Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Second 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's 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 $43,800,000,000 with a return on tangible common equity of 9%. Included in these results are a number of significant items.
First, a credit reserve build of $8,900,000,000 and then approximately $700,000,000 of gains in our bridge book and $500,000,000 of gains in credit adjustments and other, both of which represent reversals of some of the losses we took in the Q1. As we continue to navigate this challenging and uncertain environment, this quarter's performance once again demonstrates the benefits of the diversification and scale of platform. So I'll just touch on a few highlights here. CIB reported its highest quarterly revenue on record with IV fees up 64% and markets revenue up 79% year on year, each representing record performances with strength across the board. We're up 4% year on year and quarter on quarter, largely reflecting the COVID related loan growth that we saw in March.
However, on an end of period basis, loans were down 4% quarter on quarter due to revolver pay downs as well as lower balances in card and home lending, partially offset by the impact of $28,000,000,000 of PPP loans. And lastly, we increased our CET1 ratio by approximately 90 basis points in the quarter after building approximately $9,000,000,000 of reserves and paying nearly $3,000,000,000 of common dividends. As you'll recall, we started the 2nd quarter on the back of unprecedented levels of business activity in March. On the following pages, I'll give you an update on some of those key activity metrics we looked at last quarter and share what we're seeing today. So with that, let's turn to Page 2.
Starting with wholesale on the top of the page, we saw record levels of debt and equity issuance in the quarter as clients sought to pay down the majority of the revolver draws from March and continue to shore up liquidity while market conditions were receptive supported by extraordinary central bank actions. The surge in investment grade debt issuance seen in March continued throughout the Q2 and as high yield markets reopened, U. S. Issuance volumes increased by 90% compared to the Q1. In ECM, as markets rebounded to pre COVID levels, May June together were our 2 busiest months for equity issuance ever, driven by converse and follow ons.
Moving to consumer spending behavior on the bottom left. Debit and credit sales volume, while overall still down, has consistently trended upwards since the trough in the 2nd week of April to down just 4% year on year in the last 2 weeks of June. T and E and restaurant spend continued to be down meaningfully, but we have seen some improvement, especially on the back of higher levels of restaurant spend. The most significant improvement we saw was in retail with a strong recovery in card present volume in the second half of the quarter and consistently strong growth in card not present volume throughout the quarter. More recently, we've seen the improvement in overall sales growth across the country flatten out, notably in both states with increasing cases and states with decreasing cases.
We continue to see larger year on year declines in states that remain partially closed, particularly those in the Northeast and Mid Atlantic regions. In terms of consumers demand for credit, we observed similar recovery trends. In auto, April saw the low excuse me, a low in April excuse me, recovered to well above pre COVID levels in June due to a strong and broad market recovery. Continuing on the topic of consumer behavior, let's turn to Page 3 for an update on what we're seeing around our customer assistance assistance programs. Relative to the peak levels we observed at the beginning of April, we've seen a significant decline in new requests for assistance over the quarter.
To date, we have provided customer assistance for nearly 1,700,000,000 accounts, representing $79,000,000,000 of balances across both our owned and serviced portfolios. And of those accounts, a large percentage having made at least one payment while in the forbearance period, just over 50% in both card and home lending. In terms of early reenrollment trends, in card only a small portion of our customers have completed both the initial 90 day deferral period and reach the payment date, but the majority of those customers resume payments with less than 20% of accounts requesting additional assistance. And then in Home Lending, of those whose forbearance period expired in June, most have either been extended at the customer's request or auto enrolled into new 3 month forbearances with approximately 40% of the extension still current. And so while we're following this data closely, it's still too early to draw any conclusions.
Now moving on to Page 4 for some more detail about our 2nd quarter results. We recorded revenue of $33,800,000,000 which was up $4,300,000,000 or 15% year on year. While net interest income was down approximately $600,000,000 or 4% on lower rates, mostly offset by higher market NII and balance sheet growth, non interest revenue was up $4,900,000,000 or 33 percent, predominantly driven by CIB markets and IVC. Expenses of $16,900,000,000 were up approximately $700,000,000 or 4% year on year on revenue related expenses, partially offset by continued reduction in structural expenses. This quarter, credit costs were $10,500,000,000 including a net reserve build of 8 $900,000,000 and net charge offs of $1,600,000,000 Let's turn to Page 5 for more detail on the reserve builds.
Our net reserve bills of $8,900,000,000 for the quarter consists of $4,600,000,000 in wholesale and $4,400,000,000 in consumer, predominantly card. The reserve increase in the Q1 was predicated on an acute, but short lived downturn with a solid recovery in the second half of the year. And while we have seen some positive momentum in the economy over recent weeks, there does continue to be significant uncertainty around the path of updated base case. But remember, this is just one of 5 scenarios we use of 2021 of 2021. In addition to the obvious impact on consumer, this protracted downturn is expected to have a much more broad based impact across wholesale sectors than we assumed in the Q1.
Given the unit behavior will play out and the future of government stimulus and its ultimate effectiveness as it relates to both consumers and wholesale clients, we put more meaningful weight on the downside scenarios this quarter. And so therefore, we're prepared and have reserved for something worse than the base case. And given CECL covers life of loan, if our assumptions are realized, we wouldn't expect meaningful additional reserve bills going forward. Now moving to balance sheet and capital on Page 6. We ended the quarter with a CET1 ratio of 12.4%, which is over 100 basis points above our new FCD base minimum of 11.3%.
And just to touch on SLR, while our reported ratio is 6.8%, it's worth noting that we're not going to rely on temporary relief and so without that our ratio is 5.7%. As we said in late June, unless things change meaningfully, the Board intends to maintain the $0.90 dividend in the 3rd quarter. Given the wide range of potential outcomes going forward, I'd like to spend a few minutes on why we're comfortable saying that, including the value of our strong and steady earnings stream as well as how we're managing our capital through this crisis. So with that, let's go to Page 7. It's an obvious point, but it's worth a reminder that since 2018, our average quarterly PT and R of over $13,000,000,000 has been generating over 60 basis points of new CET1 capacity per quarter, even after having made meaningful investments in our businesses.
This powerful earnings stream allows us to grow the franchise and serve our customers and clients when they need us most and it provides us the capacity to absorb losses and quickly replenish capital in times of stress. While over the last two and a half years, we've paid out approximately 100% of cumulative earnings, distributing nearly $75,000,000,000 of excess capital, we're now building a significant amount of capital since we've suspended our share repurchases. And we believe our capital base remains strong even in more severe scenarios, which you can see on Page 8 in capital, of which $16,000,000,000 is excess over and above our regulatory buffers. Our 3.3 FCB translates to $51,000,000,000 of capital that is available to pre fund stress at any time. And on top of that, our 3.5% GSIB surcharge translates to another $54,000,000,000 All that, so our $69,000,000,000 regulatory minimum is never touched.
And as you know, we prepare for and manage our capital to a number of scenarios and one of them is the extremely adverse scenario that Jamie discussed in his shareholder letter earlier this year. We've updated this analysis and it now assumes an even deeper contraction of GDP, down nearly 14% at the end of 2020 versus 4Q 2019 and reported unemployment ending the year at nearly 22%. Even under this scenario, we estimate that we would end the year with a CET1 ratio above 10% and we would be down by advance, so our regulatory minimum would be 10.5%. While we are not likely to voluntarily dip into any of our regulatory buffers, this scenario would require us to do so, but notably only to a small extent. It's also worth noting that based on the limited information provided from the Fed about their U and W scenarios, we believe that our extremely adverse scenario simulates an even worse path for the economy over the next 12 months.
And even if we get this wrong and our losses are twice as high, we still wouldn't use the entire SCV.
Okay. Yes. So this is Jamie. I'd just like to amplify a couple of these points. So we're showing this example, obviously, it's predicated a lot of assumptions, which we're not going to give you a lot of detail on, just simply to show that we can bear another $20,000,000,000 of loan loss reserves.
That $20,000,000,000 brings us to an extreme adverse, which roughly may equate to the U or W of the Fed and we're going to do a lot more analysis than that because obviously we need to be prepared for that. We dip into advanced CET1, that's because we're taking no actions. So I've always told you that advanced capital is very pro cyclical. So as things get downgraded, your RWA goes way up. Your capital base doesn't change that much, but the RWA goes way up.
And there be lots of actions we would take that we can avoid that from taking place whatsoever. The other thing I want to point out, in this extreme average probably can't happen in 1 quarter. It will happen in several quarters because we already know kind of what July looks like in August and stuff like that. So even if the economy starts to head there, it will take us a couple of quarters before you make the determination that that has a 100% possibility. Remember, this is saying we now believe it's 100%.
Of course, things could be worse by the way, but we're just trying to show you how much capital the company does have. And the dividend, now I'm going to be it sounds like I'm going to contradict myself, I am not, okay? Today, we have all of that PPNR, all of that earnings, all the things. So we can't be foolish to guess the future of extreme adverse and cut your dividend, because we can easily get through very, very tough times and never cut the dividend. However, if you enter something like extreme adverse, all of a sudden you have new scenarios which are even worse.
You don't know. So at one point, the Board would consider cutting the dividend because things should get even worse than extreme adverse and we want to be able to handle anything out there. The primary concern of the company is to serve our clients, serve our community, do it differently than and no one's ever worried about JPMorgan Chase. So there's no intent to do it, but if things get really bad, I mean, we use the word materially and significantly, that's something we should look at. The other thing by the way is these loan losses are our best estimate of loan losses and not the CCAR type of stuff.
You all are doing estimates that show D FAST and Fed adverse. We will not lose that kind of money on credit, okay. And on the next page, Jen is going to explain some stuff. I'm going to make a few slight additional comments. I also want you to she said that we're not going to use temporary buffers.
I think temporary is a funny thing to go into a crisis and you could use it for a while, but it disappears on March 1 or February 1. So, my view is we shouldn't rely and anything like that.
And I'll just add, Jamie, to the point on advanced RWA. If you look on the slide and you can see, we travel from 13.1% to 10.4%, about half of that is just the RWA increasing and the other half is the lumpy decreasing. So anyway, as Jamie said, moving on to Page 9, all of this is against the backdrop of a capital framework that still has opportunities for recalibration. So while we've talked about this for years, it has perhaps never been more important. I'll start with CCAR and Jamie just made this point, but it is not predictive of what we actually think would happen.
And the best example of this might be the global market shock. It is a significant portion of the FCB and we've obviously experienced a very different result here in the first half of twenty twenty. So we continue to believe that there are opportunities to rationalize the overall capital framework, including the points we've repeatedly made about GSIB. These changes would foster a higher pace of economic growth over time without compromising financial stability?
Yes. So again, I do want to emphasize a couple of things here. So look, the point of CCAR was that banks couldn't handle extreme stress and if everything goes wrong. CCAR itself is not a predictive forecast of what your results might be. So all the CCAR tests roughly equate to a global financial crisis and all the CCAR tests always have us losing somewhere between $25,000,000,000 $30,000,000,000 over the ensuing 9 quarters.
But in the ensuing 9 quarters at the Lehman, we made $30,000,000,000 We never lost money in a quarter. We take actions, we diversify, we got our streams of earnings. And so I'm not we're not against CCAR because that's protecting you from the worst of the worst of the worst, but that's not necessarily predictive. The global market shock, which I think they have is $25,000,000,000 in counterparty losses. Again, just to be instructive of that, in 'eight and 'nine, you had Fannie Mae go bankrupt, Freddie Mac go bankrupt, you had Bear Stearns effectively, you had Lehman Brothers effectively, you had AIG effectively, you had tons of financial institutions in Europe, tons of counterparty failures and our trading results in the worst two quarters combined was a loss of $4,000,000,000 not $25,000,000 And of course, it was quickly made back because as we pointed out, when things get bad in trading, spreads gap out and then all of a sudden you're making more money trading because you and you have recoveries in position.
So, the stress capital buffer 3.3 is not indicative of what we would lose. And so, and I hope over time we could drive that down by taking real access to a number of close to 2.5. G SIB itself, I pointed out before, I'm not against the concept of big banks and more capital, but G SIB is it's not the same as CCAR. CCAR includes your diversification, your strength, your earnings, your PPNR and things like that. G SIB does not.
It's just a measure of size multiplied over and over and over. It doesn't include diversification, it doesn't include margins, it doesn't include actions, it doesn't include and so it's really not representative of all, but I would say is risk of a company or something like that. And so we have enough capital to handle a lot of stuff, which is we've always run the company that way. We've always run the company so that we can handle adverse times because in my short lifetime, I've seen crises over and over and over and over. We're not predicting them.
We're just prepared for them. So I'll stop there.
Okay. Thank you. All right. So let's go on to the businesses. So we'll start on Page 10 with Consumer and Community Banking.
So CCB reported a net loss of $176,000,000 including reserve builds of 4,600,000,000 Revenue of $12,200,000,000 was down 9% year on year driven by deposit margin compression, lower transaction activity and customer relief, partially offset by strong deposit growth and home lending margin expansion. The deposit margin was down 108 basis points year on year on a sharp decline in rates, but deposit growth was a record 20% year on year, up over $130,000,000,000 We would estimate that approximately 50% of that growth is COVID related due to government stimulus for consumers and small businesses, lower consumer spending and tax payment delays. Mobile users were up 10% year on year and since the start of the pandemic, we've seen increased levels of digital engagement. For example, quick deposit enrollment is up 2 times pre COVID levels. As I noted earlier for consumer lending, activity for the quarter reflected an environment that continued to evolve.
Auto loan and lease originations were down 9% year on year due to the exit of the Mazda partnership. Excluding this impact, auto originations were up mid single digits. And while the home lending market was favorable, home lending total originations were down 1% year on year, driven by a decline in correspondent volumes, substantially offset by an increase in retail volume. Total CCB loans were down 7% year on year driven by home lending down 14% due to prior loan sales and card down 7% on lower spend, offset by business banking, up 59% due to PPP originations. Expenses of $6,600,000,000 were down 3%, driven by lower travel related benefits, structural and marketing expenses.
And lastly, credit costs included the $4,600,000,000 reserve bills I mentioned earlier and net charge offs of $1,300,000,000 driven by card. Now turning to the Corporate and Investment Bank on Page 11. CIB reported net income of $5,500,000,000 and an ROE of 27 percent on revenue of $15,400,000,000 Investment Banking revenue of $3,400,000,000 was up 91% year on year, largely driven by our strong performance in capital markets as well as the gains on our bridge book, which were primarily a function of improved market conditions. IBCs for the quarter were an all time record, up 54% year on year. We maintained our number one rank and grew our market share to 9.8% for the first half of the year.
In advisory, we were up 15% driven by the closing of a few notable transactions. Debt underwriting fees were up 55%. We maintained our number one rank in overall wallet and were the leaders and lead left across leverage finance. In equity underwriting, fees were up 93 percent and we grew share by approximately 200 basis points relative to the Q1. With regards to outlook, we expect Q3 IV fees to be down both sequentially and year on year due to the usual seasonal declines and lower M and A announcements year to date.
And if the economy begins to stabilize, we expect capital markets to revert to normal levels. However, any sustained period of instability could result in additional demand for liquidity and therefore increased capital markets activity. Moving to markets, total revenue was $9,700,000,000 up 79% year on year, an all time record driven by strong performance throughout the quarter and it was only later in June that activity began to revert to more normal levels. We saw strength across products and regions from both flow trading and large episodic transactions. While strong client activity was a continuation of the Q1 theme, our market making activity this quarter benefited from improved market liquidity and we were able to better monetize flows.
Fixed income was up 99% year on year or 120% adjusted for the gain from the IPO of Tradeweb last year, driven by very active primary and secondary markets across products, particularly in macro. Equities was up 38%, largely driven by strong client activity in equity derivatives and cash. Looking forward, we expect the slowdown that we started to see towards the end of June to continue. In addition, the second half of last year was very strong, making any year on year comparison difficult. But obviously, the environment makes forecasting market performance even more challenging than usual.
Wholesale payments revenue of $1,400,000,000 was down 3% year on year, primarily driven by our reporting reclassification in merchant services. Security services revenue of $1,100,000,000 was up 5% year on year as continued elevated volatility in the 2nd quarter drove increased transaction volumes and higher average deposit balances. Credit adjustments and other was a gain of $510,000,000 as I mentioned upfront, dollars as I mentioned upfront, driven by the tightening of funding spreads on derivatives and was a partial reversal of the losses in the Q1. Expenses of 6.8 $1,000,000,000 were up 19% compared to the prior year due to revenue related expenses. Finally, credit costs of $2,000,000,000 reflects the net reserve bills I referred to earlier.
Now moving on to Commercial Banking on Page 12. Commercial Banking reported a net loss of $691,000,000 which included reserve bills of approximately $2,400,000,000 Revenue of $2,400,000,000 was up 5 percent year on year driven by higher deposits and loans and equity investment gain and higher investment banking revenue, largely offset by lower deposit NII. Record gross investment banking revenues of $861,000,000 were up 44% year on year due to increased bonds and equity underwriting activity. Expenses of $899,000,000 were down 3% year on year driven by lower structural expenses. Deposits of $237,000,000,000 were up 41% year on year as the increase in balances from March has largely remained on our balance sheet as clients look to remain liquid in this environment.
End of period loans were up 7% year on year, but down 4% quarter on quarter. G and I loans were down 7% quarter on quarter as revolver utilization while still elevated has declined significantly from the all time highs in March. However, this was partially offset by the impact of PTT loans. CRE loans were flat with generally lower originations in both commercial term lending and real estate banking. Credit costs of $2,400,000,000 included the reserve bills mentioned earlier and $79,000,000 of net charge offs, roughly half of which were in oil and gas.
Now on to Asset and Wealth Management on Page 13. Asset and Wealth Management reported net income of $658,000,000 with pre tax margin and ROE of 24%. Revenue of $3,600,000,000 for the quarter was up 1% year on year as growth in average deposit and loan balances along with higher brokerage activity were largely offset by deposit margin compression. Expenses of $2,500,000,000 were down 3% year on year with lower structural as well as volume and revenue related expenses, partially offset by continued investments in advisors. Credit costs were $223,000,000 driven by the reserve bills that I mentioned earlier.
For the quarter, net long term inflows were $29,000,000,000 positive across all channels and all regions, led by fixed income and equity. At the same time, we saw net liquidity inflows of $95,000,000,000 making us the number one institutional money manager globally. AUM of $2,500,000,000,000 and overall client assets of $3,400,000,000,000 up 15% and 12% year on year respectively were driven by cumulative net inflows into liquidity and long term products. And finally, deposits were up 20% year on year on growth in interest bearing products and loans were up 12%, the strength in both wholesale and mortgage lending. Now on to corporate on Page 14.
Corporate reported a net loss of $568,000,000 Revenue was a loss of $754,000,000 down $1,100,000,000 year on year, driven by lower net interest income on lower rates, including the impact of faster prepays on mortgage securities. And expenses of 100 and $7,000,000 were down $85,000,000 year on year. Now let's turn to Page 15 for the outlook. You'll see here that despite the uncertain environment, our latest full year outlook remains largely in line with our previous guidance. Based on the latest implies, we expect net interest income to be approximately $56,000,000,000 and adjusted expenses to be approximately $65,000,000,000 which is slightly higher than expected previously, reflecting the outperformance in the second quarter and will ultimately be an outcome of our performance in the second half of the year.
So to wrap up, against the backdrop of an unprecedented environment, our 2nd quarter performance highlighted the benefits of our priorities remain unchanged. We are focused on supporting our employees, customers, clients and communities around the globe and on being good stewards of the capital entrusted to us by our shareholders. I'd like to end by thanking all of those who continue to serve on the front lines of this crisis and our people here at JPMorgan Chase who
Certainly. Our first question comes from John McDonald of Autonomous.
Good morning, Jen and Jamie. Jen, I was wondering if you could give us some incremental color on your commercial exposures to heavily COVID impacted sectors across CRE and C and I. So thinking oil and gas, travel, retail, just to help us understand the types of areas where your incremental commercial reserve building was directed towards this quarter?
Sure. So I'll start by saying, the most impacted sectors like the ones that you mentioned represents about a third of our overall exposure. More than half of that is investment grade and 2 thirds of the non investment grade is secured. And in terms of the Q2 downgrade, well, first I'd say in the Q1 when we were really looking at a deep but short lived downturn, we were really very much focused on the most impacted sectors. And now that we're looking at a more protracted downturn, we're reserved for a much more broad based impact across sectors.
So just to put that in context, the 2nd quarter reserve build, about 40% of that is in the most impacted sectors versus 2 thirds of the build in the Q1 was the most impacted sectors. And then in terms of the downgrades that we saw in the second quarter less than a third of those were in the most impacted sectors.
And just for your definition of most impacted sectors, what would you be including in that?
Consumer and retail, oil and gas, real estate, retail and lodging and subsectors as you think about real estate.
Okay. And just a quick follow-up question. You maintained the NII outlook for the year despite a pretty big drop in net interest margin. Can you talk about the dynamics embedded in that second half outlook for NII and maybe how trading NII might play into the thinking?
Yes. It's a great question and you're spot on, which is markets helps NII. So the outperformance in markets helps NII, but can be a headwind NIM just given that the NIM is below the average. So yes, it was maintaining that outlook did have something to do with the outperformance in markets. You're right.
Our next question is from Betsy Graseck of Morgan Stanley.
Hi, good morning. Thanks. Jennifer, just to kick off on the question. On Page 3, you went through a lot of detail around the forbearance that you've been given and the percentage that has been paying you at least once during the deferral period. Could you give us a sense on these different asset classes that you've outlined in your base case?
What are you assuming those delinquencies end up becoming?
So I won't go into specific details, but I'll just say a couple of things, which is it is still too early to really read a whole lot into what we're seeing. The visibility here remains low, I would say, given the amount of support that is out there. But you are right that we are considering these customers to be higher risk given that they are in forbearance program. So we did account for that as we thought about our reserves.
Okay. Because I'm thinking, all right, you've got the inverse of the right hand column could be construed as what should be expected to become delinquencies over time. And I'm wondering, as a follow-up question, you mentioned during the prepared remarks that if your assumptions are realized, that you could be basically close to fully reserved for this cycle. Maybe you could give us a sense as to which assumptions you're talking about because I know you're expecting an outcome that's worse than your base case. So I was just a little confused about what I should assume your base case is and what assumptions you're pointing to that if realized you're done on the reserving?
Sure. So first of all, there are a lot assumptions given, as I said, the visibility is still quite low. So assumptions around the economic outlook, and I'll come back to that, assumptions around consumer payment behavior and then assumptions around stimulus. So going back to the economic outlook, we have 5 different scenarios. We did lean in more heavily to the downside scenarios relative then to what we would have otherwise done.
Even the Fed has put equal weight on downside scenarios and their base case. So we certainly thought having a conservative bias there was the prudent thing to do. And so as you look at that Slide 5, that is just the base case. So you can see there exiting this year just under 11%. When you then look at the weighted outcome of unemployment across the five scenarios, we end up with double digit unemployment through the first half of twenty twenty one versus what you see on Page 5 there is just the base case, which shows some improvements relative to the Q4 getting down to just under 8% by the end of 2021.
Betsy, can I just clarify? The base case, if you took Morgan Stanley's estimates or Mike Ferroli's or JPMorgan or the Fed estimates for their base case, that is basically the base case. Embedded in that are always assumptions about stimulus and PPP and all these other things. So that is the base case and we're reserved more than that. So therefore, if the base case happens, we may be over reserved.
I hope the base case happens.
Me too.
Hey, good morning. Maybe just a quick follow-up on the consumer and delinquencies. Obviously, you had an impact from deferral programs and delinquencies actually 30 day delinquencies were actually down. Can you talk to what you're seeing in the non deferral programs? It doesn't seem like we're seeing much stress at all even in early stage delinquencies.
What would you attribute that to? What are you seeing in your non deferral programs?
I mean, simply, I would attribute it to the amount of support that is out there in the form of stimulus. And so as I said, the visibility on what we're dealing with is very, very low because we're not seeing right now what you would typically expect to see given a recession. And so the way we have think about reserving is all about the outlook because we're not actually seeing it today. And so Jamie has said this many times, May June will prove to be the easy bumps in terms of this recovery and now we're really hitting the moment of truth, I think in the months ahead.
Yes. And then just to amplify, in the normal recession, unemployment goes up, delinquencies go up, charge offs go up, home prices go down, none of that's true here. Incomes go down, savings go down, savings are up, incomes are up, home prices are up. So, you will see the effect of this recession. You're just not going to see it right away because of all the stimulus and the fact, 60% or 30% of the unemployed are making more money than they were making when they were working.
So it's just very peculiar times and Yes.
No, it's fair. Maybe a follow-up on DFAST. Jamie, you made comments about the market shock and we kind of went through a market shock and everyone's trading held up quite well. Do you see that changing the Fed's view over time in terms of how they think about stress losses in the trading book? Or is it or you don't think that's
too optimistic? I don't expect any change. And like I said, they're not what they're looking at is they're making sure a bank can withstand the bad as if they were the all the worst bank. They're not giving credit to banks for things having good. So I'm not against that concept.
I just want to say, if it goes really bad and you do everything totally wrong, what happens to your trading or something like that. And they do the same assumptions like outflows. The outflows they have on liquidity are worse than the outflows of the worst bank in the worst crisis. But they just want to make sure that every bank can withstand that.
Our next question is from Brian Kleinhanzl of KBW.
Great. Thanks. Quick question on the balance sheet. I mean, obviously, there's tremendous balance sheet growth as liquidity built up in the quarter. But how are we thinking about that on a go forward basis?
Is that expected to roll off over the next couple of quarters? Is that kind of persistent and expected to stick around or you're just going to be operating with a much larger balance sheet near term?
So I'll start with deposits. I mean, in the Q1, it was very much a wholesale story and we said we expect it to normalize and we have seen that. We started to see that. So looking ahead on wholesale, I think there are puts and takes. We'll continue to see revolvers pay down.
Security services will likely continue to normalize. I think tailwinds for deposits, said balance sheet expansion will be slower, but we'll continue and we do think we'll continue to see organic growth. On the consumer side, probably down from here, on tax payments as well as a pickup in consumer spending. But in both cases, I think we'll continue to see very, very strong year on year growth both for wholesale and consumer in the latter part of this year. And then in terms of balance sheet management, I mean, we manage the balance sheet across multiple dimensions, NII, liquidity, capital and interest rate risk.
And so we have had $400,000,000,000 of deposit growth since the end of last year. And when you consider, as you know, that some of that growth is likely to be transitory and deployment opportunities have been diminished given the rate environment, we have held a decent amount of that in cash. However, we did add about $88,000,000,000 in securities here in the Q2. And on the deposit side, we've been very disciplined on pay rates. So
if those deposits hit ground, we should expect more to migrate from deposits on the asset side into securities or are you looking to fund loans on those?
As the Fed grows the balance sheet, it's going to end up in deposits and for the most part, a lot of deposits will end up in securities because the loan growth usually going to recession doesn't go up that much.
Yes. We should see as consumer spending recovers, we should see some growth in card, which will help, but we'll have PPP starting to pay down and as Jamie said, loan growth, but likely slower.
I should point out that if you look at the big numbers, we have over $1,000,000,000,000 between cash held at the central banks, which is close to $400,000,000,000 or $500,000,000,000 treasuries, which is close to several 100,000,000,000 and other very liquid assets, mostly securities, that's $1,000,000,000,000 When people look at the safety and soundness of an institution like this, that is a tremendous sum of money. Some is required. We are required to hold a lot of liquidity, but some is just because we're investing considerably.
Thanks.
Our next question is from Matt O'Connor of Deutsche Bank.
Good morning. I was just wondering if you could talk a bit about the expected timing of starting to see some charge offs. Obviously, there's a lot of unknowns with the stimulus and the forbearance, but what are your assumptions in terms of when charge offs start going up, maybe where they peak and how long they stay at that level?
It's really difficult to know. I mean, first, we have to start seeing delinquencies. And so, later this year, but next year will be much heavier on charge offs as we think about realizing the assumptions that we've made in the reserves. It's very it's difficult to know. The good thing is CECL is
life of
loans. Loans. So we feel well covered for the scenarios that we're looking at.
And then remind us, you are seeing some creep in the non performing assets. Obviously, it's off low levels, but they are starting to go up. And remind us, why that's not starting to feed into net charge offs? Or is this just a timing issue and will in the next quarter or 2?
Yes. When you look at the non accrual increase in wholesale, half of that is one client. So it's really I wouldn't draw any conclusions from that. And as you say, it's creeping up off of very low levels. So again, we still aren't seeing what you would expect to see in terms of recessionary indicators.
Our next question is from Mike Mayo of Wells Fargo.
Hi. Just more on the reserve question. So if the Fed's base case is achieved, then you are over reserved. If your base case assumptions, which would work
We hope over reserved Okay.
And if your base case assumptions, which are more conservative are realized, then okay, you're done with the reserve building. And if it's worse, then you'll have to add more reserves. But since the end of the quarter, we're seeing an increase in COVID cases in Florida and Texas and California and elsewhere. And isn't there a link between an increase in COVID cases with deaths with economic activity or how do you think about that? And I'm staring at Slide 2 and I can't get my eyes off that debit and credit card sales volume and it seems like it's flattening off here in June.
So just since the end of the quarter, if you were to kind of mark to mark your thinking mark to market your thinking as of this second with what's happening, do you feel better or worse for the same versus the end of the quarter as it relates to your assumptions?
So, Kai, this is Mitch. We feel exactly the same today that we did at the end of the quarter. That's the mark to market. And Mike, we're very clear, we cannot forecast the future. We don't know.
We're also very clear that at least I think you're going to have a much murkier economic environment going forward than you had in May June. And that we you have to be prepared for that. You're going to have a lot of ins and outs. You're going to have people get scared about COVID, they're going to get scared about the economy, small businesses, big companies, bankruptcies, emerging markets. So it's just going to be murky, which is why if you look at the base case, an adverse case, an extreme adverse case, they're all possible.
And we're just guessing at the probabilities of those things. That's all we're doing. We are prepared for the worst case. We simply don't know. I don't think anyone knows.
And with this, the word unprecedented rarely is rarely used properly. This time it's being used properly. It's unprecedented what's going on around the world. And obviously COVID itself is a main attribute. So the Fed's W case, they made it very clear, their W case is that COVID comes back in a big way in the fall and you have to shut down the economy again.
And obviously, we got to be prepared for that too. We don't know the probability of that. We simply don't know. And by the way, we're waiting time guessing.
And I would just add Mike to clarify that we are reserved for something worse than the base case. And for all the reasons you said, they informed our decision to lean in a bit more on the downside scenarios. And so while there is a bit of a, we hope, a conservative bias here, this does represent our best estimate based upon everything we know, which does include the sort of slowdown that you referenced in terms of more recent activity.
All right. And my follow-up would be kind of the flip side during this very difficult time, you've grown deposits over the past year equal to the 5th largest bank. I mean, the deposit growth is kind of off the charts here. So you said half of that is due to COVID, but is the other half due to share gains? So I guess there's several questions in that, but how much of that is related to digital banking and how much of that do you expect to go away once this crisis has passed?
So I talked a little bit about how we're thinking about deposits looking forward. Also, I'd just clarify, Mike, when we said 50% COVID related, that was on the consumer side. And so that we do think some of that will leave with tax payments and consumer spending coming back. And then in terms of how much of it is share gain, it's difficult to know. At this point, historically, we have performed well in lower rate environments.
And I think you're right. I think it is because of our digital capabilities and our branch footprint and our people and all the things that we offer that differentiate us in a time like this.
Our next question is from Erika Najarian from Bank of America.
Hi, good morning. The first question is for Jamie. A lot of investor feedback has indicated that they are encouraged by the fact that banks can remain profitable while absorbing pretty significant provisions, which you've proven today, but are hesitant about bank stocks given the overhang of the DFAS resubmissions in the Q4 and what that
could imply for the dividend.
And I guess, I just I know you alluded to this in your prepared remarks, but I'm wondering under the scenario that you see playing out and relative to that 60 basis points of CET1 generation per quarter, what is your view on dividend sustainability outside of that extreme adverse case?
That's completely sustainable. And if we enter the extreme adverse case, the Board should and will consider reducing it. And like I pointed out, the extreme adverse case itself is completely sustainable with the dividend. The reason they would consider reducing it is because once you enter like 14% or 15% unemployment, you don't know the future. So now you're going to have another extreme adverse case, which is going to be 20% unemployment.
And therefore, you protect yourself from that and cutting the dividend is cheap equity. And so, the goal is to sustain the dividends. You can look at the numbers, it's completely minuscule relative quarter by quarter. So this decision could be made as you enter these things and we're all hoping the base case happens.
And just as a quick follow-up, we also got this question from investors. In the extreme adverse case, is there a preference towards cutting the dividend or a temporary suspension or is there a difference between the 2?
There's no difference between the 2. You cut your dividend, you're going to hopefully put it back when the time comes and so you have the temporary suspension just sounds peculiar, it's a suspension. And I've done that twice in my life. It's a prudent thing to do. And if you might need that capital going forward, because things are going to get that terrible or something like that.
So, remember the other thing, you can ask the other question, if the base case happens, we're going to end up with far too much capital generation and we'll start buying back stock again, which I hope we can do before it goes way up. Our next question We don't expect that this year, but I wouldn't completely rule out in the Q4.
And our next question is from Glenn Schorr of Evercore.
Hi, Glenn.
Hello there. Question for you. So we've had this big market rebound in the overall markets and that's led to a lot of revenue. But given this outlook and the uncertain path that we've been talking through this whole time, I'm curious on ways you think about potentially de risking on balance sheet. Now some of it is just this huge liquidity buildup is a derisk balance sheet, I get that.
But are there proactive things you can do to reduce the high leverage RWA in a more stressed environment? Have you been selling into this recovery is I guess my question?
I guess there's 2 components to it, which is the investment securities portfolio and then proactive things we can do on things we could do on RWA. If that answers your question, Brian, I'll start with investment securities. We are being cautious and we have opportunistically looked to reduce credit exposure there over the Q2. And then on RWA, we are because we're preparing for a range of outcomes, we are spending a lot of time thinking about if we needed to, what could we do. But it is sort of a last resort because we certainly don't want to have any impact on clients and customers.
And so we're ready, we're looking at it, but we haven't done anything, I would say, proactively at this point. We're very much focused on helping clients and customers get through this crisis.
So let me answer this right. On the consumer side, we like other banks have seen are kind of prudent tightening up with how you do credit. That's already happened. And obviously, you can do some more. But Jen, you had some great numbers about how good credit is.
Like I think the give those FICO numbers you gave me the other day.
The FICO.
Well, how much better home lending
is Oh, that was on the LTV, the weighted average LTV. I mean, it's really extraordinary and I was in mortgage, so I should have remembered, but I did have to ask. And in 2010, our weighted average LTV on the portfolio in home lending was 90 percent and it's now 56%.
Right. And you can assume it's better in credit cards, better in auto, we have less subprime, That's the consumer side. On the lending on the business side, we've always been prudent. We're always very tight and careful and stuff like that. Usually what happens in downturns like this, you get a little more serious about security and the management team and responsiveness and raising capital.
So a lot of these companies have been raising a lot of capital. On the investment side and this is a kind of a peculiarity of accounting again, we can actually make it more conservative, putting securities into health maturity, which we've done very little over than I'm going to consider it. I don't personally understand why that reduces risk, but it does reduce your SCB and maybe we'll do that over time. But the security proposal pretty crude as they are. And in trading, it's every day.
So trading is just think of trading as Daniel and Troy Werbach and Jason Sippel and the whole team, they are every single day managing those risks and those exposures and you could assume that they're managing very, very well and tightly today. And we certainly are not hunting to the fences or anything like that. We're trying to be very cautious and serve our clients. And so, yes, you are more conservative. And reducing RWA, yes, we can if we wanted to, we could start doing that by all these various things.
Thanks. One quickie on the consumer side. I'm curious if you've had went out 4 months in to the bulk of the lockdown in the United States and some of your branches have been either closed or drive up only. And I'm and we're watching your deposits grow like a weed. So I'm curious if you've learned any lessons that might change your thoughts on the branch network, on your organic growth efforts as we go forward and come out of this someday?
Yes. So first of all, the deposit numbers, deposits went up as a PPP. Deposits went up because of the payroll checks that people got. Deposits went up, the revolvers are taken down by $50,000,000,000 or like that or something like that. Almost all that end up in deposits.
And of course, a lot of that's already reversed and stuff like that. So you got to look at both sides of that. And but you were going to say something, Jen?
I was just going to add on. I mean, there's of course, we're learning a lot. I mean, I mentioned the quick deposit enrollment, but we haven't learned enough to make any changes to our strategy around branch expansion. In fact, we just opened our 100th branch in market expansion, so we're really excited about that. We think we'll open probably another 75 this year.
So we'll be nearly halfway to the 400 branches that we've talked about in market expansion. And so we'll see. We do have still have about 1,000 branches that are closed. And it's possible that we learn something that helps us think about accelerating e densification or consolidation, but it will be at the margin and we're not going to make any big changes quickly because we want to make sure that we have the benefit over time of watching our customer behavior. So they can really be the ones that inform our strategy.
Our next question is from Charles Peabody of Portales Partners.
One on Page 6, you give the SLR ratio as adjusted for the temporary relief programs on the capital. I wonder if you had a similar ratio for CET1. And part of that question would also be, which would be the more confining ratio starting next March?
There's no temporary relief in CET1.
Well, CET1, the only and I'm not even trying to call it relief, there's a phase in on CET1, but it's over many years. And so I don't necessarily think about that as temporary like SLR. SLR, at this point, it is temporary. It is due to expire in the Q1 of next year, which is why we're very focused on managing that without the exclusions.
And they're both we manage them both. I wouldn't say one is more than the other. We manage it to like 20 different capital liquidity ratios.
And Jamie, FSOC is meeting today behind closed doors. If I understand there are 2 topics. 1 has to do with mortgage secondary mortgage market liquidity and the other with the COVID stress test overlay. Do you have any thoughts or insights as to what they may be discussing on either of those?
I don't. The COVID I mean, you could be you obviously have some insights, right? The COVID, obviously, we're going to run a new stress test. We're going to run it we're going to look at all the Fed cases, UNW and stuff like that, because they laid it out perfectly reasonable that people prepare that kind of stress test. I think the mortgage markets is a different issue, okay?
And we've been very consistent that mortgages, believe it or not, are more far more costly than they should be. Normally, you'd be looking at if you look at the 10 year rate, which is like 60 basis points, the mortgage takes to be 1.6% or 1.8% instead of 3.3%. The cost of the reason for that is because the cost of servicing and origination is so high, it's obviously got to be passed through. It's high because enormous amount of rules and regulation put in place that a lot do not create safety and soundness. Safety and soundness is basically 80% LTV, verify people's incomes, make sure you're doing the right kind of stuff.
And the second one is because there's very low securitization market. The securitization market is important because it reduces your risk weighted asset and it puts more incentive for banks to put on their balance sheet. And the securitization market is a real transfer of risk to somebody else. So I think they should change that, they should change it immediately. The beneficiary of that will be non agency mortgages, which are even more expensive a lot more expensive than agency mortgages.
So, once you have a securitization market that people believe in and you have to change Reg A B a little bit for that all things, you're going to have a much better market. The cost of mortgages will come down and they'll particularly come down for people at the lower end. I mean, so this should be phased and it should be phased right away.
Our next question is from Saul Martinez of UBS.
Thanks for taking my question. I have a broader question and I just want to get your perspectives on public policy and banks and a little bit more broadly than the discussion about capital planning and stress test. And I know banks are working hard to be part of the solution this time and not part of the problem. But we're also having more open discussions about things like inequality and social justice, which in my opinion are long overdue. But I worry that fair or not banks are sort of being depicted as being on the wrong side of some of those issues.
And I think you see that in things like the mainstream press as depictions of big banks and PPP and stuff like that. And I'm just curious if you are concerned at all about populous anti bank policies gaining traction, however you want to define them, whether it's breaking up the banks, directed lending, recapture or whatever in a pretty polarized political environment? Or do you think I'm being too alarmist or overly concerned about stuff that is pretty unlikely in our country? So just kind of want to get your perspective just generally on how banks fit into overall policy and political backdrop?
I mean, the thing you got to do every single day when you go to work is to do the right thing for the right reasons, serve your customers and we try to do that. We tried very hard to take care of our employees, to train people, we tried very hard to advance Black leaders of the finance others. And of course, we make mistakes. And so I understand some of the angst out there, but we try to do the best we can. We get involved in policy like this mortgage thing, that would be better for Americans and we understand that this people want banks to help Americans do.
The most important that we could do is be a healthy buy from banks through this crisis and continue to serve our clients. And remember, responsible lending is good lending. Irresponsible lending is bad lending. So very often, we hear that banks should do more of that. No, irresponsible stuff is irresponsible.
It will lead to bad outcomes. And that's kind of what happened last time around. So we try to do it right and we try to listen very carefully when there's criticism and sometimes and often legitimate about what we could have done better or should do better or try to do better in the future.
Okay. That's helpful. I guess as broad as that question was, I'm going to ask a very narrow question for Jen and on your NII guidance. Does that I presume that includes gains on PPP fees for unforgiven loans. And have you quantified that or sized that up in terms of where you think the magnitude of those figures could be?
So we've been really clear on PPP, which is that we don't intend to profit from PPP. That doesn't mean that you won't have some geography issues. So you'll have some revenue and then you'll have expenses and the profit will be near 0. It is an immaterial amount this quarter, given these fees are recognized over the lives of the loans. So it's very little this quarter, both revenue and expenses.
And looking out, you'll see we'll see more of that, probably in the 3rd Q4. Again, they it will still be 0 on the bottom line and even the gross numbers won't be meaningful in the grand scheme of things.
Our next question is from Gerard Cassidy of RBC.
Thank you. Good morning, Jane. Can you share with us the reclassification of the wholesale portfolio that you talked about?
How often do you go through that process where you have to look to reclassify the corporate loans? And second, you touched on earlier in a question about some of the COVID related sectors that are being impacted because of what we're going through. Can you highlight for us what is the most stressed within that COVID group that you mentioned?
So first on the reclassification, we mentioned it was a geography issue in merchant services.
It didn't have to be There was no reclassification of wholesale loans.
Yes. Yes. And then in terms of the most impacted, I mean, they are the ones that you would expect to see around travel, oil and gas and real estate and retail. So it's the sectors that you would expect to see. Although as I said earlier, and it's important to note that for the downgrades that we experienced in the Q2, less than a third of them were in the most impacted industry.
So really this is we're seeing this as being much more broad based.
Okay. Thank you.
And then second, I may
have missed this, I apologize, but
in your Slide 3, you gave us very good detail on the forbearance on the consumer portfolio. Do you have any numbers on the commercial and corporate portfolios that loans that might be in forbearance? And is it more commercial real estate or C and I?
Yes. They're just not meaningful numbers. We would have included them had they been. So I'll just go back to what we said, which is we're just not seeing what you would typically see.
But they end up in non performing.
They end up in non performing.
We don't have a category in wholesale or commercial, the same way you have a category in consumer.
And our next question is from Ken Usdin of Jefferies.
Thanks. Good morning. Just a question on the points and slides you made about capital and long term opportunities for recalibration. First, I guess, will you have any dialogue with the Fed about the 3.3 SCB as some other banks have mentioned? And then secondly, where do you think we stand on the G SIB recalibration to your points about systemic risk not that shouldn't impact a bank's balance sheet?
We're not going to go back to the Fed and the 3.3, but obviously we're looking at why 3.3 and we can try to adjust our plans going forward to try to reduce that number a little bit. Because we know we have another C car coming up in a couple of months, so there's no reason for us to go through extensive amount of work as opposed to fix what's already there. And G SIB, look, I've always thought G SIB needs a lot of recalibration, but there are things they should have recalibrated for already, which is America gold plated it, which I think is wholly unnecessary. They should have taken cash in treasuries and a whole bunch of stuff out of the calculation. But obviously, it goes way up when the Fed does things like they're doing recently.
And they never adjusted it growth in the economy or growth in the shadow banking system, which they were supposed to do. So I'm just hoping they go about do that at one point, but these things get so wrapped up in political, people politicize very complicated calculations, which I find kind of peculiar and funny, but my view is if they do the numbers, they should do them right and they're just not right anymore.
Yes. And the second question is just going back to Slide 3. You lay out the percent of accounts on this page. Auto seems to be the biggest. And then in the supplement on Page 13, the balances seem to imply a bigger percent on deferral.
Just can you talk a little bit about the differences there? And then why do you think you're seeing more accounts in auto deferring versus other asset classes? Thank you.
Okay. I don't actually know the answer to reconciling the supplement to Slide 3. So Jason and team can follow-up with you on that one.
All right. Maybe then just a comment about auto deferrals and why do you what do you think you're seeing in that customer base versus others? And do you think that means anything different for forward credit trends?
No. No, yes.
Okay. Thanks very much.
Our next question is from Chris Kotowski of Oppenheimer.
Yes. Good morning. Thank you. I guess I just think it was such an extraordinary quarter for capital raising. Theologic shows over $2,000,000,000,000 of debt and equity raised in the quarter.
And I guess a 2 part question around that. One is, as you look at that, was a good portion of that in kind of the stressed areas and presumably capital that's junior to your bank debt and to what extent has all that helped raise the quality of bank loans? And then secondly, looking forward, I mean, did all the companies that needed to and could raise capital do so in the Q2? And therefore, we're looking at a kind of a flat spot going forward? Or do you see this as kind of like there's an ongoing need for a lot of these companies to continue to raise capital?
Well, I think, first of all, it was across the board. I mean, you saw strong companies, weaker companies, high yield markets opened up, converts, I put converts and equity in there too. People did a lot of capital raise. I think it was wise. I think a lot of people said they prefunded a lot of their capital needs to make sure they can get through whatever this crisis means for their company and their industry and stuff like that.
So I don't think it would be like it was before. So it will definitely come down, but I still think there's opportunity for some people to prefund some of that. But it is prefunding. This is not capital. All this capital is not being raised to go spend.
It's being raised to sit in the balance sheet so that you're prepared for whoever comes next. And you've heard a lot of companies make statements and you guys got to go through yourself about, we've got 2 years of cash, we've got 3 years of cash, we've got people want to be prepared, I think it's appropriate.
Okay. That's it for me. Thank you.
But just for your models, we don't expect revenues in Investment Banking, they'll normalize or even come down below normal next quarter and the quarters out. At one point, we can't predict month by month exactly. And for trading, because no one has, cut it in half. Cut it in half and that will probably be closer to the future than if you say it's going to still be double what it normally runs.
And our next question is from Andrew Lim of Societe Generale.
You said that's the last question.
Hi, good morning. Thanks for taking the questions. I think they're quite straightforward. I just wanted some clarity really on the nature of CECL provisioning. And obviously, you've made some very big provisions based on much more conservative assumptions.
But the nature of CECL provision logically should mean that in the Q3, if your assumptions do not change, then your provisions should fall down quite considerably versus the second quarter to a much more normal level. I just wanted to see how you thought about that for the Q3?
Sure. So I would start by saying where we are right now, while there is a conservative bias to where we are right now, it is our best estimate of what we're facing. We certainly hope that in the future we look back on this as a conservative moment, but this is our best estimate. And so if our assumptions are realized and again, our reserve reflects something worse than the base case. So if that's realized, then we shouldn't see meaningful reserve builds in the 3rd quarter or if that continues to be
our option
in the Q3.
Right. So I mean context, would it be similar to quarters that we've seen in 2019, for example?
Yes. You have reserves for growth, but not for the prices per se.
Yes, exactly, exactly. That's very clear. Thanks for that. And then on the CIP trading environment, obviously, we saw June and we've seen better with July. Would you say that's normalized to a level consistent with what we've seen with 2019?
Or are you still seeing some pretty strong trading falling through into the Q3? I just
answered that question. You should assume it's going to fall in half. We don't know. It's only a couple of weeks into the thing, but we don't assume we have these unbelievable trading results going forward and hopefully we'll do better than that, but we simply don't know. I also just want to point on reserving since it's probabilistic, you could actually change nothing in your assumptions, but the probabilities of potential outcomes and put up more reserves.
We have no further questions at this time.
Thank you.
Thank you.
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