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 Pieczak. Ms. Pieczak, please go ahead.
Thank you, operator. Good morning, everyone. As you heard, Jamie is with me on the call and I know I speak for the entire company when I say we are just thrilled that he's back. Before we get into the Q1 performance, we want to start by recognizing that this is an extremely challenging time for all of us and our thoughts are with those most affected by COVID-nineteen, 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.
And as always, it's available on our website and we ask that you please refer to the disclaimer at the back. Starting on Page 1, I'd like to highlight some of the ways we're responding to COVID-nineteen. As a firm, we are focused on being there for our employees, customers, clients and communities in what is an unprecedented and uncertain environment. And 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 and for many groups that number is well north of 90%. And 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.
And 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 3 quarters of our 5,000 branches have been open, all with heightened safety procedures and many with drive through options.
And the vast majority of our over 16,000 ATMs remain accessible. And while our call center capacity has been challenged, we've quickly activated resiliency plans to address customer calls seeking assistance and we put in place new digital and self-service solutions in record time. And 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.
And in the month of March, we extended more than $100,000,000,000 of new credit. In wholesale, clients drew more than $50,000,000,000 on their revolvers with us and we approved over $25,000,000,000 of new credit extensions for clients most impacted. And for our small business clients, we're actively supporting the SBA's paycheck protection programs. The number you see on the slide are as of April 12 and as of this morning, we have more than 300,000 in some stage of the application process, representing $37,000,000,000 in loans and we funded $9,300,000,000 to businesses with over 700,000 employees. And to help the most vulnerable and hardest hit communities as an initial step, we've announced a $150,000,000 loan to get capital to underserved small businesses and nonprofits as well as the $50,000,000 philanthropic investment.
Now turning to Page 2 for highlights on our Q1 financial performance. For the quarter, the firm reported net income of $2,900,000,000 EPS of $0.78 and revenue of $29,100,000,000 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-nineteen, which I'll discuss in more detail later. But at a high level, these items are a credit reserve bill of $6,800,000,000 approximately $950,000,000 of losses in CIB largely due to the widening of funding spreads on derivatives and a $900,000,000 markdown on our bridge book. It might be an obvious point, but the quarter was really a tale of 2 cities, January February and then March when the crisis started to unfold.
And with that, I thought it would be helpful to talk through some key metrics that highlight this dynamic across our businesses. So let's go to Page 3. 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, but even that is now starting to normalize. And we saw similar trends in merchant services as highlighted in the significant decline in brick and mortar spend excluding supermarkets, whereas e commerce spend to tell that 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 remains 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. And 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. And 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.
And finally, flows in AWM were meaningfully different in March compared to January 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 4 and some more detail about our Q1 results. Revenue of $29,100,000,000 was down $782,000,000 or 3 percent 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.
And 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 $16,900,000,000 were up 3%, driven by higher volume and revenue related expenses, continued investments and higher legal expense, all of which were largely offset by structural expense efficiencies. This quarter, credit costs were $8,300,000,000 including a net reserve build of $6,800,000,000 reflecting the impacts of COVID-nineteen and net charge offs of $1,500,000,000 in line with prior expectations. Now turning to Page 5, we'll have some more detail on the reserve bills. Our net reserve build of $6,800,000,000 for the quarter consists of $4,400,000,000 in consumer, predominantly card and $2,400,000,000 in wholesale with bills primarily due to impacts of COVID-nineteen as well as lower oil prices.
This reserve increase assumes in the Q2 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. And in wholesale, the majority of the build is in sectors most directly impacted by COVID-nineteen, 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 2nd quarter and build could be meaningfully higher in aggregate over the next several quarters relative to what we took in the Q1. 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 and the effectiveness of government support, customer relief and enhanced unemployment benefits, while uncertain, undoubtedly will act as mitigants to the losses. And so even though our losses will be material, we will be doing what we can to help customers recover from this crisis and help our clients stay in business. Now moving to balance sheet and capital on Page 6.
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. And that combined with our earnings power is an extraordinary base to absorb the inevitable losses to come. For the quarter, we distributed $8,800,000,000 of capital to shareholders, which includes $6,000,000,000 in net share repurchases up to March 15. 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 customers and clients. This capital distribution outweighed our earnings for the quarter and 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 1st place. We currently also have capacity and intend to continue to pay the $0.90 dividend pending Board approval.
And as you can see in the CET1 walk on the bottom left, it is a small claim on our capital base. And before we move on, just a moment on liquidity. Even with everything we facilitated, our liquidity position remains strong. And looking forward, it's helpful to remember that we have significant liquidity resources beyond HQLA, including the discount window if need be. And now turning to the businesses starting with Consumer and Community Banking on Page 7.
CCB reported net income of $191,000,000 including reserve bills of 4,500,000,000 dollars January February showed a continuation of strength across the business, but 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. And on the small business side, we saw significantly reduced inflows and merchant processing activity, early signs of pressure on payment rates as well as line utilization and increased demand for credit. Turning back to the results, revenue of $13,200,000 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 and we expect it to decline further given current rate environment.
And 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 February activity. Expenses of $7,200,000,000 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. And lastly on this slide, credit costs included the $4,500,000,000 reserve bills I mentioned earlier and net charge offs of $1,300,000,000 driven by card and consistent with prior expectations. Now turning to the Corporate and Investment Bank on Page 8.
CIB reported net income of $2,000,000,000 and an ROE of 9% on revenue of 9,900,000,000 dollars Investment Banking in the first half of the quarter showed continued momentum from last year, but as the market environment shifted, we saw delays in M and 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 we helped our investment grade clients raise approximately $380,000,000,000 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 $820,000,000 and here it's worth noting our bridge book exposure is about a quarter of what it was entering the 2,008 crisis and is a higher quality portfolio. As a result of this backdrop, IB revenue of $886,000,000 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 the challenged first quarter last year and we saw strong activity in January February before the market effectively closed in March. And 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 the corresponding rebound in activity, we could also see significant downside risk to our forward looking pipeline if the downturn is protracted. Now moving to markets, here total revenue was $7,200,000,000 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.
Then the growing COVID-nineteen 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 and 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. And now on to wholesale payments, the 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 $1,400,000,000 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 Security Services, revenue was $1,100,000,000 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 Security 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 $951,000,000 which was one of the significant items that I mentioned upfront.
Credit costs were $1,400,000,000 driven by the net reserve bills I referred to earlier. And finally, expenses of $5,900,000,000 were up 5%, driven by higher legal and volume related expenses and continued investments. Now moving on to Commercial Banking on Page 9. Commercial Banking reported net income of $147,000,000 including reserve builds of approximately 900,000,000 dollars Revenue of $2,200,000,000 was down 10% year on year with lower deposit NII on lower rates and the $76,000,000 markdown on the bridge book, partially offset by higher deposit balances. Gross Investment Banking revenues were $686,000,000 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 percent 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 $40,000,000,000 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 and I loans in March. C and 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 $1,000,000,000 included the reserve bills I mentioned and $100,000,000 of net charge offs largely driven by oil and gas. Now on to Asset and Wealth Management on Page 10. Asset and Wealth Management reported net income of $664,000,000 with pre tax margin of 24% and ROE of 25%. Revenue of $3,600,000,000 was up 3% year on year, driven by higher management fees on higher average market levels and net inflows over the past year.
And 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 $2,700,000,000 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 $94,000,000 driven by reserve builds from the impact of COVID-nineteen as well as loan growth. Net long term outflows were $2,000,000,000 as the strength we saw in January February was more than offset in March.
At the same time, we saw $75,000,000,000 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 and 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 $125,000,000 Revenue was $166,000,000 a decline of $259,000,000 year on year, primarily due to lower net interest income on lower rates, partially offset by higher net gains on investment securities.
Expenses of $146,000,000 were down $65,000,000 year on year. And 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. And obviously since then the backdrop has changed significantly. Based on the latest in 5s 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 $55,500,000,000 for the full year.
And to give you an idea for the Q2, we expect NII to be $13,700,000,000 On non interest revenue, it's always difficult to provide meaningful guidance and even more so given the current heightened level of uncertainty. But based on our best estimates today, we do expect to see headwinds in 2020 compared to 2019. In addition to the 2 significant items in the Q1, these headwinds include a $3,500,000,000 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. And we now expect adjusted expenses for 2020 to be approximately $65,000,000,000 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. So to wrap up, the challenges we are all facing as the COVID-nineteen 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. And that feels stronger than ever with our teams work 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. And with that, operator, please open the line for Q and
And our first question comes from Erika Najarian of Bank of America.
Hi, good morning. And Jamie, we're glad that you could join us and that you're well enough to join us. My first question is on the forbearance activity. Jen, if you could give us a sense of byproduct, 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 to the percentage of your clients.
And 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 9 quarters for the Fed and 4.1% for company run.
Sure. So first of all, I'll start with the payment relief and forbearance there. I would start by saying that we have already refunded 1,000,000 of dollars in fees. We've approved payment relief for 100 of 1000 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've built in record time.
But 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 1 payments seems BAU. In card, we're seeing payment rates down a bit, but still strong and we've seen a slight up tick in late payments in auto. But 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.
And then in terms of how 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. And so, we have assumed as best we could for our Q1 results, the impact of those programs as well as the ultimate impact on payment relief that we'll be providing for our customers. But that is for sure an unknown and we certainly expect to learn a lot more about that in the Q2.
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. So if I understand it, it would be a 60 percent payout restriction on eligible net income. And 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. So, as you probably know, Erica, that the Fed made some changes there recently, which as you say, puts us in a 60% bucket as we go below 10.5%. And 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. So that was particularly helpful.
And 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. And in that scenario, our CET1 drops to have significant room to continue to serve our customers and clients through this crisis, but 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. Questions for you. 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?
Yes, it's a very important question. And I think in times of need, banks have always been the lender last resort to their customers. And obviously, you've got to be a disciplined capital provider because undisciplined loans are bad. So 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. But we do forecast all of that. So we are we know we can handle really, really adverse consequences. There will be a point and the last question brought it up was where you get below 10% CET1, even though we'll have almost $200,000,000,000 of capital and $1,000,000,000,000 of liquidity, all these other constraints start to kick in like SLR, GSIFI, advanced risk weighted assets that may kind of constrain it.
And so, and then obviously, then you got to look forward. So we want to do our job. We can help the country get through this, everybody's better off. If we move a little bit more money in the meantime, so be it. But obviously, we're going to protect our company, our balance sheet, our growth and we'll be having close conversations with regulators about what that is.
I also think you have to take in consideration the extraordinary measures the government has taken. That's the income to individuals, the PPP and all these Federal Reserve things.
So 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. So what is your base case for how people come back to work that's behind those assumptions? And I know you have a lot of scenarios too, but just a base case.
Yes. I'll let Jen talk about the base case. But I think the back to work, we shouldn't think it was a binary thing that after the CDC and 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, but isn't like no one's going to work. And you can 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. And the turn on will be regional by company, all following standards of best health practices. And in some ways, you need to get that done because the bad economy has very adverse consequences way beyond just the economy. And in terms of mental health, domestic abuse, substance abuse, etcetera.
So a rational plan to get back to work is a good thing to do. And hopefully, it will be tuned around later, but it won't be May. You can talk about June, July, August, something like that. So I don't know if that answers your whole question.
Yes.
And then Jen, can you give the base case on?
Sure. So Mike, as we close the books for the Q1, 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 in to our reserving, including management judgment of some like world class risk management and finance people and also other analytics. And so that just kind of gives you a frame of reference, but 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 and now have GDP down 40% in the 2nd quarter and unemployment at 20%.
That's obviously materially different. Both scenarios though do include a recovery in the back half of the year. And so 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 Q2. But all else equal, given the deteriorated macroeconomic outlook, we would expect to build reserves in the Q2. But 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.
And we're going to still have a number of unknowns, I would say, at the end of the Q2, but for 2nd quarter reserves.
Our next question is from Steven Chubak of Wolfe Research.
Hi, good morning. And Jamie, nice to have you back. So I wanted to ask a question on some of the remarks relating to capital. Quarrel has 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. And 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, Stephen. So, 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. And then 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 have always pointed out, I've always find the flaw of doing one stress test, which will not be the stress you go through. JPMorgan does 100 a week and we're always looking at potential outcomes and obviously we're doing our own COVID related type of study about it That's what we're going to have to deal with this time, not what I would consider a traditional stress test.
Yes. We have looked at a the range of outcomes probably have never been broader. And so as Jamie said, CCAR has been a good place for us to start in terms of one scenario, but we have looked at a number of different scenarios at how this may play out. And obviously, Jamie articulated what we think could be an extreme adverse and we're prepared for that too. So 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. And just a follow-up on the securities book. Just given some of the significant declines at the long end of the curve, Jen, 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? And then just separately, given the large impact of QE driven deposit growth, how you're deploying some of that excess liquidity in this environment?
Sure. So on the investment securities portfolio, managing the balance sheet in this rate environment is obviously a different dynamic and 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.
Our next question comes from Saul Martinez of UBS.
Hi, good morning. I wanted to follow-up on the CECL related question. Chen, 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 and your economics team is now for the Q2. But 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 and 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 that of financial stress in your borrower base that could emerge in a reasonably near future as credit losses?
Sure. So it's a great question, Saul. So I would start by saying that we haven't actually seen the stress emerge as of yet. So I wouldn't necessarily use the term mechanistic, but I would say that what we took in the Q1 is our best estimate of future losses. It's also important to note that we don't reserve for future growth.
And so future growth with all else being equal, be a reserve build. So 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. I mean, 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. But that's their view.
And like I said, we did spend a lot of time thinking about it. And I would say that it is our best estimate of the losses that will inevitably emerge through this crisis. And it is life alone, which of course is different under CECL. And so again, all else equal, you can think hard with larger than it would have been under an incurred model, but 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. And Jen, just on that point of growth, pivoting a little bit. What obviously a lot of the pressure in CET1 was because of risk weighted asset growth and drawdowns on commitments. Kind of where are we in terms where do you think we are in terms of those draw downs?
I think it's like $350,000,000,000 still in wholesale commitment, unfunded commitments. But like how do we think about that and how much room there is for that to continue to make pressure risk weighted asset
evolution? Yes. So like so many other things, it is difficult to predict. I will say that early here in the Q2, we have seen a pause on revolver draws, but it could very well just be a pause. And so 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 Q1.
And then, of course, the timing and the pace of the pay downs 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 we could 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 need to tighten given what we've learned or kind of a scenario that we didn't encounter on their previous underwriting. In other words, does lending spreads widen and 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. So there I would say that our approach we always take a long term franchise
view on things
like that. And so our philosophy has not marginal cost of new activity is higher for us right now. And so that's a consideration. But 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. And 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.
I'll just add on the consumer side, you forward looking view of risk. On the wholesale side, the revolvers that are taken down to like $50,000,000,000 are existing spreads. The bilateral stuff is being done by new credits. They're being done at slightly different spreads and stuff like that, higher. And then trading, obviously, you're actually getting higher spreads and a lot of things you're doing in training, you finance people and do things and stuff like that.
And then 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. So you will see an eventual tightening and an eventual increase in spreads. But you won't see banks do price gouge, which you've seen in other industries. Banks are very careful to support their clients through times like this.
Okay. And then one more impossible question, Jen, maybe. Could you help qualify? I know you can't quantify, but exit rate revenues that you kind of alluded to and some of the things like underwriting falling off. So tail of 2 quarters, the quarter itself, if it weren't for the ginormous credit issue that we're facing, would have been like, yes, revenue is down a little bit, expenses up a drop, okay.
But how much of the exit rate revenues are we looking at 2nd quarter, 3rd quarter versus the full first quarter? And that's a hard one.
Glenn, I'm glad you acknowledged that it's an impossible question and a hard one. And so 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. So, but I will say like if you think there's obviously nothing that we can really say with confidence about exit rates in 2021. But I will say based upon the latest implied, 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.
And then we've given you expense guidance to think about. And then 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, 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 be sure I know you gave
us the color on the base case 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 build?
Sure. So it is I don't have the numbers to hand, Gerard, but they're public. It was 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, I think, 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.
So 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. But 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.
So 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. And then 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. So 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. So it's about $13,000,000,000 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 Q2.
So we'll see where we land at the end of the quarter, but so far
Just basically marking the positions to market effectively.
Yes. And the good news is with no imminent And with no imminent closing deadlines, it's not necessarily the case that we'll realize those losses. But as Jamie said, their mark to market at the end of the quarter.
And I would just also put this in perspective. And we're adults. We know that we have a bridge loan book that you're going to have quarters with things gap out, you might lose some money. We're the leader in leverage lending, we're the leader in high yield, we're the leader in loans, etcetera. And we intend to maintain that position.
And every now and then you have not a particularly good quarter. So we're not we don't worry about this very much. And like Jen 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, Jen. 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?
Yes. Hi, John. So 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. And so with that, I would say that we would, given what we know today, expect outstanding to trend down from here.
And then can you help us think about how you do the accounting for the consumer deferrals? 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?
Yes, you got it, John. So 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 just want to add 2 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. And 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. So I'm trying to understand how the next change in the reserving is likely to traject between the various asset classes? Is there 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. So, on the wholesale side specifically, Betsy, the reason you see that dynamic is because of CECL. So, and it's in the presentation, so you can see the numbers. So, we the CECL adoption impact in wholesale was a net release. And so we've now built back.
And so that's why you see that dynamic there. And then 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, because 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 because as I said, obviously everything is incredibly fluid and we need to we really need to learn a lot about the ultimate impact of these programs because they are extraordinary and should have an extraordinary impact, but we need some time to learn.
And also just
to add on the wholesale side, kind of at one point you 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, so a real detailed review of that.
So 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 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 this 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? And specifically around like 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.
But 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 would 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 and put a reserve against it or something like that. This is such a dramatic change of events. So there are no models that have done 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 $350,000,000,000 it might be $550,000,000,000 Unemployment where it looks like 30% to 40% of people going on unemployment, but higher income than before they went on unemployment. So what does that mean for credit card or something like that? Or that the government is going to make direct payments to people. So this is all in the works right now. The company is 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. And I think people are making too much 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. Like we know we've got to expect the credit card delinquencies and charges will go up, that we've seen very little of it so far. But by the end of the second quarter, you'll see more of it.
And then we'll also know if there's a 4th round of government stimulus. We'll know a whole bunch of stuff and we'll report that out. We hope for the best, which is you have that recovery and plan for the worst, so you can handle it.
Yes. And 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 45,000,000,000 dollars So clearly that is not our central case, but that's the kind of scenario that we are making sure that we're prepared for. And then just coincidentally, if you look at our credit costs from the Q4 of 'eight to the Q4 of 'nine, across those five quarters, we had credit costs of 47,000,000,000
dollars So Right. I forgot the number, but we reserves went from like $7,000,000,000 to $35,000,000,000 back to $14,000,000,000 dollars Reserveing itself is procyclical and often wrong. And you're required to do it, but it certainly doesn't match revenues and expenses. And so we like to be conservative in reserving, but I have to point out the flaws of this.
Our next question is from Brian Kleinhanzl of KBW.
Yes. Thanks. Good morning. Just a couple of questions again, 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?
I mean, are you assuming some amount of government programs get used and that's included? Or 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. So you can think about the government stimulus as being incorporated in the macroeconomic variables. And then the payment release, those are I'm referring to our own programs there. And there, we based upon our judgment and experience in the past, we applied some percentage of pull through in the portfolio of people who will get payment relief. And then we think about the impact that that could have.
Again, I would say both, while estimated for the Q1, we'll know a whole lot more about both of them for the Q2.
And Jen, remind me, when we do the 10 Q for the quarter, we're going to lay out lots of these various assumptions about CECL. And one of the problems with CECL is this precisely. We're going to spend all day on CECL, which was $4,000,000,000 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, that stuff like that. No one ever looks at it anymore.
That's right. And we still have
And every company does it differently.
Yes. And we still have obviously several weeks and so before the Q. And so we'll be able to give our best view on things then.
Okay. And then in the quarter, is there I mean, given what the marks were on the bridge loans, but is there a way to frame what the total marks were? I mean, I'm 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?
Yes, there could be, but that's only where we are at this point in the quarter. And so it will obviously all depend on the market from now to the end of the quarter. But right now, the market is performing a bit better and spreads have come in, as you mentioned.
A couple of the deals may be syndicated, but I hope it might be syndicated by the end of the second and third quarter.
Our next question is from Chris Kotowski of Oppenheimer.
Yes. 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 look at the world. And so if you put aside all this, I'm curious, does the release
I don't know about you guys. I can't we can't understand a word you're saying.
Yes. Chris, this is unfortunately part of our all of our new reality. We all work remotely. We couldn't hear you.
Sorry, is this better?
Yes.
Okay. So 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. And so if you push aside all the CECL reserving noise, I'm curious, does the customer relief, the 90 day grace period, does that change the alter the historic charge off?
Because as long as the customer is performing under the forbearance program, they are not delinquent. But of course, it will all depend on whether these programs ultimately are able to bridge people back to employment.
Okay. So We still know a lot more 90 days about how this affected what we would have expected.
Yes. And we'll be and 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. And of course, with CECL being life of loans, if it's just delayed losses, you can expect that that would we would be reserving for that.
Okay. But just in terms of charge offs, if one normally might have charged the credit card going off after 180 days, it now might be 2.70. Am I getting that right?
It may be. It may be. But again, it's going to just completely depend on whether people are able to remain performing under a payment relief or a forbearance program. But we don't really think about it that way. We think about what the ultimate losses will be and we reserve for that.
But and then importantly in the Q1, 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 Q1 of course don't at all reflect the ultimate impacts of COVID-nineteen. They were just normal BAU, I would say.
Our next question is from Andrew Lim of SocGen.
Hi, good morning. Thanks for taking my questions. So firstly, on government guaranteed loans, These are 0% risk weighted. And I'm wondering to what extent you're using them to refinance existing loans on your portfolios. And if you are, to what extent this weighted assets have gone there as you do this?
Yes. So, I'm not sure specifically what programs 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.
So I mean just to maybe elaborate on that. Is there maybe some part which where there's a bit of a capital uplift if you use government guaranteed loans at 0% risk weighting where previously you've a capital uplift. So your risk weighted assets go down, say, for some corporate loans that now are government guaranteed?
We'll incorporate all of that into how we run the company, trying to serve the client, etcetera. And there are peculiar things here like the PPP, if you put in your balance sheet is 0 RWA, but it does affect a lot of other things like SLR and GSIP fee and stuff like that. Whereas if you sell it to the government, those it all goes away. And we'll manage through that as we learn how these programs are working and what we want to do.
And we have no further questions at this time.
Okay. Thanks, everyone.
Thank you for spending time with us.
Thank you for participating in today's call. You may now disconnect.