Please stand by. We're about to begin. Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's first 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 Piepszak. Ms. Piepszak, please go ahead.
Thank you, operator. Good morning, everyone. As you heard, Jamie is with me on the call. I know I speak for the entire company when I say we are just thrilled that he's back. Before we get into the first quarter performance, we want to start by recognizing that this is an extremely challenging time for all of us. Our thoughts are with those most affected by COVID-19, particularly those on the front lines of this crisis. The presentation this quarter is slightly longer to address a few key topics as we navigate this environment. As always, it's available on our website. We ask that you please refer to the disclaimer at the back. Starting on page one, I'd like to highlight some of the ways we're responding to COVID-19.
As a firm, we are focused on being there for our employees, customers, clients, and communities in what is an unprecedented and uncertain environment. While we don't know how this will play out, we will be transparent here about our assumptions and what we know today. Our number one priority is to continue to provide our services in an uninterrupted way while also providing a safe work environment for our employees. We're incredibly proud of all that our firm has been able to do over the past few weeks, so I'll just hit on a few examples here. We've mobilized our workforce around the globe to work remotely where feasible, including operations and finance teams, portfolio and risk managers, bankers, and traders, ensuring they have the right tools to work effectively.
Currently, we have about 70% working from home across the company, for many groups, that number is well north of 90%. For those who still need to go into the office or into a branch, we are taking extra precautions and being extremely mindful of their safety. We're providing assistance in other ways, too. For instance, we're offering free COVID-related medical treatment for U.S. employees and their dependents. On the consumer side, approximately three-quarters of our 5,000 branches have been open, all with heightened safety procedures and many with drive-thru options. The vast majority of our over 16,000 ATMs remain accessible. While our call center capacity has been challenged, we've quickly activated resiliency plans to address customer calls seeking assistance, and we've put in place new digital and self-service solutions in record time.
While wait times have been extended, we're making good progress reducing them. For our customers who are struggling financially during this time, we are providing relief, such as a 90-day grace period for mortgage, auto, and card payments, as well as waiving or refunding certain fees. We continue to support our customers and clients by providing liquidity and advice during this challenging market environment. In the month of March, we extended more than $100 billion of new credit. In wholesale, clients drew more than $50 billion on their revolvers with us, and we approved over $25 billion of new credit extensions for clients most impacted. For our small business clients, we're actively supporting the SBA's Paycheck Protection Program.
The number you see on the slide are as of April 12th. As of this morning, we have more than 300,000 in some stage of the application process, representing $37 billion in loans. We funded $9.3 billion to businesses with over 700,000 employees. To help the most vulnerable and hardest hit communities as an initial step, we've announced a $150 million loan program to get capital to underserved small businesses and nonprofits, as well as a $50 million philanthropic investment. Now turning to page two for highlights on our first quarter financial performance. For the quarter, the firm reported net income of $2.9 billion, EPS of $0.78, revenue of $29.1 billion with a return on tangible common equity of 5%.
While the underlying business fundamentals this quarter performed very well, we reported a number of significant items all due to impacts from COVID-19, which I'll discuss in more detail later. At a high level, these items are a credit reserve build of $6.8 billion, approximately $950 million of losses in CIB, largely due to the widening of funding spreads on derivatives, and a $900 million markdown on our bridge book. It might be an obvious point, but the quarter was really a tale of two cities, January and February, and then March when the crisis started to unfold. With that, I thought it would be helpful to talk through some key metrics that highlight this dynamic across our businesses. Let's go to page three.
Starting with card sales volume on the top left, in March, we saw a rapid decline in spend initially in travel and entertainment, which then spread to restaurants and retail as social distancing protocols were implemented more broadly. While most spend categories were ultimately impacted, we did see an initial boost to supermarkets, wholesale clubs, and discount stores as people stocked up on provisions. Even that is now starting to normalize. We saw similar trends in merchant services as highlighted in the significant decline in brick-and-mortar spend, excluding supermarkets, whereas e-commerce spend has held up well by comparison. In investment banking, in the middle of the page, there was a surge in debt issuance by investment-grade clients as the market remained open and clients' desire to shore up liquidity was top of mind. It was the largest quarter ever in terms of investment-grade debt issuance led by JPMorgan.
In markets, volatility drove elevated trading volumes across products, most notably across rates and commodities, which at their peak were more than triple our average January trading volumes. On the far right, deposit growth accelerated meaningfully in March, most notably driven by wholesale clients as they secured liquidity and held those higher cash balances with us. At the same time, we saw accelerating loan growth, primarily driven by revolver draws. Finally, flows in AWM were meaningfully different in March compared to January and February. Long-term flows through February were strong, positive across all asset classes, but this was more than offset by outflows in March. On the flip side, we saw significant net liquidity inflows into our government funds during March, which more than offset prime money market outflows. On to page four and some more detail about our first quarter results.
Revenue of $29.1 billion was down $782 million or 3% year-on-year, as net interest income was flat to the prior year due to the impact of lower rates, offset by balance sheet growth and mix and higher CIB markets NII. Non-interest revenue was down 5%, driven by the significant items I already mentioned, which were largely offset by higher CIB markets revenue. Expenses of $16.9 billion were up 3%, driven by higher volume and revenue-related expenses, continued investments in higher legal expense, all of which were largely offset by structural expense efficiencies. This quarter, credit costs were $8.3 billion, including a net reserve build of $6.8 billion, reflecting the impacts of COVID-19, and net charge-offs of $1.5 billion in line with prior expectations. Turning to page five, we'll have some more detail on the reserve builds.
Our net reserve build of $6.8 billion for the quarter consists of $4.4 billion in consumer, predominantly card, and $2.4 billion in wholesale, with builds primarily due to impacts of COVID-19 as well as lower oil prices. This reserve increase assumes in the second quarter that U.S. GDP is down approximately 25% and the unemployment rate rises above 10%, followed by a solid recovery over the second half of the year. In addition to these macro assumptions specific to each business, our consumer reserve build reflects our best estimate of the impact of payment relief that we are providing to our customers as well as the federal government stimulus programs. In wholesale, the majority of the build is in sectors most directly impacted by COVID-19, such as in consumer and retail and also in oil and gas.
We expect other sectors to be impacted to a lesser extent if we avoid a prolonged downturn. We have also assumed that the stress in oil and gas continues, with WTI remaining below $40 through the end of 2021. After we closed the books for the quarter, our economists updated their outlook, which now reflects a more significant deterioration in U.S. GDP and unemployment. If that scenario were to hold, we would be building in the second quarter, and builds could be meaningfully higher in aggregate over the next several quarters relative to what we took in the first quarter. A primary unknown is the duration of the crisis, which will directly impact losses across our portfolios.
With that being said, our consumer portfolio skews more prime than the industry average, the effectiveness of government support, customer relief, and enhanced unemployment benefits, while uncertain, undoubtedly will act as mitigants to the losses. Even though our losses will be material, we will be doing what we can to help our customers recover from this crisis and help our clients stay in business. Moving to balance sheet and capital on page six. Our balance sheet capital and liquidity going into this crisis were incredibly strong and importantly allowed us to facilitate client needs in a period of stress. That, combined with our earnings power, is an extraordinary base to absorb the inevitable losses to come. For the quarter, we distributed $8.8 billion of capital to shareholders, which includes $6 billion in net share repurchases up to March 15th.
Since then, we stopped our buybacks, which was both a prudent decision at the time and consistent with what we always say, which is that we would prefer to use our capital to serve our customers and clients. This, coupled with significant RWA growth, resulted in a decline in our CET1 ratio to 11.5%. On RWA, which you can see on the bottom right of the page, the key drivers of growth were market volatility, which should subside over time, and more importantly, going forward, in order to leverage our balance sheet to serve our clients, we are prepared to use our internal buffers, which may mean our CET1 ratio falls below our target range, and if necessary, we can also use regulatory buffers to go below our 10.5% minimum.
It's worth noting here that an environment like this is precisely why we have the buffers in the first place. We currently also have capacity and intend to continue to pay the $0.90 dividend, pending board approval. As you can see in the CET1 walk on the bottom left, it is a small claim on our capital base. Before we move on, just a moment on liquidity. Even with everything we facilitated, our liquidity position remains strong. Looking forward, it's helpful to remember that we have significant liquidity resources beyond HQLA, including the discount window if need be. Now turning to the businesses, starting with Consumer and Community Banking on page seven. CCB reported net income of $191 million, including reserve builds of $4.5 billion. January and February showed a continuation of strength across the business.
Again, March showed a major shift in trends, and across our consumer segments, we saw a drastic deceleration in spend across all forms of payments, and a decline in origination volumes except in the mortgage refi market. On the small business side, we saw significantly reduced inflows in merchant processing activity, early signs of pressure on payment and delinquency rates, as well as line utilization and increased demand for credit. Turning back to the results, revenue of $13.2 billion was down 2% year-on-year. In consumer and business banking, revenue was down 9%, driven by deposit margin compression, partially offset by strong deposit growth of 8% that accelerated in the quarter. Deposit margin was down 56 basis points year-on-year. We expect it to decline further given the current rate environment.
In card and auto, revenue was up 8%, driven by higher card NII on loan growth and margin expansion. Average card loan growth was 8%, with sales up 4% over the quarter, driven by January and February activity. Expenses of $7.2 billion were up 3%, driven by revenue-related costs from higher volumes, as well as continued investments in the business, partially offset by structural expense efficiencies. Lastly, on this slide, credit costs included the $4.5 billion reserve build I mentioned earlier, and net charge-offs of $1.3 billion driven by card inconsistent with prior expectations. Turning to the Corporate and Investment Bank on page eight. CIB reported net income of $2 billion and an ROE of 9% on revenue of $9.9 billion. Investment banking in the first half of the quarter showed continued momentum from last year.
As the market environment shifted, we saw delays in M&A announcements and completions, postponements of new equity issuance, and increased draws on existing lines of credit. At the same time, the investment-grade debt market remained open, and we helped our investment-grade clients raise approximately $380 billion of debt in the quarter across a wide range of sectors. By contrast, the high-yield market was effectively closed, and high-yield spreads widened significantly. As a result, our bridge book commitments were marked down by $820 million, and here it's worth noting our bridge book exposure is about a quarter of what it was entering the 2008 crisis and is a higher-quality portfolio. As a result of this backdrop, IB revenue of $886 million was down 49% year-on-year, largely driven by the bridge book markdowns. IB fees were up 3% year-on-year, and we maintained our number one rank with 9.1% wallet share.
Advisory was down 22%, not only due to a tough compare, but also reflecting delays in regulatory approvals pushing out the closing of certain large deals. We did, however, complete more deals than any other bank this quarter. Equity underwriting was up 25% versus a challenged first quarter last year, we saw strong activity in January and February before the market effectively closed in March. Debt underwriting was up 15% and an all-time record. We maintained our number one rank with 9.5% share up 90 basis points from 2019. Lending revenue was up 36% year-on-year, driven by the impact of spread widening on loan hedges. Looking forward, while a rapid recovery in the economy could produce a corresponding rebound in activity, we could also see significant downside risks to our forward-looking pipeline if the downturn is protracted. Now moving to markets.
Here, total revenue was $7.2 billion, up 32% year-on-year. It's worth noting that even before the crisis, as we said at Investor Day, markets performance was strong for the quarter. The growing COVID-19 concerns triggered a major correction in equity markets, significant widening of spreads, and a spike in volatility, leading to extraordinary government intervention and a substantial change in monetary policy, followed by a sharp decline in Treasury yields. Simultaneously, we also saw a drop in oil prices. This unique combination of events led to further increased client participation and record trading volumes in several products. Fixed income was up 34%, driven by strong client activity, most notably in rates and currencies and emerging markets. Equity markets was up 28% on strength in equity derivatives driven by increased client activity. In terms of outlook, it goes without saying that it's too early to project this performance going forward.
In fact, low rates and low economic activity may even be a headwind. However, we are in a strong position to continue playing a central role in ensuring the orderly functioning of markets and serving our clients' needs. Now on to Wholesale Payments, a new business unit we're reporting this quarter comprised of treasury services, trade finance, and the merchant services business, which was previously part of CCB. Wholesale Payments revenue of $1.4 billion was down 4% year-on-year, driven by a reporting reclassification in merchant services. As clients focused on preserving liquidity, we experienced higher deposit levels in Wholesale Payments throughout the quarter, offsetting revenue headwinds from lower rates and payments activity. In Securities Services, revenue was $1.1 billion, up 6% year-on-year. Market volatility drove increased transaction volumes and deposit balances, which offset the impact of the market correction on asset balances.
In Wholesale Payments and Securities Services, tailwinds from this quarter, like elevated deposit balances, may be relatively short-lived and more than offset by the impact of low rates and potentially lower transaction volumes if the crisis is elongated. Credit Adjustments and Other was a loss of $951 million, which was one of the significant items that I mentioned upfront. Credit costs were $1.4 billion, driven by the net reserve builds I referred to earlier. Finally, expenses of $5.9 billion were up 5%, driven by higher legal and volume-related expenses and continued investments. Now moving on to Commercial Banking on page nine. Commercial Banking reported net income of $147 million, including reserve builds of approximately $900 million. Revenue of $2.2 billion was down 10% year-on-year, with lower deposit NII on lower rates and a $76 million markdown on the bridge book, partially offset by higher deposit balances.
Gross investment banking revenues were $686 million, down 16% year-on-year compared to a record prior year. While we remain confident in our long-term target, we expect some softness in our pipeline, specifically related to M&A and equity underwriting. Expenses of $988 million were up 5% year-on-year, consistent with the ongoing investments we discussed at Investor Day. Deposits were up 39% year-on-year on a spot basis and increased about $40 billion during the month of March, with about half of that coming from clients drawing on their credit lines and holding their cash with us as they look to secure liquidity. End-of-period loans were up 14% year-on-year, mainly driven by increases in C&I loans in March. C&I loans were up 26% as revolver utilization increased to 44%, which is an all-time high. CRE loans were up 3%, and here the story remains largely unchanged.
Higher origination in commercial term lending driven by the low rate environment were partially offset by declines in real estate banking as we remain selective. Credit costs of $1 billion included the reserve builds I mentioned and $100 million of net charge-offs, largely driven by oil and gas. On to Asset and Wealth Management on page 10. Asset and Wealth Management reported net income of $664 million with pre-tax margin of 24% and ROE of 25%. Revenue of $3.6 billion was up 3% year-on-year, driven by higher management fees on higher average market levels and net inflows over the past year. Then in addition, we saw record brokerage activity in March related to the recent market volatility. These increases were largely offset by lower investment valuations.
Expenses of $2.7 billion were flat year-on-year, with higher investments in the business as well as increased volume and revenue-related expenses offset by lower structural expenses. Credit costs were $94 million, driven by reserve builds from the impacts of COVID-19 as well as loan growth. Net long-term outflows were $2 billion as the strength we saw in January and February was more than offset in March. At the same time, we saw $75 billion of net liquidity inflows driven by significant inflows into our industry-leading government funds in March, as I mentioned earlier. AUM, up 7% and 4% respectively, were driven by cumulative net inflows partially offset by lower market levels. Deposits were up 9% year-on-year on growth in interest-bearing products. Finally, loan balances were up 11%, with strength in both wholesale and mortgage lending. Now on to corporate on page 11.
Corporate reported a net loss of $125 million. Revenue was $166 million, a decline of $259 million year-on-year, primarily due to lower net interest income on lower rates, partially offset by higher net gains on investment securities. Expenses of $146 million were down $65 million year-on-year. Now let's turn to page 12 for the outlook. At Investor Day, we showed you a path to 2020 where we expected net interest income to be slightly down from 2019. Obviously since then, the backdrop has changed significantly. Based on the latest implieds and what we know today, we expect to see further pressure from rates, partially offset by balance sheet growth and CIB markets NII, which results in NII of about $55.5 billion for the full year. To give you an idea for the second quarter, we expect NII to be $13.7 billion.
On non-interest revenue, it's always difficult to provide meaningful guidance, and even more so given the current heightened level of uncertainty. Based on our best estimates today, we do expect to see headwinds in 2020 compared to 2019. In addition to the two significant items in the first quarter, these headwinds include a $3.5 billion decrease in non-interest revenue, all else equal, which is also due to the impact of rates and is the offset to higher CIB markets NII, and therefore revenue neutral. We also expect to see pressure on AWM and investment banking fees. We now expect adjusted expenses for 2020 to be approximately $65 billion, largely due to lower volume and revenue-related expenses versus the outlook we provided at Investor Day. It goes without saying all of this is market dependent and we'll keep you updated at future earnings calls.
To wrap up, the challenges we are all facing as the COVID-19 crisis continues to unfold around the globe are unprecedented. Although we don't quite know what the path will look like going forward, what we do know is that we will continue to be there for our employees, clients, customers, and communities as we always have been, and we have the talent, resources, and operational resiliency to do so. Our employees have proven that being resilient is not just about maintaining operations. It's also about culture. That feels stronger than ever with our teams around the world working harder than ever to continue to serve our clients, customers, and communities. We've never been more proud of our people, and we simply can't thank them enough. With that, operator, please open the line for Q&A.
If you would like to ask a question, please press star, then the number one on your telephone keypad. We kindly request that you ask one question and only one related follow-up. If you would like to ask additional questions, please press star one to be re-entered into the queue. Our first question comes from Erika Najarian of Bank of America.
Hi. Good morning. Jamie, we're glad that you could join us and that you're well enough to join us. Jenn, if you could give us a sense of by product, how many of your clients, for example, in card and auto, home lending, are in a forbearance state, so they started to defer the payment, so the percentage of your clients. How we should think about the significant government intervention relative to the severely adverse scenarios. I believe for total losses, it's 5.9% over nine quarters for the Fed and 4.1% for company-run.
Sure. First of all, I'll start with the payment relief and forbearance there. I would start by saying that we have already refunded millions of dollars in fees. We've approved payment relief for hundreds of thousands of accounts across consumer lending, and we obviously expect that to be meaningfully higher through time. We've paused foreclosures and auto repossessions, and importantly, we've made the process easier for our customers through digital and self-service options that we built in record time. In terms of what we're seeing, those are the numbers. They're still, as I said, relatively small, compared to what we think we'll ultimately see. In mortgage, just to give you context, outside of customers asking for forbearance, which is just a little over 4% of our service book at this time, the April 1st payments seem to be okay.
In card, we're seeing payment rates down a bit, but still strong, and we've seen a slight uptick in late payments in auto. The quality of these portfolios was strong coming in as we've done surgical risk management over the last few years, and that has made these portfolios more resilient. In terms of how we effectiveness of these programs, which are extraordinary in terms of the direct payments or the enhanced unemployment insurance, the ultimate effectiveness is, I think, the biggest unknown. The key, obviously, is being able to bridge people back to employment. We have assumed as best we could for our first quarter results, the impact of those programs as well as the ultimate impact on payment relief that we'll be providing for our customers.
That is for sure an unknown, and we certainly expect to learn a lot more about that in the second quarter.
Thank you. My second question, you mentioned that you're prepared to go below 10.5% CET1 to help your clients. Going below 10.5% is also when the automatic restrictions start kicking in from the Fed in terms of payout. If I understand it would be a 60% payout restriction on eligible net income. Just wanted to understand your thoughts on balancing servicing your clients and also thinking about your capital levels relative to those automatic restrictions from the regulators.
Sure. As you probably know, Erika, the Fed made some changes there recently, which as you say puts us in a 60% bucket as we go below 10.5%. We have a reasonable amount of room below 10.5% to remain in the 60% bucket. I would say that that was very helpful clarification from the regulators in terms of how we should think about using regulatory buffers. That was particularly helpful. Right now, we are focused on serving clients and customers, and we've looked at a range of scenarios so we can ensure that we're managing our capital quite carefully. Jamie talked about an extreme adverse scenario in his chairman's letter that we've looked at, assuming large parts of the economy remain in lockdown through the end of this year.
In that scenario, our CET1 drops to have significant room to continue to serve our customers and clients through this crisis. We are managing it quite carefully and looking at a range of scenarios so we make sure that we're prepared.
Our next question is from Mike Mayo of Wells Fargo.
Hi, and welcome back, Jamie. Question's for you.
Sure.
How do you thread the needle between supporting your customers and the country and doing all those things that you want to do while still protecting the resiliency of the balance sheet and not getting hit with unexpected litigation costs, as you mentioned in your CEO letter?
Yeah, no, it's a very important question. I think in times of need, banks have always been the lender of last resort to their customers. Obviously, you've got to be a disciplined capital provider because undisciplined loans are bad. You take a calculated risk. We're making additional loans. We're adults. We know that if the economy gets worse, we'll bear additional loss. We do forecast all of that, so we know we can handle really adverse consequences. There will be a point, and the last question brought it up, was where if you get below 10% CET1, even though we'll have almost $200 billion of capital and $1 trillion of liquidity, all these other constraints start to kick in, like SLR, G-SIB, advanced risk-weighted assets that may kind of constrain it. Then obviously then you've got to look forward.
We want to do our job. If we can help the country get through this, everybody's better off. If we lose a little bit more money in the meantime, so be it. Obviously we're going to protect our company, our balance sheet, our growth, and we'll be having close conversation with the regulators about what that is. I also think you have to take into consideration the extraordinary measures the government's taken. That's the income to individuals, the PPP, and all these Federal Reserve things.
Also in your CEO letter, you talk about the economy coming back online and, I guess with your reserve build, you're assuming, what, 10% unemployment and then the economy improves in the second half of the year? What is your base case for how people come back to work that's behind those assumptions? I know you have a lot of scenarios too, but just a base case.
Yeah. I think the back to work, we shouldn't think of it as a binary thing. After the CDC, we all get instructions from the government, after there's enough capacity in the hospitals, after there's proper amount of testing. Remember, a lot of people are going to work today in farms, factories, food production, retail, pharmacies, hospitals. It isn't like no one's going to work. Hopefully you can turn it back on where it's very safe. There's plenty of capacity. You're not worried that you can't give every American who does get sick the best possible medical advice. The turn-on will be regional by company, all following standards of best health practices. In some ways, you need to get that done because the bad economy has very adverse consequences way beyond just the economy.
In terms of mental health, domestic abuse, substance abuse, et cetera. A rational plan to get back to work is a good thing to do. Hopefully it'll be sooner rather than later, but it won't be May. You're talking about June, July, August, something like that. I don't know if that answers your whole question.
Yeah.
Jen, you give the base case on.
Sure. Mike, as we close the books for the first quarter, just to give it context, we were looking at an economic outlook that had GDP down 25% in the second quarter and unemployment above 10%. It's just important to note that that kind of gives you a frame of how to think about it, but there's a lot more that goes into our reserving, including management judgment of some world-class risk management and finance people and also other analytics. That just kind of gives you a frame of reference. There we did think about a number of other scenarios that we should contemplate in reserving, and we also thought about the impact, what's our best estimate of the impact of these extraordinary government programs as well as our own payment relief programs.
Since then, as I noted in my prepared remarks, our economists have updated their outlook, now have GDP down 40% in the second quarter and unemployment at 20%. That's obviously materially different. Both scenarios, though, do include a recovery in the back half of the year. All else equal, and of course, the one thing, probably the only thing we know for sure, Mike, is that all else won't be equal when we close the books for the second quarter. All else equal, given the deteriorated macroeconomic outlook, we would expect to build reserves in the second quarter. Again, a lot will depend on the ultimate effect of these extraordinary programs and how effective they can be in bridging people back to employment.
We're going to still have a number of unknowns, I would say, at the end of the second quarter, but meant for second quarter reserves.
Our next question is from Steven Chubak of Wolfe Research.
Good morning. Jamie, nice to have you back. I wanted to ask a question on some of the remarks relating to capital. Quarles actually made some comments on Friday alluding to efforts by the Fed to incorporate real-life COVID stress in the upcoming CCAR cycle. We haven't gotten much color since then. I'm wondering whether you've received any guidance from the Fed on which changes, if any, they plan on contemplating for this year's test. Maybe just bigger picture, how are you thinking about the potential impact that could have on the SCB and potentially raise some of your capital requirements?
Sure. Thanks, Steven. We haven't gotten specific guidance, but it certainly makes sense that the Fed would want to look at a scenario like that. We have been, as you might imagine, staying very close to our regulators through this crisis, so they can have a very good understanding of how we are managing things. In terms of the potential impact, we'll learn more about that in June. We've given our best estimate of SCB and the impact it will have on our minimums, and that is absolutely incorporated into our thinking about how we'll manage capital through a range of scenarios here, but we'll learn more from the Fed in June.
I've always pointed out, I've always thought it flawed doing one stress test, which will not be the stress you go through. JPMorgan does 100 a week. We're always looking at potential outcomes. Obviously we're doing our own COVID related about it. That's what we're going to have to deal with this time, not what I would consider a traditional stress test.
Yeah. We have looked at the range of outcomes probably have never been broader. As Jamie said, CCAR has been a good place for us to start in terms of one scenario. We have looked at a number of different scenarios at how this may play out. Obviously Jamie articulated what we think could be an extreme adverse, and we're prepared for that too. I think the most important thing, is that we're prepared for a range of outcomes, and we'll learn more about SCB in June.
Got it. Just to follow up on the securities book, just given some of the significant declines at the long end of the curve. Again, I was hoping you could help us think about where reinvestment levels are today, just compared with the 2.48% yield on the blended securities book. Just separately, given the large impact of QE-driven deposit growth, how you're deploying some of that excess liquidity in this environment.
Sure. On the investment securities portfolio, managing the balance sheet, in this rate environment is obviously a different dynamic. With lower rates, as well as the deposit growth that you mentioned with the Fed balance sheet expansion, you do see a large increase in our investment securities portfolio this quarter, which makes a lot of sense. Right now, in terms of balance sheet management, we are completely focused on supporting client activity. Our balance sheet is harder to predict right now, but we are prepared for a range of outcomes.
Okay. Thanks very much.
Sure.
Our next question comes from Saul Martinez of UBS.
Hi. Good morning. I wanted to follow up on the CECL-related question. Jenn, you gave us a good amount of color on what the underlying economic assumptions that were used to build the reserves and where Bruce Kasman in your economics team is now for the second quarter. Maybe thinking about it a little bit differently, in terms of how to attribute the CECL reserve build. I'm not looking for specific numbers, more just directional. How do we think about it in terms of how much is attributed to sort of mechanistic model-related changes where you calibrate your model for new economic scenario versus actual signs of stress that you're seeing in your book that maybe aren't showing up in credit measures, but that you do think will show up in a reasonably short time period, call it within the next few quarters? How much of it's growth?
How much of it's mix? Just if you can talk to that because I guess what I'm trying to get at is how much of it's more mechanistic and how much of it's actual tangible signs that you're seeing of financial stress in your borrower base that could emerge in the reasonably near future as credit losses.
Sure. It's a great question, Saul. I would start by saying that we haven't actually seen the stress emerge as of yet. I wouldn't necessarily use the term mechanistic, but I would say that what we took in the first quarter is our best estimate of future losses. It's also important to note that we don't reserve for future growth. Future growth with all else being equal, be a reserve build. I wouldn't necessarily think of this as materially different because of CECL. We didn't actually really think about the impact of CECL relative to the incurred model. The regulators have given their point of view on that, given the change in the capital rules where 25% is assumed to be the difference. That's their view. Like I said, we didn't spend a lot of time thinking about it.
I would say that it is our best estimate of the losses that will inevitably emerge through this crisis. It is life of loan, which of course is different under CECL. Again, all else equal, you can think CARD was larger than it would have been under an incurred model. We didn't really think about it that way, and it's impossible, of course, to know what judgment we would have applied under a different model.
Okay. No, that's helpful. Jen, just on that point of growth, pivoting a little bit. Obviously, a lot of the pressure in CET1 was because of risk-weighted asset growth and drawdowns on commitments. Where do you think we are in terms of those drawdowns? I think it's like $350 billion still in wholesale unfunded commitments. How do we think about that and how much room there is for that to continue to maybe pressure risk-weighted asset evolution?
Yeah. Like so many other things it is difficult to predict. I will say that early here in the second quarter, we have seen a pause on revolver draws. It could very well just be a pause. We're assuming, as we think about our own capital plans, that we will see revolver draws continue in the second quarter, albeit at lower levels than the first quarter. Of course, the timing and the pace of the paydowns will depend upon the ultimate path of the virus and the economic recovery.
Our next question is from Glenn Schorr of Evercore ISI.
Hi. Thanks very much. I appreciate the limited sight we all have. Maybe let's assume, hopefully sooner than later, we get past the bulk of the credit impact. On the other side of this, have you thought about lending spreads, underwriting criteria, and how much terms we need to tighten given what we've learned, or on a scenario that we didn't encapture under its previous underwriting? In other words, those lending spreads widen. Do you get paid more for your balance sheet? I'm just curious on how you're thinking about risk management on a go-forward basis.
Sure. There, I would say that we always take a long-term franchise view on things like that. Our philosophy has not changed. It is true, however, that the marginal cost of new activity is higher for us right now. That's a consideration. I would say in terms of risk management, we do what we've always done and what we always do, which is manage carefully within our risk appetite. I think that has served us well coming into this crisis, and we'll continue to stay close to our clients and manage that carefully. Dimon?
Can I just add, on the consumer side.
Yes
you have a forward-looking view of risk. On the wholesale side, the revolvers that are taken down, which are like $50 billion, are existing spreads. The bilateral stuff that's being done by IG credits, they're being done at slightly different spreads and stuff like that, are higher. Trading, obviously, you're actually getting higher spreads in a lot of things you do in trading. Your finance people and do things and stuff like that. You will see a tightening of credit in the market. Think of leverage lending, certain underwriting, certain non-bank lenders who are no longer there. You will see an eventual tightening and an eventual increase in spreads. What you won't see banks do, is price gouge, which you've seen in other industries. Banks are very careful to support their clients through times like this.
One more impossible question, Jenn, maybe. Could you help qualify, I know you can't quantify, but exit rate revenues that you kind of alluded to in some of the things like underwriting falling off. Tail of two quarters. The quarter itself, if it weren't for the ginormous credit issue that we're facing, would've been like, "Eh, revenue's down a little bit, expenses up a drop." How much of the exit rate revenues are we looking at second quarter, third quarter versus the full first quarter? I know that's a hard one.
Glenn, I'm glad you acknowledged that it's an impossible question and a hard one. There's a reason why we gave directional guidance here in terms of what could be headwinds, but it is just impossible to predict right now, as you point out. I will say, if you think there's obviously nothing that we can really say with confidence about exit rates in 2021. I will say, based upon the latest implies, if you look at NII, you could see growth in 2021 on balance sheet growth there, and then NIR is absolutely going to depend on the path of the virus and the economic recovery and when and how we all get back to work. We've given you expense guidance to think about.
From a credit perspective, as I said, we could see continued builds over the next several quarters, but the way CECL works, in theory, again, all else equal, is that should be, could be behind us by the end of the year, and we then have those reserves to absorb the losses that will inevitably emerge over the back half of this year and into 2021.
Our next question is from Gerard Cassidy of RBC.
Thank you. Good morning. Can you show us, I know you gave us the color on the base case, the downturn in the second quarter. What's your outlook on that recovery in the second half of the year? Can you give us any color on what kind of recovery you're expecting in the second half of the year as part of the CECL reserve building?
Sure. I don't have the numbers to hand, Gerard, but they're public. I suppose you can say it was based on our economist outlook at the end of March, which did have a recovery. I just don't have the GDP numbers to hand and the unemployment. I think what's most important to note, Gerard, is that based upon what we're looking at, you do have a recovery in the back half of the year, but it still leaves you from a GDP perspective and unemployment, below your launch point on absolute levels of GDP and above your launch point on absolute levels of unemployment. It's a recovery. It is our latest outlook, and as I said earlier, it is probably the only thing we know for sure is that that is going to change through time.
It is a recovery in the back half of the year that doesn't get us back to where we started, and importantly, as we've said, that we're prepared for a range of scenarios. While that may be the case that we based our reserve levels off, it is not the only scenario that we are preparing for.
Very good. Just as a follow-up, on the bridge book, and I apologize if you addressed this and I missed it. I know you guys mentioned the losses in the bridge book. Could you share with us the size of the book and then some more color on what triggered the losses in the bridge book?
Sure. There I would just start by, I said it in the prepared remarks, but it's worth repeating. Our bridge book is about a quarter of the size it was in the financial crisis. It's about $13 billion. It's slightly down from where we were at year-end. Importantly, we don't have any imminent closing deadlines, and the market is actually performing a little bit better here in the second quarter. We'll see where we land at the end of the quarter, but so far.
Just basically marking the positions to market.
Yeah
effectively.
Yeah. The good news is with no imminent-
Ex fees.
Right.
Yeah.
With no imminent closing deadlines, it's not necessarily the case that we'll realize those losses. As Jamie said, they're marked to market at the end of the quarter.
I would just also put this in perspective, and we're adults. We know that when you have a bridge loan book that you're going to have quarters where things gap out and you might lose some money. We're the leader in leveraged lending. We're the leader in high yield, we're the leader in loans, et cetera. We intend to maintain that position. Every now and then you'll have not a particularly good quarter. We don't worry about this very much. Like Jenn said, so far because of the spreads, it's probably a recovery this quarter.
Our next question is from John McDonald of Autonomous Research.
Hi, Jenn. Regarding credit cards, just based on payment rates that you've seen so far and maybe the draws on revolves, how are you expecting card spending and card balances to trend over the next few quarters this year?
Yeah. Hi, John. Based upon what we're looking at right now, spend was down. We talked about different categories, but spend in aggregate was down 13% in the month of March year-over-year, and we're seeing trends like that continue here in April. With that, I would say that we would, given what we know today, expect outstandings to trend down from here.
Can you help us think about how you do the accounting for the consumer deferrals? Do you keep accruing, but do you add some kind of haircut for NII and suppression in terms of what might not be collectible even though technically you're allowed to accrue while you defer?
Yeah, you got it, John. We do continue to accrue, but it is a lower yield over the life of the loan.
Our next question is from Betsy Graseck of Morgan Stanley.
Hi, good morning.
Hi, Betsy.
I have two questions. One, just thinking about the outlook for the next couple of quarters here. I know you mentioned that your economics team had updated their estimates, and maybe if you could give us a sense as to the timing of when you clip your reserves versus those estimate changes. Part of the reason I'm asking is because of the reserve ratio move between 4Q 2019 and 1Q 2020 for the various segments. When I look at the CIB and the commercial bank, the reserve ratios are down from where they were in 4Q 2019. I'm trying to understand how the next change in the reserving is likely to traject between the various asset classes. As you move from an adverse case to a severely adverse case, are there different asset classes that potentially have a higher uptick in reserve ratio that we should be expecting here?
Sure. On the wholesale side specifically, Betsy, the reason you see that dynamic is because of CECL. It's in the presentation, so you can see the numbers. The CECL adoption impact in wholesale was a net release, and so we've now built back. That's why you see that dynamic there. In terms of the reserving, when we close the books, which was here in early April, we do have to, of course, kind of snap the chalk line at some point and close the books, which is why we wanted to be very transparent about how we think about reserving going forward. Like I said, all else equal, given the macroeconomic outlook that we're looking at, that we would expect to have a build in the second quarter and perhaps beyond.
As I said, obviously everything is incredibly fluid, and we really need to learn a lot about the ultimate impact of these programs because they are extraordinary and should have an extraordinary impact. We need some time to learn.
Also just to add on the wholesale side, you kind of at one point have an overlay about what you expect in terms of migration downward and downgrades and stuff like that. It'll also be name by name. Company by company, name by name, reserve by reserve. A real detailed review of that.
As we think through because effectively, I think what we're saying is there's the possibility of the severely adverse case coming, which we can look back at prior Fed stress tests to see what you anticipated that to mean for the credit losses, and maybe Jamie, if you could get an understanding as to how you're thinking about what your economists are looking for versus prior severely adverse stress cases that you have run on your own bank. Is it fair to look at the severely adverse stress cases on a bank-run modeling basis that we have access to, and it's in line with that kind of level? Or is this something that's even a little bit tougher? Specifically around things like commercial real estate. I get the name by name on the corporate side, that is obviously extraordinarily granular, and you have access to that.
I'm wondering on the commercial real estate side, is there anything we should be thinking about that's different from perhaps what a Fed stress test might have suggested in the past?
I suppose I'd say commercial real estate, eventually it will be loan by loan and name by name, too. If you have reason to believe that a loan is bad, you're going to write it down or put a reserve against it or something like that. This is such a dramatic change of events. There are no models that have dealt with GDP down 40%, unemployment growing this rapidly, and that's one part. There are also no models that have ever dealt with a government which is doing a PPP program, which might be $350 billion, it might be $550 billion. Unemployment where it looks like 30% or 40% of people going on unemployment, but higher income than before they went on unemployment. What does that mean for credit card or something like that? That the government's just going to make direct payments to people.
This is all in the works right now. The company's in very good shape. We can serve our clients, and we're going to give you more detail on this, but it's happening as we speak. I think people are making too much of a mistake trying to model it. When we get to the end of the second quarter, we'll know exactly what happened in the second quarter. We've got to expect that credit card delinquencies and charges will go up, though we've seen very little of it so far. By the end of the second quarter, you'll see more of it. Then we'll also know if there's a fourth round of government stimulus. We'll know a whole bunch of stuff, and we'll report that out.
We'll hope for the best, which is you have that recovery, and plan for the worst so you can handle it.
Yeah, then in terms of planning for the worst, Betsy, maybe it'd be helpful. The extreme adverse scenario that Jamie referenced in his Chairman's letter had 2020 credit costs of more than $45 billion. Clearly that is not our central case, but that's the kind of scenario that we are making sure that we're prepared for. Then just coincidentally, if you look at our credit costs from the fourth quarter of 2008 to the fourth quarter of 2009, across those five quarters, we had credit costs of $47 billion.
Right. I've got the number. Reserves went from like $7 billion to $35 billion back to $14 billion.
Right.
Reserving itself is pro-cyclical and often wrong, and you're required to do it, but it certainly doesn't match revenues and expenses. We like to be conservative in reserving, but I have to point out the flaws with it.
Our next question is from Brian Kleinhanzl of KBW.
Yeah. Thanks. Good morning. Just a couple of questions. One on CECL maybe to start with. Can you just maybe give a little bit more qualitative disclosure on how this payment relief factors in? Are you assuming some amount of government programs get used and that's included? Is this just payment relief that you're directly giving to consumers and corporates? Just trying to get a sense of how all these government programs kind of flow through the model.
Sure, Brian. You can think about the government stimulus as being incorporated in the macroeconomic variables. The payment relief, I'm referring to our own programs there. There, based upon our judgment and experience in the past, we apply some percentage of pull-through in the portfolio of people who will get payment relief. We think about the impact that could have. Again, I would say both, while estimated for the first quarter, we'll know a whole lot more about both of them for the second quarter.
Jenn, remind me, when we do the 10-Q for the quarter, we're going to lay out lots of these various assumptions about CECL. One of the problems with CECL is this precisely. We're going to spend all day on CECL, which was $4 billion, and it's kind of a drop in the bucket, but it's a lot of data. It's like all the data we did after the last crisis. We give you on Level 3 and all these assumptions and stuff like that. No one ever looks at it anymore.
That's right.
Every company does it differently.
Yeah. We still have obviously several weeks before the 10-Q, and so we'll be able to give our best view on things then.
Okay. In the quarter, you gave what the marks were on the bridge loans, but is there a way to frame what the total marks were? Assuming credit spreads tightened kind of dramatically post quarter end, so it seems like there would be a reversal of some of those marks initially.
Yeah, there could be. That's only where we are at this point in the quarter, and so it'll obviously all depend on the market from now to the end of the quarter. Right now the market is performing a bit better and spreads have come in, as you mentioned.
A couple of those deals may be syndicated, but hopefully might be syndicated by the end of the second or third quarter.
Our next question is from Chris Kotowski of Oppenheimer.
Yeah. Good morning. Thank you. At Investor Day, Jamie said that the real earnings are pre-provision earnings minus net charge-offs. Kind of always the way I looked at the world. If you put aside all this noise, does the customer relief change the charge-offs?
We can't understand a word you're saying.
Yeah. Chris, this is unfortunately part of all of our new reality.
Hi
since we all work remotely. We couldn't hear you.
Oh, sorry. Is this better?
Yes.
Okay. My apologies. At Investor Day, Jamie said something like that the real economic earnings are pre-provision earnings minus net charge-offs, which I agree with. If you push aside all the CECL reserving noise, I'm curious, does the customer relief, the 90-day grace period, does that alter the historic charge-off?
As long as the customer is performing under the forbearance program, they're not delinquent. Of course, it will all depend on whether these programs ultimately are able to bridge people back to employment.
Right. Okay.
We'll surely know a lot more in 90 days about how this affected what we would've expected.
Yeah.
Yeah.
To Jamie's point, what we may learn over the next 90 days is, of course, whether programs have been effective or whether they've just delayed losses. Of course, with CECL being life of loan, if it's just delayed losses, you can expect that we would be reserving for that.
Okay. Just in terms of charge-offs, if while normally it might have charged a credit card that's gone off after 180 days, it now might be 270. Am I getting that right?
It may be. Again, it's going to just completely depend on whether people are able to remain performing under a payment relief or a forbearance program. We don't really think about it that way. We think about what the ultimate losses will be, and we reserve for that. Importantly, in the first quarter, the charge-offs you're seeing, which is why I was clear to say it was consistent with prior expectations, because the charge-offs in the first quarter of course don't at all reflect the ultimate impacts of COVID-19. They were just normal BAU, I would say.
Our next question is from Andrew Lim of Société Générale.
Hi. Good morning. Thanks for taking my questions. Firstly, on government-guaranteed loans, these are 0% risk-weighted. I'm wondering to what extent you're using them to refinance existing loans on your portfolios. If you are, to what extent risk-weighted assets have gone to zero as you do this?
Yeah. I'm not sure specifically what program you're referring to. I would just say broadly speaking on the Fed facilities, they're obviously very large programs rolled out very quickly and just an extraordinary response to unprecedented market conditions. Here, we are happy to leverage the facilities to intermediate these programs for our clients, but we are only using them where it makes sense to ensure that credit and liquidity is flowing to where it's needed.
Just to maybe elaborate on that, is there maybe some part where there's a bit of a capital uplift if you use government-guaranteed loans at 0% risk weighting?
A what uplift?
Where previously A capital uplift. Your risk-weighted assets go down, say for some corporate loans that now are government guaranteed.
Look, we'll incorporate all of that into how we run the company. Just trying to serve the client, et cetera. There are peculiar things here, like the PPP, if you put in your balance sheet is zero RWA, but it does affect a lot of other things like SLR and G-SIB and stuff like that. Whereas if you sell it to the government, it all goes away. Look, we'll manage through that as we learn how these programs are working and what we want to do.
We have no further questions at this time.
Okay. Thanks everyone.
Thank you for spending time with us.
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