Please stand by. We are about to begin. Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's second quarter 2019 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. Before I get started, I'd like to thank Marianne for nearly seven years as CFO and for her support of me over many years, but particularly her support during my transition into this role. A huge thanks to Marianne.
Jen, I just want to add my thanks too. I think Marianne, as you all know, did a great job. Smart, honest, thoughtful, helped make the company a better company. All the thanks go out to Marianne, we also all know that Jen is going to do a great job too.
Thank you, Jamie. Now on to the presentation, which as always is available on our website, we ask that you refer to the disclaimer at the back of the presentation. Starting on page one, the firm reported record net income of $9.7 billion, an EPS of $2.82 on revenue of $29.6 billion, with a return on tangible common equity of 20%. Included in these results are tax benefits of $768 million related to the resolution of a number of tax audits. Adjusting for this, as well as a few other notable items that largely offset, we delivered an 18% ROTCE this quarter. Underlying performance for the quarter was strong, with highlights including client investment assets and consumer banking up 16%, largely driven by net new money flows. In card, 11% growth in sales and 8% growth in outstanding.
Number one in global IBCs year to date, gaining share across all products and regions. Steady results in the Commercial Bank with net income of $1 billion while continuing to invest in the business. In Asset & Wealth Management, record long-term inflows, AUM and client assets. Overall for the firm, total loan growth was 2% year-on-year, down 1% sequentially. Important to note here that these variances include the impact of loan sales and Home Lending as we continue to optimize our usage of capital and liquidity across the firm. Credit performance remained strong across businesses, and we delivered another quarter of positive operating leverage. On to page two and some more detail about our second quarter results.
Revenue of $29.6 billion was up $1.2 billion or 4% year-on-year as net interest income was up approximately $900 million or 7% on balance sheet growth in mix as well as higher rates. Non-interest revenue was up approximately $300 million year-on-year, largely driven by the absence of the card rewards liability adjustment we took in the prior year. Excluding that variance and the other offsetting notable items I mentioned, non-interest revenue was about flat with strong performance in Consumer across Auto Lease, Home Lending production, and Consumer & Business Banking, offset by lower markets revenue and IBCs as previously guided. Expenses of $16.3 billion were up 2% related to continued investments in our businesses, partially offset by a reduction in FDIC charges of approximately $250 million. Credit remains favorable with credit costs of $1.1 billion, down 5% year-on-year.
In Consumer, credit costs of $1.1 billion were flat as higher net charge-offs were offset by net reserve releases. In Wholesale, credit performance remained favorable with a net charge-off rate of eight basis points, which was fully reserved for in prior quarters. Once again, we do not see any signs of broad-based deterioration across our portfolios, both Consumer and Wholesale. On to balance sheet and capital on page three. We ended the second quarter with a CET1 ratio of 12.2%, up more than 10 basis points versus last quarter. In the quarter, the firm distributed $7.5 billion of capital to shareholders, and as you know, the Fed did not object to our 2019 CCAR capital plan.
We are pleased to have significant flexibility with gross repurchase capacity of up to $29.4 billion over the next four quarters, and the board announced its intention to increase the common dividend to $0.90 per share effective in the third quarter. On to page four in Consumer and Community Banking. CCB generated net income of $4.2 billion and an ROE of 31%. Loans were down slightly year-on-year driven by Home Lending down 7% reflecting the loan sales I just mentioned. However, card loan growth was healthy, up 8%. Business Banking loans were up 2%, and Auto loans and leases were flat. We saw strong deposit and investment growth year-on-year with deposits up 3% and client investment assets up 16%, growing across both physical and digital channels. Card sales were up 11% as growth remained strong across key products.
Across the franchise, active mobile users were up 12% year-over-year given continued engagement in our new features. For example, customers have opened over 2 million checking and savings accounts digitally, activated over 60 million Chase Offers, and our enrollment in Credit Journey now exceeds 18 million. Revenue of $13.8 billion was up 11%. This increase included two notable items that largely offset. First, the current quarter included a negative MSR adjustment in home lending driven by updates to our model inputs. In the prior year, as I mentioned, we had a rewards liability adjustment in cards of approximately $330 million. Consumer and Business Banking was up 11% on higher deposit NII, driven by margin expansion.
Home lending was down 17%, although excluding the MSR adjustment I just mentioned, revenue would have been up 4%, driven by higher net production revenue on better margins and higher volumes, largely offset by lower NII on spread compression and lower balances. In Cards, Merchant Services and Auto was up 18%. Excluding the previously noted rewards liability adjustment, revenue was up 11%, driven by higher card NII on loan growth and margin expansion and the impact of higher auto lease volumes. Expenses of $7.2 billion were up 4%, driven by continued investments in the business and higher auto lease depreciation, largely offset by efficiencies and lower FDIC charges. Of note, the overhead ratio was 52% and we delivered significant positive operating leverage.
On credit, this quarter included a reserve release in the home lending Purchased Credit Impaired portfolio of $400 million, reflecting improvements in delinquencies and home prices, which was partially offset by a reserve build in card of $200 million. This was primarily driven by growth and to a lesser extent, mix, as the newer vintages naturally season and become a larger part of the portfolio. Net charge-offs were up $212 million. Excluding the recovery on a loan sale in home lending in the prior year, net charge-offs were up $80 million, driven by card as we continue to grow the portfolio. Now turning to the Corporate & Investment Bank on page five. CIB reported net income of $2.9 billion and an ROE of 14% on revenue of $9.6 billion.
As a reminder, our performance was particularly strong last year, which featured record or near record revenues in overall IB fees and equity markets. With that in mind, for the quarter, IB revenue of $1.8 billion was down 9% year-on-year in a market that was also down. Advisory, debt underwriting, and equity underwriting fees were down 16%, 13%, and 11% respectively, reflecting lower levels of deal activity as well as a 10-year record share in equity underwriting in the prior year. It's worth noting on a year-to-date basis, we continue to rank number one overall and have gained share across all products and regions, benefiting from our continued investments in bankers. In advisory, we grew share in announced deal volumes and announced more deals than any other bank. In debt underwriting, we also ranked number one, benefiting from our strong lead-left positions in leveraged finance.
In equity underwriting, we have seen significant pickup in activity since the first quarter, and we continue to benefit from our leadership positions in tech and healthcare, where there has been robust activity. Looking forward, the overall IB pipeline is healthy, though lower compared to the elevated activity we saw last year, and with fewer acquisition financing and refinancing opportunities in debt underwriting. Dialogue with clients remains active and we expect strong deal flow to continue. Moving to markets. Total revenue was $5.4 billion, which was flat year-on-year. Our results include a notable gain in fixed income from the IPO of Tradeweb. Excluding this gain, markets revenue would have been down 6% year-on-year against a strong second quarter performance last year.
Fixed income markets was down 3% on an adjusted basis, with relative weakness in EMEA partially offset by increased client activity in North America rates and agency mortgage trading due to the changing rate environment. Equity markets was down 12% against a record second quarter last year. Reduced client activity and a tough compare contributed to a year-on-year decline in equity derivatives. That said, cash and prime remained stable with client balances and prime reaching an all-time high. Treasury services and security services revenues were $1.1 billion and $1 billion, down 4% and 5% year-on-year respectively, with organic growth being more than offset by deposit margin compression. As a reminder, similar to last quarter, deposit margin was primarily impacted by funding basis compression rather than client betas, and at the firm-wide level, there is an offset.
Sequentially, treasury services was flat and security services was up 3% on higher balances and fees. Finally, expenses of $5.5 billion were up 2% compared to the prior year, with higher legal expenses partially offset by lower performance-based compensation expense. The comp-to-revenue ratio for the quarter was 28%. Now moving on to commercial banking on page six. Commercial banking reported net income of $1 billion and an ROE of 17%. Revenue of $2.2 billion was down 5% year-on-year, predominantly driven by lower investment banking activity due to our outperformance last year and lower NII on slightly lower deposit balances. Also worth noting here, gross IB revenue of $1.4 billion was up 8% year-to-date on strong syndicated lending and M&A advisory activity, and we continue to progress solidly toward our long-term $3 billion target.
Deposit balances were down 1% year-on-year and importantly up 1% sequentially as balances have largely stabilized in total, although we continue to see migration from non-interest to interest-bearing deposits. Expenses of $864 million were up 2% year-on-year, driven by ongoing investments in banker coverage and technology. Loans were at 1%, with C&I loans being flat or up 3% adjusted for the continued runoff in our tax-exempt portfolio. The story here remains unchanged. We saw solid growth in areas where we've been investing, including expansion markets and specialized industries, offset by lower acquisition-related and short-term financing activity. CRE loans were up 2%, with modestly higher activity in commercial term lending, where clients are taking advantage of lower long-term rates offset by declines in real estate banking, where we continue to be selective given where we are in the cycle.
Finally, credit costs were $29 million with a net charge-off rate of 3 basis points. Now on to Asset and Wealth Management on page seven. Asset and Wealth Management reported net income of $719 million with pre-tax margin and ROE of 27%. Revenue of $3.6 billion for the quarter was flat year-on-year, as the impact of higher average market leverage was offset by lower investment valuation gains. Expenses of $2.6 billion were up 1% year-on-year, as continued investments in advisors and technology were partially offset by lower distribution fees. For the quarter, we saw record net long-term inflows of $36 billion driven by fixed income, and we had net liquidity inflows of $4 billion. AUM of $2.2 trillion and overall client assets of $3 trillion, both records, were up 7%, driven by cumulative net inflows into long-term and liquidity products, as well as higher market levels globally.
Deposits were up 2% sequentially and up 1% year-on-year. Similar to the Commercial Bank, balances in total have largely stabilized. Finally, we had record loan balances up 7%, with strength in both wholesale and mortgage lending. Now on to Corporate on page eight. Corporate reported net income of $828 million, including the vast majority of the tax benefits that I mentioned earlier. Revenue was $322 million, up $242 million year-on-year due to higher net interest income driven by higher rates and balance sheet mix, partially offset by net losses on legacy private equity investments versus net gains in the prior year. Expenses of $232 million were down $47 million year-on-year. Finally, turning to page nine and the outlook. On this page, I'll just comment on NII, which should not be surprising given the changes to the rate environment.
As you can see, we are updating our 2019 full-year NII outlook to about $57.5 billion. The reduction is based on multiple scenarios, which assume, among other things, lower long-end rates and up to three rate cuts this year, which is consistent with current market sentiment. As a reminder, this compares to a rate scenario that assumes zero cuts at the time of first quarter earnings. To wrap up, the U.S. consumer remains healthy, overall credit is in great shape, and the earnings power of the company is evident. We delivered strong returns this quarter. The diversification and scale of our business model positions us well to outperform in any environment. Understanding there is some macro uncertainty and potential headwinds from the rate outlook, we still expect to grow the franchise and will continue to strategically invest in our businesses in technology, bankers, and beyond.
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.
[inaudible] .
Our first question comes from Jim Mitchell of Buckingham Research.
Hey, good morning. I noticed that card loan growth was particularly strong this quarter. Just wanted to get a sense of what you feel is driving that uptick, and do you think how sustainable is it at sort of 8% year-over-year growth?
Sure. On card loan growth, we feel very good about what we're seeing there. As we talked about at Investor Day, we have a real opportunity with our existing customers. We talked about how our existing customers have about $250 billion of borrowing off us. About $100 billion of that is squarely within our existing buy box. You can think of this as highly targeted to high-quality existing customers. For the first time, we're actually seeing loan growth in cards, the majority of it coming from existing customers versus new customers. We're really shifting the paradigm there, and we feel great about being able to harvest the opportunity that we talked to you about at Investor Day.
All right. Should we expect just sort of you to continue to reduce the mortgage footprint in this rate environment?
On the mortgage business, I would say it was a good quarter on the back of the rally. We did see volumes increase, and we saw some margin expansion as well. Obviously highly rate dependent, but I would say the structural challenges in that business remain unchanged. We continue to focus on optimizing the balance sheet across capital and liquidity, and so looking at loan sales and thinking about de-risking the portfolio from a servicing perspective. Good quarter on the back of the rally, but doesn't change the overall structural challenges.
Okay, thanks.
Our next question is from Erika Najarian of Bank of America.
Hi, good morning.
Hi, Erika.
Hi. I just wanted to go back to what you were saying earlier in that your guide or your guide lower is including up to three rate cuts this year, which would suggest to me that your net interest income is quite defensive in the face of rate cuts. I guess my first question is, could you give us your primary assumptions for that $500 million swing, particularly on deposit pricing?
Okay, sure. First off, I'll take you back to the first quarter where our guidance was $58 billion+ , and we talked about some pressure on the long end at that point. That pressure has persisted, and in fact increased. We pulled the impact of the long end through in terms of our outlook. On the short end, the range of outcomes are obviously quite broad. You can think about if it's one cut, $57.5 billion+ , and if it's more, $57.5 billion- . Based on current implied, you can think about the third quarter as being $100 million- $150 million below the second quarter, and then a bit more than that in the fourth quarter, given we would have a full quarter at that point.
In terms of on betas, largely speaking, you can think of betas as being symmetric. On the consumer side, we saw little reprice on the way up, and so there is not a lot of opportunity on the way down. On the wholesale side, if you look at large institutional businesses like treasury services and security services, we are largely at full reprice there. There should be opportunity there. In places like the commercial bank and Asset & Wealth Management, we are still ahead of what the model would have assumed, but we have started to see reprice pick up there. Importantly, I would say we're not going to lose any valuable customer relationships over a few ticks of beta. We'll see how it goes.
That's all embedded in your assumption.
It's all embedded in the assumption. Correct.
Got it. Just going back to Jim's question, I noticed that investment securities balances continue to go up and mortgage loans were down another 5%. Should we think about this as part of the overall, you were saying optimizing capital and liquidity, and therefore, as we think about it going forward, we could also expect to see perhaps some relief in RWA growth and some relief in the continued reserve release as part of the optimization?
Sure. On the RWA side, yes. That is precisely why we're doing it. When you see the loan sales and home lending, yes, they are offset in securities purchases, which are more efficient from a capital perspective as well as a liquidity perspective. Yes. Having said that, on reserves are not necessarily going to be impacted directly by that because, of course, that will depend upon the environment and the mix of the portfolio that remains.
I would just say our standardized capital ratio is at 12.2. Advance is 13. Advance is obviously a far more important and relevant economic number. It simply does not make sense to own home mortgages when you're constrained by standardized and you can't securitize.
Got it. Thank you.
Our next question comes from Mike Mayo of Wells Fargo.
Hi. The efficiency ratio went from 56%- 55% year-over-year. I guess that's with some accelerated tech spending. Do you plan to keep this pace of tech spending going? What's the current update on that tech spending? Where is it connecting? Where is it not connecting? Because I think you said you'd accelerate it for a couple of years, maybe we'd see more of the results in 2020, 2021.
Can I just take that one? It's about $11.5 billion today. I think it was a little bit lower last year. If we had to stay where it is today for next year, it'll be something like $11.5 billion. I think it's always becoming more efficient. You really have in tech is some things are becoming cheaper all the time. Then you're also investing money all the time, which we're going to do regardless of the environment. We're not going to cut things we're trying to build like my rewards programs and My Chase Loan and the Credit Journey because there's a recession or something like that. Daniel Gordon will tell you right now that they think they can get more efficient spend, and we shouldn't tell people to spend whatever you want, but you have to spend to win in this business.
We're very efficient. We very question about how we spend in technology. We're going to do it regardless of the environment. We'll try to get more efficient in tech spend, too.
That's right. Our investments in technology create capacity in terms of productivity to continue to invest in. We've talked a lot about AI and machine learning. It's early innings there, and there's a lot that we're going to be able to do to invest there and become more productive. Cloud, developers can become more productive using the cloud.
It's amazing. Our fraud costs with all the things going on in the world today are down because of effectively because of AI and Big Data and stuff like that. It's hard to completely invest in You Invest. You look at our client investment, it has to do 16%. A portion of that was You Invest. Obviously, You Invest costs hundreds of millions of dollars to build. You got to put all these things in perspective about how you try to make these decisions going forward.
Follow up. Jamie, you mentioned the environment, all the things taking place in the world. How is the environment now? On the one hand, you have trade war, you have lower interest rates, you have capital markets, which are down for the big banks. You have a lot of pessimism. On the other hand, you highlighted your results.
Yeah.
When you take the temperature of the environment, what's the temperature?
It's not that bad. Uncertainty is a constant. The one thing in life is you know there's going to be uncertainty going forward. Geopolitical tension is kind of a constant. Those things may be a little bit higher now than normal. I think what you see is global growth is north of 3%. You kind of expect the U.S. to be 2.5% this year. The consumer in the U.S. is doing fine. Business sentiment is a little bit worse, mostly probably driven by the trade war. You travel around the world, you know that Japan is growing and Europe is growing a little bit, and Brazil's gone up from negative four to zero. A lot of countries have opportunity to expand. They're not doing great, but they should be doing better, like Mexico and Turkey. I wouldn't get too pessimistic yet.
Obviously, the Fed will react to the data they see. I would say it's more important what's going on than just what the Fed does. If the Fed's cutting rates because we're in a recession, that's not a good rate cut. If the Fed actually raises rates one day because we're booming, that's not so bad.
All right. Thank you.
Our next question comes from Glenn Schorr of Evercore ISI.
Hi. Thanks. I'm not sure if I missed it, but I think total average loans were up 2% year-on-year, but that was impacted by the loan sales. Can you tell us either the size of loan sales or what average loan growth was up year-on-year without that?
Yeah, there's a few things going on in loan growth, as you say, Glenn . We have the loan sales. We also have the runoff of the tax-exempt portfolio. You can think about loan growth probably closer to 4% if you adjust for those items. Importantly, as we always say, loan growth is an outcome, not an input. We feel good about the loan growth that we're seeing in terms of the areas where we're investing. For the full year, you can think about a number, if you adjust for the loan sales and [FCIB], of 2%-3% full year.
Okay. Appreciate that. Just curious on the non-interest-bearing deposits only being down 2% year-on-year. We've seen a lot bigger numbers at some peers. Is that just strength of JPMorgan franchise, or are you doing anything actively to manage that lack of mix shift?
As I said, we are seeing balances stabilize in the commercial bank and AWM. We are still seeing some migration from non-interest-bearing to interest-bearing, but largely we're seeing those balances stabilized. We do, of course, have continued growth in the consumer bank. The second quarter is typically seasonally high in the consumer bank. We have some growth in non-interest-bearing there. Even in the consumer bank where we've seen growth decelerate, that's largely as a result of consumer spending. That feels healthy as well.
Okay, maybe last one. Appreciate the guide on 2019. Because it's a half, if you looked forward into 2020 with no incremental rate cuts, is it remotely linear? In other words, if we think about if the ongoing rate and curve environment persists into next year after the two or three cuts this year, are we looking at $1 billion or is it way too complex to oversimplify like that?
Yeah, it's probably more complicated, Glenn. Just given the range of outcomes are as broad as they are, and importantly, if we're looking at cuts that are insurance cuts that sustain the expansion versus cuts that may be in response to a broader economic slowdown, there are other things that we would be talking about. We're not going to give further guidance on 2020 until we know more.
Okey-dokey. Thank you. Appreciate it.
Our next question is from Gerard Cassidy of RBC.
Thank you. Good morning. When you take a look at your merchant services business, you had some really strong growth year-over-year. I think it was up 12%. Your card volumes, excluding the commercial card, were also up very strong. Can you share with us what's driving that strong growth, that double-digit rate of growth?
Thanks for noticing.
Thank you for noticing. I would say that is firing on all cylinders. It's brand, it's people, it's product. It does certainly help to have the backdrop of a healthy U.S. consumer as well. Retail sales this morning looked strong. We can expect that to continue.
Is it more the market, as you just referenced the retail sales, that they were strong? Is it more that, or are you guys also seeing gains in market share that gives you an added boost?
Yeah. We have taken share, a little bit of share in card. As you know, we're number one in sales there. I think importantly, what's helpful in card is that we don't even need to take share to grow, just given the secular tailwind that we have in the card business on the electronification of cash.
And we're taking-
We're taking share in merchant acquiring.
We expect to take more share in the future.
Speaking of the future, can you guys give us some color on what your first read of Libra is? The Facebook announcement about the payments system that they're going to initiate.
Yeah. Just to put it in perspective, we've been talking about blockchain for seven years, very little has happened. You're going to be talking about Libra three years from now. I wouldn't spend too much time on it. We don't mind competition, the request is always going to be the same. We want a level playing field, governments are going to insist that people who hold money or move money only according to rules where they have the right controls in place. No one wants to aid and abet terrorism or criminal activities, that's going to be true for everybody involved in this. Obviously, banks have been doing either KYC, BSA/AML for the longest period of time. Those standards, I think, will just become for everybody at one point, and they should.
Thank you.
Our next question is from John McDonald of Autonomous.
Hi. I wanted to ask about the CCAR. You got a big authorization this year. How did you approach the CCAR plan this year in relation to your long-term CET1 target of 11%- 12% that you've talked about?
Sure. As we think about capital distribution, first we would start by always saying that we prefer to use our capital to invest and grow our businesses, and then to have a competitive and sustainable dividend, and only then to return excess capital to our shareholders. We are pleased with the approval and the additional capacity to return that $29.4 billion to shareholders. Having said that, we are still targeting the upper end of the 11%-1 2% range. We're always going to want to have a management buffer because, as I had said, our first priority will always be to invest and grow our businesses. Of course, there remains a lot of uncertainty in terms of the regulatory capital framework.
Importantly, we wouldn't actually need to make that decision for a few more quarters given the way the capital distribution plan is laid out over four quarters. As of now, we are still targeting the upper end of 11%- 12%.
Okay, thanks, Jen. Any updated thoughts on CECL, or could you remind us of what your thoughts on initial impact there? Thanks.
Sure. It hasn't changed from yesterday. Our range continues to be $4 billion-$6 billion, and we're prepared for the January 1 implementation.
Just to take a chance. CCAR is one test a year on stress. We do 120 a week. We are always prepared for stress. CCAR has us losing $20 billion-$30 billion over nine consecutive quarters. I just want to remind you all that in the nine quarters after Lehman, the real stress event, we made $20 billion-$30 billion. CCAR assumes you're going to grow your balance sheet. It assumes you're going to continue your dividends and stuff like that. We have plenty of capital. I mean, our capital cup runneth over, and we prefer to deploy that capital. Remember things like opening branches. For every branch we'll eventually use $10 million of capital. 400 branches will eventually be $4 billion of capital. Restraints on growth also restraints on capital usage and the ability to finance the U.S. economy.
We're really optimistic about our ability to somehow use our capital, including like the InstaMed acquisition we just did, which I think closes sometime soon.
Our next question is from Betsy Graseck of Morgan Stanley.
Hey, good morning. Jamie, you mentioned about blockchain. We've been hearing about it for seven years and not much has happened. I think you at JPM have built a blockchain solution for at least your correspondent banks. I guess I wanted to understand where you think you're planning on taking that. Right now it's just an AML/KYC use case. Is that something that you think you could deliver more functionality over time?
We think that blockchain is real, and the reason it takes so long is you have to get people to agree to the protocol. People write a lot of code to get into it. The one you're referring to, IIN, is think of an information network of banks. Right now, banks transfer a lot of information among each other. Think of trade finance and correspondent banking and stuff like that. I think we have 120 banks signed up. We're going to have 400. Right now it's for bank wholesale use to have immediate information. We all have the same information. You can move things. Eventually you'll be able to move money quicker with data. Yeah, we're optimistic about that, and we're going to roll it out as soon as we can and constantly test it and make sure it's secure and all that.
I remind people when it comes to moving money, JPMorgan Chase moves $6 trillion a day quite securely and quite cheaply. You got to look at the problem you're trying to solve. People legitimately said, "Well, you didn't have real-time payments." That was true. Now we do effectively Zelle from P2P. Now we do effectively something that's built called RTP real-time payments through TCH. We are building the things that the future's going to want. APIs, blockchain ledgers that have much more data, real-time movement of money that also goes through fraud checks, et cetera. We're quite optimistic about it. It just take a while to get everyone using it. One day it will have to be opened up to a broader customer set possibly.
One of the things that's coming out in these Senate and House Financial Services Committee meetings is this desire for real-time payments, a desire for a cheaper solution for payments. That's supposedly what Libra is going to offer. To your point, seems like you're already doing that. The question is, how do we think about the outlook for interchange, and what's your strategy towards interchange pricing here as we go over this period?
When interest get raised, there is real-time P2P, free, safe, and secure called Zelle. When people say do it, that's already done. That's not cross-border. There are people who might want to do that cross-border. Remember, cross-border remittances are much, much smaller than actual use of debit card, credit card payment systems here. The banks who built a real-time payment system is actually already in use. To me, the issue there is going to be fraud. To make sure in your real-time payments that you also put it through effectively real-time floor checks and stuff like that. In the United States, credit card, debit card, people love these cards. The beneficiary is the consumer. You guys remember that's who we're here to serve. Someone's going to pay eventually for services provided, but people like their credit cards.
They use their credit cards far more than they use their debit cards. I don't remember the last time I used my debit card.
Yeah, when you get rewards, it's great. Okay, thanks.
JPMorgan, we're getting more free stuff. You can buy and sell stock for free. We just gave you. It just got rolled out, and we only have a few accounts, but robo-investing, very cheap, very clear. We're going to take and give our clients more and better and faster and cheaper all the time. How we package that with Sapphire Banking, a Sapphire card, or discounts on mortgages, they're not always made to be seen. The future's very bright because if we can do more for our customers, that's a very good thing.
Don't forget, on credit cards, you get chargeback rights, and you get the float.
Right. You go on, if you're a Chase customer, you get your FICO score for free. We're going to tell customers the great financial education, how they can improve their FICO score. You get offers like this Chase Offer. I mean, you don't really market it, but it's really taken off.
Sure. The Chase Offers, we talked about that at Investor Day. It's like a really powerful flywheel where we can deliver value to our large merchant clients in terms of being able to bring a very large customer base to them, and then we can deliver that value to our customers at zero cost to us. As I said in the presentation, we've had over 60 million Chase Offers activated. This is really powerful and benefits not just our consumers, but our large merchant clients and at zero cost to us.
That message of more efficient, less cost maybe needs to get heard on the Hill as well.
Yeah. We talk to the Hill all the time, and a lot of people understand that. Of course, they always want you to do a better job for consumers, which we agree with them.
Yeah. I guess the final question here is just on the underbanked. Is there something or is there an offer that you have for them? Are you considering that? I'm just thinking about where fintech's trying to exploit you, and I know it's a catchphrase, underbanked, that is being used by labor. Doesn't necessarily to me seem like it's solving anything for them, but maybe you've got a better solution that we just don't focus on.
We have, similar to JPMorgan Chase, we have, I think, 25% of our branches in LMI neighborhoods. When we go to those neighborhoods, we do some philanthropy. We're doing more and more financial education, which I think is really important. I just mentioned the FICO score, but think there might be other things we can do. We do Chase chats or get people into the branch to educate them about saving, FICO scores, what you need to do to get a mortgage to buy a house and stuff like that. Then we have a product which we think is great called Secure Banking. Think of it as a card, but it's the full thing. You can't overdraft. I think it's $4.95 a month. You can use ATMs, you can have direct deposit, you can do online mobile payments and stuff like that.
We think that's a great product for the underbanked. I think that's going now 25%, and we've kind of pushed that a little bit more. We always try to do a thing. We also have special, I call it venture banking, the Entrepreneurs of Color Fund, where we're making loans to entrepreneurs of color that are not traditional bank loans, but help them grow their businesses. We're finding a lot of ways to do it, and a lot of folks in Congress understand it. I would say we're at the forefront of that. Fintech, of course, always going to try to eat your lunch, I think that's good. That's called American capitalism, and we have to stay on our toes to compete. We are.
Like when Jen was at card, she rolled out last year, announced the last My Chase Plan and My Chase Loan so that people can move their credit balances immediately to do what they want to do and do it well. We rolled out Zelle P2P. That's good for everybody. If you have a bank account, you can move money to your friends and relatives without having to pay the $10 money changer fees and stuff like that. We're all in in trying to do a better job for the American consumer. We think we do a great job for them. With the legitimate complaints, we'll fix it.
That's right. You mentioned the 25% in LMI neighborhoods. In terms of our branch footprint in our expansion markets, that's 30%.
Thanks.
Our next question is from Ken Usdin of Jefferies.
Thanks a lot. Good morning. Just wanted to ask on the balance sheet. Last year or so, you've seen a huge jump in the trading related assets, and I know you had the accounting change that you mentioned in the supplement. Could you talk about, is that related to market share gains? Is it related to just specific strategies with regard to managing liquidity? It doesn't seem to be equally growing on the asset side and the trading liability. Just can you explain the dynamics behind that and how that adds to the net interest income story? Thanks.
Sure. In terms of the balance sheet growth that you saw quarter-over-quarter, that was primarily related to our balance sheet intensive businesses in the markets businesses. We were down on a spot basis quarter-over-quarter. We start with deposit growth, and so we have had strong deposit growth, and so you see that reflected on the balance sheet side as well, and you would have seen securities balances up as well. Some of that is adding duration, and some of that is short duration securities that are higher yielding than IOER.
Okay. It is part of the liquidity management strategy. Okay. Jen, did you say what the amount of the gains that you had on the loan sales this quarter?
It's a liquidity trade. If you get a higher return on repo and you get an IOER, you're going to do that. If you get a higher return using standardized capital on securities than you are on holding home loans, you're going to do that. That's what we've seen on some of these things.
That's right. The securities growth, I should have mentioned, was also due to the home sales and home lending.
Right. Okay. Got it. That makes sense. Can you tell us what the amount of the gains on the loan sales this quarter were if they were above trend?
We haven't disclosed the amount of the gains. We had some loan sales in the fourth quarter, the first quarter, and the second quarter. The first and second quarter, in terms of the notional amount, the first quarter was about $7 billion, and the second quarter was about $9 billion, so just a little bit more.
The gains are said to net network. They show up in different places but not much.
Yeah.
Not material.
Yeah.
Got it. Lastly, just any thoughts on the investment banking pipeline and just the continuation of the outlook across the buckets there? Thanks.
Sure. In terms of the investment banking pipeline, I will just remind you that the third quarter is typically a seasonally lower quarter, sequentially, you should think about IBCs being down a bit. That said, the pipeline is healthy, although off a record performance last year, which is a function of a reversion to more normal levels of activity as well as some overhang from macro uncertainty. In M&A, still feels very healthy, and it is still a space where companies are looking for synergistic opportunities for growth, especially in North America. Perhaps Europe, a bit more muted. ECM, we had a very strong second quarter, so that will taper off in the second half a bit. I would say deals are getting done well in the current environment. DCM.
DCM will be more subdued, reflecting a slowdown in acquisition financing activity as well as refinancing opportunities, but albeit with a good backdrop for new issuance given the rate environment.
Our next question is from Matt O'Connor of Deutsche Bank.
Good morning. I realize rate expectations can change quickly, how do you think about managing the company in a rate environment that follows the curve that's out there for three to four cuts? You said earlier you wouldn't cut back on technology, are there other areas and expenses you think about managing the balance sheet and the liquidity a little bit different?
Sure. In terms of balance sheet management, we manage the balance sheet in both directions. It's a negatively convex balance sheet, all else being equal, as rates are declining we would naturally drift shorter, driven both by assets and liabilities. You would expect us to add duration, which we did this quarter. We're not going to change the way we run the company because of the rate environment. We're going to continue serving our clients, investing with discipline, and managing the balance sheet across all dimensions, that being capital, liquidity, and duration. In terms of expenses, again, we're not going to change the way we run the company because of an interest rate environment. I'll just say again that the range of outcomes are very broad here. If we end up with insurance cuts, it's a temporary headwind.
If we end up with cuts in response to a broader economic slowdown there will be a lot more to talk about. As Jamie always says, we're not going to change the way we run the company because of the macro environment. That said, in a broader slowdown, obviously there are natural levers on volume-related expenses. We re-decision a large part of our investment portfolio on an annual basis. We will always continue to invest in the things that we think are important, we would have that opportunity depending upon the opportunity to take a look at that.
Remember, in a real recession, okay, there are always opportunities to reduce your costs, vendors fall all over themselves to give you better deals and stuff like that. There are also huge opportunities to spend your money wisely. Sapphire card was birthed in 2009. You could imagine that you say, "Okay, well, it's nice. We have this great opportunity. We're not going to take it." I think you've got to be very careful. Even if it is marketing money, it's usually better spent in a downturn. The returns on it usually double.
You talked about the capital and your thought process there. Obviously, the authorization of the buybacks is a very big number. Is it your expectations that you will use it all, or is that still to be determined based on balance sheet growth, stock price, and the environment?
I would say still to be determined. Our first choice will always be to use our excess capital to invest and grow our business. Still to be determined. As you know, it's over four quarters. We have time to think about it, but obviously pleased to have the flexibility.
Is the timing of that even, or is there flexibility there too?
It has been in the past, but we can change it every day.
Our next question is from Saul Martinez of UBS.
Hey, good morning. Couple of questions. First, on the NII outlook beyond this year. I fully appreciate you're not giving guidance beyond this year. You do have the guidance from Investor Day out there of a sustainable NII of $58 billion-$60 billion that was set in a very different rate environment. If we were to see multiple rate cuts, how do we think about that guidance, and what are some of the moving parts that might get you perhaps to the lower end of that $58 billion-$60 billion? Is it simply dependent on how the economy responds, deposit pricing? If you can just kind of outline what you think some of those moving parts are.
Sure. The guidance we gave at Investor Day, steady state $58 billion-$60 billion, I would say largely still stands. Importantly, because when we talked about that at Investor Day, we weren't assuming any further benefit from rates. We were assuming that any incremental increases in rates would be offset and repriced, and the majority of that growth was going to come from balance sheet growth and mix. If you remember the slide, there were a number of arrows on the slide. Even at that time, which was obviously a different rate environment, we were implying that there were a number of different paths to get there. That obviously continues to be true. There may be a different path to get there.
It may take a little bit longer, but we still believe in that steady state number because we still believe in the growth of the franchise.
Okay. That's helpful. If I could change gears a little bit. You recently announced that you're closing Finn, or you closed Finn, and I think the stated logic is you learned that millennials don't need a separate brand or experience. Can you just elaborate on the logic there and what you learned from that experience? It does seem to maybe fly in the face of what some other entities or financial institutions are doing with their digital banking strategy.
That's right. Go ahead.
I was just going to say, we learned a lot in Finn. You said it, that we learned that importantly, the power of the Chase brand certainly means that we don't need a separate brand. We also learned about a number of features that our customers love, and we were able to reuse those features and port them over to the Chase mobile app. I think we always need to be testing and learning and doing things like this and not afraid to shut them down when we've learned what we needed to learn and can serve our customers through the primary Chase mobile app.
We've learned a lot like that, how to do digital account openings only digital, because when you do it out of a retail bank, you tend to rely on what you already have. There are a lot of lessons there. We always are going to be running some kind of skunk works and learning from things like that. We don't look at those kind of things like failures at all. That is how you'll learn. Jeff Bezos will tell you mistakes are good. Mistakes are what make you smarter and better. I hope we made some really good mistakes that could teach us in all of our business at one point. The people doing Finn did a great job. They're embedded. By the way, you can open a Chase account now and never go into a branch.
I mean, you can open an account. Takes minutes to open an account. We've gotten much better at digital only, but we don't separate it from the physical branch system.
Yeah. The digital account opening is now about 25% of our new account opening.
We'll be doing it in small business and merchant processing and all these various things.
Got it. Okay, thanks very much.
Our next question is from Eric Compton of Morningstar.
Good morning. Thanks for taking my question. This question kind of ties into some of the items already mentioned, longer term kind of tech focused and also related to Finn. There has been some press recently about reasons for closing down the Finn app, and one of the items that was mentioned was some of the difficulties banks can potentially run into with their legacy platforms, which for the most part are built on COBOL, which has been around since the sixties. Depending on who you talk to, these legacy platforms can either be huge problems for banks or not really a big deal. I guess from the outside, at least for me, it can be kind of hard to tell what really is going on there.
My question is: As you compete with fintech firms who are building new platforms from scratch, how do you strategically view dealing with your own legacy platforms? Is there a need to kind of redo these things eventually in order to actually compete with newer tech over time? Do these legacy platforms really hamstring you in any way? Is the hype around those issues really overdone? If so, why? Thanks.
The hype has been around now for the better part of a decade, right? We seem to be doing fine. It is true, and some of these legacy platforms are also the reason why you have 50 million customers. It is true that over time, these platforms need reformulated and refactored to be cloud eligible and things like that. Those things are more efficient. Your costs will go down, your error rates will go down. The way I look at it a little bit is we run like 6 or 7 thousand applications. Over time, those will be modularized and be refactored to be cloud eligible, whether it's our own private cloud or a public cloud, yes, they will be more efficient.
We also have tons of new digital platforms, AI, that are built around these things that do the customer service upside that they've seen. They open accounts in minutes. You get your free Credit Journey. We can modify so many things in days and weeks as opposed to years because you're not mucking with the whole legacy system. It's a little bit of both. Those numbers are embedded on tech spend. The refactoring, building data centers, getting better, adding AI, they're already in those numbers.
We have no further questions at this time.
Thank you very much. Jen, you did a great job.
Thank you.
We'll talk to you all in a quarter. Thank you.
Thanks, everyone. Thanks, Jamie.
Thank you for participating in today's call. You may now disconnect.