Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's First 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 standby. At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon and Chief Financial Officer, Mary Anne Lake. Ms. Lake, please go ahead.
Thank you, operator. Good morning, everybody. I going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on page 1, the firm reported record net income of $9,200,000,000 and EPS of $2.65 and record revenue of nearly $30,000,000,000 with a return on tangible common equity of 19%.
The results this quarter were strong and broad based. Highlights include core loan growth ex CIB of 5%, with loan trends continuing to progress as expected. Credit performance remains strong across businesses. We saw record client investment assets in consumer of over $300,000,000,000 and record new money flows this quarter, and double digit growth in both card sales and merchant processing volumes, up 10% and 13%, respectively. We ranked number 1 in global IBCs and gained meaningful share, which are well above 9% this quarter.
In the Commercial Bank, we had record growth IB revenue, in Asset and Wealth Management record AUM and client assets, and the firm delivered another quarter of strong positive operating leverage. Turning to Page 2 and talking into more detail about the 3rd quarter. Revenue of $29,900,000,000 was up $1,300,000,000 or 5% year on year, driven by net interest income, which was up $1,100,000,000 or 8% on higher rates as well as balance sheet growth and mix. Non interest revenue was up slightly as reported, but excluding fair value gains on the implementation of a new accounting standard last year, NIR would have been up 5%, reflecting auto lease growth and strong investment banking fees. And while market revenue was lower, there were other items more than offsetting.
Expenses of $16,400,000,000 was up 2%, relating to continued investments we're making in technology, real estate, marketing and front office, partially offset by a reduction in FDIC charges of a little over $200,000,000 Credit remains favorable across both consumer and wholesale. Credit costs of $1,500,000,000 were up $330,000,000 year on year, driven by changes in wholesale reserves. In consumer, charge offs were in line with expectations and there were no changes to reserves this quarter. In wholesale, we had about $180,000,000 of credit costs, driven by reserve builds on select C and I client downgrades, and recall that there was a net release last year related to energy. Once again, these downgrades were idiosyncratic.
It was a handful of names and across sectors. Net reserve builds of this order of magnitude are extremely modest given the size of our portfolios, and we are not seeing signs of deterioration. Moving on to Page 3 and balance sheet and capital. We ended the quarter with a CET1 ratio of 12.1%, up modestly from last quarter, with the benefit of strong earnings and AOCI gains given rallying rates being partially offset by slightly higher risk weighted assets. RWA is up, primarily due to higher counterparty credit on trading activity, but notably this quarter being offset by lower loans across businesses on a spot basis.
Quarter on quarter loans were down in home lending as a result of a loan sale transaction, in the CIB as a result of a large syndication, and in Card and Asset Wealth Management Asset Wealth Management seasonally. Also on the page, total assets
are up over $100,000,000,000 quarter on quarter,
principally driven by higher CIB trading assets, in part a normalization from lower levels at the end of the year given market conditions. Lower end of period loans are partially offset by treasury balances, including higher securities. In the quarter, the firm distributed $7,400,000,000 of capital to shareholders, including $4,700,000,000 of share repurchases, and we submitted our 2019 CCAR capital plan to the Federal Reserve. Moving to Consumer and Community Banking on page 4. CCB generated net income of $4,000,000,000 and an ROE of 30%, with consumers remaining strong and confident.
Core loans were up 4% year on year, driven by home lending and cards both up 6% and business banking up 3%. Deposits grew 3%, in line with our expectations, and we believe we continue to outperform. Client investment assets were up 13%, driven by record new money flows, reflecting growth across physical and digital channels, including new invest. We also announced plans to open 90 branches this year in new markets. Revenue of $13,800,000,000 was up 9%.
Consumer and Business Banking revenue up 15% on higher deposit NII driven by continued margin expansion. Home lending revenue was down 11%, driven by net servicing revenue on both lower operating revenue and MSR. But notably, while volumes are down, production revenue is up nicely year on year on disciplined pricing. And card, merchant services and auto revenue was up 9%, driven by higher card NII on loan growth and margin expansion and higher auto lease volumes. Expense of $7,200,000,000 was up 4%, driven by investments in the business and auto lease depreciation, partially offset by expense efficiencies and lower FDIC charges.
On credit, net charge offs were flat as lower charge offs in home lending and auto were offset by higher charge offs in card on loan growth. Charge off rates were down year on year across lending portfolios. Now turning to Page 5 and the Corporate and Investment Bank. CIB reported net income of 3 point $3,000,000,000 and an ROE of 16 percent on strong revenue performance of nearly $10,000,000,000 For the quarter, IB revenue of $1,700,000,000 was up 10% year on year. And outside of an accounting nuance, all of advisory, GCM and total IV fees would have been record for our Q1.
Advisory fees were up 12% in a market that was down, benefiting from a number of large deals closing this quarter. We ranked number 1 in announced dollar volumes and gained nearly 100 basis points of wallet share. Debt underwriting fees were up 21%, also outperforming a market that was down, driven by large acquisition financing deals and our continued strong lead left positions in leveraged finance. We maintained our number one rank and gained well over 100 basis points a share. And equity underwriting fees were down 23%, but in the market down more.
As the combination of the government shutdown, uncertainty around Brexit and residual impacts from December volatility weighed on issuance activity across the regions in the Q1. But already in the second quarter, we've seen a major recovery in U. S. IPO volumes back to normalized levels, and we are benefiting from our leadership in the technology and healthcare sectors, which again dominate the calendar. Moving to markets, total revenue was $5,500,000,000 down 17% reported or down 10% adjusted for the impact of the accounting standard last year that I referred to.
Big picture, on a year on year basis, we are challenged by a tough comparison. Backlog in the Q1 of 'eighteen was supportive, clients were active, and we saw broad based strength in performance with a clear record in equity last year. In contrast, this quarter started relatively slowly and overhanging uncertainties kept clients on the sidelines, despite a recovered and more stable environment. So with that in mind, I would characterize the results as solid and a little better than we thought at Investor Day just a few weeks ago, largely due to a better second half of March. And for what it's worth so far, the environment in April feels generally constructive, but it's too early to draw any conclusions in terms of P and L.
Fixed Income Markets revenue was down 8% adjusted, driven by lower activity, particularly in rates and in currencies and emerging markets, which normalized following a strong prior year. However, we did see relative strength in credit trading on strong flow, as well as in commodities. Equities revenue was down 13% adjusted, seeking more to the record prior year quarter than this quarter's performance, which was still generally strong across products. Although derivatives got off to a somewhat slower start, cash in particular nearly matched last year's exceptional results. Treasury services revenue was $1,100,000,000 up 3% year on year, benefiting from higher balances and payments volume, being partially offset by deposit margin compression.
Security Services revenue was $1,000,000,000 down 4%, and organic growth was more than offset by fee and deposit margin compression, lower market levels and the impact of a business exit. Of note, deposit margin in both Treasury Services and Security Services is impacted by funding basis compression rather than client basis, and at the firm wide level there's an offset. Finally, expense of $5,500,000,000 was down 4%, driven by lower performance based compensation and lower FDIC charges, partially offset by continued investments in the business. The comp to revenue ratio for the quarter was 30%. Moving to Commercial Banking on Page 6.
A strong quarter for the Commercial Bank with net income of $1,100,000,000 and an ROE of 19%. Revenue of $2,300,000,000 was up 8% year on year on strong investment banking performance and higher deposit NII. Record gross ID revenue of over $800,000,000 was up more than 40 percent year on year due to several large transactions, and the pipeline continues to feel robust and active. Deposit balances were down 5% year on year and 1% sequentially, as migration of non operating deposits to higher yielding alternatives has decelerated, and we believe is largely behind us. From here, we expect deposits to stabilize given the benign rate outlook.
Expense of $873,000,000 was up 3% year on year as we continue to invest in the business, in banker coverage and in technology. Loans were up 2% year on year and flat sequentially. C and I loans were up 2% or up 5% adjusted for the continued runoff in our tax exempt portfolio. We continue to see solid growth across expansion markets and specialized industries. CRE loans were up 1% as competition remains elevated and we continue to maintain discipline given where we are in the cycle.
Finally, credit costs of $90,000,000 were predominantly driven by higher reserves from select client downgrades and net charge offs were only 2 basis points on strong underlying performance. Before we do on, want to address the perceived gap between our reported C and I growth statistics and those that we all see in the Fed weekly data. If we look across all of our wholesale businesses, we also show strong growth year on year at about 8%. So there are 3 comments I would make. The first is that there can be reasonable noise in the Fed weekly data.
2nd, CIB is a big contributor for us, and CIB loan growth this quarter was supported by robust acquisition financing and higher market loans. And 3rd, as previously noted, the definition of C and I for the Fed does not include our tax exempt portfolio, which has seen significant year on year declines given tax reform. So while it's true that the Fed data is showing strong growth year on year and apples to apples so are we, in the domain stream middle market lending space we're seeing good mid single digit demand in line with our expectations. Moving on to Asset and Wealth Management on Page 7. Asset and Wealth Management reported net income of $661,000,000 with a pre tax margin of 24% and an ROE of 25%.
Revenue of $3,500,000,000 for the quarter was flat year on year as lower management fees on average market levels, as well as lower brokerage activity were offset by higher investment valuation gains. Expense of $2,600,000,000 was up 3% year on year as continued investments in our business as well as other headcount related expenses were partially offset by lower external fees. For the quarter, we saw net long term inflows of $10,000,000,000 with strength in fixed income, partially offset by outflows from other asset classes. Additionally, we had net liquidity outflows of $5,000,000,000 AUM of $2,100,000,000,000 and overall client assets of $2,900,000,000,000 were both records up 4%, driven by cumulative net inflows into liquidity and long term products and with 3rd quarter market performance nearly offsetting 4th quarter declines. Deposits were up 4% sequentially on seasonality and down 4% year on year, reflecting continued migration into investments, although decelerating, as we continue to capture the vast majority of these flows.
Finally, we had record loan balances up 10% with strength in both wholesale and mortgage lending. Moving to Page 8 and corporate. Corporate reported net income of $251,000,000 with net revenue of $425,000,000 compared to a net loss of over $200,000,000 last year. The improvement was driven by higher NII on higher rates as well as cash deployment opportunities in treasury. And recall, last year, we had nearly $250,000,000 of net losses on security sales relative to a small net gain this quarter.
Expense of $211,000,000 is up year on year and includes a contribution to the foundation of $100,000,000 this quarter. Concluding on Page 9, to wrap up, this is the sort of quarter that really showcases the strength of the firm's operating model, benefiting from diversification and scale and our consistent investment agenda. We delivered record revenue and net income in a clean first quarter performance despite some hangover from the 4th quarter. Underlying drivers across our businesses continue to propel us forward, and in March and coming into April, the economic backdrop feels increasingly constructive, client sentiment has recovered, and recent global data shows encouraging momentum. Investor Day is only 6 feet behind us, so our guidance for the full year hasn't changed.
We do remain well positioned and optimistic about the firm's performance. With that operator, we'll take questions.
Your first question comes from the line of John McDonald with Autonomous.
Hi, good morning. Mary Anne, you had good expense control this quarter. In your Jamie's letter, you show goals of improving the efficiency ratio on each of the main business units for the next few years. Just kind of wondering what's driving that? Is there any kind of cresting of investment spend that's going to occur in 2020?
Or is this just kind of positive operating leverage carrying through?
Yes, hey John. So I would say just big picture is a combination of both obviously. We talked at Investor Day about the fact that we're always going to make the net investment, the net incremental investment decision based on its own merits. But in total, with the amount we're spending now and the amount of dollars that roll off every year that get re decisioned for investment, we feel like we should see our net investment spend reach a reasonable plateau over the course of the next several years. And so that is part of it.
Obviously, a lot of the investments that we've been making in technology are also not only to do with customer service and risk management and revenue generation, but they're also to do with operating efficiency. So we would also expect to start to see some of that drive operating leverage. But it's also in the case that we're looking for revenue growth too, so it's a combination of both.
Okay. And then just on the NII outlook, it's reassuring to be able to hold the Investor Day outlook of the $58,000,000,000 for this year, even though the curves flattened, there were some concerns there. What are the dynamics that enable you to keep the guidance even with the change in curve that we've seen?
Yes. So, I mean the first thing I would say is that we've said this before and we've seen these periods where you get kind of short term fluctuations in the curve is that it's a bit dangerous to chase it up and down every month or so. And so in the big picture, we said $58,000,000,000 plus yes, it's true that a persistent slacker curve would have a small net drag on carry and we're not immune to that. So there is a little bit of pressure as a result of that if it is persistent at this level throughout the year. But we continue to grow our loans and our deposits and you know against that you know there's a mixed bag of lower for longer.
So while we may not have a tailwind of higher rates, we also may not have the same kinds of pressures that we would see on basis necessarily. And while lower long end rates may be a net small drag in the short term on earnings, there's a credit on the balance sheet and you know, you could argue a patient's bed and lower rates for longer may elongate the cycle. So net net there are pluses and minuses. I would say there may be some pressure as a result of that if it's persistent, but it's modest.
Your next question comes from the line of Mike Mayo with Wells Fargo.
Hi. You mentioned consumer deposit growth is outperforming. We get average consumer deposits up over $20,000,000,000 year over year. So those are the numbers. I just I was hoping for a little bit more on the why, and to what degree does that reflect your build out of branches?
How is that deposit growth going? How much of this is related to digital banking? And then how much would be due to simply a perception that you have superior strength? I know that came up during the CEO here at benefit due to a perception of being too big to fail? Thanks.
Yes. So look, I would say there's lots of different opportunities for people to get insured deposits. We'll come back to the 3rd point, but all of that plays a piece. So you'll recall that we've built a large number of branches following the financial crisis as we densified our position in new markets in California and Florida and Nevada and the like. And so we do have a decent portion our branches that are still in their maturation phase.
And so we're definitely seeing some growth in deposits there. I also firmly believe and we've talked about it many, many times that we've been investing consistently over the last decade in customer experience. Customer satisfaction in our consumer bank is at an all time high and continues to increase consecutively. Digital products, new products and services, value propositions to our customers, convenience, new markets, all of which I think are increasingly important to our customers as well as obviously a number of other factors. So for me it's a combination of all of the above and less so at this point a perception of a flight to quality that people have a lot of choices.
Year over year, I would say we're seeing deposit growth flow exactly in line with our expectations, but this year the slowdown speaks a little bit more as far as we can see to higher consumer spend and a little bit less to do with deposit flows out to rate seeking alternatives. So customers are voting with their business, they're bringing deposits to us, and I think it speaks to a combination of the investments we're making and also including branches.
So how much of the deposit growth is due to digital banking? Can you quantify that or give us a ballpark figure?
Well, I can tell you that and so it's not just about deposit growth as well, remember it's also about investment assets and we talked about our digital offerings providing headwinds there. So I don't have a breakout for you, we can follow-up. It deepens, but our branch growth is the reason why we continue to believe in a physical and digital combined channel presence, both are important, but we can get back to you.
Your next question comes from the line of Glenn Schorr with Evercore ISI.
Hi, thanks very much. On sec services, I heard you loud and clear about the funding basis compression being part of the answer on revs Could you talk about the business exit? I wasn't aware of that, how big that is. And then flip to the better side, you also did mention about organic growth. We haven't heard too much since the big $1,000,000,000,000 win, but I know there's stuff going on underneath the covers.
Talk about what type of business you are winning there?
Yes. So, on the business exit, this is it's the sort of feature of what we're talking about year over year. To me, this feels like really old news. It was the U. S.
Broker dealer exit that, you know, we talked about many quarters ago, but obviously, we're still on a year over year basis for another couple of quarters, to see the impact of that on our revenues. It's about $20,000,000 just over $20,000,000 year on year revenue negative impact, but it's relatively speaking old news in terms of the exit took place last year. Lower market levels were about an equivalent drag on revenues. And then we are seeing solid underlying growth, but this is a very competitive environment. As we are growing our assets on our custody assets and as we're growing and winning new mandates, fees are under competitive pressures and it also depends on mix.
So there's a bunch of factors going on. What we're focused on is for both of these businesses that the long term growth opportunities are very big and the organic growth in the underlying businesses are performing well. And even with these revenue pressures, we're focused on continuing to drive efficiencies and these are good ROE businesses, above mid teens. I'm sorry, can I just make one more comment? Mike, I didn't say this on the digital space, but I think it's important as we think going forward that as we think not just about our digital assets, but digital account opening and that as being a feature of how we're attracting new accounts, 25% of checking production, 40% of savings production now able to be open digitally.
So increasingly digital will be a driver, but we will get back to you with the mix.
Mary Anne, just one quick qualifier on the 7 hour marathon the other day in DC. Besides finding out Jamie is a capitalist, that's shocking news. One of the risks that I think that the group talked about was in the private credit markets and non bank lending. And I just wanted to get a little qualifier of that. I'm pretty sure you didn't mean the exposure JPMorgan has those, it's just more risk being taken, but if you can just expand on that, that would be helpful.
Yes. So for sure, the comment is more about the overall risk in the environment and not about our risks to those sectors. And our risks are all the things that we've always told you about which are relatively modest, relatively senior, well secured, well diversified. We look at losses under a variety of risk scenarios that are manageable. The comments are really about the percentage of leverage lending or the percentage of some of our businesses that have now been taken outside of the banking market.
And while we wouldn't say necessarily that that's systemic, being not systemic and suggesting that there won't be problems are 2 different things. Not all non banks are situated similarly, so there are some healthy driving, you know, well capitalized, well and responsibly run companies, and there are some others who may not be standing at the end of another downturn. So the real question for all of this business that is migrated outside of banks is, you know, how much of it will be unable to be rolled over, refinanced, on the same terms and with the same prices as it is now. So it's not about us, but it's about understanding that we would want to be able to be there to support and intermediate risk in these markets going forward, but for a variety of reasons, whether it's structure, whether it's capital liquidity pricing, that may not be as easy as it sounds in a downturn for portions of that market.
Yes. So, if I just add, so just take the big numbers, we're just growing. So, obviously, regulators keep an eye on it. And we're not particularly worried about it. And just to give you some facts, the banks, there's a $2,300,000,000,000 the banks have the generally the senior piece, the A piece of about $800,000,000,000 or $900,000,000,000 Then institutional investors, some of them are quite right, these are life insurance companies, funds, etcetera, own the VPs, which is about $900,000,000,000 and there's $500,000,000,000 which they call direct.
And think of these as large funds. For the most part, large funds. Some are very capable, very bright. They have long term capital. In the institutional piece that I mentioned, a lot of even CLOs.
And I know that people worry about that. But if you actually look at the CLOs, there's more equity in those CLOs. They're more funded. And both the direct piece and the CLO piece is more capital permanent capital. And so the system is okay.
It's just getting bigger and it's more outside the regulated system. And It should be something that should be watched, but it's not a systemic issue at this point.
Your next question comes from the line of Betsy Graseck with Morgan Stanley. Hi, good morning.
I had a question for Jamie. Jamie, in the shareholder letter, you mentioned, because of because of some significant issues around mortgage that you are intensely reviewing your role in origination servicing and holding mortgages and the odds are increasing that we will need to materially change our mortgage strategy going forward. Could you give us some color and context for that statement and what kind of things you're thinking about there?
Yes. So, if you look at the business, I mean, it is costly. You have 3,000 federal and state origination and servicing requirements. It is litigious. If you just look at history, you can see that.
And it's becoming a huge non banks are becoming competitors and they don't have the same regulations, the same requirements in the servicing or production. So you're having that issue up. Servicing itself is a hard asset. And so we just want to we know it's an important thing for a bank. We also want and also we standardized capital since a lot of banks are constrained by standardized capital.
It's a capital pot far more than it should be if you look at it relative to the real risk embedded in holding mortgages. So we just want to have our eyes open, look at that, go through every piece and structure it in a way that we're very happy going forward. We don't mind the volatility. We don't mind staying in the business. But you got to look at that and ask a lot of questions about whether banks should even be in it.
Okay. And then separate topic, but just a question I wanted to ask because I got a couple of questions on it yesterday. The whole group of CEOs was asked, who do you think could succeed you? Would a woman or would a person of color succeed you? And I don't think you raised your hand.
And just wanted to understand, why and just hear from you why you answered the question that way?
Yes. So what I should have just said is that we don't comment on or speculation on succession plan. That's a Board level issue. It's not something you do in Congress where you play your hand out in Congress. But also, I was confused by a question likely without a timetable.
So we have exceptional women and my successor may very well be a woman and but it may not. And it really depends on the circumstance of the time and it might be different if it's 1 year from now versus 5 years from now. So that's all that was. I think a bunch of people were kind of confused and thinking what does the word likely mean and all this stuff like that. So I mean, it's been going out portion.
There are several people on the operating committee who can succeed me.
Thanks. I appreciate that. That's the answer I expected you were going to give, but wanted to hear it from you. So I appreciate that. Thanks.
You're welcome.
Your next question comes from
the line of Steven Chubak with Wolfe Research.
Hi. Just wanted to follow-up on the remarks on the mortgage business. We did see a healthy decline in resi mortgage loans. And Mary Anne, I know you spoke at Investor Day of the balance sheet optimization strategy, which could drive more growth in securities versus loans. I'm wondering is that what's really driving the slowdown that we saw in resi loan growth?
And maybe more broadly, how we should think about core loan growth or sustainable pace of core loan growth in 2019? Yes.
So mortgages, you know, and 20 eighteen-twenty 19 are the epicenter of it for mortgage. So the market itself is more year on year, it's about 15% smaller because notwithstanding all of the discussion about lower rates, they're still higher year on year than they were this time last year. So that obviously is having an impact and as we've been and we're down similarly. So we've added about $6,000,000,000 of core mortgage loans to our portfolio, but against that, as you saw last year, we did a number of loan sales and we did another sale again in the Q1 and that speaks to optimizing the balance sheet. We're trying to take loans off of our balance sheet, core loans off our balance sheet and them if we can reinvest in agency MBS and non lab based assets that have better capital liquidity characteristics.
So, there's going to be it's going to be a little bit harder to look at trends, you're going to need to look at things growth. So, we are originating high quality loans. We are adding a number of loans to our portfolio. We're distributing based on best execution as that would go, but we will continue to optimize our balance sheet.
Very helpful. And just a follow-up for me on CCAR. Sorry, the federal Visa document recently highlighting the changes to the loss models this year, including some higher card and auto losses in the upcoming exam. I'm just wondering how does that inform the way you're thinking about capital return capacity? And are you still confident in that sustainability of the 75% to 100% net payout as well as the 11% to 12% CET1 target?
Yes.
So, I didn't hear the second part of the question on losses, which losses were up this year that you were mentioning, but here's what I would say.
The card and auto losses.
Yes. So I applaud transparency for sure and we love to be able to get more detail as we think about the way that the Fed model losses for our portfolios and we've been observing that over time. Necessarily, it's the case that the Federal Reserve models are typically less granular and less tied to our specific risks necessarily because they're industry wide. Net net, it doesn't change our point of view that as we're at 12.1% CET1 right now, so arguably a little bit above the high end of our range and continuing to grow earnings that we ought to be able to distribute a significant portion of earnings, but we always invest in our businesses first. So, we are growing our businesses as responsibly as we can.
We're adding branches, we're adding customers, we're adding advisors, you know, across our businesses, but to the degree that we have excess earnings, we'll continue to distribute them and the ranges that we gave you at the end of February, nothing's
changed. Next question comes from the line of Brian Kleinhanzl with KBW.
Hi. Good morning, Miriam.
Good morning. Quick question. I know you mentioned that the increase in NPLs within wholesale was again idiosyncratic, but last quarter there was also an increase and it was 5 credits last quarter. Is there any way you could give more color as to specific drivers in there? I know you said in the past that you're expected to normalize that you're off a low base, I got that, but I mean just a little bit additional color perhaps?
Yes. So the color is there is really no color, which is to say, if you were to go back over the course of the last 8 quarters and take oil, gas, energy releases out, you would have seen quarters where reserve were close to home and other quarters where there are $100,000,000 $50,000,000 So there's always been the propensity for there to be 1 or 2 or 3 or 4 downgrades. The thing we look for is whether or not as we look at the portfolio of facilities we have, whether we're seeing pressure on corporate margins and free cash flow and whether we're seeing that broadly across the sectors and companies we're banking and we're just not. So it's not to say that we aren't paying close attention to real estate given where we are in the cycle. It's not to say we aren't paying close attention to retail, but the color is there is no real color that these are genuinely a handful of names across a handful of sectors as was true last quarter and even if you look quarter over quarter over quarter that there's no trends to call out.
And we have a large wholesale lending portfolio. These are extremely modest in the context of that. And remember, every quarter, like we talk about a few, because it's non zero, but we downgrade and upgrade 100 of facilities every quarter. And it's not just downgrades, it's upgrades and they're approximately of equal measure. So we're looking very carefully at it.
We understand why people are questioning concerns and these are cyclical businesses and the cycle will turn, but we're not seeing it yet.
Okay. And then a separate question in the mortgage banking. It looks like gain on sale margins were at a high point over the last 5 years this quarter. Was that something in the market, something with the rates or was there a one off impacting that number this quarter?
So you may recall that we did a mortgage loan sale last quarter and realized as a geography in the home lending business when we do these mortgage loan sales because we're match funded, net net there's very little P and L. But there's last quarter there was a loss in the NIR and an offset in rate funding in NIR. This quarter there's a gain. So you've got a loss last quarter, again this quarter, both small, but nevertheless that's driving the majority of the production margin going up. But in addition, if you just strip all that noise out, which is not material, but nevertheless significant quarter over quarter, we are seeing better revenue margins on better pricing.
Okay, great. Thank you.
Your next question comes from
the line of Gerard Cassidy with RBC.
Good morning, Mary Anne.
Good morning.
Can you share with us, obviously, you've got your de novo branching strategy moving forward. And what have you guys discovered and how long does take for the branches to reach breakeven and then eventually get to your desired return on investment numbers?
Yes. So we're really, really excited to be able to open these branches in these markets and serve more customers across the United States. But when you talk about branches, you are talking about investment these are entering, these are extremely nascent investments, the branches, in many cases, we haven't even broken ground on. However, that said, early indications, very, very early indications are strongly positive. We're seeing a lot of excitement in the market.
We're seeing new accounts in production a little better than we would have expected at this very early stage. On the whole, you see branches breakeven over several years and mature in terms of deposits and investments and relationships closer to 10 years or below that.
Very good. And then following up on some comments you made at Investor Day, and I believe touched on today about technology spending. If I recall correctly, next year technology spending should be self funding and stabilize at the level just about where you are today. When you compare it to the past 5 years, what has changed where the growth trajectory of technology nominal dollars has now kind of stabilized versus what it was like again in the past 5 years?
So, I just want to reiterate something that I want to make sure you guys completely internalize, which is, we believe given the level of spend and the continued efficiency we're getting out of each dollar of spend that overall our net investment should be more flat going forward than they have in the past. But we will continue to look at every investment on its own merit. That said, we've been growing our technology spend and in particular we've been growing the portion of it that is invested in changing the bank and that runs the gamut from platform modernization and cloud to controls and security and customer experience and digital R and D, the whole lot. It's a large number. And each year, a lot of that you know a lot of those dollars that we've been investing roll off and we get the ability to redecision and reinvest them.
So you know this is not that we're going to be doing anything other than continuing to invest very, very heavily in the agenda and in particular in the technology agenda. It's just that each year and we'll continue to make the right decisions and we see that being flatter going forward than it has been.
Thank you.
And we're getting more efficient. So in the past, the way that technology was delivered was very different. And the more that we're in a modern virtualized cloud ready way with new technologies, each dollar of technology is more productive.
Great. Thank you.
Your next question comes from the line of Al Alevizakos with HSBC.
Hi. I've got a quick question and a follow-up basically. My question is on the treasury services. Year on year, the growth going from double digit, you just go to 3%, where apparently the volumes remain healthy, but the margins started to deteriorate. I wonder how you feel going into the remaining of 2019, especially given that the trade talks are still ongoing and therefore volumes could actually be a bit more problematic.
Do you still believe that we can go back to kind of double digit growth year on year for the remaining quarters? And my follow-up question is, you talked about change the bank versus run the bank for IT budget. Can you give us a number just to get an indication of how much you're spending on innovation? Thank you.
Yes. Okay. So first point on Treasury Services, last year revenue growth was in double digits, you're right this quarter, 3% year on year. I mentioned earlier that you know for both of our wholesale businesses we happen to have basis compression between the funding spread that we provide to the businesses and the pricing to clients. And so, you know, that sort of just given where rates have moved maybe a headwind this year as the segment results are reported, but for the company it's obviously net 0.
The more important point is that organic growth underlying all of that balances and payments is holding up very well and we do expect that to continue. So you will see margins maybe compressed on that. It's not speaking to deposit flows, it's not speaking to volumes, and it's not speaking to escalating payouts at this point. And we're talking about the underlying organic growth in the business. With respect to technology spend, you'll recall last year we were kind of sixty-forty run the bank, change the bank and it's more fifty-fifty this year.
So $11,500,000,000 of spend, about half and half.
Thank you very much.
Remember, in the Change the Bank, it runs the whole gamut from platforms and controls to customer experience, digital, data, R and D. So it's the whole spectrum.
Your next question is from the line of Matt O'Connor with Deutsche Bank.
Good morning. I just wanted to follow-up on the net interest income and it came in a lot better than expected this quarter. Is there anything that's lumpy or one time that you'd flag? Because if you annualize that you're already above the full year target of $58,000,000,000 plus and obviously there's day count drag this quarter and I realize there's puts and takes with rates and balance sheet growth, but it seems like the guidance is conservative versus where you're at right now.
Okay. So we did slightly better in the Q1, 2 things driving it. One is small, but nevertheless is arguably non recurring, which is we talked about the fact that overall in the company when we do these loan sales that net net there may be a small residual gain or loss that resides in treasury and it was a small gain in the Q1 in NII, call it $50,000,000 approximately. And then in addition, we talked in the Q4 about the fact that we were seeing the opportunity to deploy cash in short duration liquid investments that were higher yielding than IOER. That continued into the Q1.
So we did benefit from that. And it may or may not continue, but we're not necessarily expecting that to continue all the way through. So I would say that day count was a drag. As you look forward, risks and opportunities, honestly, obviously, there's a risk associated with the flat yield curve, not big, but nevertheless, net neutral to downward pressure or downward pressure if long end rates stay lower for longer. As we don't have the tailwind anymore from higher rates and we continue to process the December rate hike, you could see more rates paid a little bit into the Q2.
So there are risks and opportunities. We still think it's a decent outlook, but I don't think it's conservative. I think it's $58,000,000,000 is straight down the middle at this point. The trouble with the yield curve is it can fluctuate dramatically over the we'll continue to update
you. Okay. And then just on the rate positioning of the balance sheet and the approach to adding security, are you thinking any differently going forward than maybe you were 6 weeks ago? You clearly seem more positive on the macro and obviously things can change there. But are you approaching the balance sheet management a little bit differently, given maybe a more positive macro outlook?
Well, so, I mean, we only spoke to you most recently about 6 weeks ago. So the sort of overall answer is, no, not really. We expected at that point that we would have a patient fed. It turns out that all the central banks are pointing to being a little bit more dovish, which could generally be constructive for the environment and for credit risk on the balance sheet. Obviously, the curve being flatter is not sort of a compelling situation to add more duration, but there's natural drift in our balance sheet.
So overall, very little. We feel good about credit. The curve is flat, and we'll continue to manage the overall environment and company as we see the economy unfold.
Okay. Thank you.
Your next question comes from the line of Erika Najarian with Bank of America.
Yes. Hi, good morning. I just wanted to follow-up, Mary Anne, on the comments. In the backdrop for lower rates for longer, could you give us a sense on how you're thinking about your deposit strategy in retail and wholesale? In other words, I know you discussed some dynamics on pricing for the Q1, but when do you expect competition to taper off?
And do banks have room to actually lower deposit costs if the rate curve stays this way for a prolonged period of time?
So I'll just look the big contextual answer will always be the same, which is when we think about our strategy around deposits and deposit pricing, it is 100% driven by what we're observing in our consumer behaviors and what we're seeing in deposit flows. And so that's the environment that we look at to determine what's happening. And you've seen naturally over the course of the last couple of years as rates have been rising that we've seen flows of deposits to higher yielding alternatives, whether it's investments or whether it's more recently in CDs and that may continue. We'll continue to watch that. It is our expectation that rates will be relatively stable from here in terms of the short end and it's the short end that predominantly drives the sort of deposit pricing agenda.
So even if the curve is flatter, as long as it's because the front end is stable, I don't necessarily see deposit costs going down, but we're going to continue to watch our customer behaviors and deposit flows and respond accordingly.
Thank you. And my follow-up question is, we heard you loud and clear during your prepared remarks that there the increase in wholesale non accruals was idiosyncratic. And I'm wondering, as we look at a tick up in non accrual loans in the Corporate and Investment Bank for the past two quarters, are we just part in the part of the cycle where we're just growing from a low base or should we expect a step down in the second quarter in non accrual similar to how we saw last year?
There are a couple of situations that we would expect to maybe not be pleasant in the second quarter, but I would say it's a feature more of the extremely low base. And so from that, any movements, whether they're up or down, are somewhat exaggerated. But we would continue to call the credit environment benign. Great. Thank you.
Your next question comes from the line of Ken Usdin with Jefferies.
Thanks. Marion, just if I could ask you, you mentioned that the some signs that the economy is strengthening. And I wanted to just ask you to, can you split that between just what you're seeing on the consumer side versus the wholesale corporate side in terms of the spend numbers are obviously double digit year over year. Some others have talked about a little bit of a slowdown. Yours are still staying quite good.
And then there's this unevenness about just CapEx and spending and corporate side. So just could you just kind of walk us through just where you're seeing pockets of relative strength and improvement?
Yes. I mean, I think that as it relates to the U. S. And in particular, looking at sort of the U. S.
Consumer, you've got all of jobs, more recently auto, housing, spend, all generally encouraging and holding up well and robust and whether it's double digits or whether it's not, we're continuing to see this and consumer confidence by the way, which is still very high and has recovered from any sort of hangover from the equity market actions over the Q4. So for us, U. S. Consumer has always been strong and confident. And even if we're not at all time highs in confidence, we're still very high.
And generally the data is and even some like housing and also that that hasn't necessarily been super strong is looking encouraging. And then on the global front, it is a little harder, but as you look at some of the areas that have been struggling a bit and Europe would be a good example, we would think that and the Q1 sort of transitory factors around social unrest and politics and Brexit and trade seem to be fading a little, business confidence has recovered a little. Businesses are still spending on labor, which is generally a good side of underlying confidence notwithstanding any kind of sentiment numbers. And even there, there's job growth, there's wage growth that's helped by dovish monetary policy and general financial conditions having improved and eased. So I mean, I think generally we feel optimistic across the consumer and the rest of the sector, albeit that it sort of green shoots on the wholesale side.
So it's early, but it's what we were expecting to see and so Long May continue.
Yes. And one follow-up just on the Investment Banking business, you had mentioned that the pipelines look good and obviously we've seen the reopening of the ECM market. Your general outlook just again on that global point about the a bit unevenness between U. S. And global, just how do you feel about the advisory drop and obviously some big deals on the tape again today, but had it been a little bit of an air pocket here, partially probably because of the soft 4th quarter, but how's that side of the business feeling and sounding from a backlog perspective?
Yes. So I would say that a couple of things. Obviously, there was some deals that moved into the Q1 out of the second half twenty eighteen. And so, we do benefit from that. But just as a general market matter, you know, M and A is still attractive in a low growth environment, albeit a growth environment.
Investors are still constructive. North America, which is by far the biggest market for M and A is still healthy. And so Europe was a big driver last year and Europe has seen a sharp drop off in volumes and wallet and so that may continue, although we have a pretty good position there. So I would say that the pipeline is down, but still M and A is attractive and people are looking for synergistic growth.
That makes sense. Thanks very much.
Your next question comes from the line of Jim Mitchell with Buckingham Research.
Hey, good morning. Maybe just a follow-up on the NII outlook. I mean, I think we've talked a lot about a flat curve. What kind of levers do you have to pull if we were to see what some are speculating,
it doesn't sound
like you're in that camp, but if we were to get a rate cut, how do you manage that? How do you think the balance sheet reacts and NII reacts to a potential for a rate cut over the next 12 months?
Right. So the market which is usually more, I would say pessimistic, but more in that camp than us is still only expecting an ease at the end of the year. So we are not by the way as you point out. So I think for 20 nineteen's NII outlook, it's not a clear and present danger that there will be an ease. Obviously, we have on the way up on rates been over indexed to short end rates.
And so clearly, if we were to have an ease, it would have an impact on our NII. If we felt generally that that was the direction that the economy and rates were going in, then it might change our view on how we position the balance sheet. But right now the Fed is on pause. Right now that's constructive for corporate profit margins, constructive for credit and generally constructive for how we're positioned on the balance sheet.
Do you feel like you have room to, I guess, extend duration to kind of protect NII and NIM if that were to happen?
Yes, yes, we do. Okay.
All right. Thank you very much.
Your next question comes from the line of Saul Martinez with GBS.
Hi, good morning. I wanted to follow-up on Matt's question on sort of idiosyncratic items in the quarter and lumpiness. This is obviously a pretty strong quarter from an earnings standpoint, earnings well ahead of my estimates and consensus, especially in CCB, but there weren't a lot of obvious non core items really called out. So Mary Anne, can you just comment on the sustainability of the results and whether there's some idiosyncratic things that weren't necessarily called out during the call. You mentioned corporate cash deployment revenues really high relative to historical levels there.
So are there any sort of idiosyncratic items that call into question how sustainable the results are?
So first of all, just sort of big picture. That's why really high I think is a bit of an oversight. The higher I think is fair. No, not really, if there were, we would have called them out. There are a few little things.
So I'm just going to call out a few of the things that we have mentioned. We contributed $100,000,000 to the foundation this quarter. Net net legal was a very, very small, but nevertheless positive this quarter. So there's a few little bits and pieces like that, but if you look at revenue performance, we did a little better across the board than you all were expecting. We did better in IVCs and we gained a lot of share.
We did a little better in markets. We did a little better in NII. So, you know, it is just a little bit of a wind at our backs sort of phenomenon. Probably my best answer to you is as happy as we are with the performance and we are gaining share and continuing to see our underlying drivers propel us forward and the momentum we've got in our businesses, we are not making you know, we feel great about our positioning in Investment Banking in the first quarter, we feel great about our positioning in Investment Banking in the Q1, Coalition is still expecting the wallet to be down between 5% to 10% year on year. So we do expect to gain share to help offset that, but last year was a record.
So we haven't changed our full year guidance at all yet. We'll take this as a very good down payment for that. And if markets are constructive and while it expands, we'll benefit from that.
But we're
not leading it across and changing everything.
That's helpful. I'll change gears a little bit. Any update on the stress capital buffer, what the Fed is thinking there and when you think we could see a little bit more details or a little bit more clarity on the proposal?
So the as I know, there is a chance, but not necessarily a probability that there could be an SEB proposal for 2020 CCAR. So there's a set of meetings or a meeting that's coming up sometime in the summer that I think might be an important moment, but we continue to work as constructively as we can to help understand the best way to bring fresh capital together with point in time capital, but it's complicated. Now as we said, the most important thing is not to issue an SMB proposal that doesn't deal with the entire landscape of capital and look at it cohesively. So we're talking about GCIB, we're talking about minimums, we're talking about Basel, we're talking about SCB, it's complicated. I'd say there's a chance, but not a probability that we might have something in time for 2020, GPAS.
Got it. Thanks a lot.
Your next question comes from the line of Marty Mosby with Vining Sparks.
Thanks for taking the questions. Hey, good morning. First, I want to ask as you go into CCAR, now we're getting into that season again. One of the things that I think has an impact is that what we had was a significant 30% plus growth in earnings last year. So if you kind of look at the plan for your capital going forward and you think of holding payout ratios, let's say they were just constant, doesn't that kind of presume that you have kind of wind behind the sales just to increase fairly significantly just off the increase in earnings last year?
I mean, yes, yes, yes. If you look at payout ratios, obviously, sort of described as a percentage, then we said over the longer term we'd expect to pay out in a benign environment between 75% 100%, and analysts have estimates of 90% -plus. And obviously, as earnings grow, that would be a bigger dollar number. But again, we'll always calibrate that relative to our opportunity to invest in our businesses and it's capacity not a promise. So we'll continue to see how the whole environment unfolds.
But you're right, as earnings continue to grow, a strong payout ratio, we're above the top end of our capital range. So we are starting at a robust level, would be a higher dollar number yet.
And then, Jamie, I was just curious, I think one of the issues facing the outside is that the cycle is 10 years old. And my thought is that, that internal time clock is just off this time. And so if we look at it, I think there's things that you're seeing Mary Anne that you see inside the company that probably dispel that the recession is kind of on the horizon. So just wanted to get your comment on that as well as my follow-up question. Thanks.
Yes. So I think sorry, go, Jimmy.
Yes. No, I was going to say, someone showed a number of the day that Australia had growth for 28 years. And just offsetting a notional, but you have to have a recession. Now they've had a lot of backwind with their growth in Asia and stuff like that. But if you look at the American economy, the consumer is in good shape, the balance sheet is in good shape, people are going back to the workforce, companies have plenty of capital, capital expenditures are still up year over year, a little bit less this quarter than last quarter.
Our capital is being retained in the United States. Business confidence and consumer confidence are both rather high, not all time peaks, rather high. So you could just easily it could go on for years. There's no law that says it has to stop. We do make a list and look at all the other things, geopolitical issues, lower liquidity.
So there may be a confluence of events somehow caused the recession, but it may not be in 2019, 2020, 2021. Obviously, at one point, it will probably be something. And I think the biggest short term is going to be something going wrong with China, the trade issue with China. So I just wouldn't account them there having to be a recession
in the short run.
I agree. Thanks.
Couple of years.
Question comes from the line of Andrew Lamb with Societe Generale.
Hi, morning. Thanks for taking my questions. So my first question is on the end of period loans. So if we look across the board, it looks like there's some contraction down on a quarter to quarter basis of about 3% to 4%. And I was just wondering if you saw that as a 1 quarter issue relating to what happened in 4Q 2018.
And if you can give some color maybe on the quarters ahead speaking to company CEOs whether you see growth reemerging again?
Yes. So quarter on quarter, and I think I mentioned a couple of these things, but we across our businesses for a variety of reasons on an end of period basis loans are down. So like stepping through them, the first one that I would point out is mortgage and we just talked about that I think earlier in the call, which is we continue to originate mortgage loans, we continue to distribute them and portfolios, but we did do a loan sale, which is part of the discussion that we've been having with you about optimizing our balance sheet. We did a sale at the end of the quarter. So that's impacting our mortgage loans.
In the CIB and one of the reasons why we call out core loan growth ex the CIB isn't because we don't consider CIB loans core, it's because they are just by their nature oftentimes more episodic and lumpy. And so we did see a large funded syndicated loan at the end of last quarter, which was fully syndicated into the Q1. And then in our other businesses, in Asset Wealth Management, a bit of seasonality, a few pay downs in card seasonality. So it's a sort of combination of factors, but I would say 2 drivers, CIB and Home Lending. CIB on sort of a large syndication home lending on a loan sale.
Going forward, we'll continue to, to optimize the loan versus security part of our balance sheet as best we can for capital and liquidity purposes, but just underlying core business demand for bank balance sheet lending, I look at the middle market space and say we're still seeing solid demand. It is in our investment areas in our expansion markets and specialized industries, but we're still growing that portion of our loans in the mid single digits year over year.
Great, thanks. So my follow-up question is on Sorry,
Andrew, There are going to be other areas where we just won't grow loans. I mean in commercial real estate you see loan growth is much lower, it's very competitive, spreads have come down, we continue to provide financing and funding for our core loans, but we're not going to chase it down and similarly auto.
Sure. Okay. Thanks. So my follow on question is on CLOs. So I understand Japanese Institutions are big buyers of U.
S. Highly rated CLOs. But a few weeks ago, the Japanese FSA introduced some new rules saying that there had to be 5% risk retention by U. S. Issuers in order for the Japanese institutions to buy them.
So I'm just wondering if you're seeing yet any change in demand from Japanese institutions. And likewise, on the other side, if there's any change in behavior from U. S. CLO issuers in terms of trying to integrate 5% risk retention?
So that is a great question. The answer I'm going to give you is not that I'm aware of at this point, but I'll have to follow-up with you. Jamie, are you aware? No. Sorry, Andrew, we'll come back to you.
Not that I'm aware of, but that it's a good, but nevertheless quite detailed question.
Okay, thanks.
Thanks.
There are no further questions at this time.
Thanks everyone.
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