JPMorgan Chase & Company (JPM) — Q1 2024 Earnings Call Transcript

Thank you very much, and 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 $13.4 billion, EPS of $4.44 on revenue of $42.5 billion and delivered an ROTCE of 21%. These results included a $725 million increase to the special assessment resulting from the FDIC's updated estimate of expected losses from the closures of Silicon Valley Bank and Signature Bank. Touching on a couple of highlights. Firm-wide IB fees were up 18% year-on-year, reflecting particular strength in underwriting fees. And we have seen strong net inflows across AWM as well as in the CCB and Wealth Management business. On Page 2, we have some more detail. This is the last quarter we'll discuss results excluding First Republic, given that going forward, First Republic results will naturally be included in the prior period, making year-on-year results comparable. For this quarter, First Republic contributed $1.7 billion of revenue, $806 million of expense and $668 million of net income. Now focusing on the firm-wide results excluding First Republic. Revenue of $40.9 billion was up $1.5 billion or 4% year-on-year. NII ex Markets was up $736 million or 4% driven by the impact of balance sheet mix and higher rates as well as higher revolving balances in card, largely offset by deposit margin compression and lower deposit balances in CCB. NIR ex Markets was up $1.2 billion or 12% driven by higher firm-wide asset management and Investment Banking fees as well as lower net investment securities losses. And Markets revenue was down $400 million or 5% year-on-year. Expenses of $22 billion were up $1.8 billion or 9% year-on-year driven by higher compensation, including growth in employees and the increase to the FDIC special assessment. And credit costs were $1.9 billion, reflecting net charge-offs of $2 billion and a net reserve release of $38 million. Net charge-offs were up $116 million predominantly driven by Card. On to balance sheet and capital on Page 3. We ended the quarter with a CET1 ratio of 15%, relatively flat versus the prior quarter, reflecting net income which was predominantly offset by higher RWA and capital distribution. This quarter's higher RWA is largely due to seasonal effects, including higher client activity in Markets and higher risk weights on deferred tax assets, partially offset by lower Card loans. Now let's go to our businesses, starting with CCB on Page 4. Consumers remain financially healthy, supported by a resilient labor market. While cash buffers have largely normalized, balances were still above pre-pandemic levels, and wages are keeping pace with inflation. When looking at a stable cohort of customers, overall spend is in line with the prior year. Turning now to the financial results excluding First Republic. CCB reported net income of $4.4 billion on revenue of $16.6 billion, which was an increase of 1% year-on-year. In Banking & Wealth Management, revenue decreased by 4% year-on-year, largely due to lower net interest income from reduced deposits, with average balances down 7% as our certificate of deposit mix increased. Client investment assets rose by 25% year-on-year, driven by market performance and strong net inflows. In Home Lending, revenue increased by 10% year-on-year, primarily due to higher net interest income and production revenue. Originations were up by 10%, though still modest. Moving to Card Services & Auto, revenue increased by 8% year-on-year, driven by higher net interest income from increased revolving balances, partially offset by higher card acquisition costs due to new account growth and lower auto lease income. Card outstandings rose by 13% due to strong account acquisition and the normalization of revolving credit. In auto, originations totaled $8.9 billion, down 3%, while we maintained healthy margins and market share. Expenses amounted to $8.8 billion, an increase of 9% year-on-year, primarily due to field compensation and ongoing investments in technology and marketing. In terms of credit performance this quarter, credit costs were $1.9 billion, driven by net charge-offs that rose by $825 million year-on-year, mainly due to the ongoing normalization in Card. The net reserve build was $45 million, reflecting increases in Card largely offset by a release in Home Lending. Next, the Corporate & Investment Bank. Before reporting CIB's results, I want to note that this will also be the last quarter we report earnings for the CIB and CB as separate segments. Between now and Investor Day, we will provide an 8-K with historical results, including five quarters and two full years of history consistent with the new structure of the Commercial and Investment Bank segment, in line with the reorganization announced in January. Turning back to this quarter. CIB reported net income of $4.8 billion on revenue of $13.6 billion. Investment Banking revenue of $2 billion was up 27% year-on-year. IB fees were up 21% year-on-year, and we ranked #1 with year-to-date wallet share of 9.1%. In Advisory, fees were down 21% driven by fewer large completed deals. Underwriting fees were up significantly, benefiting from improved market conditions with debt up 58% and equity up 51%. In terms of the outlook. While we are encouraged by the level of capital markets activity we saw this quarter, we need to be mindful that some meaningful portion of that is likely pulling forward from later in the year. Similarly, while it was encouraging to see some positive momentum in announced M&A in the quarter, it remains to be seen whether that will continue, and the Advisory business still faces structural headwinds from the regulatory environment. Payments revenue was $2.4 billion, down 1% year-on-year, as deposit margin normalization and deposit-related client credits were largely offset by higher fee-based revenue and deposit balances. Moving to Markets. Total revenue was $8 billion, down 5% year-on-year. Fixed income was down 7% driven by lower activity in rates and commodities compared to a strong prior year quarter, partially offset by strong results in Securitized Products. Equity Markets was flat. Securities Services revenue of $1.2 billion was up 3% year-on-year. Expenses of $7.2 billion were down 4% year-on-year predominantly driven by lower legal expense. Moving to the Commercial Bank on Page 6. Commercial Banking reported net income of $1.6 billion. Revenue of $3.6 billion was up 3% year-on-year driven by higher noninterest revenue. Gross Investment Banking and Markets revenue of $913 million was up 4% year-on-year with increased IB fees, largely offset by lower Markets revenue compared to a strong prior year quarter. Payments revenue of $1.9 billion was down 2% year-on-year driven by lower deposit margins and balances, largely offset by fee growth, net of higher deposit-related client credits. Expenses of $1.5 billion were up 13% year-on-year predominantly driven by higher compensation, reflecting an increase in employees, including for office and technology investments, as well as higher volume-related expenses. Average deposits were down 3% year-on-year, primarily driven by lower nonoperating deposits and down 1% quarter-on-quarter, reflecting seasonally lower balances. Loans were flat quarter-on-quarter. C&I loans were down 1%, reflecting muted demand for new loans as clients remain cautious. And CRE loans were flat as higher rates continue to have an impact on originations and sales activity. Finally, credit costs were a net benefit of $35 million, including a net reserve release of $101 million and net charge-offs of $66 million. Then to complete our lines of business, AWM on Page 7. Asset & Wealth Management reported net income of $1 billion with pretax margin of 28%. Revenue of $4.7 billion was down 1% year-on-year. Excluding net investment valuation gains in the prior year, revenue was up 5% driven by higher management fees on strong net inflows and higher average market levels, partially offset by lower NII due to deposit margin compression. Expenses of $3.4 billion were up 11% year-on-year largely driven by higher compensation, including revenue-related compensation; continued growth in our private banking advisor teams; and the impact of the JPMorgan Asset Management China acquisition; as well as higher distribution fees. For the quarter, long-term net inflows were $34 billion, led by equities and fixed income. AUM of $3.6 trillion was up 19% year-on-year. And client assets of $5.2 trillion were up 20% year-on-year driven by higher market levels and continued net inflow. And finally, loans were down 1% quarter-on-quarter and deposits were flat. Turning to Corporate on Page 8. Corporate reported net income of $918 million. Revenue was $2.3 billion, up $1.3 billion year-on-year. NII was $2.5 billion, up $737 million year-on-year driven by the impact of the balance sheet mix and higher rates. NIR was a net loss of $188 million. The current quarter included net investment securities losses of $366 million compared with net securities losses of $868 million in the prior year quarter. Expenses of $1 billion were up $889 million year-on-year predominantly driven by the increase to the FDIC special assessment. To finish up, we have the outlook on Page 9. We now expect NII ex Markets to be approximately $89 billion based on a forward curve that contained 3 rate cuts at quarter end. Our total NII guidance remains approximately $90 billion, which implies a decrease in our Markets NII guidance from around $2 billion to around $1 billion. The primary driver of that reduction is balance sheet growth and mix shift in the Markets business. And as a reminder, changes in Markets NII are generally revenue-neutral. Our outlook for adjusted expense is now about $91 billion, reflecting the increase to the FDIC special assessment I mentioned upfront. And on credit, we continue to expect the 2024 Card net charge-off rate to be below 3.5%. Finally, you may have noticed that our effective tax rate has increased this quarter, and it will likely stay around 23% this year, absent discrete items, which can vary quite a bit. The driver of this change is the firm's adoption of the proportional amortization method for certain tax equity investments. Our managed rate is unchanged, and it should average about 3.5% above the effective tax rate. This is a smaller gap than we've previously observed, and we expect this approximate relationship to persist going forward, although the difference will continue to fluctuate as it has in the past. For the avoidance of doubt, these changes have no meaningful impact on expected annual net income. We're just mentioning this to help with your models. So to wrap up. We're pleased with another quarter of strong operating results even as the journey towards NII normalization begins. While we remain confident in our ability to produce strong returns and manage risk across a range of scenarios, the economic, geopolitical and regulatory uncertainties that we have been talking about for some time remain prominent, and we are focused on being prepared to navigate those challenges as well as any others that may come our way. And with that, let's open up the line for Q&A.

So I have a couple of questions. First, Jamie, could you explain the decision to raise the dividend at this point in the cycle, especially before the CCAR? Additionally, how are you viewing the target range for the dividend payout ratio? It has been between 24% and 32% in recent years. Does this indicate that we might be approaching the higher end of that range or even going above it? I also want to clarify the buyback strategy and maintaining the CET1 ratio at 15%. The minimum requirement is 11.9%. I understand we need to wait for the Basel III endgame reproposal, but should we expect to maintain the 15% CET1 until we have clarity on these regulations?

I'm glad to have you on this call, Betsy. I want to acknowledge the tough medical situation you've faced recently and express the immense respect we have for you and your work over the last two decades. We're earning significant profits, which is why we raised the dividend. Ideally, we want to pay out about one-third of normalized earnings. While calculating normalized earnings can be tricky, we're comfortable being slightly ahead or behind that target. Now, regarding the 15% capital level, this will help us prepare for the Basel endgame. The details are less important right now; what matters is that we can adapt in the short and long term. The Basel III endgame might turn out better than expected, possibly freeing up about $20 billion in capital. As always, our approach is to prioritize using capital to grow the business first, then pay the stable dividend, and if appropriate, engage in stock buybacks. We are currently buying back $2 billion in stock annually, but I don't want to increase that significantly at the current prices. We're waiting for more clarity on Basel, and once we have it, we can give more specific guidance. It's also worth noting that there are short-term capital uses that can benefit shareholders and may reduce our CET1. We could take actions now to enhance earnings and utilize that capital. We're in a strong position, and we'll be patient. I encourage analysts to remember that excess capital isn't wasted; it's potential earnings waiting to be realized. We'll deploy it wisely for our shareholders in due time.

Betsy, I just wanted to add my welcome back thoughts as well. And just a very minor edit to Jamie's answer. I think he just misspoke when he said $2 billion a year in buybacks, the trajectory. It's $2 billion a quarter.

I'm sorry, $2 billion a quarter.

Otherwise, I have nothing to add to Jamie's very complete answer. But welcome back, Betsy.

Okay. Thank you so much, and I appreciate it. Looking forward to seeing you at Investor Day on May 20.

Excellent. Us too.

Jeremy, can you speak to the trends you're seeing with respect to deposit migration in the quarter, if there's been any change? Have you seen that migration start to slow or not?

Yes, that's a great question, Jim. The straightforward answer is no, not really. As we have mentioned for some time, the shift from checking and savings accounts to CDs remains the primary trend driving the increase in the average rate paid in our consumer deposit business. This trend is ongoing, and we continue to capture that migratory money at a high rate. We are pleased with what that indicates about our consumer franchise and the level of engagement we are experiencing. While there is some discussion about whether we are nearing the end of what people sometimes call cash-sorting, our analysis shows some signs that it might be slowing slightly, but we remain cautious about that. We believe it is not reasonable to think that in a scenario where checking and savings accounts yield effectively 0 and the policy rate exceeds 5%, there won't be continued migration. We anticipate ongoing migration and yield-seeking behavior even if the yield curve environment changes and substantial rate cuts are introduced. In fact, even in a hypothetical fourth-quarter yield curve projection that included six cuts, we still expected an increase in the average rate paid as migration continued. So, I can say that there has been no significant change in the trends, and the expectation for continued migration remains very strong.

Okay. And just a follow-up on that and just sort of bigger picture on NII. Is that sort of the biggest driver of your outlook? Is it migration? Is it the forward curve? Is it balances? It sounds like it's migration, but just be curious to hear your thoughts on the biggest drivers of upside or downside.

Yes. So I mean, I think the drivers of, let's say, what's embedded in the current guidance is actually not meaningfully different from what it was in the fourth quarter, meaning it's the current yield curve, which is a little bit stale now, but the snap from quarter end had roughly 3 cuts in it. So it's the current yield curve. It's what I just said, the expectation of ongoing internal migration. There is some meaningful offset from card revolve growth, which, while it's a little bit less than it was in prior years, is still a tailwind there. We expect deposit balances to be sort of flat to modestly down. So that's a little bit of a headwind at the margin. And then there's obviously the wildcard of potential product-level reprice, which we always say we're going to make those decisions situationally as a function of competitive conditions in the marketplace. And you know this, obviously. But in a world where we've got something like $900 billion of deposits paying effectively 0, relatively small changes in the product-level reprice can change the NII run rate by a lot. So the error bands here are pretty wide. And we're always going to stick with our mantra, which has been not losing primary bank relationships and thinking about the long-term health of the franchise when we think about deposit pricing.

Jeremy, you had mentioned at a conference earlier this year that the market might need to build in more reserve growth for Card growth. You've had more reserve build. We didn't see that this quarter. Is that just kind of seasonal? And would you still expect the kind of growth math to play out in terms of Card growth and reserve build needs?

Yes, John. So in short, yes to both questions. So yes, the relative lack of build this quarter is a function of the normal seasonal patterns of Card. Yes, we still expect 12% card loan growth for the full year. And yes, that still means that all else equal, we think the consensus for the allowance build for the back 3 quarters is still a little too low if you map it to that expected card loan growth. Obviously, there's the wildcard of what happens with our probabilities and our parameters and the output of our internal process of assessing the SKU and the CECL distribution and so on. And we're not speaking to that one way or the other. So if you guys have your own opinions about that, that's fine. But we're narrowly just saying that, based on the card loan growth, that we expect and normal coverage ratios for that, we do expect build in the back half of the year.

Okay. Got it. And then just a follow-up to make it super clear on the idea of the Markets NII, that outlook being revised down by $1 billion, but revenue-neutral. I guess the obvious thing is there, there's typically an offset in fee income, and you don't guide to that. But the idea would be, the way you're structuring trades, the way the balance sheet is evolving, there's some offset that you'd expect in Markets fees from the lower Markets NII, correct?

That is exactly right. And specifically, what's going on here is this shift between the on-balance sheet and off-balance sheet in the financing businesses and prime and so on within Markets. And you can actually see a little bit of a pop of the Markets balance sheet in the supplement, and these things are all related. So fundamentally, you can think of it as like we either hold equities on the balance sheet, non-interest bearing, high funding expense, negative for NII; or we receive that in total return form through derivatives, exactly the same economics, no impact on NII. So that shifts as a function of the sort of borrower relationships in the marketplace in ways that are bottom line effectively neutral. It's second-order effects, but they change the geography quite a bit, and that's what happened this quarter. And that's why we've been emphasizing for some time that the NII ex Markets is the better number to focus on in terms of an indicator of how the core banking franchise is performing.

Jamie, could you share your thoughts on the current economic outlook and the health of both your commercial and consumer customer base? Considering the possibility of sustained higher rates, do you think the economy is too robust to anticipate any rate cuts? What insights are you gathering from your customers and bankers about where the momentum is heading? I recognize the macro risks you've addressed, but I'm trying to understand your perspective on the most likely outcomes based on current customer feedback.

I would say that consumer customers are generally okay. Unemployment remains very low, although home and stock prices have decreased. The income needed to manage their debt is still relatively low, but the extra funds available to lower-income individuals are normalizing. You can see some normalization in credit as well. Higher-income individuals still have more disposable income and continue to spend. Therefore, regardless of what happens, customers are in decent condition, and even in the event of a recession, they should still be fine. Businesses are also doing well; current confidence levels are high, order books are stable, and profits are improving. However, I want to caution that these positive results stem from significant fiscal spending and quantitative easing, and the future remains uncertain. We need to consider not just the present year, but also the next two to three years, as geopolitical factors, oil, gas, and fiscal spending will play crucial roles alongside upcoming elections. While we are stable now, that doesn’t guarantee future stability. Historically, being okay in the present moment has always been the case at inflection points, as seen in 1972, among others. I maintain a cautious perspective; current confidence levels and sentiments do not preclude a potential economic inflection point. Everything seems fine today, but we must be ready for various possible outcomes, and we are preparing for that. Regarding inquiries about interest rates, yield curves, net interest income, and credit losses, we should focus on generally accepted economic scenarios, like anticipated Fed rate cuts. However, history shows these projections can often be inaccurate. We must also consider alternative scenarios, such as the possibility of higher rates during a modest recession, which could significantly affect these projections. I believe the likelihood of such developments occurring is greater than many might think, and I do not have a precise outcome in mind. Predicting significant economic inflection points accurately has not been achieved historically.

That's helpful. And just tied to that, as we look at commercial real estate, both for JP and for the economy overall, is higher rates alone enough to create more vulnerabilities and issues beyond office CRE? How would you characterize the health of the CRE market?

Sure. I'll break it down into two parts. First, we are doing well and have solid reserves for office space. We believe the multifamily sector is also stable. Jeremy can provide more details if needed. When considering real estate, there are two factors to think about. If interest rates rise, especially the 10-year bond rate by 2%, the value of all assets, including real estate, may decline by around 20%. This can create stress as people need to refinance. However, this situation impacts everyone, not just real estate. The reason for the rate increase matters; if it’s due to a strong economy, it could benefit real estate since it may mean job growth and higher occupancy. Conversely, if the increase is linked to stagflation, we could see higher vacancies, more companies downsizing, and fewer leases, which would have negative repercussions across the economy, reminiscent of the experiences we had post-2010. So, keep in mind the reasons behind interest rates, the economic conditions, and potential recessions. If the situation remains stable, we are likely to see a soft landing. While real estate will adapt, different markets and property types will experience varying outcomes. However, navigating higher rates alongside a recession would be particularly challenging for many, not just within the real estate sector.

Given your response to Betsy's question, the current 15% CET1 positions you well for the Basel III endgame as stated. You are achieving 22% without the FDIC assessment. Looking ahead to Investor Day in about 5 to 6 weeks, as we consider the 17% through-the-cycle target, if you are at the appropriate capital level, where do you see yourselves overearning right now?

Right. That's an interesting way to frame the question, Erika. I think we've been fairly consistent about where we're overearning. A major area of that is in deposit margins, particularly in consumer banking. This is why we expect sequential declines in net interest income, as we've mentioned concerns about shrinking deposit margins and increasing the average rate we pay. I would say that's the biggest source of what we might call excess earnings right now. You also heard Jamie mention that we're overearning in credit. Wholesale charge-offs have been quite low, but we have prepared for that. So, it's less clear what we're currently earning at this run rate. In the Card segment, while charge-offs are nearing normal levels, we did experience a lengthy period where charge-offs were very low compared to historical standards, though that was alongside net interest income also being low historically. Therefore, from a bottom-line perspective, the net effect isn't entirely clear. However, broadly speaking, deposit margin is the primary factor in our overearning narrative. Embedded in your question is the consideration of the 17% CET1 in the context of current capital levels. You mentioned Investor Day, and I had hoped we would have exciting updates regarding the Basel III endgame, especially since the most significant factor for that 17% is how much denominator expansion we anticipate from Basel III. At our current pace, we may not have much more clarity on that by Investor Day. So, we might not be able to say much beyond reiterating my previous statements, which are that our returns will be very strong in both absolute and relative terms. We will optimize, seek to reprice, and adjust where possible to the best of our abilities. However, given the proposed structure of the rules, many aspects cannot be optimized away, so you should consider this as a headwind in our base case.

Got it. And just as a follow-up question. You mentioned that the current curve you based your NII outlook on is outdated. Does that matter? It seems like the market is down-pricing; there are obviously no cuts in June or September, and a lot of uncertainty for December, which shouldn't impact this year. As we consider that $90 billion, if we completely rule out rate cuts, does that make a significant difference? Given that it looks like June is the only one that...

Yes. Sorry, Erika. So just quick things on this. One, let's focus on NII ex, not on total NII. So I'd anchor you to the $89 billion. Number two, if you want to do math for like the changes of the average funds rate for the rest of the year and multiply that times the EAR, like be my guest. Looks like as good as an approach as any. But I would just once again remind you, of the $900 billion of deposits paying practically 0, that very small changes there can make a big difference. And we've got other factors, we've got the impact of QT on deposit balances, et cetera, et cetera, et cetera. So we want to make sure that we don't get too precise here. We're giving you our best guess based on a series of assumptions. And it's going to be what it's going to be.

Which we know are going to be wrong.

Jeremy, could you elaborate on one of your comments? You mentioned that we have hopes and expectations for the Investment Banking pipeline to keep progressing. We noticed positive movement in ECM and DCM, but there has been some lag in Advisory. Can you discuss that? You also mentioned potential cautiousness around the election. What insights are you getting from both the corporate and sponsor sides regarding M&A, particularly about the general sentiment on moving forward or holding back? Additionally, what do you think is needed to stimulate more IPO activity in the ECM markets?

Sure. Yes. Let me take the IPO first. So we had been a little bit cautious there. Some cohorts and vintages of IPOs had performed somewhat disappointingly. And I think that narrative has changed to a meaningful degree this quarter. So I think we're seeing better IPO performance. Obviously, equity markets have been under a little bit of pressure the last few days. But in general, we have a lot of support there, and that always helps. Dialogue is quite good. A lot of interesting different types of conversations happening with global firms, multinationals, carve-out type things. So dialogue is good. Valuation environment is better, like sort of decent reasons for optimism there. But of course, with ECM, there's always a pipeline dynamic, and conditions were particularly good this quarter. And so we caution a little bit there about pull-forward, which is even more acute, I think, on the DCM side, given that quite a high percentage of the total amount of debt that needed to be refinanced this year has gotten done in the first quarter. So that's a factor. And then the question of M&A, I think, is probably the single most important question, not only because of its impact on M&A but also because of its knock-on impact on DCM through acquisition financing and so on. And there's the well-known kind of regulatory headwinds there, and that's definitely having a bit of a chilling effect. I don't know. I've heard some narratives that maybe there's like some pent-up deal demand. Who knows how important politics are in all this. So I don't know. We're fundamentally, as I said, I think on the press call, happy to see momentum this quarter, happy to see momentum in announced M&A. Little bit cautious about the pull-forward dynamic, a little bit cautious about the regulatory headwinds. And in the end, we're just going to fight really hard for our share of the wallet here.

Got it. And I guess I'll just stick on the theme of capital markets. And not surprising at all to see a little bit tougher comp in FICC. I think you guys have kind of indicated that maybe a flattish fee pool is a reasonable place, and I know that's impossible to guide on. But just maybe just talk through some of the dynamics in terms of activity across the fixed income and equities business. And do you feel like this is the type of environment where, given that lingering uncertainty about rates, clients are either more engaged or less engaged in terms of how they're positioning portfolios?

Yes, a really good question. I would say, in general, that the sort of volatility and uncertainty in the rate environment overall on balance is actually supportive for the Markets revenue pool. And I think that, together with generally more balance sheet deployment as well as sort of some level of natural background growth, is one of the reasons that the overall level of Markets revenue has stabilized at meaningfully above what was normal in the pre-pandemic period. And while that does occasionally make us a little bit anxious like, oh, is this sustainable? Might there be downside here? For now, that does seem to be the new normal. And I do think that having rates off the lower 0 bound and a sort of more normal dynamic in global rates, that not only affects the rates business, but it affects the foreign exchange business. It generally just makes asset allocation decisions more important and more interesting. And so all of that creates risk management needs, and active managers need to grapple with it and so on and so forth. So I think that those are some of the themes on the Markets side at the margin. And yes, we'll see how the rest of the year goes. But it sort of seems to be behaving relatively normally, I would say.

Jamie, I'm just trying to reconcile some of your concerns in your CEO letter. I'm sure the 60 pages, I can see you put a lot of effort into that and it's appreciated. But you talked about scenarios, tail risk, macro risk, geopolitical risk and all that over several years, it's not weeks or months, I get it. On the other hand, the firm is investing so much more outside the U.S., whether it's commercial or some digital banking, Consumer or Wholesale Payments. So I'm just trying to reconcile kind of your actions with your words. And specifically, how is global Wholesale Payments going? You mentioned you're in 60 countries. You do business a lot more. How is that business in particular doing?

I'm sorry to inform you that Jamie is unable to join us today as he is attending a leadership offsite, which is why he is remote. Allow me to address some of your concerns without speaking on Jamie's behalf. When we consider the effects of geopolitical uncertainty on our outlook, it’s important to recognize that the U.S. is not immune to these global macroeconomic challenges. Issues stemming from geopolitical factors can impact not only the world outside the U.S. but also the global economy, which in turn affects the U.S. and our corporate clients. In this context, we remain committed to our philosophy of investing through economic cycles and managing risks. While we make adjustments when necessary, the idea of significantly retreating from one of our company’s fundamental strengths—our global presence—due to a specific geopolitical event would contradict our long-standing approach. Regarding the Wholesale Payments business, it's performing exceptionally well. We are gaining market share, innovating continuously, investing in technology, and enhancing connectivity to payment systems in various countries. We look forward to sharing more details in other discussions, but overall, the outlook is positive and encouraging.

Just as a follow-up to that, then. Why is it doing great in terms of Wholesale Payments, given such the dislocations in the world from wars to supply chain changes, everything else, why is Wholesale Payments doing great?

One aspect of payments businesses is that they tend to be resilient, though "recession-proof" may not be the right term. While we are not currently facing a recession, the fundamental process of transferring money globally remains essential regardless of economic conditions. Additionally, our commitment to investment, which you have consistently focused on, is a major factor that distinguishes us in this sector at this time. We are already witnessing the positive outcomes of this strategy.

Your discussion with Ken's questions was insightful and clear regarding Investment Banking for the near term and this year. I have a broader question about your performance in terms of overearning. Do you think you are currently underearning in Investment Banking? Considering your past figures, the market has seen an increase of around $40 trillion in equity market cap and $40 trillion in fixed income market cap over the last 10 years, yet the wallet share is still over 20% below the 10-year average. Is there a significant upside potential, and is it simply a matter of timing rather than a possibility?

Yes, Glenn, in short, yes. I mean, I think we're not shy about saying that we're underearning in Investment Banking now. Clearly, we're below cycle averages, as you point out. We've been talking about when do we get back to the pre-pandemic wallet. But as you know, at this point, it was like March 2020, right, it was the beginning of the pandemic. So it's like 4 years ago at this point. So there's been GDP growth, especially in nominal terms during that period, and you would expect the wallet to grow with that. So I do think there's meaningful upside in the Investment Banking fee wallet. As I've noted, there are some headwinds, I think, particularly in M&A. But over time, you would hope that the amount of M&A is a function of the underlying industrial logic rather than the regulatory environment. So you could see some mean reversion there. And yes, so that's why we're sort of leaning in. We're engaging with clients. We're making sure that we're appropriately resourced for a more robust level of the wallet and fighting for every dollar of share.

Maybe one other follow-up. You're always investing. You clearly benefit from growth across the franchise as you do. But compared to many other banks that have kept expenses relatively flat, do you see a situation where JPMorgan would reduce this significant wave of investment spending?

Sure. So I think the first thing to say, which is somewhat obvious, but I'm going to say it anyway, is that there are some like auto-governors in this, right? Like some portion of the expense base is directly related to revenue, whether it's volume-related commissions, whether it's incentive compensation, whether it's other things. So there are some auto-correcting elements of the expense base that would happen automatically as part of the normal discipline. So that's point one. Point two is that, independently of the environment, we are always looking for efficiencies. And it's a little bit hard to see it. And in our world, where we're guiding to, I guess now with the special assessment added, $91 billion of expenses, it's hard to tell a story about all the efficiencies that are being generated underneath. But that is part of the DNA in the company. That does happen in BAU all the time as we grind things out, get the benefits of scale and try to extract that efficiency. And I think, to get to the heart of your question, which is, okay, in what type of environment would we make different strategic questions? And in the end, I think that's a little bit about what that environment is really like. So if you talk about like a normal recession with visibility on the cycle, would we change our long-term strategic investment plans, which are always built up from a financial modeling perspective, assuming resilience through the cycle? No, we wouldn't. Could there be some environments that, for whatever reason, change the business case for certain investments or even certain businesses that lead us to make meaningfully different strategic choices? Yes, but that would be because the through-the-cycle analysis has changed for some reason. I just don't see us fundamentally making strategically different decisions if the strategic outlook is unchanged, simply because of the business cycle in the short term.

You mentioned one use of capital is to lean into the trading businesses with your balance sheet. And we did see the trading assets going up Q2, which is probably seasonal, but also up a lot year-over-year, but not necessarily translate into higher revenues. And I know they don't like match up necessarily each quarter. But maybe just elaborate like how you're leaning into the trading with the balance sheet and how you expect that to benefit you over time.

Sure, let me break this question down into a few parts. What Jamie was suggesting is that you can think of a concept similar to strategic capital versus tactical capital. He is indicating that when you have a lot of excess capital for strategic reasons, you theoretically have the option to deploy some of it into relatively short-duration assets, strategies, or client opportunities in a tactical sense. He’s pointing out that this is an option available to you. As for whether this quarter's increase in Markets RWA reflects that, maybe a little bit, but probably not. I agree that it's challenging to directly link changes in capital and RWA to changes in revenue each quarter since there are too many variables involved. However, it is true that the higher run rate of the Markets businesses is connected to a higher deployment of our balance sheet into those areas. We take great pride in being analytical and disciplined in assessing capital liquidity, balance sheet deployment, and G-SIB capacity utilization in the Markets business. We don’t simply pursue revenue; we focus on fully measured returns, which is ingrained in our approach, and we will continue to do this. We are currently operating under several binding constraints, and the environment is complex, so it isn’t always simple to allocate a large amount of capital to opportunities. Nevertheless, we remain in a strong capital position, partly in anticipation of the ongoing uncertainty. This also means that if opportunities arise before the Basel III endgame is finalized, we are well positioned to take advantage of them.

Got it. Within the consumer card businesses, you mentioned that volumes are up 9% year-over-year, which is a strong performance. Are there any notable trends regarding changes in spend categories, either overall or within specific segments?

There may be some slight changes in spending. Jamie mentioned this earlier, and while I believe spending levels are stable, they aren't booming. There are various ways to analyze this, such as looking at inflation effects. When you consider everything, the overall picture appears somewhat flat. There's some indication that consumers are shifting from discretionary to nondiscretionary spending. The most significant observation is that while real incomes for the lowest-income groups have increased, there are still individuals experiencing declines in their real incomes, which affects their financial situation. This group is showing meaningful reductions in spending, rather than the feared scenario of increased borrowing. This could be seen as an economic indicator, although since this group represents a small portion of the population, its broader implications might not be substantial. However, it is a positive sign from a credit perspective, as it indicates that people are managing their finances sensibly in a post-pandemic context, which is encouraging news for credit assessments.

Despite your outlook on uncertainty, which Jamie discussed in the shareholder letter and earlier on this call, could you provide insights into the current state of the corporate lending market? It seems that spreads are tightening, which doesn't appear to reflect a genuine fear in the global geopolitical landscape. Additionally, any insights into the leveraged loan market would be appreciated.

Right. In general, credit spreads, including those in secondary markets and to some degree the leveraged lending space, are exceptionally tight. While there may have been a slight reversal in recent days, throughout the quarter, we've observed a significant tightening of credit spreads. This is reflected in our OCI this quarter, where potential losses from higher rates have been largely offset by tighter credit spreads in our portfolio. This aligns with the overall upward trend in equity markets and a generally bullish sentiment, leading to noticeable credit spread tightening in secondary markets. In the leveraged lending space, this has resulted in increased competition among providers for the revenue pool, which is causing some loosening of terms that raises our concerns. As we've done before, we are prepared to lose market share in that area if the terms are unfavorable, as we do not compromise on structure. Beyond the leveraged lending space, there was a period a few months ago when banks were anticipating a more challenging capital environment, leading to a slight widening of corporate lending spreads. I'm not sure if that trend has continued in the last few weeks, as it can be difficult to gauge. Overall, there’s a tension between the desire to manage balance sheets cautiously and the fact that asset prices and conditions remain supportive, while secondary market credit spreads have rallied significantly.

And I guess as a tie-in to that question and answer. We've read and seen so much about the private credit growth in this country by private credit companies. Can you give us some color on what you're seeing there as both as a competitor but also as a client of JPMorgan, how you balance the 2 out? Where you may see them bidding on business that you'd like, but at the same time, you're supporting their business.

Right. Yes. I mean, I think that tension between us as a provider of secured financing to some portions of the private credit, private equity community, now you're talking about different parts of the capital structure. But we do recognize that, that we compete in some areas and we are clients of each other in other areas. And that's part of the franchise, and it's all good at some level. But narrowly on private credit, it is interesting to observe what's going on there. So I would say for us, the strategy there is very much to be product-agnostic, actually. It's not so much like, oh, is it private credit or is it syndicated lending? What does it take to be good at this stuff? And what it takes is stuff that we have and have always had and that we're very good at in each individual silos. So you need underwriting skills, structuring skill, origination, distribution, secondary trading, risk appetite, credit analysis capabilities. And this is what we do, and we're really good at it. And increasingly, what you see actually is that as you see us doing a little bit, as the private credit space gets bigger, it starts to make sense to actually bring in some co-lenders so that you can sort of do big enough deals without having undue concentration risks. I mean, even if you have the capital, you just may not want the concentration risk. And so in a funny way, the private credit space becomes a little bit more like the syndicated lending space. At the same time, the syndicated lending space, being influenced a little bit by these private credit unitranche structures, gets pushed a little bit in the private credit direction in terms of like speed of execution, other aspects of how that business works. So we're watching it. The competitive dynamics are interesting. Certainly, there's some pressure in some areas. But we really do think that our overall value proposition and competitive position here is second to none. And so we're looking forward to the future here.

A couple of questions on the First Republic acquisition. Some of us obviously thought that would be a home run, and I'm glad to see that Jamie Dimon validated that in his annual letter. When you look at the first quarter, it annualizes out to $2.7 billion, $2.8 billion, above the $2 billion that Jamie published in the letter. Now I know you don't want to extrapolate that. But can you remind us what sort of cost savings you still have in that? Because this quarter did see expenses come down to $800 million, down from $900 million. And then secondly, is there an offset to that where the accretion becomes less and less, and that's why you don't want to extrapolate the $2.7 billion, $2.8 billion? So that's my first question.

Okay. Thanks, Charlie. And I'm going to do my best to answer your question while sticking to my sort of guns on not giving too much First Republic-specific guidance. But I do think that kind of framework you're articulating is broadly correct. So let me go through the pieces. So yes, the current quarter's results annualize to more than the $2 billion Jamie talked about. Yes, a big part of that reason is discount accretion, which was very front-loaded as a result of short-dated assets. So that's part of the reason that you see that converge. Yes, it's also true that we expect the expense run rate to decline later in the year as we continue making progress on integration. Obviously, as I think as I mentioned to you last quarter, from a full year perspective, you just have the offset of the full year calendarization effect. There was maybe an embedded question then there, too, about we had talked about $2.5 billion of integration expense. And the integration is real, the expenses are real, and also the time spent on that is quite real. It's a lot of work for a lot of people. It's going well, but we're not done yet, and it takes a lot of effort. But broadly, I think that our expectation for integration expense are probably coming in a bit lower than we originally assumed on the morning of the deal for a couple of reasons. One is that the framework around the time was understandably quite conservative and sort of assumed that we would kind of lose a meaningful portion of the franchise and would sort of need to size the expense base accordingly. And of course, it's worked out, to your point, quite a bit better than that. And therefore, the amount of expenses that is necessary to keep this bigger franchise is higher. And that means less integration expense associated with taking down those numbers. It's probably also true that the integration assumptions were conservative. They were based on kind of more typical type of bank M&A assumptions as opposed to the particular nature of this deal, including the FDIC and so on and so forth. So yes, I think that probably is a pretty complete answer to your question. Thanks, Charlie.

As a quick follow-up, where do you anticipate the next major opportunities will arise? This extends beyond JPMorgan and indicates a possibility of more regional bank failures, whether this year or next. There will be chances to acquire these banks. Private equity and family offices are preparing to engage in the upcoming round of bank failures. Mnuchin's acquisition of NYCB appears to be aimed at creating a platform for consolidating failed banks. Additionally, several family offices have filed shelf registrations for bank holding companies specifically to acquire failed banks. Do you believe these opportunities will face competition from private credit? Furthermore, do you think regulators will perceive private credit as a less favorable option compared to bank takeovers of failed institutions? That is my question.

Right. Okay, Charlie, there's a lot in there. And to be honest, I just don't love the idea of spending a lot of time on this call speculating about bank failures. Like you obviously have a particular view about the next wave in the landscape. I'm not going to bother debating that with you. But I guess let me just try to say a couple of things, doing my best to answer your question. Like as we talked about earlier, we have a lot of capital. And as Jamie says, the capital is earnings in store. And right now, we don't see a lot of really compelling opportunities to deploy the capital. But if opportunities arise, despite the uncertainty about the Basel III endgame, we will be well positioned to deploy it. I think embedded there is also sort of a question about the FDIC and the FDIC's attitude towards different types of bidders. And obviously, there's a lot of thinking and analysis happening about the entire process and some recent forums and speeches on bank resolution and so on and so forth. And I think probably we can all agree that it's better, all else equal, for the system to have as much capital available and as many different types of capital available to ensure that things are stabilized if anything ever goes wrong. But the mechanics of how you do that when you're talking about banks are not trivial and not to be underestimated. So I guess that's probably as much as I have on that.

Thank you, everyone.