Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Third Quarter 2020 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation.
Please stand by. At this time, I would like to turn the call over to JPMorgan Chase Chairman and CEO, Jamie Dimon and Chief Financial Officer, Jennifer Pieczak. Ms. Pieczak, please go ahead.
Thank you, operator. Good morning, everyone. I'll take you through the presentation, which as always is available on our website and we ask that you please refer to the disclaimer at the back. Starting on Page 1, the firm reported net income of $9,400,000,000 EPS of $2.92 and revenue of $29,900,000,000 with a return on tangible common equity of 19%. Included in these results are $524,000,000 of legal expenses, primarily related to the resolution of legal matters announced last month.
Overall for the quarter, while we're still in a very uncertain environment, our underlying business fundamentals performed quite well. So I'll just touch on a few highlights here before getting into the line of business results. The CIB continued its strong performance with IV fees up 9% and markets revenue up 30% year on year and we had record revenue in AWM up 5% year on year. On deposits, while we expected to see some normalization in our balances, instead we saw another quarter of growth with average deposits up 5% sequentially and notably we moved into the number one spot in U. S.
Retail deposits with 9.8% market share, gaining 50 basis points of share year on year. On the other hand, average loans were down 4% quarter on quarter, primarily on revolver pay downs from our wholesale clients. With that, let's turn to Page 2 for more detail on the 3rd quarter results. We recorded revenue of $29,900,000,000 which was flat year on year. Net interest income was down approximately 1 point $2,000,000,000 or 9% on lower rates, partly offset by higher markets NII and balance sheet growth.
And non interest revenue was up $1,200,000,000 or 7%, primarily driven by CIB, including higher banking and markets revenues, as well as net securities gains in corporate. Expenses of $16,900,000,000 were up approximately $500,000,000 or 3% year on year on the higher legal expenses that I already mentioned. This quarter, credit costs of approximately $600,000,000 were down $900,000,000 year on year, primarily driven by modest reserve releases, which you can see in more detail on Page 3. We released approximately $600,000,000 of reserves this quarter, primarily on runoff in home lending and changes in wholesale loan exposure. Charge offs across our portfolios remain relatively low and in fact were down slightly year on year and quarter on quarter.
While we could see an uptick in charge offs over the next few quarters given payment relief and government stimulus already provided, we don't expect any meaningful increases in charge offs until the second half of twenty twenty one. As you can see at the bottom of the page, our updated base case reflects some improvement from last quarter. However, the medium to longer term is still highly uncertain, in particular as it relates to future stimulus. And so we remain heavily weighted to our downside scenarios and with reserves of $33,800,000,000 we're prepared for something worse than the base case. And now turning to Page 4, I'll provide a quick update on what we're seeing in our customer assistance programs.
You can see here that the vast majority of card and auto customers have exited relief. And so what's left in deferral is primarily in home lending, including $11,000,000,000 of owned loans and $17,000,000,000 in our service portfolio. And in terms of what we're seeing with our customers that have exited relief, approximately 90% of accounts remain current. Now turning to balance sheet and capital on Page 5. We ended the quarter with a CET1 ratio of 13%, up 60 basis points versus last quarter on earnings generation and lower RWA, partially offset by dividends of $2,800,000,000 And it's worth noting that we have over $1,300,000,000,000 of liquidity sources available to us across HQLA and unencumbered securities.
Now let's go to our businesses, starting with Consumer and Community Banking on Page 6. CCV reported net income of $3,900,000,000 and an ROE of 29%. Revenue of $12,800,000,000 was down 9% year on year, driven by deposit margin compression and lower card NII on lower balances, partially offset by deposit growth and strong home lending production margins. Deposit growth was 28% year on year, up over $190,000,000,000 largely on lower spending and higher cash buffers across both our consumer and small business customers, as well as organic growth. Fine investment assets were up 11% year on year, driven by both net inflows and market performance.
Overall, consumer customers are holding up well. They have built savings relative to pre COVID levels and at the same time lowered debt balances. With regard to digital adoption, early signs suggest the increased customer migration to digital will persist. In fact, nearly 69% of our customers are digitally active and that's up 3 percentage points year on year and accelerating. And quick deposit now represents more than 40% of all check deposits versus 30% pre COVID.
Moving on to consumer lending, starting with home lending, total originations were down 10% year on year driven by correspondent. However, consumer volumes were up 46% year on year and notably more than half of consumer applications were completed digitally, twice the level of the Q1. In Cars, while net sales were down 8% year on year, spend continued to improve throughout the quarter and in the month of September sales were down only 3% year on year, reflecting the lowest decline since March. Retail, which is a significant portion of overall spend was a bright spot, reaching double digit year on year growth in the 3rd quarter, largely driven by card not present transactions. Total CCD loans were down 7% year on year with Total CCD loans were down 7% year on year with home lending down 15% due to portfolio runoff and cars down 11% on lower spend, offset by business banking up 83% due to PPP loans.
Expenses of $6,800,000,000 were down 4%, predominantly due to lower marketing investments. And lastly, credit costs of $794,000,000 included a $300,000,000 reserve release in home lending and net charge offs of $1,100,000,000 driven by card. Now turning to the Corporate and Investment Bank on Page 7. BIB reported net income of $4,300,000,000 and an ROE of 21% on revenue of 11,500,000,000 dollars Investment Banking revenue of $2,100,000,000 was up 12% year on year and down sequentially off an all time record quarter, and we maintained our number one rank in IB fees year to date. The quarter's performance was largely driven by our Equity Capital business, which saw an uptick in IPO issuance driven by a strong equity backdrop with stocks trading at or near all time highs.
In advisory, we were down 15% year on year, largely impacted by the muted M and A announced volumes in the first half of the year. However, we saw a surge in M and A activity this quarter with announced volumes returning to pre COVID levels as companies began to shift their focus from day to day operations to more strategic and opportunistic thinking. Debt underwriting fees were up 5% year on year, but down 21% sequentially as we saw investment grade activity return to more normalized levels from the record volumes we saw in the Q2. The leveraged finance market continued to recover with high yield spreads approaching pre COVID levels and some notable acquisition financing deals closing. We maintained our number one rank in overall wallet and we're the leaders and lead left across leverage finance.
In equity underwriting, fees were up 42% year on year, resulting in the best Q3 ever, primarily driven by our strong performance in IPOs and follow ons. In terms of the outlook, we expect 4th quarter IDPs to be roughly flat versus a strong quarter last year and down sequentially. However, evaluations remain elevated, we could continue to see momentum in capital markets. Moving to markets, total revenue was $6,600,000,000 up 30% year on year. While activity continued to normalize with spreads, volumes and volatility reducing from the elevated levels of the first half of the year, the performance was strong throughout the quarter and across products, reflecting the resilience and earnings power of this franchise through a broad range of market conditions.
Fixed income was up 29% year on year against strong Q3 last year, driven by a favorable trading environment across products, notably in commodities, as well as elevated client activity in credit and securitized products. Equities was up 32% year on year on continued robust client activity and equity derivatives, as well as a recovery in prime balances and a solid performance in cash. Looking forward, it's important to remember that 4Q 2019 performance was very strong, making for a difficult year on year comparison and obviously forecasting markets performance remains challenging in this environment. Wholesale payments revenue of $1,300,000,000 was down 5% year on year, driven by deposit margin compression, largely offset by balance growth, as well as a reporting reclassification in merchant services. Security Services revenue of $1,000,000,000 was flat year on year, where higher deposit balances were offset by deposit margin compression.
Expenses of $5,800,000,000 were up 5% compared to the prior year, largely due to higher legal expense, partially offset by lower structural and volume and revenue related expenses. Now moving on to Commercial Banking on Page 8. Commercial Banking reported net income of $1,100,000,000 and an ROE of 19%. Revenue of $2,300,000,000 was flat year on year driven by deposit margin compression offset by higher balances and fees and higher lending revenue. Gross Investment Banking revenue of $840,000,000 was up 20% year on year on increased debt and equity underwriting activity.
Expenses of $966,000,000 were up 3% year on year. Average loans were up 5% year on year, but down 7% quarter on quarter due to declines in revolver utilization by C and I clients and lower origination volume in CRE. Deposits of $248,000,000,000 were up 44% year on year and 5% quarter on quarter as client balances remain elevated. Finally, credit costs were a net benefit of $147,000,000 including a $207,000,000 reserve release and net charge offs of 60,000,000 dollars Now on to Asset and Wealth Management on Page 9. Asset and Wealth Management reported net income of $877,000,000 with pre tax margin of 31% and ROE of 32%.
Record revenue of $3,700,000,000 for the quarter was up 5% year on year as growth in deposit and loan balances along with higher management fees and brokerage activity were largely offset by deposit margin compression. Expenses of $2,600,000,000 were flat year on year and credit costs were a net benefit of $51,000,000 primarily due to reserve releases. For the quarter, net long term inflows of $34,000,000,000 were positive across all channels and driven by fixed income and equity. At the same time, we saw net liquidity outflows of $33,000,000,000 AUM of $2,600,000,000,000 and overall client assets of $3,500,000,000,000 up 16% 15% year on year respectively were driven by net inflows into liquidity and long term products as well as higher market levels. And finally, deposits were up 23% year on year and loans were up 13 percent with strength in both wholesale and mortgage lending.
Now on to corporate on Page 10. Corporate reported a net loss of approximately $700,000,000 Revenue was a loss of $339,000,000 down $1,000,000,000 over year driven by lower net interest income on lower rates, including the impact of faster prepays on mortgage securities, partially offset by $466,000,000 of net securities gains in the quarter. And expenses of $719,000,000 were up $438,000,000 year on year, primarily due to an impairment on a legacy investment. Now let's turn to Page 11 for the outlook. You'll see here that our full year outlook for 2020 remains in line with what I said at Barclays.
We expect net interest income to be approximately $55,000,000,000 and adjusted expenses to be approximately $66,000,000,000 And while we don't have anything on the page for 2021 and we're not planning to do Investor Day, we'll share more color with you on the outlook in the Q1 of next year. So to wrap up, even though recent economic data has been more constructive than we would have expected earlier this year, there remains a significant amount of uncertainty and so we continue to prepare for a broad range of outcomes while focusing on serving our customers, clients and communities through this time. With that, operator, please open the line for Q and A.
Our first question comes from Matthew O'Connor of Deutsche Bank.
Good morning. Good morning. So I think one of the key questions on investors' minds right now is how will banks grow revenue kind of medium term here as we think about lower for longer rates? And I was hoping you could just talk about how you think about managing the company if rates stay very low for a long time and how you can grow revenue. And obviously, year to date, the revenue has been very good, up 4%.
And if you could just weave in the branch expansion that you alluded to in the comments as part of that answer, that would be helpful. Thank you.
Sure. So in terms of how we think about the revenue outlook for 2021, first of all, it's early and we'll come back to you in the Q1 with more details. But it is true that if we think about the NII outlook that that will be under pressure relative to 2020 and I can give more detail on that. But also we are on pace for record revenue in markets and Investment Banking and so that will be a tough compare. Having said that, we're not going to change the way we run the company because of what might be temporary rate headwinds.
And we see significant franchise value in the growth that we're seeing in the deposit base. And with that, on branch expansion, we are continuing on our plans in branch expansion. We have, I think, almost 120 branches open in our expansion markets. We'll do more than another 150 so far this year. We got approval to enter 10 additional states, which will ultimately put us in all Lower 48.
So we continue with the branch expansion and remain very excited about it with those new branches, in most cases, performing well above the original business case.
And kind of kind of set that to give you a little bit of longer term view. There's not one single business, we're not any bankers, countries, products, digital. We're growing security services and cash management services. We're adding we're growing the Chase wealth management business, we're adding private bankers, we're adding products and asset management and we kind of look through all the things I call them the weather. We just keep on growing that.
The branch expansion is one example of that. We never stopped doing that. We never stopped getting credit card product. We never stopped growing digital home lending products. And we'll be doing that for the next decade.
And of course, you'll have always ins and outs from what I call the weather, MAI, spreads, margins, markets, etcetera. But the goal is always the same, you grow the business to serve your clients around the world.
And then just as a follow-up, Jen, you'd said that you'd elaborate on the net interest income. I don't know if you meant now or you're going to wait till January for that in terms of the outlook for NextEros and the puts and takes?
Sure. So there, I had said at Barclays that the current run rate was a good place to start. So 13,000,000,000 dollars is a good place to start and for 2021 reflects the impact of the rate environment and some normalization in markets NII. But from there, balance sheet growth and mix should be supportive throughout the year. And so for the full year of 2021, my best view at this point would be $53,000,000,000 plus or minus.
But yes, we'll sharpen our pencils on that and continue to provide updates. But right now full year $53,000,000,000
Our next question is from Glenn Schorr of Evercore ISI.
Hello there.
Hi, Glenn.
Good morning. So I guess the reserve release was definitely driven by mortgage prepay and runoff, so that I get that. But NPAs were still up 18% quarter on quarter. I wonder if you could talk about what drove that, maybe comment on commercial real estate specifically, it would be appreciated. Thanks.
Sure. So the reserve release, as you said, was largely on portfolio runoff and changes in exposure in wholesale, so not a reflection of a change in our outlook. And then the increase in non accrual loans is on the consumer side is mortgage and it represents the customers that have come out of forbearance and are not paying. And so as you saw on that slide, the payment deferral slide, about 90% are still current. The other 10% have now been reflected in the non accrual exposure.
So that is all mortgage. And then the increase in non accrual on the wholesale side was just a few name specific sound grades, which are in sectors you would expect, as you just said, retail related real estate and oil and gas. And then more broadly on commercial real estate, I'll just share that we feel adequate reserve for what we're facing. But if you look at rent collections as an example, overall, with the exception of retail between 85% 95% and then even retail in the month of September was about 80%, had recovered to about 80%. So still a lot of uncertainty there, but we feel adequately reserved.
Okay. I appreciate that. Maybe one on Asset Management. You've been doing great. I don't need to ask on your specific business.
But in the past, you've spoken about potential interest in participating in industry consolidation. We saw some of that happening lately. Can you just talk remind us about the parameters of what you would and might not be interested in doing in asset and wealth management? Thanks.
Since we have you on the line, our doors and our telephone lines are wide open. We would be very interested in reducing EOC consolidation of the business. But we're not going to be more specific about product sensitive, the system, the technology, the business logic, the ability to execute. There are a lot of issues that will determine whether something makes sense for us in there.
Our next question is from Mike Mayo of Wells Fargo Securities.
Hi. Hey, Jen and Jamie. That was some comment. You said you do not expect much higher charge offs until the second half of next year. And that's even with the higher NPAs.
So what are your assumptions behind that, Jen, as far as specifically when the forbearance actions run their course and Jamie policy actions that might be embedded in that expectation?
Okay. So I'll just start, Mike, with first of all, the increase in non accrual was on mortgage. And when you look at the LTV on those the loan to value on those loans, that's what is embedded in how we're thinking about the what charge offs will look like in the near term. There's still very healthy LTVs on those loans. So really when we talk about losses really emerging in a significant way, not until the back half of twenty twenty one, we're talking about cards.
And just given the amount of stimulus and payment relief and just support in the system, we haven't seen the delinquency buckets begin to fill up and we charge 180 days past due in cards. So that is primarily just a timing issue as it relates to cards. We could see increases in charge offs in the next few quarters on the wholesale side or maybe here and there on the consumer side. It's just that the meaningful change in charge offs we don't expect until the second half of twenty twenty one.
Yes. Mike, about policy, first of all, I wouldn't say that policy is determinative here because this is unprecedented times. And what we're saying is that policy will matter and will skew the odds and fate with a better outcome. So I think the policy obviously the Fed is doing what it can to keep markets open, but the policy on the fiscal side is to have some kind of continuation of unemployment insurance and PPP. Those are the 2 most vulnerable areas.
So just maximize the chance that we'll have better outcomes. And I do think that over time, intelligent return to work. I caution people to remember 100,000,000 people go to work every day. So the complete focus is on the 50,000,000 who don't go to work, but the 100,000,000 who go to work, it's rather safe. There's a lot of examples where you're going to do this social distancing and you're cleaning and all the very things like that, that it may be safer than being home in your community.
And so but the getting back to work is a little bit important because you look at cities and travel and a whole bunch of stuff, there are a lot of people who are under a lot of stress and strain who won't be able to survive another year of complete close down. So the other policy is a new almost rational, thoughtful return to the office done properly, which will help all those businesses support the big office towers and buildings and stuff like that. Those 2 things will maximize the chance of good outcome. They don't guarantee the chance of a good outcome.
And I know this is a tough question, but you're in the middle of the stress test part 2. When all is said and done, Jamie or Jen, where do you think these charge offs go as a percentage of the global financial crisis? You have to have I know you have scenarios, but where should we thinking? Is it like half the GFC level, same GFC level, twice the GFC level? What are you guys thinking in the back of your mind?
It's a very difficult question to answer. It's very different, of course, because the GFC was heavily mortgage related and this will probably be less so. We also our portfolios are in significantly better shape coming into this, whether it's mortgage or card. But just given the amount of uncertainty about where this could go, we still have 12,000,000 people unemployed. I think it's very difficult.
I don't know, Jamie, whether you would add.
It's very hard. I agree with you, James. It's very hard to say. And Mike, it depends on the outcome. Again, we look at the good case, the medium case, the relative adverse case and the extreme adverse case, and there the answer is completely different and we don't know the future.
So it's hard to predict what it's going to be. Our reserves are prepared for a relative adverse case, which is equal to the roughly equivalent to the CCAR extreme adverse case that we just got roughly. Again, very hard to compare apples to apples in these things.
Our next question is from Erika Najarian of Bank of America.
Hi, good morning. I'm going to ask the 2 questions that I often get from investors that are hesitant to dip their toe back into bank stocks. And the first is, and Jen, this goes back to your earlier comment. The one question I get on credit quality is, did stimulus and policy redefine cumulative credit losses lower for this cycle? In other words, I think Jamie said change the outcome or do you think it just delayed the realization of these losses?
So I think it's difficult to know. I think the purpose of it was to change the outcome, not just delay the losses. But it's difficult to know. People sort of described it as a bridge and the question as to whether the bridge will be long enough and strong enough to bridge people back to employment and bridge small businesses back to normalcy. So I think it remains to be seen.
As Jamie said, we're obviously preparing for it to not necessarily change the outcome obviously because we've built significant reserves. So we're prepared for it to be a delay rather than change the outcome.
Got it. And my follow-up question and perhaps if I could direct this to Jamie. This is a bit of a follow-up to Matt's earlier question, but investors are essentially worried on the other side of the credit recovery about what the interest rate environment may imply for normalized ROTCE. And as you think about what you mentioned to be weather considerations, what prevents JPMorgan from going back to that 17%, 19% ROTCE that you posted in 2018 2019?
You guys have to forecast the future is hard to tell. I think negative interest rates are a bad idea and will probably force over time the banking industry to shrink and which means they'll be buying back stock and doing other things with their capital. But we're able to handle low rates and we can have decent returns at low rates. I guess it's a bad long term strategy. I also think it's a bad idea if we all assume we're going to continue like that forever.
I mean, we had massive global QE in the last go round and we didn't have inflation, but I remind people a lot of QE was a round trip. The Fed and the Central Bank's board securities that would create deposits to banks. The banks were forced to put deposits in the Central Banks. So it was not new as inflationary, it's fiscal stimulus. Fiscal stimulus, which has been extraordinary around the world, is by its nature inflationary.
And so we don't really know the outcome of that. But my view, and when I tell investors, we're going to build our businesses day in and day out regardless of interest rate environments, etcetera. And we have plans to adjust interest rate environments. We cannot do certain things, we can charge for certain things, we can do a whole bunch of different stuff. But the services are still required, moving money around the world, trading for people, underwriting securities and helping manage their money and we'll be okay.
We'll work through it.
Our next question is from Betsy Graseck of Morgan Stanley.
Hi, good morning. Can you hear me?
Yes. Hi, Betsy.
Hi. I have two questions. One was be interested in understanding how you are threading the needle between your outlook here for reserves and the potential to buy back stock. You've got the reserve level high with a base case outlook for unemployment that's above where we are today for the next 6 months, it looks like or even longer. And your capital build is obviously continuing to increase here.
So how should we think about that? Could we imagine that your buyback could kick off before reserve release happens? And would you release reserves before the net charge offs start to come through like you mentioned in second half twenty twenty one?
Sure. So as we first of all, on stock buybacks, obviously, we are restricted here in the Q4. We are hopeful that the Fed will see what they need and get what they need in the resubmission to give them the confidence to revert to a more normal distribution framework under SCB in the first quarter. So that's obviously the most important hurdle for us. And then if we have excess capital and the reserve decision and the buyback decision are not related to one another.
We are always going to make sure that we have our best estimate of losses that we're facing considering the uncertainty as well. And then, of course, our capital hierarchy would always look to grow our businesses 1st and foremost. But if we have excess capital and if we do not have regulatory restrictions, you could see us buy back stock as early as the Q1. And like I said, that wouldn't necessarily be related to a reserve release. The other thing on potential reserve releases, we obviously need to see the economy continue to deliver on the base case to give us the confidence that that is what we're dealing with.
But I would just say that remember there was a capital release, a partial capital release on CECL bills. So when you release reserves, only about half of that actually falls through to capital.
And could you talk a little Jen, could you talk a little bit about the Slide 3 where you've got the base case outlook for unemployment? And just give us a sense as to what's driving this base case outlook for unemployment in 4Q 2020 at 9.5% and then 2Q 'twenty one at 8.5 percent, they're obviously above where we are today. And could you help us understand how you're thinking about flexing that going forward? What would change those assumptions?
Yes, that's like largely, Betsy, a timing issue with when we actually run the models for the reserve. That's not Q4, use the latest outlook for the base case. But then again, as Jamie said, we look at a number of different scenarios and depending upon what we think we're dealing with in terms of the uncertainty, we may continue to heavily weight the downside scenarios or maybe even more heavily weight the downside scenarios, we have to see. So if you look at the weighted outcome of all of the scenarios that we use to drive the reserves, it is we are prepared for a double digit unemployment, peak unemployment level, but it would start with the revised base case, shall I say, from our economists.
Yes. Kind of just putting in perspective just a little bit of capital. I mean, we have extraordinary amounts of capital, dollars 200,000,000,000 We've got $1,300,000,000,000 of liquid assets and securities. And the way you should look at it is the $200,000,000,000 in the next 8 quarters will earn PPNR like pretax, pre provision earnings, roughly $80,000,000,000 give or take. We don't know exactly what's going to be.
So with the $80,000,000,000 if things get better, it'll be more than that and take down reserves. If things get worse, it may be about that, a little bit worse than that, we have to put up $20,000,000,000 Even if you put up the $20,000,000,000 in my view, that won't emerge in quarter, that will emerge over several quarters, which means you can buy pay the dividend, buy back stock, have plenty of capital and still be very conservatively capitalized. And that's the reality of it, okay? Forget all the other stuff you read, and we're conservative. We'd like to be conservative regarding loan losses and capital.
So we'll be patient, but we have tremendous amount of wherewithal to do both when the time comes. And I hope we're allowed to do it before the stock is much higher.
And the $20,000,000,000 that Jamie referenced is we talked about the extreme adverse scenario last quarter. So you can think that that's the $20,000,000,000 that Jamie is referencing, if that is what
And that $20,000,000,000 is unemployment of 12% to 13% that goes up into the better part of 6 quarters. I mean, it's really extreme adverse. It's far worse than the CCAR case we just got.
Our next question is from John McDonald of Autonomous Research.
Good morning. Jen, you mentioned that next year you have some tough revenue comps. Can you talk about the notion of expense flexibility at JPMorgan? Underneath the surface of flattish expenses, where are you on saving money from digitization and structural change? And how does that give you flexibility against where you'd like to be investing?
Sure. So first of all, it's early. We're still working through next year. So I will certainly refine the guidance in the Q1. But as it relates to expenses, we will and you mentioned digital, that's one.
We will continue to deliver on structural expense efficiencies as we have been for the last several years. There will as we do expect the world to normalize a bit, there will be opportunity in volume and revenue related expenses, but we are going to continue to invest. And so there will be puts and takes and we'll provide more detailed guidance in the Q1.
Okay. And as a follow-up, on capital, can you talk about the notion of reducing your SCB and maybe your GSIB surcharge footprint over time? I think you've commented that there's potential to do that. What is the path and the route to doing that? And how do you feel the prospects for those two things in getting better over time?
Sure. So I'll start with G SIB, which is that we do expect to be in the 4 percent bucket at the end of this year, but it is not effective immediately. And so we will have 2021 to manage that back down. What I would say there is that with the Fed balance sheet at these levels possibly expanding, that makes managing the GSIB back down quite challenging. So in the absence of recalibration, which we remain hopeful about, managing that back down will certainly be challenging, but not impossible, but we'll certainly think about any impact on our client franchise before we do anything.
So we have some time there. We could see recalibration that would help, but no doubt that that's a challenge. On SCV, I'd start by saying it's scenario dependent, of course. So all else equal, we do think that we have opportunities to manage down the STB and that can include transferring securities from AFS to health and maturity and then some other mechanical issues on our side that we're confident will all things equal reduce our SCD. But again, it's scenario dependent.
So all that being said, John, I would just say that our expectation at this point over time is that our target capital level of 11.5% to 12% should be unchanged over time.
Got it. Thanks.
Our next question is from Ken Usdin of Jefferies.
Thanks. Good morning. Jen, Jamie mentioned earlier that you've got $1,300,000,000,000 of cash and securities. It didn't look like you really changed the size of the investment portfolio this quarter, but you didn't make a bunch of moves into held to maturity from available for sale. And I'm just wondering, you guys have talked about expectation that deposits might settle down, but they're continuing to grow.
And so what can you do at this point and going forward with a move starting to move some of that cash into things that might at least earn some more to protect the NII going forward? Thanks.
Sure. So So Jake, I just take that. We're not going to do anything to protect the NII. We have $300,000,000,000 of cash we're going to invest today and that becomes $400,000,000,000 We're not going to invest in stuff making 50, 60 or 70 basis points, so we get a little bit more of NII. We're going to make long term decisions for the company and if you're on NII and then just squeeze a little bit, so be it.
But we don't want to be in a position where we lose a lot of money because you made investments in 5 or 10 year securities, which you'll lose a lot if rates go up. So we're not protecting NII.
Yes. So as a principal matter, it's important to remember that we manage the portfolio across multiple dimensions, not just optimizing NII, as Jamie said, and we're thinking about capital protection at these levels. But just in terms of the activity that you saw in the securities portfolio, we've been very active. We added about $160,000,000,000 through the end of Q2. In Q3, we were active buyers and sellers, because in Q3, we saw attractive selling opportunities, which made economic sense for us.
So just to Jamie's point, so you give up some NII, but it just made economic sense for us. But we were also buying in the Q3. We also focus our focus on optimizing liabilities with the excess liquidity. So you'll see that our debt is down nearly $40,000,000,000 from last quarter. So then just in terms of the transfer to health maturity with the significant growth in the securities portfolio, it just made sense from a capital protection perspective.
It's also helpful for FCD, as I mentioned, and these are high quality core holdings.
Yes, and fully agree on that duration point, Jamie. Follow-up just on if you think about the fee businesses and some of
You guys should be you guys also be raising the question about why moving some of the health maturity reduces SCB. Like is that a rational thing? I don't think it is, but that's what it is and that's what we're going to deal with, why we can drive down SCB. Yes.
On duration, the tenure has backed up a bit over the last couple of weeks. And so we have been we'll remain opportunistic, but we have added at these levels.
Great. And then just one follow-up on just fees in general. You've got the consumer fee businesses that are still trying to get back to where they were a year ago. And then last quarter, Jamie had made the comment about cut it in half in trading and it wasn't anywhere close to that, which was positive. It's still quite, quite good.
And just how you think through just pushes and pulls between fees as you look forward, right, in terms of how much better do you think the consumer can get from where it is and how much, if any, are the institutional businesses over earning relative to where they posted in the first half? Thanks.
Sure. So on consumer fees, you'll see that consumer fees recovered a bit in the 3rd quarter. The decline there was both relief actions that we took, but also because of the higher cash buffers that consumers are experiencing, that also impacts fees. So and that's a good thing. So we'll take that.
So that did recover a bit in the 3rd quarter, but that will take time to get back to what you might consider normalized levels. And then on the institutional side, we did expect to see markets normalize in the Q3. We did see that a bit, but not as much as we had thought when we were at 2nd quarter earnings. And IB fees also continued to be very strong in the Q3, exceeding our expectations for what we might have thought in the Q2. Looking forward though, the Q4 is a tough compare.
So we do and we do expect markets to continue to normalize. And then on the IBC side, our pipeline is flattish to what it was last year. It's still down a bit in M and A, but we did see M and A recover in the Q3 and it's up in ECM. So as I said, flattish in the 4th quarter feels about right at this point.
Our next question is from Steve Chubak of Wolfe Research.
Hi, good morning.
Hi, Steve.
So Jen, I was hoping you could speak to just expectations for loan growth across both the institutional and consumer channels. When do you anticipate we could begin to see balances inflect positively? And separately, just what level of loan growth is contemplated in the $53,000,000,000 NII guide that you provided for 2021?
Sure. So loan growth will be challenged, I think for in the short term. On the wholesale side, I think we'll probably tread water at these levels, but increasing CEO confidence with M and A activity and capital investment should be supportive of more normalized loan growth, but that may take some time. On the consumer side, we are seeing cards continue to revert to more normal levels, and so that will continue into 2021. But that could be offset by continued prepays in mortgage.
So there will be puts and takes there. And then asset management, I think, will continue to see solid growth. So net net, not significant loan growth, but mix will be helpful because card growth is supportive of a mix benefit on NII.
Thanks for that. And maybe a question for you, Jamie. You had alluded to the potential for charging for additional products and services to offset rate pressures. And I was hoping you could speak to some of the areas where you might look to potentially charge clients? And just philosophically, how you're handicapping the risk of client attrition if competitors ultimately don't follow suit?
First of all, I don't think it's going happen, so I don't spend too much time worrying about it. But we have as a company matter gone through everything we do and how we do it and how we respond to negative rates. I'm not going through account by account, but like I said, a lot of these are necessary services, all the competitors, it's a competitive world. So I agree with you, competitors don't do stuff, you have a hard time doing it. But I think you will see a lot of competitors respond to negative rates in a lot of different ways.
So there will be an opportunity to do something like that.
Our next question is from Jim Mitchell of Seaport Global.
Hey, good morning. Maybe just a question on deposit growth. I think we've all been surprised at the continued growth. Can you just kind of talk to what you're seeing? It looked like we had further growth in September.
Are you expecting this to continue? Is it sort of moving out of money markets into deposits? What do you think is driving the growth and do you expect to continue?
Sure. So there's no doubt that with the Fed being this active that there is significant excess liquidity in the system. We did think that we would see deposits normalize in the 3rd quarter, both on consumer spending on the consumer side and then on the wholesale side in places like security services with asset managers holding cash on the sidelines. We didn't see what we thought we would. So yes, we did continue to see deposit growth here in the Q3.
Going forward, I think that normalization is still very much a part of our outlook except for that, given that the normalization is a bit deferred here, it will likely be offset by continued organic growth, perhaps more than offset by continued organic growth.
Right. Makes sense. And then maybe a follow-up on credit. I mean, I appreciate that we're not going to see charge offs given where delinquencies are today. But what do you think how do we think about delinquencies and what triggers you to either release or build reserves?
I would imagine that we'll see it, but you would be making those decisions before charge offs. Where do we see delinquencies? You've had very good experience so far in your core book as well as the deferrals acting well. When do we I mean, it just seems very surprising that we haven't seen delinquencies tick up yet in any material way. When do you expect that?
Or is it really all dependent on the goodwill of the government?
Well, I think one of the reasons we haven't seen delinquencies tick up is because of the payment release, but also the extraordinary support that has been provided through stimulus. So we'll probably see delinquencies tick up in the early part of 2021. We're not assuming further stimulus beyond the end of this year and how we think about reserves. So we do think you'll start to see delinquencies tick up early 2021 and then charge offs in the back half of 2021. I think future stimulus would give us more confidence in the economy delivering on the base case.
There's a lot of factors that we'll be looking at as we think about the right level of our reserves over the coming quarters, and delinquencies will be just one part of that.
Our next question is from Gerard Cassidy of RBC.
Thank you. Good morning, Jennifer.
Hi, Gerard.
I may have missed this. I had to jump off for a minute on the call. But can you give us some color as you've spoken very well about what's going on in the consumer credit area. But when you go into the commercial side of the business, can you share with us the sectors that you're seeing the biggest challenges? And can you give us some color on the rerating process that you're going through on those credits that are troubled today and what kind of deterioration you're seeing in those specific credits in terms of possibly write downs or revaluations of if it's collateral like on a commercial real estate loan?
Sure. So the sectors I think are ones that you would expect, airlines, lodging, restaurants, other T and E, real estate, oil and gas. And those continue to be the sectors under the most pressure. When you look at downgrades, here in the Q3 or not here in Q3, in Q3, we saw downgrades slow a bit, because in the Q2, we saw significant downgrades just on the increased level of debt that companies were taking on. So we saw downgrades slow a bit in the Q3, but we do expect downgrades to continue, particularly in real estate.
And then elsewhere in wholesale, I would say CEO sentiment is guarded, but constructive.
Very good. And then as a follow-up, I know Jamie touched on interest rates and how you're very focused in growing your business in any rate environment. Could you give us some color inflation, if it does pick up and if we get a steepening in the curve, obviously, Chairman Powell has indicated he's not going to move on rates for quite some time. But if we're looking in your Q3 of, let's say, 2021 and then 10 year government bond yield is, let's say, 125 basis points. Can you just give us some color?
I know that's not your prediction, but what would that do for the margin and revenues if we were fortunate enough to see a steeper curve due to higher inflation?
It's a great concern. I don't have the sensitivity to hand. Go ahead,
Yes. There's a disclosure we make in the 10 Q, which shows what would happen if rates go up 100 basis points. I forgot the number, Jen, it's like I'm going to say $1,500,000,000 a year. But
with the
long end is a piece of that, but the smaller piece. So it rolls and that rolls in and compounds over time. But that's not the right way to look at it. You have to be as to why. If you have an active environment, rates are going up, we're going to have more volume and more NII.
If you have stagflation by any chance, that's a really bad idea. So the why is more important than just the what here.
Our next question is from Saul Martinez of UBS. Saul, your line is open. Please proceed.
Hello. Sorry about that. I was on mute. I wanted to follow-up on an earlier question. I think it was from Ken on partly on sales and trading.
But you're tracking this year in sales and trading to a revenue of close to $30,000,000,000 And if we go back to, say, 2010, shortly after the crisis, it's been pretty consistently the annual revenues in say the $18,000,000,000 to $21,000,000,000 range. There's obviously a lot of volatility on a quarterly basis, but it's generally been in that range. So how do we think about or frame the range of outcomes as market conditions normalize, do you feel like there have been changes in terms of either share or market structure that maybe allow you to have a larger revenue base and more revenues from those businesses than you have had historically, even as market conditions normalize or is it just kind of too hard to tell? I'm just trying to think through because you'd obviously have a pretty big impact on your overall PPNR and revenue forecast going forward.
So I think that, I mean, as you know, we're on pace for a record year. So I think any compares are going to be challenging and we do expect the market to continue to normalize and that could be partially offset by share gains as you mentioned, but it is never a good idea to try to forecast markets even early in the quarter, never mind the year before.
Right. I don't
know if you had anything.
I'd say, look, this is a ground war game. We've got a lot of tough competitors and we're all building systems and stuff like that that can do a better job for them. Almost impossible forecast short term numbers in that.
Yes. No, and I understand that. I totally get that and appreciate that. It's just that you're kind of tracking to a revenue that's about 50% higher than what you've done in the post any year in the post crisis environment or to that somewhere to that effect. So just that delta between the current run rate and what's a what has been a more normalized run rate is pretty sizable.
So just trying to get any color in terms of kind of thinking through kind of a range of outcomes for where that could settle in and not necessarily in a given quarter per se, but just more on a normalized basis you think about the business as a whole?
First of all, I'd say our traders did have done an exceptional job. But I would say the Q2 was will not be typical and the Q3 probably won't loan. Hopefully, it might be better than it's been in the past couple of years, but we don't know. But remember, the market itself, total bonds, total assets under management, total credit products, total mortgage products, total global products, that's growing over time. So there is an underlying growth spreads and sell them around and competition moves around.
Our next question is from Andrew Lim of Societe Generale.
Hi, good morning. Thanks for taking my questions. So the first one, you've got €33,800,000,000 of reserves. I guess that's in line with an extreme adverse scenario. I know you can't tell what's going to happen going forward given many different variables, but we've already seen some of that being released.
So I was wondering if we had the base case scenario pan out over the coming years, how much of that SEK33,800,000,000 dollars should we expect to be released back to the P and L and over what time period?
So I'll start by saying we're not reserved for the extreme adverse scenario. So we are reserved for something worse than the base case because we have put heavy weight on scenarios that are worse than the base case, but we are not reserved for the extreme adverse scenario. And the release this quarter was, first of all, very small in the grand scheme of things and was almost exclusively related to portfolio runoff or exposure changes, not anything to do with the change in our outlook. And then if the economy delivers the base case, you will see reserve releases from us in the coming quarters, but it is very, very difficult to try to tell you how much and when.
I mean, surely, you've got like you can make it like an estimate of your reserves if you did assume the base case going forward? And I guess it's the difference between what you
are I've already said that the base case if the Fed base case happens, we're probably something like $10,000,000,000 over reserve.
$10,000,000,000 over reserved or
$10,000,000,000 Go ahead.
And I mentioned it earlier, it's just important to remember that there were capital modifications to CECL. So only about half of that ends up in capital.
Because as you release your release, you'll release those.
Yes, of course.
Yes.
Got it. Understood. Thanks for that. And then just a follow-up question on your CET1 ratio. You had a nice pickup there this quarter.
Obviously, you've had strong earnings, but you've also had a near 2% reduction in misweighted assets. I was just wondering if you could give a bit more color on the moving parts there and how you expect that to pan out in the coming quarters?
That's largely the RWA reduction was largely on revolver pay downs. So I wouldn't expect that kind of pace to continue. We will continue to build, if we're not allowed to buy back stock, but we will continue to build capital on earnings, but probably less so on RWA reduction.
Our next question is from Charles Peabody of Portales Partners.
Yes, good morning. Question about your rate sensitivity to the long end. If I look at a time series going back to the Q2 of last year, your rate sensitivity has increased every single quarter to a steepening yield curve. In other words, your NII would improve the more the yield curve steepened at the long end. So my question is, was that an intended action or residual effect?
Because I did notice that you've been adding fairly significant to your MBS portfolio.
Yes. So Charles, I don't know precisely the answer to that, but it's largely going to be, I'm assuming, on the growth in our deposit base, which then, has supported the growth in the securities portfolio.
Okay.
It's substantial. I mean, if you go back to the Q2 of last year, you had a $600,000,000 potential increase in Q2 of this year, which is 1,700,000,000 dollars Anyway, my second question is related to the legacy impairment charge. Can you give us some color around that? What sort of asset class that was in? And is it over $500,000,000 under $500,000,000
So under $500,000,000 of what remains, and it was a legacy investment that we took an impairment on and it's not meaningful in the grand scheme of things.
Our next question is from Brian Kleinhanzl of KBW.
Great, thanks. Just a quick question to start with, maybe as you think about kind of what you've been doing for our customer accommodation as it relates to the pandemic, I know there would have been fee waivers Q1, Q2 of this year, but what kind of customer accommodation was happening in the Q3? Is it kind of a clean number from a fees perspective in the Q3? Or is there still a certain level of accommodation going on?
There is probably I don't actually know. Jason and team can get you the details. It's less than what it was in the Q2 and it's more the what remains in terms of the reduction in fees is more a function of cash buffers.
Okay. And then is there a way
that you can give kind
of an update on the IB pipeline, but on a geographic basis? I mean, as we've seen negative head rates around COVID kind of around the world, is there different pipelines building in different regions? Thanks.
There's less of a regional story, but from a product perspective, overall, we're flattish to last year, but M and A is a little bit lower. Importantly, though, recovered quite nicely in the Q3 and ECM is a little bit higher, but overall flattish.
And we have no further questions at this time.
Okay. Thanks, everyone.
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