandemic but even relative to sort of 2019, which is what you might consider the last normal year. We do eventually think we'll recover to those levels and hopefully recover to above those levels, recognizing that by the time it happens, you will have had many years of economic growth in the meantime. And to be fair, while the current environment is a little bit complicated in mix and there are some headwinds, as you pointed out, things have improved a little bit. And I think I would say our banking team is a little bit more optimistic than they were last quarter. So it feels to me like a little bit of a slow grind with some positive momentum, but obviously, significant uncertainty in the outlook and some structural headwinds, given lower levels of announced M&A and some regulatory headwinds on that side.

Thanks for the color. And just for my follow-up on some of the regulatory commentary you provided, certainly a lot of helpful color on the slide. So thank you for that. If the proposal were to go through as written, what proportion of the inflation do you believe can be mitigated over time? And I was also hoping you could provide some context as to the quantum of how you think CECL inclusion could potentially impact the SCB and CCAR.

Those are all good questions, Steve. I think it's probably too early to provide a specific quantification on either topic. Starting with the Basel III endgame proposal, we are currently focused on advocating for the necessary changes, some of which are philosophical and others that are more technical, including aspects we believe may be errors in the proposal. Discussing potential optimizations that could change feels premature at this time. It’s important to recognize that operational risk RWA is significant in this proposal and can be viewed as a generic tax across the spectrum, making it non-optimizable in some respects. Thus, we need to manage expectations regarding the level of optimization possible once the rule is finalized and technical issues are addressed. The definition of optimization plays a role here. There’s a concept I sometimes refer to as costless optimization, involving technical fixes that don’t impact revenue or require exiting businesses. Finding such optimizations may be more challenging than in the past. However, we might need to exit certain areas, as that could be better than engaging in activities detrimental to shareholder value, although it won’t be without cost. An example of this is the renewable energy tax credit investment business, which, due to the significant increase in risk weight, may no longer be viable. We hope for a change in this area, but it’s complicated because these are long-duration assets. Until the rule is finalized, we have to consider whether we want to put these assets on the balance sheet. I apologize for the lengthy response. Regarding quantifying CECL and CCAR, we need to wait because there’s a lack of transparency into the Fed's exact modeling, making it difficult to predict the precise impact of CECL on CCAR. We know probabilistically that it will, like many things today, increase capital levels.

Very helpful color, Jeremy. Thanks for taking my questions.

Yep.

Hey, good morning. Just first question, Jeremy, on credit. I think you mentioned some of the reserve release was tied to the change in the central scenario. Could you just talk to us, remind us what the central scenario is today, what changed? And then in terms of fundamentally on credit, like, where are you seeing softness either on the consumer or the commercial side?

Yeah. So on the central scenario, you should read the research that gets put out by our competitors and our excellent research team. No, but in all seriousness, I think our US economists had their central case outlook to include a very mild recession with, I think, two quarters of negative 0.5% of GDP growth in the fourth quarter and first quarter of this year. And that then got revised out early this quarter to now have sort of modest growth, I think, around 1% for a few quarters into 2024. So just flowing that through our process while acknowledging that we're still skewed to the downside, we're still reserved to a significantly higher unemployment rate on a weighted average basis than is in the central case outlook. So that number we’ve sometimes given you is 5.5% this quarter. So it's really not much more complicated than that. We're just kind of following the process. And I think your other question was, where am I seeing softness in credit. And I think the answer to that is actually nowhere roughly or certainly nowhere that's not expected, meaning we continue to see the normalization story play out in consumer more or less exactly as expected. And then, of course, we are seeing a trickle of charge-offs coming through the office space. You see that in the charge-off number of the Commercial Bank. But the numbers are very small and more or less just the realization of the allowance that we've already built there.

That's helpful. Referring back to the details you mentioned about the Basel endgame, I recall Jamie stating last month that we don't anticipate any changes. However, considering the pushback, is it falling on deaf ears from a shareholder perspective? Are we accepting that we might see a more unfavorable outcome occur, or is there potential for a compromise as this situation gets resolved?

Yeah. So I'll let Jamie speak for himself on that point, but our job is to advocate. We're not going to guess what the sentiment is in Washington. It's a 1,000-page rule proposal as you know. We've got a big team of very smart people studying it very closely. Interestingly, we noted recently that in some of the analysis that they did about the impact on lending, they sort of forgot about like $1 trillion of the Fed and their preamble, they forgot about $1 trillion of operational risk RWA. So it just highlights that there is a possibility or seem to have forgotten. They simply omitted the impact of the operational risk RWA on fees. So anyway, the point is it's long, it's complicated, it's technical. We do think there are probably some technical mistakes and they are going to forcefully advocate on all of those. And while we disagree with a lot of this stuff, these are technical issues that should be, in some sense, resolved technically. And hopefully, they'll listen.

Got it. Thank you.

Sorry, I'm just getting a correction in the room. I meant to say trillion.

Yeah, no, I got that. I got the trillion dollars. Yep.

Hey, good morning. I want to dig in on the NII side. So you raised the 2023 NII markets guidance by $2 billion for this year. So I know your comments in the press release suggest JPMorgan's overearning. So I just want to triangulate there. What does normalized NII look like? And do we get to normalize next year or later on?

Yeah, a couple of things. So let me do the timing question first. So we're being very clear that we are not predicting when it's going to be a function of the marketplace and the rate environment and competitive dynamics and so on and so forth. So we're just really just trying to remind everyone not to bank on the current run rate, which we just don't fundamentally think is sustainable. You'll be aware that before Investor Day earlier this year, we tried to quantify what we thought that kind of normalized range might look like, and we put a sort of mid-70s type number out there. And at Investor Day, we talked about how the acquisition of First Republic was going to push that number up a little bit, although there were some overlaps and so on and so forth. So anyway, with the benefit of time and having everything settled in a little bit, if you sort of push us for that kind of what does that number now look like, we think it's probably closer to about 80 with all the obvious caveats that this is a guess and we don't know when. But we're just trying to point out that it's a bit lower than the current run rate.

Got it.

Inside the company, some people think it will happen sooner, i.e., me. Some people think it will happen later, i.e., Jen and Marianne and Jeremy.

There was no way that I was in that camp, actually, but I don't know. I'm not sure I have an opinion on it.

And then on the loan growth side, industry loan growth has slowed significantly this year. What demand are you seeing for loan growth across the different categories? And I know it might be too early to talk about next year, but directionally, how should we think about loan growth, given where we are in the cycle and the higher capital requirements coming?

Yeah, sure. So on loan growth, the story is pretty consistent with what we've been saying all year. So we were seeing very robust loan growth in Card, and that's coming from both spending growth and the normalization of revolving balances. As we look forward, we're still optimistic about that, but it will probably be a little bit more muted than it has been during this normalization period. In Auto, we've also seen pretty robust loan growth recently, both as a function of slightly more competitive pricing on our side as the industry was a little bit slow to raise rates. And so we lost some share previously, and that's come back now. And generally, the supply chain situation is better. So that's been supported. As we look forward there, it should be a little bit more muted. And I think generally in wholesale, the loan growth story is going to be driven just by the economic environment. So depending on what you believe about soft landing, mild recession, no lending, we have slightly lower or slightly higher loan growth, but in any case, I would expect it to be relatively muted. And of course, Home Lending remains fairly constrained both by rates and market conditions. But also, and I think this is true across the board, we will be managing things actively as mentioned in light of Basel III, which may not change originations, but it will change what we retain.

Thank you.

Good morning, Jeremy. How are you?

Hey, Gerard.

Jeremy, you guys have put up a really strong ROTC number of 22% for the quarter. And when you dive into your different segments, what really jumps out at us is the 40% ex-First Republic ROE in Consumer and Community Banking. I know you and Jamie have talked about your over-earning on credit, we get that. But in view of all of these fintechs and all these other non-bank competitors that were all supposed to pick away at everybody's market share, you guys have put up great numbers here. What's the drivers behind an ROE, even when you take that credit over-earning out, what's driving this business profitability at such high levels?

Yeah, Gerard, I'd say a couple of things there. So first, it's not just credit, it's also deposit margin, right? So when we talk about over-earning on NII, a disproportionate amount of that is coming out of the consumer franchise for all the reasons that we've talked about. But I would also point out, sometimes we don't like the word overearning because right now, customers are happy, and they're doing CDs. And the broader answer to your question about why we're able to compete effectively really comes back to a decade, two-decade long history of investing for the future and recognizing that there's a holistic value proposition here that includes branches and the app and all the online services and the entire suite of products and services that is around this enterprise, which drives engagement and customer loyalty. And we're seeing some of the benefits of that now, although we're not complacent. The competition is still there, the fintechs are still there, and we know we need to continue investing to preserve the value. And it's also true that the particular circumstances of the current rate and credit environment means that the earnings are a little bit above normal, but that core franchise is extremely robust.

Very good. And then as a follow-up, which ties into your answer on the deposit margin and consumer and your earlier comments, you and Jamie, about the internal debate inside JPMorgan about the migration of rates going higher on the funding side. Your noninterest-bearing deposits, I think, are around 28% of total deposits, which is slightly above the 26% you guys had back in 2018 or 2019 or pre-pandemic. Is this expectation that you're going to see more of the noninterest-bearing deposits going to interest-bearing or is it just the repricing of interest-bearing deposits that have some of your folks inside JPMorgan a little more cautious on that net interest income number?

That’s a good question, Gerard. I think it's a little bit bigger picture than that. And I'm not sure. I get your question. It's a good question, but I'm not sure that the reported interest-bearing, noninterest-bearing split is the best one to look at this through for a couple of reasons. So first, like between wholesale and retail, we've got some amount of noninterest-bearing in wholesale that's sort of the ECR product, and so you see some dynamics there that play out. And in consumer, in a world where savings is paying a relatively low rate paid across checking and savings, the migration dynamics are probably not that different right now. But then, of course, even within consumer across both consumers and small businesses, you've got slightly different dynamics in terms of how people manage their operating balances. So I would tend to zoom out a little bit and see this as a holistic answer that's driven by internal migration from checking, savings, to CDs, from ECR to interest-bearing and wholesale. And then our potential response to the rate environment, the competitive environment, the overall level of system-wide deposits in terms of product-level reprice that may or may not happen at the moment in the future.

Great. Thank you.

Hi, good morning. Jeremy, my first question is for you. Again, sort of maybe re-asking the question a different way. Your new guide for net interest income for this year would imply an exit run-rate of $22.9 billion in the fourth quarter. As we think about the dynamics in higher for longer, on one hand, your fixed rate assets will continue to reprice. On the other, you've been asked a lot about the deposit dynamics that could continue to creep higher. How do you think about those puts and takes as we think about that relative to that exit rate of $22.9 billion in the fourth quarter?

The straightforward answer to your question is that the fourth quarter exit number corresponds to a $90 billion run rate excluding Markets. We believe that a more typical figure is around $80 billion. One interesting aspect is that as the proportion of deposits in CDs rises, the balance between internal migration and betas, along with rates and volume, becomes less binary and smoother. When we analyze these factors and model migration, balances, and product-level repricing, as we move away from a situation with a 0% CD mix, things tend to stabilize more overall. It will be important to monitor this, as it remains a key focus for us as a company. We believe we can manage it effectively, but it's crucial to remember the broader perspective, which is our client relationships. We have consistently emphasized our focus on primary bank relationships, and we did not lose any of those in the previous cycle. We intend to maintain that stability in this cycle, which reflects our long-term commitment.

I would say that quantitative tightening will have a significant impact, and we are not entirely sure about the repercussions on wholesale and consumer aspects. Additionally, it's important to note that the Fed's RRP program is also drawing money into the Fed, which is reducing deposits, and that amount is still $1 trillion.

Thank you. My second question is regarding the impacts of the Basel III endgame. It's clear that the situation is overly complicated and unnecessary at this time. However, it's evident that you generated 75 basis points of CET1 this quarter despite a decrease in RWAs. My question is whether this situation has affected JPMorgan's natural return profile of 17%. Jamie, I recall you discussed a 14% return at Barclays in September. Ultimately, it appears that the Basel III endgame negatively impacts the earnings potential and returns for JPMorgan's portfolio managers who support the company through market cycles.

That's a great question, Erika. Let me address the key point first, which is our target of 17% through the cycle. We are not changing that figure today, despite the Basel III endgame proposal. It's important to recognize that a 25% increase in capital poses a significant challenge to our returns. While we consider earnings power and returns to be distinct concepts, increasing capital dilutes the numerator, resulting in a lower return number. This could represent the minimum impact from the Basel III changes for a few reasons. We anticipate potential modifications, and once the rules are finalized, we will look to adjust pricing where possible, which may differ between consumer and wholesale sectors. This could help alleviate some challenges, but it may also lead to higher costs affecting the real economy, which relates to our concerns about decreased availability of products, services, and lending. There may be chances for optimization without costs, though I'm somewhat skeptical about those opportunities, but we've surprised ourselves before in similar situations. Lastly, we might choose to stop or exit certain activities, but that alone isn't likely to sustain our 17% return target. It's primarily about eliminating shareholder-disruptive activities that aren't yielding significantly better returns. Regarding your other point about organic capital generation, it's crucial to differentiate between how the economy is affected and our long-term returns versus our ability to meet capital requirements. As Jamie often states, JPMorgan will manage fine, and we are accumulating capital while doing so conservatively. We aim for timely or early compliance, as is our goal, but that doesn’t directly impact our long-term return target or the real economy.

Got it. Thank you.

Hi, thank you. I appreciate your comments on the larger global issues and their potential effects on markets, the crude market, and global trade. I agree that we are in one of the most perilous times in decades. My question is whether it surprises you that markets are maintaining stability, and if you still have a hopeful or optimistic view about banking despite these circumstances. More importantly, if you believe what you stated, what actions are you taking in response? How do you approach your management conservatively, and how do you prepare for challenging times?

Yes. Go ahead, Jeremy. Do you want to start?

Okay. So I mean, on green shoots, you'll just note that our comments are cautious. I mean, there is momentum. I do think we are a little bit more optimistic than we were. But obviously, markets have been bumpy, both equity markets and rate markets have been very whippy recently. So we don't want to get too carried away with optimism here. We are coming off a very low base. And so there's a hope and an expectation that we are on the path to normalization and improvement. And of course, the overall economic picture, at least currently, looks solid. The sort of immaculate disinflation trade is actually happening. So those are all reasons to be a little bit optimistic in the near term, but it's tempered with quite a bit of caution.

I would advise caution. There has been a significant amount of fiscal monetary stimulus still present in the system. While this can influence markets, sentiment, sales, and profits, it cannot persist indefinitely. We need to consider how much longer fiscal stimulus will continue at this level before we face various factors. Therefore, it's essential to exercise caution. The dealer policies pose a considerable challenge that we must address. We conduct numerous stress tests each week, examining different scenarios, including geopolitical and interest rate concerns. Typically, geopolitical tensions manifest as either a significant recession or a mild downturn, often affecting specific regions or markets considerably. Just because markets are performing well does not guarantee that this trend will continue. History reminds us of difficult years such as 1987, 1990, 1994, 2000, and 2009, which were often unforeseen. The current landscape presents many uncertainties, so we must remain vigilant. Despite these challenges, our focus is on providing our clients with improved products and services consistently and securely. Ultimately, our goal is to serve our clients well. We recognize that tough times will come, which is not a surprise. While we may not always predict their arrival or source, our commitment to serving clients and building a solid business remains steadfast, regardless of how it impacts returns. We will address these return issues as we determine the best course of action.

Thank you for all that.

Thanks, Glenn.

Hi. I understand the NII strategy benefited from First Republic asset sensitivity, TD strategy, money in motion. And I'm curious to how much is the NII increase and the deposit benefits a function of the 67 million digital banking customers. Do you have more digital banking customers and branch customers now? If you can just refresh that? And then a more general question, I guess, the first one for Jeremy and the second one for Jamie. You have record tech spend. What's the benefit of having record tech spend? If you can kind of mark to market your thoughts there as it relates to AI as it relates to maybe wasted spending, your outlook for next year? And does it really help to be the biggest tech spender of the banking industry?

Yes. Let me do digital banking, Mike. I spent some time on this actually a couple of weeks ago. And it's interesting to note the sort of extent to which the growth in digitally engaged consumers is higher than the overall growth in consumer accounts, meaning that we're continuing to increase the percentage of our consumers that are digitally engaged. And it sort of goes back to my prior point about...

The percent who are digital-only is much lower than that.

Certainly, this relates to the broader issue of how much our current NII story is benefiting from a comprehensive, multi-channel strategy focused on fully engaging customers. This approach necessitates significant investments in both branches and various digital services. Thus, the current environment can be seen as a return on that investment, but it certainly doesn't mean we will cease investing. Regarding your other question about the advantages of being a major tech spender, I believe it’s essential. As a large, technology-driven business in a competitive landscape, everything is evolving. Younger generations have distinct expectations, and we need to stay agile and proactive to avoid being disrupted. I’m not sure if Jamie wants to add anything.

And just the competition, we look at it as, it’s Wells. It was coming back, which I'm happy for you guys. It's obviously Marcus, it's Apple. It's Chime, it's Dave. There’s a lot of people coming up with these businesses in different ways. Some have been quite successful, like Stripe in payments. And so we want to be very good and very competitive. Some of that tech spending is things which are almost a sine qua non, which is cybersecurity, data center resiliency, regulatory requirements and things like that, which we simply are going to do and be very, very good at to protect the company.

As it relates to AI specifically, which is the talk of the town, I guess the consensus among people outside the banking industry is that banks will not win that battle, including JPMorgan. You won't control the front end. What are you doing with AI to make a difference now? Or is this simply a moonshot?

I disagree with that statement. Banks possess an exceptional amount of proprietary data, in addition to the public data used by large language models, which analyze everything available on the internet or that has ever been published. AI is an incredibly effective tool for our use. We recently appointed a woman to lead our data analytics and AI efforts. There are various types of AI we employ for risk management, fraud detection, marketing, and prospecting. Our management team continuously seeks ways to leverage data to minimize errors, improve client service, and assist salespeople by providing insights into client interactions. We must embrace this approach. While it does allow for the possibility of new disruptors entering the field, that has always been a reality with technology, and we are confident in our ability to navigate it successfully.

And then lastly, I think you had made a mention at a conference about investment spend or tech spend over the next year. Where do you stand on that?

Yeah. No, because you did ask a little bit about the expense outlook for next year. So I think at the conference, we said I think the consensus was $88 billion, but we're still going through budget process, et cetera, et cetera. So that's still true. I think we're still kind of in the ballpark, but I would say at the margin, there's going to be a little bit of upward pressure on that as we sort of do our usual thing and look at all the opportunities that we see and the investments that we want to make. So no surprise in that sense that we're going to invest prudently. Nothing dramatic, but probably a little bit of upward pressure on the margin.

All right. Thank you.

Hey, good morning. Jeremy, do you think there's any receptivity among regulators regarding the double counting, not only of operational risk, but I think you alluded to this earlier in the Markets business, but there's clearly double counting and market risk in the trading book. Is there any receptivity?

Can I just answer real quickly? We don't really know. It's a one-sided conversation generally. They say put in your comments. So everyone's going to put in extensive comments, kind of like you heard from Jeremy, and we don't really know. We don't really know what's going on inside the Fed, how many people get involved. In my view, it's become a very politicized process as opposed to the technical analysis, I think that’s required to do it exactly right. So we'll see.

Okay. If it doesn't change, could you clarify the potential impact on liquidity in the Markets business? Is this related to JPMorgan withdrawing from certain types of business, or are you suggesting that the exit of smaller, less scaled players will result in fewer liquidity providers? If that's the case, could it create an opportunity for JPMorgan to gain market share in a reduced business landscape?

If you consider the Markets segment alone, there's a significant increase in capital, approximately 60%. You can analyze it by product, but some products are more worthwhile than others, and overall, it's challenging across the board. Market making is an essential function, and currently, there are only a limited number of large market makers capable of serving various critical entities such as governments, schools, and financial institutions in substantial amounts. Market makers operate differently from hedge funds. It's unclear what the ultimate intention is in this context, and it's something that requires careful consideration. We approach market making cautiously and have never incurred the kind of losses often discussed during global market disruptions. However, I acknowledge that market making could potentially drive some players out of the field, leading to lower positions, which presents certain risks. At the same time, it might lead to more consolidation, as clients have a high demand for these services, possibly resulting in unexpected consolidation in market making. Moreover, with various regulatory constraints on liquidity, capital, and other factors, there will always be limitations on operational capacity.

Yeah. And I think that last point of Jamie's is particularly important because, sure, if you want, you can construct as what I would consider a very optimistic argument that the higher cost of doing business will lead smaller-scale players to exit, and that's a share gain opportunity for us. But I refer back to the comments about the disincentives to beneficial diversification and scale. Getting bigger, especially in Markets, it's quite expensive from, for example, a GSIB perspective. And so you wind up kind of hemmed in on all sides, which is one of the reasons why we're sort of highlighting that it does seem like the only way out sometimes when you look at the cumulative effect of everything that's happened in Markets over the last 15 years is a fundamentally very different system. And well, obviously...

Great opportunity for European market makers. I mean, a great opportunity. Like they can do repo and FX and swaps and credit and stuff with 30% less capital. That is a big difference in that kind of business.

Great. That’s helpful. Thanks.

Hi, good morning. You talked about increased investment spend in some areas in response to an earlier question, but just how do you think about cost control overall looking at the medium term? The outlook for revenue is obviously pressured at least on net interest income, fees might help. But the backdrop is for potentially declining revenue or at least flattish revenue for a couple of few years. So I know you always say you want to invest for the cycle, and it's really paid off over time, but how are you thinking about cost control in the next few years?

I wish I had a response that fit your framework better, but we fundamentally disagree with it. Over the last couple of years, we’ve seen situations where interest rates drop suddenly and then rebound significantly, leading to unusual credit conditions and fluctuations in capital markets. We experienced this from 2021 to 2022, where the revenue environment changed quickly for reasons often beyond our control. While some parts of our expenses are directly sensitive to revenue in the short term and adjust either naturally or more forcefully based on volume, other expenses are more structural. Our goal is to align those structural expenses with what we believe are sustainable returns over the cycle. We remain focused on managing costs, and that internal discipline is stronger than ever as we approach the budget cycle. However, our strategies are long-term, and we do not aim to artificially lower costs in response to reduced revenue, especially when we did not inflate costs during periods of high revenue that we felt were unsustainable.

Yeah, that makes sense. Regarding First Republic, the contribution is significantly higher than we anticipated. How do you view the balance between potential loan runoff and the opportunities to strengthen those relationships?

Yeah. So you're right about the contribution and about the runoff of loans and it is notable, the net income, the First Republic-related net income that we printed this quarter. So the first thing to say is that we don't think that that First Republic-related net income number from this quarter is a sustainable indicator of the future run rate. Some of the same dynamics that we just talked about, in particular, overearning on deposits or sort of above-normal deposit margins also apply to the First Republic franchise to some degree. So we would expect that to normalize. And probably more significantly, as I think you alluded to, we do have some accelerated pull-to-par on some of the commitments that we took on at a fair value discount as part of the acquisition. And so that's a short-term tailwind in the revenue that will come out of that over the next few quarters. And yeah, in terms of how it's going overall and deepening the relationships, that remains a focus. And I think more of that will happen as we continue the integration and we continue stabilizing. And yeah, I think, as I said, I think, on the press call, things are going well, arguably a little bit better than we had sort of modeled as part of the acquisition, and we're happy to see that.

Okay. Thank you very much.

Thank you very much.