Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's fourth quarter and full year 2018 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, Marianne Lake. Ms. Lake, please go ahead.
Thank you, operator. Good morning, everyone. I'm 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 one, the firm reported fourth quarter net income of $7.1 billion, an EPS of $1.98 on revenue of nearly $27 billion, with a return on tangible common equity of 14%. Market impacts aside, underlying business drivers remain solid, including core loan and deposit growth, consumer sentiment and spending in a robust holiday season, capital market activity, with credit performance continuing to be very strong across businesses. For the full year of 2018, the firm reported revenue of $111.5 billion and net income of $32.5 billion. Both clear records, even adjusting for the impact of tax reform. We feel we're entering 2019 with good momentum across our businesses.
Turning to page two. For more detail about our fourth quarter results, revenue of $26.8 billion was up $1.1 billion or 4% year-over-year, driven by net interest income. NII was up $1.2 billion or 9% on higher rates and on loan and deposit growth. Non-interest revenue was down slightly, with lower market levels impacting asset wealth management fees and private equity losses, being offset by higher card fees and auto lease growth in CCB. Expense of $15.7 billion was up 6% year-over-year. The increase relates to investments we are making in technology, marketing, real estate, and front office, as well as revenue-related costs, including growth in auto. This was partially offset by a reduction in FDIC fees.
As we had hoped, the incremental surcharge was eliminated effective the end of the third quarter. This is a benefit of a little over $200 million for the quarter across our businesses. Credit trends remain favorable across both consumer and wholesale. Credit costs of $1.5 billion were up $240 million year-over-year, driven by changes in reserves. In consumer, we built reserves of $150 million in card on loan growth. In wholesale, over the last several quarters, we have seen net reserve releases and recoveries. However, this quarter we had about $200 million of credit costs. Again, largely reserve builds on select C&I client downgrades driven by a handful of names across multiple sectors. While we are constantly looking at the granular level for shadows, these downgrades are idiosyncratic and do not reflect signs of deterioration in our portfolios. The outlook for credit as we see it remains positive.
Shifting to the full year results on page three. We reported net income for the year of $32.5 billion, a return on tangible common equity of 17%, and EPS of $9 a share. Net income was a record for the firm as well as for each of our businesses, even excluding tax reform. Revenue of $111.5 billion was also a record and was up nearly $7 billion or 7% year-on-year. $4.3 billion of which was higher net interest income on higher rates, with growth and card margin expansion being offset by lower market NII. Non-interest revenue was up $2.5 billion or 5%, driven by CIB markets and growth in consumer, being offset by private equity losses and the impact of spread widening on FVA.
We ended the year with adjusted expense of $63.3 billion, up 6%, which brings our overhead ratio to 57% for the year, even as we continue to make very significant investments across the franchise. Although we are showing modest positive operating leverage on a managed basis, remember our revenues were impacted by lower growth ups given tax reform. Adjusted for this or looking on a GAAP basis, we delivered nearly 200 basis points of positive operating leverage for the year and well over 100 basis points for the fourth quarter. On credit, the environment remained favorable throughout 2018. Credit costs were $4.9 billion, down 8%, driven by lower net reserve builds in consumer, as well as the impact in 2017 of the student loan sale. Moving on to page four on balance sheet and capital. We ended the quarter with a CET1 ratio of 12% flat to last quarter.
Risk-weighted assets decreased with loan growth more than offset by derivatives counterparty and trading RWA, given a combination of seasonality, market conditions, and model enhancements. Our net payout ratio for the quarter exceeded 100%, and we repurchased $5.7 billion of shares. Moving to Consumer & C ommunity Banking on page five. CCB generated net income of $4 billion and an ROE of 30% for the fourth quarter, and for the year, nearly $15 billion of net income and an ROE of 28%. Customer satisfaction remains near all-time high across our businesses. For the quarter, core loans were up 5% year-on-year, driven by home lending up 8%, card up 6%, and business banking up 5%. Deposits grew 3%. Growth continues to slow given the rising rate environment, but importantly, we believe we continue to outpace the industry.
Of note this quarter, we opened the first 10 branches in our expansion markets, including D.C., Boston, and Philadelphia. Although it's clearly early, reception in the market and the performance of the new branches has been strong. Despite volatile markets, client investment assets were still up 3%, and we saw record net new money flows for the year. Card sales were up 10%, debit sales up 11%, and merchant processing volumes up 17%, reflecting a strong and confident consumer during the holiday season. In keeping with our focus on digital everything, of note, active mobile customers were up three million users or 11% year-on-year. Revenue of $13.7 billion was up 13%. Consumer & Business banking revenue was up 18% on higher deposit NII, driven by margin expansion. Home lending revenue was down 8%, driven by lower net production revenue in a low volume, highly competitive environment.
Of note, while not a material driver of overall expense, revenue headwinds here were offset by lower net production expense. Card, merchant services, and auto revenue was up 14%, driven by higher card NII on both loan growth and margin expansion, lower card net acquisition costs, principally Sapphire Reserve, and higher auto lease volumes. The card revenue rate was 11.6% for the quarter and 11.27% for the year, as expected. Expense of $7.1 billion was up 6%, driven by investments in technology and marketing and auto lease depreciation, partly offset by lower FDIC charges and other expense efficiencies. On credit, net charge-offs were down $18 million, as modestly higher charge-offs in card were more than offset by lower charge-offs in auto and home lending. Charge-off rates were down year-on-year across all portfolios.
Economic indicators remain upbeat. Given the breadth and depth of our franchise, we have a pretty good barometer. From everything we see, the U.S. consumer remains very healthy. Turning to page six and the Corporate & Investment Bank. CIB reported net income of $2 billion and an ROE of 10% on revenue of $7.2 billion for the fourth quarter. For the year, net income of nearly $12 billion and an ROE of 16%. In banking, it was a record year for both total fees and advisory fees. We ranked number one in global IB fees for the 10th consecutive year, gaining share across all regions. For the quarter, IB revenue of $1.7 billion was up 3%. We saw continued momentum in advisory with fees up 38%, driven by the closing of several large transactions. For the year, we ranked number two in wallet, gaining share.
Equity underwriting fees were down 4% but significantly outperforming the market. We ranked number one for the year and the quarter and saw leadership positions across all products globally, with particular strength in IPOs as well as in the technology and healthcare sectors. Debt underwriting fees were down 19%, versus a strong prior year and better than the market. We maintained our number one rank for the year and continued to hold strong lead positions in high-yield bonds and leverage loans. Moving to markets, total revenue was $3.2 billion, down 6% reported, and down 11% adjusted for the impact of tax reform and the Steinhoff margin loan loss last year.
A confluence of factors throughout the quarter, including trade, concerns around global growth and corporate earnings, fears of a more hawkish Fed, as well as other negative headlines, caused spikes in volatility, which were amplified by markets that lacked depth and liquidity. Although we saw decent client flow, rates rallied, spreads widened, and energy prices fell significantly, all against general market conviction that was anticipating a stronger end to the year. As a result, fixed income markets in particular were challenging, with revenue down 18% adjusted. Weaker performance across rates, credit trading, and commodities was partially offset by good momentum in emerging markets. Equities revenue was up 2% adjusted, a solid end to a record year. Prime continued to do well, but we saw clients deleveraging over the course of the quarter, and cash and derivatives were solid in a tougher environment.
Treasury services revenue was $1.2 billion, up 13%, driven by growth in operating deposits as well as higher rates, but also benefiting from fee growth on higher volumes. Security services revenue was $1 billion, up 1%. Underlying this was strong fee growth and a modest benefit from higher rates, together being substantially offset by the impact of lower market levels and a business exit. Credit adjustments and other was a loss of $243 million, reflecting higher funding spreads on our derivatives. Finally, expense of $4.7 billion was up slightly, with continued investments in technology and bankers and volume-related transaction costs. Partially offset by lower FDIC charges and lower performance-based compensation. The cost of revenue ratio for the quarter and for the year was 28%. Moving to commercial banking on page seven.
The commercial bank reported net income of $1 billion and an ROE of 20% for the fourth quarter, and for the year, $4 billion of net income and an ROE of 20%. Revenue of $2.3 billion for the quarter was down 2%, as the prior year included a tax reform related benefit. Excluding this revenue was up 3%, driven by higher deposit NII. Gross IB revenue of $600 million was down 1% year-on-year, but up 4% sequentially on a strong underlying flow of activity, particularly in M&A. Full year IB revenue was a record $2.5 billion, up 4% on strong activity across segments, in particular Middle Market Banking, which was up 8%. Deposit balances were up 1% sequentially as client cash positions are seasonally highest towards year-end. Although down 7% year-on-year, as we continue to see migration of non-operating deposits to higher yielding alternatives.
We believe we are retaining a significant portion of these flows. Expense of $845 million was down 7% year-on-year, as the prior year included $100 million of impairment on lease assets. Excluding this expense was up 5%, driven by continued investments in the business, in banker coverage, as well as in technology and product initiatives. Loans were up 2% year-on-year and flat sequentially. C&I loans were up 1%, reflecting a decline in our tax-exempt portfolio given tax reform. Adjusting for this, we would have been up 4%, which is still below the industry, as we focus on client selection, pricing, and credit discipline. Keep in mind, in areas where we have chosen to grow, such as in our expansion markets, we are growing at or above industry benchmarks.
CRE loans were up 2%, also below the industry, as we've proactively slowed our growth due to where we are in the cycle, through continued structural and pricing discipline and targeted selection of new deals. Underlying credit performance remains strong, with credit costs of $106 million, including higher loan loss reserves, largely due to select client downgrades. Moving on to asset and wealth management on page eight. Asset and wealth management reported net income of $604 million, with a pre-tax margin of 23% and an ROE of 26% for the fourth quarter. For the year, net income was nearly $3 billion, pre-tax margin of 26%, and an ROE of 31%. Revenue of $3.4 billion for the quarter was down 5% year-on-year, with the impact of current market levels driving lower investment valuations and management fees, as well as to a lesser extent, lower performance fees.
These were partially offset by strong banking results and accumulative impact of net inflows. Expense of $2.6 billion was flat, as continued investments in advisors and in technology were offset by lower performance-based compensation and lower revenue-driven external fees. For the quarter, we saw net long-term outflows of $3 billion, with strength in fixed income more than offset by outflows from equity and multi-asset products. Additionally, we had net liquidity inflows of $21 billion. For the 10th consecutive year, we saw net long-term inflows of $25 billion this year, driven predominantly by multi-asset, and in addition, saw $31 billion of net liquidity inflows this year. Assets under management of $2 trillion and overall client assets of $2.7 trillion were both down 2%, as the impact of market levels more than offset the benefit of net inflows.
Deposits were flat sequentially and down 7% year-on-year, reflecting migration into investments, and we continue to capture the vast majority of these flows. Finally, we had record loan balances up 13%, with strength in global wholesale and mortgage lending. Moving to page nine and Corporate. Corporate reported a net loss of $577 million. Treasury and CIO net income of $175 million was up year-on-year, primarily driven by higher rates. Other Corporate saw a net loss of $752 million, including on a pre-tax basis, funding our foundation for corporate philanthropy, $200 million this quarter, flat year-on-year. Including $150 million of markdowns on certain legacy private equity investments, market-related. The remainder is driven by tax-related items totaling a little over $300 million. Within this are two notable components.
The first is regular way tax reserves, the second represents small differences between the effective tax rate for each of our businesses and that for the overall company as we close the year, therefore, there is an offset across our businesses. Our full year effective tax rate was just a little over 20%, in line with guidance. Moving to page 10 and outlook. We will give you more full year outlook and sensitivity information at Investor Day, as always. However, for now, I did want to provide some color and reminders about the first quarter. Net interest income will continue to benefit from the impact of higher rates and growth. Quarter-over-quarter will be negatively impacted by day count, and we expect the first quarter NII to be relatively flat sequentially.
While it is too early, clearly, to give guidance on fee revenues, it's also fair to say that this quarter markets feel calmer and more positive, capital markets pipelines are strong. If the environment remains supportive, we would expect normal seasonal strength in the first quarter. I will remind you that the first quarter of 2018 included a $500 million accounting write-up, as well as broad strength in performance. Expect expense to be up mid-single digits year-on-year, obviously market-dependent, primarily annualization effects. Finally, as I said, we expect credit to remain favorable across products. To close, while the markets in the fourth quarter were more challenging, we should not lose sight of the fact that 2018 was a strong year, indeed, a record for revenue, net income and EPS, both reported and adjusted for tax reform.
Fundamental economic data remains supportive of continued growth, we're generally constructive on the outlook for 2019. We have good momentum coming into the year, and the company and each of our businesses are very well-positioned. With that, operator, we can open up the line for Q&A.
If you would like to ask a question, please press star then number one on your telephone keypad. We kindly request that you ask one question and only one related follow-up. If you would like to ask additional questions, please press star one to be re-entered into the queue. Our first question is from Erika Najarian of Bank of America.
Hi, good morning.
Morning, Erika.
The way bank stocks have performed, clearly investors are starting to worry about revenue trends near term and of course, credit, which you addressed. I'm wondering if the revenue trends continue to be weaker than expected, if the overhead ratio of 57% that you posted in 2017 and 2018 is something that you could continue to level off to, or will the investment horizon be more of a dominant factor when we're thinking about the overhead ratio?
I would say a couple of things. The first is just to remind you that, 2017 and 2018, I would look at a GAAP rather than a managed basis because of the adjustments to our revenues from tax reform. That said, while we don't set expense targets, nor do we set overhead ratio targets, we have given you some outlook that would suggest that we continue to believe that a combination of revenue growth and expense discipline, notwithstanding the investments that we've been making, we should see our overhead ratio continue to be stable to trending down to the kind of mid-50s, so 55-ish%. Obviously, the timing of that will depend on rates and markets and everything else. We would expect to continue to deliver positive operating leverage on higher NII, on growth if nothing else, and continued solid growth in fees.
Clearly in any one quarter, you can have pluses and minuses that can be market dependent. Generally over time, we would still expect those trends.
Thank you for that. Just as a follow-up question, the market is also thinking that the last rate hike from the Fed was December. I'm wondering how we should think about the dynamics of net interest income and more specifically, net interest margin and deposit pricing if December was indeed the last rate hike for some time.
I would say, first of all, just to say that there's a question mark about whether that's a pause or a stop. Is it the end of a cycle? We don't think so. We think the outlook for growth in the economy is still strong, the consumer is still strong and healthy, and that we're expecting to still see maybe slower but still global growth going forward. Having said that, just as a general matter, you've seen through our earnings at risk that as we have put more and more of the benefit of past rate hikes in our run rate, each incremental hike from here has, while still positive, significantly lower incremental NII drive, and that the front-end skew is a lower percentage.
It's not nothing, but clearly lower front-end rates, a lower long end of the curve or a flatter curve, all other things would be net modestly negative. Against that, you pointed out the potential for this to lead to lower or slower reprice. As the Fed pauses, it is fair to say there could be an offset from lower reprice as people digest the data and understand whether this is a pause or more. We would still look at we delivered $4.3 billion of NII growth in 2018. We'll still benefit in 2019 from the annualization effect of the higher rates we've already had, as well as solid growth. While you can't expect 2019 over 2018 to be at that level, it would still be strong NII growth year-on-year.
I would say the why is.
Yes
It is if not more important than the what. If it is a pause because you're going to go in a recession, we're going to reduce rates, that obviously is very different than if it's a pause, the economy's strong, and they raise rates.
Right.
You know which one you would choose.
If this were the end of a cycle, it's no cycle we've ever seen before. In that scenario, if terminal Fed fund rates are at 2.5% not 4.5%, 5+% , I think we've never seen that movie before. That's not our central case. By the way, the house view, the research view would still be to see incremental hikes this year, if not in the first half, in the second.
Our next question is from Jim Mitchell of Buckingham Research.
Hey, good morning. Maybe a question on the card business. There's been chatter about sort of pulling back on rewards to kind of focus more on profitability. I guess, how do you think about the strategy in cards right now? I think the revenue yield in the card business was up seven basis points to 11.57%. Can that go higher from here as you maybe pull back on rewards?
Yeah. I would say that when we think about the product continuum we have and the constructs, rewards is a very important part of driving engaged relationships with our customers. Customers are very attuned to it. We're looking for value in the product. Value and simplicity and ease of use are the three things in the products that we deliver. For us, engaged relationships drive profitability. This is still a very profitable business. While we'll always make adjustments to our offerings, it's not the case that we are looking at a meaningful pullback in rewards. If you think about things like Sapphire Banking, where we're looking to bring the impact of our products together, we're continuing to offer rewards-based incentives to drive engagement with our customers. We think it's a solid strategy, a business that already has good returns.
It's fair to say that we've seen a lot of competitive response and competitive products in the marketplace that are driving high rewards offerings too. We've not seen that lower our ability to net acquire new accounts. We feel great about the value proposition, the simplicity, and the compelling products that we have.
Okay.
It's always a very profitable business.
Right. We think about still seeing decent growth. How do we think about card losses specifically this year? You seem pretty optimistic on credit. Should we still expect some seasoning, or do you think the macro trends are that positive that we hold steady? How do you think about credit in cards?
I think the macro trends are definitely positive, they are creating tailwinds. It's also true, we talked about the fact that if you go back to 2014, 2015, that we had expanded our credit box. We had expanded it intentionally at higher risk-adjusted margins. Over the course of the last couple of years, as we've experienced that performance, we've done sort of surgical risk pullbacks and we've amended our collection strategy. All of which have led to a charge-off rate for the fourth quarter in 2018 that's down slightly year-on-year. For the year, that's at 310 basis points, which is reasonably meaningfully below our expectations, even as late as the end of last year.
We feel great that that kind of loss trend at that 310, maybe a little bit higher, is something we should look forward to at least into 2019, it will be helped by a supportive macro environment. We are seeing if you unpick all of our trends, you see the phenomenon of three vintages. You see the mature vintages that continue to be stable to grinding lower in terms of delinquencies and loss rates. You see the older expansion vintages that have passed their peak delinquencies and are trending to a more stable lower level. You do have, obviously, with new acquisitions, a cohort that are still seasoning. That will continue, but net-net, we're expecting relatively stable loss rates at levels similar to 2018.
Our next question is from Saul Martinez of UBS.
Hey, Saul.
I'm sorry, his line has disconnected. Our next question is from John McDonald of Bernstein.
Hey, John.
Hi. Good morning. Morning, Marianne. Just wondering on the markets commentary, obviously super early in the quarter, but you mentioned things feeling better. Can you just talk about seasonality there, but also just what feels better so far? Then also in the fourth quarter, what you saw in leveraged lending market, how much did you have to take in terms of maybe marks on leveraged loans and hung deals? A little bit of color there would be helpful.
Sure. Okay. I would say that obviously the fourth quarter was challenging and there was a lot of market moves, a big sort of broad sell-off. At that point, there were elevated concerns around trade. Global growth data was causing concerns. There were concerns that the Fed was going to continue to be hawkish and not necessarily as responsive to some of the things the market was worried about. There were a lot of negativity. We think too much negativity priced into the fourth quarter. It started to change a bit when we saw the first really strong unemployment print, which reminded people that there's a very long distance between 3% growth and a contraction. Yes, we could see slower growth, but still growth in the U.S. and across the globe.
A slightly more constructive narrative on trade, that continues to broadly progress, we hope and believe, in a positive direction. A more dovish outlook from the Fed, the potential for there to be pauses in rates all being relatively supportive. The fact that a lot of people were on the sidelines through the fourth quarter and investor appetite is out there for good value where it can be found. I would say just early days in the first quarter, there are still obviously risks to the outlook and any of those things could go in a worse direction. So far things just feel a little bit more positive and that's constructive. Therefore you would hope to see normal seasonal strength in January. On leverage loans. Look, sort of just diving into the sort of potential for there to be hung bridges.
It is true that there was a significant market correction with spreads widening across high yield bonds and leverage loans in the fourth quarter. Clearly, stepping back while the industry leverage finance commitments are up, they are materially down from before the crisis and very different. Credit fundamentals look pretty good. Having said that, by the way, we passed on a lot of deals in the fourth quarter. We've maintained our sort of protection in terms of flex pricing and flex protections, as a result, the vast majority of our bridge book has still got decent cushion. That's not to say that there's no deals that have the potential for there to be net losses after fees, but nothing that we would consider to be significant and nothing in the fourth quarter.
I would also say that, coming back to the first quarter, that actually the market could be quite constructive for fixed income into the first quarter, given a more dovish Fed supporting corporate margins, corporate default rate is going to stay pretty low, we do have time. None of the deals that we have need to be brought to market in a hurry, the market is moving in a positive direction.
Got it. Thanks very much.
Our next question is from Al Alevizakos of HSBC.
Hi. Thank you for taking my question. I, again, want to focus a bit on the market's performance. You pretty much mentioned weakness across the board in credit, in FX, in rates, which I assume it's the case. First of all, I want a bit of an outlook on how you think rates will perform now that volatility has picked up. More importantly, you mentioned strength in emerging markets. Can I ask whether that was primarily in Asia or LATAM? Thank you very much.
No good ever comes of talking about how we think things are going to pan out in the first quarter, other than just the general comments I've already made, which is the environment should be more constructive, and we are expecting decent volatility and client activity, and we'll see how that pans out. With respect to emerging markets, Latin America was a big piece, but Asia too.
Thank you very much.
Our next question comes from Mike Mayo of Wells Fargo Securities.
Hey, Mike.
Hi, can you hear me?
Yes.
I guess I'm a little torn between the year and the quarter. I'll just ask it to Jamie. Jamie, it seems like you guys are very happy with the year with all the record revenues and earnings. The fourth quarter, are you happy with the fourth quarter given expenses, credit fees?
I am totally happy with it. The franchise is strong.
Yes.
We're investing in new products and services. We're not immune from the weather and volumes and volatility. We're not immune from market prices and assets going up or down. I like the loans up 6%, assets up 7%, long-term flows up. I like the fact that credit card spend is up 10%, merchant processing is up 17%. Shares in almost every business, market shares have gone up. That's what I look at.
Yeah.
I really don't pay that much attention to being buffeted a little bit by the fact that volumes are low in the last three weeks of December. I honestly could care less. I look at more like in equities, we've gained share, and we're now bumping up to number one. Those folks have done a great job across cash derivatives, prime broker, et cetera. Fixed income, we've maintained our share, and we're adding products and services around the world, and we don't know.
Bank fees gained share.
Yeah. We don't know what's going to happen next quarter, I don't care.
We take the same position. We had a strong first half of the year, and we said long may it continue, but it may not. One quarter doesn't make a trend. So we don't really react to the sort of micro, even though it was driven by the macro. The real underlying business drivers continue to be strong. Even in those businesses, we are holding leadership positions and gaining share. So this too will pass, and things will continue to move forward in a constructive manner.
Well, as a follow-up, let's talk about the weather. The weather is lousy at the end of the year. Jamie, you were just appointed to your third year as chairman of the Business Roundtable. In that role, what are you doing to help JP Morgan, and I guess the other banks, in terms of China, the government shutdown, immigration, some of these headline issues that Marianne talked about having hurt the CIB in the fourth quarter?
Yeah. December is terrible, if you look at January, you have half of it back generally in spreads and markets and stuff like that. As BRT, I don't do anything to benefit JP Morgan. That's about public policy that's good for the growth of America in total. I've very specifically stayed away from doing about banks there. The BRT does take up trade, and we are supportive of the fact there are serious issues with China. We'd like to see the trade deal get done. It looks to us like they're marching along, at least to this March 1st deadline date, that enough will be done to kind of get an extension and hopefully complete the deal.
We would like to see immigration reform, so proper border security, allowing people who have advanced degrees to stay here, having the DACA stay here, having more merit-based immigration, and having some path to citizenship. That is the BRT position. We want more innovation. We'd like to reduce regulations at the local and federal level to stop small business formation. If you look at the BRT, there are 10 verticals around it, and we try to do things that are good for the growth of America. Bad policy can slow down the growth of America. I pointed out over and over, it takes 12 years to get the permits to build a bridge. I mean, it took eight years to put a man on the moon.
It is time that we reform ourselves and not blame anybody else for our own lack of, that we don't have kids getting out of school with educations, where they get jobs, that our innovation has slowed down, the government R&D spending is down. I always think you should look at yourself and what can you do better, and there's plenty this country can do better to help growth over the long run. It's not about helping it next quarter.
Our next question is from Glenn Schorr of Evercore ISI.
Hey there.
Good morning, Glenn.
Good morning. Follow up on John's question earlier on leverage lending. On slide 24, you see the balance in loans held for sale go from like $6.5 billion-$15 billion. I heard your comments on marks. I'm assuming that that is just disruption and you go back towards your normal level that's in the pipes in progress. I just want to make sure that I'm not making that wrong assumption.
Yeah. We're not expecting anything to be elevated.
Okay, cool.
That number goes up or down all the time just based on episodic.
Right
We're just cleared out of the books. There's nothing in that number that we're afraid of.
No.
Understood. Curious on the credit, on the couple of marks in C&I. I'm just curious on how much of that is internal versus external rating agency, and I guess it's a feel for the underlying fundamentals. How do you know we should treat that as idiosyncratic, as you called it?
Yeah. It's internal and it's like five names, four sectors. We know the specifics. It is situationally specific. Remember, just to give you some context, while those can drive the dollar value, regular way in any quarter, given the size of our portfolio, we might downgrade and upgrade hundreds of individual names based upon the circumstances. When we say that we're looking at this and saying that things are idiosyncratic, it's not just looking at the five situations that drive the biggest dollar value. It's also looking at the hundreds of downgrades and the hundreds of upgrades and seeing if there's any trends or net worrying signs there. Honestly, not now. If anything, marginally we had more upgrades, but it's just there's nothing to see right now in our portfolios and we're looking.
Okay.
We look for reasons to put up reserves.
Yeah.
Not to take them down.
Only the paranoid survive. We're more paranoid than you are.
Right.
Last one. Obviously, markets all went down in the fourth quarter, and we had some freeze-ups, if you will, in high yield.
Yeah
First time in like 10 years. I'm curious how you all think the markets functioned in general. In other words, things went down, spreads widened out. There was lots of fear, but it felt like the plumbing was working.
Yeah
I don't want to put words in your mouth.
Half the people weren't even here the last two weeks in December.
That's right. Plumbing was working. We didn't see any sort of algo or technology issues. We didn't see any volumes that couldn't be coped with. While I said that there was a little bit of a lack of depth of the markets and liquidity, that's typically the case when you'd have one-way trends in a market and a lot of people similarly situated. I would say that relatively functioned well, but challenging.
Our next question is from Andrew Lim of Société Générale .
Hi. Good morning. Thanks for taking my questions. I just had a follow-on question from the net fin, high yield marks question. You seem to give the impression that there weren't really much in the way of marks. Is that because you've got very strong hedging strategies in place, and that the decline in FICC revenues mainly was due to lower volumes?
There were no marks.
There were no marks. In our bridge book right now, for the vast majority, we have good cushion, and we expect to be able to clear and price through the market. For anything that's even borderline, it's completely not material.
I think some other deals did have a few marks.
Yeah.
If you look at what happened to flex pricing, like mid-December when things were their worst. Yeah, some of these things were very close to the end of their flex pricing. That means they're very close to having some kind of mark. Of course, since then, the spreads have kind of come back 40%.
Right.
Hmm. Interesting. Thanks. My follow-up question is that, obviously, the debt capital markets had a tough time. Your wholesale lending, the growth accelerated quite nicely. Do you get the impression there that corporates had a general shift there to seek borrowing from banks such as yourselves because they were shut out of the market?
There was an uptick at the end of the year. You saw it in the industry data. We saw it in our spot data. For us, in fact, it was largely driven by one investment grade loan that we extended at the end of the quarter. There was a little bit of an uptick, a little bit more in terms of acquisition financing on the balance sheet, but nothing I would call.
It wasn't because they couldn't get financing earlier.
No. Nothing that I would call unusual or a trend. We didn't have to take down things that would otherwise not clear the market.
Our next question is from Matthew O'Connor of Deutsche Bank.
Good morning. I want to circle back.
Good morning.
On the expense flexibility. I think in your base case, you're pretty clear that you're targeting positive operating leverage and moving down the efficiency ratio to the mid-50s.
Yeah.
What is some of the expense flexibility, and where would it come from if the revenue is light? I think in 2018, you accelerated some of the technology spend given tax reform. You've been opening branches. Some of that stuff obviously can't be pulled back. You always talk about some areas of flexibility. Maybe what are those? If you could kind of size or help quantify some of the flexibility you have, that would be helpful. Thank you.
Yeah. I would say, first of all, that you saw that from 2013 through 2016, we had a pretty structural expense reduction program associated with simplifying our businesses. In terms of the low-hanging fruit and things like that, we would say largely that's been harvested. We are always looking to generate core operating efficiency so that we can absorb growth. When we are investing in technology and data, one of the reasons to do it, customer satisfaction, product innovation aside, is for efficiency. We are seeing some of that come through. We'll continue to drive that down.
The efficiencies and the investments are all in the number that Marianne gives.
Yeah
When she says up 5%.
That's right.
Roughly mid-digits.
The way I would say it is that we continue to drive for expense discipline, but as long as you feel, as we do, that the decision criteria that we use to determine the investments we're making which we think are strategically important to the long-term growth of the company and the profitability of the company supporting our clients. If those are good decisions for long-term growth, while we could obviously make changes, we would not look to do that. Marketing expense, for example, is one area where you would say there's pretty sizable and immediate flexibility. Nevertheless, when we invest in marketing, we're driving new accounts and engaged customers that drive long-term growth. We invested through the cycle. We think it sort of differentiates our long-term performance, and we'd like to continue to do that.
2019 over 2018, you wouldn't expect to see necessarily the same clip up that you saw last year. We did accelerate investments in 2018. More of the growth will be revenue related, but still decent investments as the opportunity is still good to do that.
Okay. That's helpful. Just on a sidebar here on the reserve build, as we think about credit quality, are we just in the period now where we should assume some reserve build consistent with loan growth each quarter? Or was this just a quarter where you had a couple of the lumpies that really drove it? I guess where I'm getting at is.
Could you repeat the model?
Sorry. You go ahead.
I guess what I'm getting at is are we at the point where just a couple lumpy loans is going to drive a few hundred million reserve build? Or is it just maybe this is a bit unusual still?
First of all, I just want to sort of point out that in the card space, we hope we continue to grow healthy mid-single digits. There's a seasonality to card balances and losses. You typically see reserve builds in the second half of the year. That's what we saw this year and actually a little bit lower year-over-year than last. In the wholesale space, you're going to see some things will be a bit lumpier and episodic given the nature of the loans that we have. I wouldn't necessarily say that we expect to see a trend of significant reserves, but we've been flattered by recoveries and releases over the course of the last couple of years, partly or a large part, at least earlier, releasing reserves we took on energy when the energy went through the downturn. We'll have some downgrades.
We might have some releases. I would net-net think that as we grow, we would build, but not disproportionately. Remember we're arguably at the best point in the cycle. Jamie mentioned it earlier. To the degree that we have the flexibility, we're making sure that we're reserved accordingly.
Our next question comes from Saul Martinez of UBS.
Hey, good morning. Sorry about earlier. I think I need to figure out how to use my phone.
That's okay.
Is that a UBS problem or?
No comment there. A lot of talk on macroeconomics and the policy backdrop and volatile markets. As you mentioned earlier, you guys are in a pretty unique position in that you have pretty consistent dialogue with a lot of economic agents, whether it's corporates, governments, institutional investors and whatnot. Just a sense of what your clients are saying, what are they concerned about? Is there any concern on your part that some of these issues have sort of a self-fulfilling effect in that it does end up leading to actions that precipitate a downturn or a recession?
I think that we would look to the sort of macroeconomic data, which is still generally supportive and say things should be good. For sure, sentiment is not immune to external factors. Manufacturing data has been a little weaker. I would say CapEx is sluggish on fears around global growth. Government shutdown and trade are not particularly helpful. Uncertainty is not good for anyone. There's no doubt that as things continue, if there's a level of anxiety and uncertainty, it's just not constructive for confidence, and confidence begets strong or less strong markets. I wouldn't say that I think it's clear and present danger, but I think we should be extremely careful because sentiment, particularly consumer sentiment, will be incredibly important. Right now.
Still pretty good
It's good, right? Sentiment in consumer.
Yeah
We just got back some sentiment from a whole bunch of our middle-market companies that while neither are at their highs, they're still very high.
That's helpful. If I could just ask about loan growth and just a more broad question about your ability to continue to outpace the industry, I suspect we'll get more color at investor day, but just want to get your sense of the sustainability of growth. You mentioned on the commercial side, maybe you scaled back a little bit, maybe we're late cycle, but where do you feel like you can continue to outgrow the industry? Where do you feel like maybe it's time to scale back on risk a little bit?
Okay. I think it's an incredibly nuanced question because, in general, home lending has a challenging market backdrop. For us, it's a tale of two cities. We're doing quite well and gaining a bit of share in the kind of retail purchase market, and we're holding our sort of pricing discipline in correspondent and losing share there. There's a challenging market backdrop coupled with doing well there, and it's a factor of all the things we talked about, investments in digital product, rewards, all of the above. We would like to believe that we'll continue to hold our own there. Auto is extremely competitive. We play in the prime, super prime space, and we're seeing competition from people who have different economic drivers than us, like credit unions and captives. We're willing to lose share to maintain returns there.
If you bifurcate C&I, we're growing in line or better than the industry in our expansion markets where we've been making the investments, where we've been adding specialized industry coverage, and we'd like to see that because of the investments we're making. In mature markets, we're, again, being pretty prudent. I wouldn't call it tightening, but being very selective. Commercial real estate, particularly construction lending, yeah, we are tightening. We are being very cautious about new deals and selective about those. It isn't the case anymore that we would say we're seeking to grow or that we ever would. Loan growth is an outcome of a number of factors, mainly the strategic dialogue with our companies, but also the environment we're in, and it's extremely nuanced. In many of our businesses, we're going to protect profitability and credit discipline over growth at this point.
Let me just reemphasize that. We tell our management that we have no problem seeing loan books shrink.
Okay.
We are not going to be sitting here ever in our lives and saying, "You got to grow the loan book. You got to show loan growth." Remember, Warren Buffett used to say, in the insurance business, sometimes it's true in the loan business, you're better off if the sales force go play golf than they are to make new loans. We are not going to be stupid. The other thing you have to always keep in mind, it's not the loan, it's the relationship.
Yeah
You look at in total. When it comes to middle market or all these other things, there are reasons that we stay in a business knowing there's going to be a cycle, and we're not going to be children when there's a cycle. We know the losses are going to go up.
Our next question is from Betsy Graseck of Morgan Stanley.
Hi, good morning.
Hi.
Are we playing golf all day yet or?
No
Is that still far away?
Credit is pristine. Mortgage credit is pristine. Middle Market is pristine. Underwriting has been pretty good other than a few little pockets that Marianne's mentioned. We saw people stretching in auto. We saw some stretching, and we're not in the subprime credit card, but a little bit of people stretching in that. Leveraged lending, we're not worried about our loan book. I think you can have a logical conversation about the.
Yeah
Kind of the non-bank loan book, that's not our concern, it is what it is at the time.
I think where businesses are notably a little bit less relationship-driven. Think about kind of loan-only relationships, commercial term lending, real estate banking, mortgage to a lesser degree also. We are losing or ceding share where it makes sense to do it.
Yeah. Competition there, we've mentioned this before, is back everywhere, that's a good thing for America. That means that pricing is a little tough that you have to compete.
We're still off the golf course. All right. That's good.
Yeah.
Just wanted to understand a little bit more on the expense side. I know, even with the weather, you guys put out a 14% ROTCE, which is obviously best in class. The question is on the expenses, there's flexibility there, yet I know you've guided to up single digits in 1Q 2019. Based on the prior conversation, it seems like 1Q might be an aberration of mid-single digits, or should I take that that's kind of the run rate you're expecting for the full year?
No, I wouldn't annualize.
Why would 1Q be a little bit different, I guess is really the question.
Yeah. I wouldn't fully annualize the first quarter, think about we've added bankers and advisors across our businesses. You're going to get some annualization impact, particularly first quarter over first quarter. We had added more and more as the year progressed. Similarly, something like auto lease where we grew our auto lease business revenues and expenses strongly in 2018, that will be in our run rate in the first quarter. Front office auto lease, some of the technology investments we've been making, the annualization of those will be more pronounced first quarter to first quarter than fourth quarter to fourth quarter because many of them were in our run rate in the fourth quarter. Outside of that, there's a bit more in real estate as we sort of execute on our head office strategy.
Marketing, foundation contributions, those things, they're going to be timing. The first quarter will be higher. I wouldn't annualize it. We are going to see likely growth year-over-year, much more because of revenue growth than because of investments, but both year-on-year, not the same level as last year. We'll obviously give you a lot more detail and insights and thoughts on ranges and everything at Investor Day clearly.
Our next question is from Brian Kleinhanzl of KBW.
Hi, good morning.
Morning, Brian.
Hi, Marianne. Just a quick question on the balance sheet, and sorry if you gave this already, but can you kind of walk through the idea of lowering down the deposit list banks and kind of moving into repo, what you saw in the quarter. Is that just something that was temporary that's expected to reverse in the first quarter? Thanks.
Yeah. It's fair to say that money market rates traded above IOER throughout the fourth quarter and more pronounced at the end of the quarter. Through the quarter and at year end, we were able to take advantage of the market opportunity to move out of cash into cash alternatives, think reverse repos and short duration assets. For us, it was yield enhancing opportunity to redeploy cash and a mix change rather than adding duration. That continues to be the case into the first quarter. It contributed to our NIM expansion in the fourth quarter. We continue to have a bit of that mix shift in the first quarter, and it's a market opportunity.
Okay. A separate question on, I know it's not a big revenue driver anymore, but within the mortgage banking, you had a negative gain on sale in the quarter. Can you just give us some color there? What drove a negative gain on sale?
In the quarter, as we were looking at optimizing our balance sheet, we actually did a sale of conforming loans to GSEs of about $5 billion. The impact of that was to have a loss on the sale of the portfolio, given that they'd been originated at lower rates. As rates are higher, the fair value of the loans is lower. Against that, if you were to look at the rest of the P&L, you'll see a benefit in net interest income because the interest rate risk of that has been transferred to the Treasury Department. It's geography. It's a loss on the sale of a portfolio against which there's funding breakage in NII.
Just so that you know, a mortgage loan with RWA at 50% versus a security at 20% with better liquidity value, we did reinvest some of those proceeds in mortgage-backed securities in Treasury. We'll earn that back over time net of the company.
Our next question is from Steven Chubak of Wolfe Research.
Hey, good morning. Wanted to start with just a bigger picture question on credit and the impact of normalization. Certainly, the near-term guidance sounds quite encouraging. Jamie, you did make a comment recently at an investor conference talking about how the banking industry is overearning on credit, not particularly a controversial remark. In the past, you guided to a medium-term loss rate on a blended basis of roughly 65 basis points. That does contemplate continued low losses in commercial. Just given that we're late cycle, I was hoping you could maybe speak to your expectation for what a normalized credit loss rate is for JPMorgan, given your current mix, and where that might differ from your medium-term loss guidance.
We're not talking quarter-over-quarter here, just talking in general trends.
I'm talking bigger picture.
Right. Marianne has showed year after year what we consider normalized losses, and for years we've been doing better than that. In credit card, Middle Market, large corporate. Mortgage has come back down to a very low number. At one point, it's going to go up. I'm not telling you it's going to happen next quarter. Right now it looks like it's kind of steady state. At one point, we will not be surprised to see it go up. I don't know if it's going to be the second quarter, third quarter, fourth quarter, and I don't know if we're late cycle. We don't exactly know where we are in the cycle. We just won't be surprised to see it go up. The number, we look at it by product.
We don't look at it in a total, I can't actually.
Yeah.
Maybe Marianne can raise the total.
I hate to say this because I know that you don't want to wait a few weeks, but we'll have a more complete conversation about kind of range of plausible outcomes on credit at Investor Day. When we gave our medium-term simulation, we said, listen, we did a 17% return on tangible common equity in 2018, and our medium-term guidance is for 17%. We've under-earned against our guidance in other parts of the cycle. Maybe we will or won't over-earn against it, but NII and reprice lags are higher, and credit is benign. At some point, we would expect both of those things to normalize, but we would continue to see solid growth in all of our drivers. We don't know when it will be, and actually we don't see anything that thinks, I know you say is it second, third, or fourth quarter.
There's no indication that it's in any of those quarters. We'll have a more comprehensive discussion at Investor Day about range of plausible outcomes.
All right, looking forward to that. Just one follow-up from me on the IB outlook. Marianne, I was hoping I could unpack just some of your comments around how the IB backlog, you cited that as being quite strong. Just looking at the individual businesses for M&A, ECM, DCM, especially given some of the economic pressures outside the U.S., what informs your outlook across each of those?
Yeah. I would say that, first of all, we did see, given the conditions in the fourth quarter, a number of deals that got pushed from the fourth quarter into the first quarter, particularly in ECM and DCM. In M&A, it was a little bit more balanced. For every deal that got pushed or scrapped there were more that came to take its place. As a result, as we go into the first quarter, pipelines across the board are elevated relative to last year and pretty strong. At the end of the day, we talked about it earlier, confidence is still high. Companies are still motivated to drive growth. The environment should be constructive for continued M&A. Technology, healthcare, biotech innovation, technology innovation, momentum in ECM that we've been benefiting from and the IPO pipeline should continue market dependent.
Notwithstanding December, actually a sort of lower outlook for rates in the U.S. should broadly be a tailwind for fixed income in the first quarter and the first half. The second half of the year, I think is going to be determined by how things shape up over the next several months. Walking into January, again, if the market remains generally constructive, we should see tailwinds across the businesses.
If I can add to that. Backlogs, generally you want them high because that's good.
Yep.
They're a little like an accordion, too. They come and go. That's not a forecast for the future that you definitely get those revenues, they get delayed, particularly things like IPOs that you've already seen. The other thing I just want to point out is a shout-out to the folks in the investment bank. Our market share went up in Europe, Asia, Latin America, and the United States last year. That's what we really look at when we look at the business.
60 basis points whole year, right?
Yeah, 60 basis points whole year. First time ever, it went up in all four main markets.
Our next question is from Marty Mosby of Vining Sparks.
Hey, Marty.
Good morning. Jamie, I was glad that you mentioned that we don't know that we're at the end of the cycle because that's kind of just assumed because of the lapse of time, but not really the economic factors. The other piece of this is when you look at losses, they tend to be good until they go into recession, then they're bad. There's no just kind of normalization. The question about a normal rate of loss, that we really have two dichotomous answers. We have a good answer, which is when we're expanding and the economy's stable, and we have a bad answer when we're in recession. It's kind of one or the other. Just wanted to see what you thought about that.
Yeah. You're exactly right. At one point, you're going to over earn, at one point you're going to under earn. When we look at the business, we try to price through that so that we try to earn fair returns through the cycle. I totally agree with you. We know they're going to change at one point. We try to do a better job underwriting, too, by the way. We do work hard.
Right
To make sure we underwrite other people as best we can.
Which limits the volatility when you go into that bad period, which is what you want to do.
Yeah.
You underwrite to make sure you're defending against that cycle.
Exactly. The other one you have is the reserves. You put them up, you take them down. Our total reserves are, what, $14 billion now?
Yes. Looking at it.
No, at one point they were 30%. In the Great Recession, we went from 7%- 30% back to 14%. I call that ink on paper.
Right.
It doesn't mean anything. When you go into that recession, your losses go up, and your reserves have to go up. We're completely aware of that.
Although I think that you say for obvious reasons, that we wouldn't expect any near-term recession, if there is one, to look anything like it did before. Even if it did, given the credit quality of the portfolio's performance would be not only absolutely better, but we think strong on a relative basis.
Other than if you look at the consumer, the $13 trillion that's outstanding. Other than student, which is fundamentally owned by the government, the mortgage stuff that's been written is prime. It's back to $10 trillion, but it's much better than what it was in 2007. I think credit card, I forgot the exact number, is much more prime than it was in 2007. I think auto's about the same, but auto actually outperformed in the.
Small prime.
More prime. It outperformed in the Great Recession. I think people in general have done a better job underwriting middle market and lever stuff than it did last time. I think if you were to start a recession soon, going into it, their credit portfolios are much stronger than last time.
The follow-up question to that is, we talked about auto and some of those other places where you saw some of that deterioration. What our model's showing is that actually the discipline and the reaction time to that deterioration is much quicker than when we saw the one to four family cycle in the last time where you saw deterioration, growth just kept going. We've had so many banks jump in and say, "Look, we've already pulled back on auto lending," or, "We've pulled back on multifamily." There's already been places where you've seen that discipline. That discipline in itself puts a governor on economic growth, which is why we're having less growth or slower growth. Yet it also creates a, like you said, a stronger portfolio for that eventual downturn.
I agree with that. I think the lack of discipline we see is in student and a little bit in small commercial real estate.
Our next question is from.
Mortgage.
I'm sorry.
No, you're good.
Our next question is from Gerard Cassidy of RBC.
Good morning, Marianne.
Morning.
There's been a lot of talk about leverage loans and how this time around everything seems to be underwritten better. Are there any tangible statistics that you can share with us or maybe on investor day you might to show us that, yes, the leverage loan portfolio for you guys in particular is much healthier than maybe 2006, 2007. Second, on this leverage loan issue outside the banking industry, what are some of the indirect hits that you and maybe some of your peers may experience, not from the direct hit of a leverage loan, but for some of the craziness that's going on outside the banking industry?
Kind of just give the big picture. There's I think $1.7 trillion of leverage loans. Okay? Term A is about half of that. These are very rough numbers, okay? Most of which are with banks, and obviously safer than Term B. A big chunk over, I think 60% or 70% of the Term B is with non-banks. If you look in the banking system, if you look at the leverage lending bridge book in 2007 it was over $400 billion. Today it's a number like $80 billion. In 2007 there were commitments and no flex. Almost everyone has plenty of flex now. When you look at covenants, there's kind of covenants, but there's flex and there's a whole bunch of other stuff in there. It is far, far, far sounder today.
Even the CLOs, as we look through underwriting institutions, CLOs, they are far better underwritten with more equity, more sub-debt, more mezzanine, stuff like that. Now go to the shadow banks. They do things slightly differently. A lot of those folks are quite bright. They kind of know what they're doing. Someone's going to get hurt there. The issue there is in the next recession isn't going to be what the losses are. Remember, most of the major banks don't fund a lot of that. We aren't taking huge indirect exposure to that by funding some of the non-banks. I think the issue there is for the marketplace is going to be when you have a real recession, the lender will not be there. A lot of these borrowers will be stranded.
That's an opportunity or a risk or something like that, but I wouldn't put it in the systemic category.
Do you think?
Again, if you go back to 2007, it emerged in 2007, there was $1 trillion of bad mortgages that were kind of all over the place, CLOs, SIVs. There are no SIVs. The CLOs are much smaller. The leveraged lending book is a much smaller book. Capital liquidity is much higher. It is nothing like 2007. You will have a recession. It just won't be like it was last time affecting the banking system like it will. It will affect the banking system. We're a little bit canaries in the coal mine. We're not immune to what goes on in the economy. It won't be anything like you saw last time for most of the large banks.
No, I would agree with that. Do you think Janet Yellen and other Federal Reserve officials' comments about leveraged lending is more directed to the exposure outside the banking industry than inside the banking industry?
Yes, I do.
Yes.
Yeah.
Very good.
I don't think they were saying it's hugely systemic. They're saying it's something they should keep an eye on. I think that the regulators do keep an eye on that.
Right. Just to pivot on a deposit question, obviously, non-interest-bearing deposits are tough to keep as rates are going higher. Can you guys give us some color on the non-interest-bearing deposits? There was obviously a small decline. What parts of the business you're seeing that? The Fed's unwind of its balance sheet, how much of an impact do you think that might be having on the non-interest-bearing deposits?
The migration intra-product from non-interest to interest-bearing is predominantly, or largely exclusively a wholesale thing at this point. There's not enough rate benefit in the interest-bearing savings to drive intra-product migration. Definitely some growth outlook in CDs given pricing, but it's wholesale right now, and it's mainly rate related and not balance sheet related in terms of the Fed online.
Can I just make a comment about interest rates and the balance sheet of the Fed? Interest rates is one thing, but the balance sheet of the Fed obviously is causing changes in the flow of funds. It's causing changes in that banks now have options other than reserves at the central bank because the two-year and three-year bond yields for government bonds are much higher. Some people are preferring to own that because they think they're being paid better than corporate risk. It changes a whole bunch of fund flows, which concerns people, but I'd say it's part of the process of normalization.
Yeah.
Our next question is from Ken Usdin of Jefferies.
Hi, thanks. Hi, good morning. There were a couple of Fed regulatory documents out in late December, one codifying the three-year burn-in of stated CECL impacts and another one where they're pushing out till 2022 on their own implementation of CECL accounting in the supervisory stress test. Just wondering just any takeaways you had from reading that and any hopes you might have for just as we get towards some finalization of which way CECL goes and how it looks, aspirations around that and how that interacts with CCAR and such.
Before Marianne answers that question, I just want to do a shout-out to Jefferies because we actually look at what everyone does in every investment banking group. You guys did a hell of a good job in healthcare this year.
I'll pass that along, Jamie.
Following that, hard to follow. I would say that we've been pretty clear about the fact that our biggest concern around CECL was properly understanding, not just for us, but for regulators to properly understand the implications for capital, not only in benign but in stress scenarios, and what the implications of the outcome there could have on the willingness for people to extend credit, particularly as cycles age and with the outlook for volunteers to increase. Having a transition is obviously helpful. You should imagine that we would likely avail ourselves of that opportunity. That is what it is.
For me, the question that needs to be clarified is if we are to include the impact of CECL in company-run stress tests. The Federal Reserve is not going to include it in the stress test. We need to kind of understand the interplay between those two things, particularly if that might coincide with a turn in the cycle in actual fact. I think we're looking for continued clarity from the regulators about what exactly that means. If we're embedding these assumptions into our stress tests and our results sooner than they are, how do we think about the implications of that on our distribution plans and capital outlook?
Importantly, if it really is the case that we have to upfront significant amounts of capital for longer tail or lower credit quality loans, I do really believe even though the cash flows and the economics conceptually don't change, that you might find people less willing to lean into growth for longer duration assets if there are concerns around potential volatility, and we should worry about that.
It'll be a big number for a credit card.
Yeah.
If you put on 3% now on when you built a loan book by $100, the number will be 6% or so. Some number in the future will be much higher. I do think particularly smaller banks will react fairly dramatically in how they run their loan books to do that.
Our view is that more analysis needs to be done in the industry about what this looks like. I hope that what was meant by we should include it in company-run stress test is for us to collectively learn, and for the regulators to have the time to respond to that. Remember, 2022, considering all the discussion we've had on this call about the cycle, how long the cycle is, when there's a turn in the cycle, and we could actually face a stress before that. It's great that they are waiting a bit, but it might all be a bit of an academic point, depending on what happens actually.
Yeah, that's a fair point. Jamie, you've also said in the past that you guys lend on accounting, right? Don't lend on accounting and lend on economic, right? There's this kind of challenge to that Marianne just mentioned about the unintended consequences. It'd be interesting to see that if there is, in fact, a point where banks don't lean in, as you just mentioned, Marianne.
Yeah.
They will change.
We have the luxury or the flexibility of being able to say that we can continue to lend based upon the underlying economics, but someone who has a differently situated balance sheet and return profile may not be able to do that.
Okay, thanks for the color.
Our next question is from Mike Mayo of Wells Fargo Securities. Hey, Mike.
Hi. A follow-up on the net interest margin. Two sides to the question. One is commercial loan pricing. I guess it's been kind of brutal. You've had the BDCs, private equity firms, loan funds, all competing. Has there been any letup with some of the dislocation in the capital markets late in the year? The other side, retail deposit betas. Marianne, you thought they would get a lot worse. I don't think it's been as bad as you thought. What was your retail deposit beta, and what do you still expect?
Before Marianne answers that, can I just go back to the cyclical stuff? One of the issues, it's not just CECL. A lot of things that have been built and since the crisis were really good, but there is more procyclicality built into it. You're going to see the next downturn, that we have a far more procyclical accounting, liquidity, and rules, capital rules and stuff like that, which we don't know the full effect of that. If I was a regulator, I'd be very cautious about constantly building procyclicality into the system. I gave you the example of our loan losses going from 7%-30% or whatever they went to back to 14%. It will affect how people respond in a downturn, then it will cause people to pull back much quicker than maybe in the past in total.
Okay, just on your question. Corporate loan spreads, I would say we did see a sort of pretty brutal grinding down in corporate loan spreads, over the last actually couple of quarters, we saw them find a bit of an equilibrium and stabilize at levels. While I would say it's still true to say that there is a lot of competition, at least in the space in which we're operating, we're seeing spreads at relatively stable levels in the corporate space. Honestly, I don't remember saying that I thought we would see an acceleration that was dramatic in retail betas in the short term. Obviously at some point when the average level of rates and the spread between market rates and rates paid gets to a certain level, if normalization continues, we would expect to see reprice lags sort of catch up.
We have not seen that yet outside of CDs in retail space right now.
The way you calculate it, what was your retail deposit beta this quarter, and how does that compare to the past?
In checking and savings, at least savings, it's nothing. In CDs, it's something, but it rounds to a very small number.
All right. Thank you.
Thanks, Mike.
Our next question is from Gerard Cassidy of RBC.
Thank you. Just a quick follow-up, Marianne. Have your investment bankers on the front lines passed on any concerns about the government shutdown? There's been reports that the SEC is not open, is that slowing down the investment banking business? Your thoughts on that, please.
Of course.
Yeah. I would say that we've benefited from the fact that year-end and into the early part of January and the holiday season has a light calendar, typically in January for IPOs in particular. For sure, if we don't see the ability to get approvals from the SEC on IPOs and to a lesser extent, some of the M&A deals that need approvals from government agencies, it will be problematic in the ability to see those activity levels play out and fees be realized. I mean, it's one of many things that would behoove us to end this sooner rather than later.
Thank you.
We have no further questions at this time.
Thanks very much, everyone.
Thank you.
This concludes today's conference call. You may now disconnect.