Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's 4th 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 standby. At this time, I'd like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon and Chief Financial Officer, Mary Anne Lake. Ms. 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 1, Affirm reported 4th quarter net income of $7,100,000,000 and EPS of $1.98 on revenue of nearly $27,000,000,000 with a return on tangible common equity of 14%.
Market impact aside, underlying business drivers remain solid, including core loan and deposit growth, consumer sentiment and spending in a robust holiday season, capital market activity and with credit performance continuing to be very strong across businesses. For the full year of 2018, the firm reported revenue of $111,500,000,000 and net income of $32,500,000,000 both clear records even adjusting for the impact of tax reform. And we feel we're entering 2019 with good momentum across our businesses. Turning to Page 2 and some more detail about our 4th quarter results. Revenue of $26,800,000,000 was up $1,100,000,000 or 4% year on year, driven by net interest income.
NII was up $1,200,000,000 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 $15,700,000,000 was up 6% year on year. The increase relates to investments we're 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 at the end of the third quarter, and this is a benefit of a little over $200,000,000 for the quarter across our businesses. Credit trends remain favorable across both consumer and wholesale. Credit costs of $1,500,000,000 were up $240,000,000 year on year driven by changes in reserves. In consumer, we built reserves of $150,000,000 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 $200,000,000 of credit costs. Again, largely reserve builds on select C and I client downgrades driven by a handful of names across multiple sectors. While we are constantly looking at a 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 3.
We reported net income for the year of $32,500,000,000 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 $111,500,000,000 was also a record and was up nearly $7,000,000,000 or 7% year on year, dollars 4,300,000,000 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 $2,500,000,000 or 5%, driven by CIB markets and growth in consumer being offset by private equity losses and the impact of spread widening on FCA. We ended the year with adjusted expense of $63,300,000,000 up 6%, which brings our overhead ratio to 57% for the year even as we continue to make very significant investments across the franchise.
And 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 to 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 4th quarter. On credit, the environment remained favorable throughout 2018. Credit costs were $4,900,000,000 down 8%, driven by lower net reserve builds in consumer as well as the impact in 2017 of student loan sale. Moving on to Page 4 and 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 derivative 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 $5,700,000,000 of shares. Moving to Consumer and Community Banking on Page 5. CPB generated net income of $4,000,000,000 and an ROE of 30% for the 4th quarter and for the year nearly $15,000,000,000 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. And 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. And in keeping with our focus on digital everything, of note, active mobile customers were up 3,000,000 users or 11% year on year.
Revenue of $13,700,000,000 was up 13%. Consumer and 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. And of note, while not a material driver of overall expense, revenue headwinds here were offset by lower net production expense. And card, merchant services and auto revenue was up 14% driven by higher card NII of 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 $7,100,000,000 was up 6% driven by investments in technology and marketing and auto lease depreciation, partially offset by lower FDIC charges and other expense efficiencies. On credit, net charge offs were down $18,000,000 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 and 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. Now turning to Page 6 and the Corporate and Investment Bank. CIB reported net income of $2,000,000,000 and an ROE of 10% on revenue of $7,200,000,000 for the 4th quarter.
And for the year, net income of nearly $12,000,000,000 and an ROE of 16%. In Banking, it was a record year for both total fees and advisory fees. We ranked number 1 in global IBC for the 10th consecutive year, gaining share across all regions. For the quarter, IV revenue of $1,700,000,000 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 2 in wallet gaming share. Equity underwriting fees were down 4%, but significantly outperforming the market. We ranked number 1 for the year and the quarter and saw leadership positions across all products globally. With particular strength in ITOs as well as in the technology and healthcare sectors. And this underwriting fees were down 19%, versus a strong prior year and better than the market.
We maintained our number one run rank for the year and continue to hold strongly less positions in high yield bonds and leverage Moving to markets, total revenue was $3,200,000,000 down 6% reported and down 11% adjusted for the impact of tax reform and the sign off margin loan off last year. A confluence of factors throughout the quarter, including trade, concerns around global growth and corporate earnings, fears of a more mortgage Fed, as well as other negative headlines caused spikes in volatility, which were amplified by markets that lacked debt and liquidity. And although we saw decent client flow, rates rallied, spread 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 $1,200,000,000 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 $1,000,000,000 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 the business exit. Credit adjustments in other words a loss of $243,000,000 reflecting higher funding spreads on our derivatives.
Finally, expense of $4,700,000,000 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 comp to revenue ratio for the quarter and for the year was 28%. Moving to Commercial Banking on Page 7. The Commercial Bank reported net income of $1,000,000,000 and an ROE of 20% for the 4th quarter and for the year $4,000,000,000 of net income and an ROE of 20%. Revenue of $2,300,000,000 for the quarter was down 2% and the prior year included a tax reform related benefit.
Excluding this revenue was up 3% driven by higher deposit NII. Gross IB revenue of $600,000,000 was down 1% year on year, but up 4% sequentially on a strong underlying flow of activity, particularly in M and A. Full year IB revenue was a record $2,500,000,000 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 $845,000,000 was down 7% year on year as the prior year included $100,000,000 of impairment on these assets. Excluding this expense was up 5%, driven by continued investments in the business, in banker coverage, as well as in technology and rollout initiatives. Loans were up 2% year on year and flat sequentially. C and 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.
But 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 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 remained strong with credit costs of $106,000,000 including higher loan loss reserves, largely due to select client down rates. Moving on to Asset and Wealth Management on Page 8. Asset and Wealth Management reported net income of $604,000,000 with a pre tax margin of 23% and an ROE of 26% for the Q4.
And for the year, net income was nearly $3,000,000,000 pretax margin of 26% and an ROE of 31%. Revenue of $3,400,000,000 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 the cumulative impact of net inflows. Expense of $2,600,000,000 was flat as continued investments in advisers 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 $3,000,000,000 with strength in fixed income more than offset by outflows from equity and multi asset products.
Additionally, we had net liquidity inflows of $21,000,000,000 For the 10th consecutive year, we saw net long term inflows of $25,000,000,000 this year, driven predominantly by multi asset and in addition saw $31,000,000,000 of net liquidity inflow this year. Assets under management of $2,000,000,000,000 and overall client assets of $2,700,000,000,000 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 9 and corporate.
Corporate reported a net loss of $577,000,000 Treasury and CIO net income of $175,000,000 was up year on year, primarily driven by higher rates. Other corporate saw a net loss of $752,000,000 including on a pre tax basis funding our foundation for corporate philanthropy $200,000,000 this quarter, flat year on year and including $150,000,000 of markdowns on certain legacy private equity investments market related. The remainder is driven by tax related items totaling a little over $300,000,000 and within this are 2 notable components. The first is regular way tax reserves and 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. So 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 do want to provide some color and remind us about the Q1. Net interest income will continue to benefit from the impact of higher rates and growth, but quarter over quarter will be negatively impacted by day count and we expect the Q1 NII to be relatively flat sequentially.
While it is too clearly too early clearly to give guidance on fee revenues, it's also fair to say that this quarter markets feel calmer and more positive and capital markets pipelines are strong. So if the environment remains supportive, we would expect normal seasonal strength in the Q1. But I will remind you that the Q1 of 2018 included a $500,000,000 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. And finally, as I said, we expect credit to remain favorable across products.
So to close, while the market in the 4th quarter were more challenging, which not leaves sight to 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 and 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 and A.
Our first question is from Erika Najarian of Bank of America.
Hi, good morning.
Good morning, Erika.
So 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 57% that you posted in 2017 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?
Yes. So, I would say a couple of things. The first is just to remind you that 2017 2018, would look at a GAAP rather than a managed basis because of the adjustments to our revenues from tax reform. So, but that said, we have 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 trending down to the kind of mid-fifty percent, so 55% -ish. Obviously, the timing of that will depend on rates and markets and everything else.
So 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. But generally, over time, we would still expect those trends.
Thank you for that. And just as a follow-up question, the market is also thinking that the last rate hike from the Fed was December. And 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?
So I would say, 1st 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 the 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 hike in our run rate, each incremental hike from here has, whilst still positive, significantly lower sort of incremental NII drive and that the front end skew is a lower percentage. So it's not nothing, but clearly lower front end rates are lower long end of the curve or a flatter curve. All other things would be net modestly negative. But against that, you kind of pointed out the potential for this to lead to lower or slower reprice. And so 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 $3,000,000,000 of NII growth in 2018. We'll still benefit in 2019 from the annualization effects of the higher rates we've already had as well as solid growth. So while you can't expect 2019 over 2018 to be at that level, it would still be strong NII growth year on year.
And I would say the why is equally, if not more important than the what. So, if you if it is a pause because you're going to go into recession and they're going to reduce rates, that obviously is very different than if it's a pause, the economy is strong and they raise rates. Right. You know which one you would choose.
Right. And if this were the end of a cycle, it's no cycle we've ever seen before. So in that scenario, if terminal Fed funds rates are at 2.5%, not 4.5%, 5%, 5% plus, I think we've never seen that movie before, but that's not our central case. And 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? And can that I think the revenue yield in the card business was up 7 bps to 11.57.
Can that go higher from here as you maybe pull back on rewards?
Yes. I would say that when we think about the product continuum we have in the constructs, rewards is a very important part of driving engaged relationships with our customers. Customers are very attuned to it and are looking for value in the product. Value and simplicity and ease of use are the 3 things in the product that we deliver. And so for us, engaged relationships drive profitability.
This is still a very profitable business. And so while we'll always make adjustments to our offerings, it's not the case that we are looking at a meaningful pullback, pullback in rewards. And if you think about things like Zafar 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. So 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 and we've not seen that lower our ability to net acquire new accounts.
So we feel great about the value proposition, the simplicity and the compelling products that we have. Okay. So we think about That's a very positive business.
Right. And so 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 and cards?
So I think the macro trends are definitely positive. So they are creating tailwinds, but 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. But 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 amended our collection strategy, all of which have led to a charge off rate for the Q4 in 2018 that's down slightly year on year and 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. So 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 and it will be helped by a supportive environment. And we are seeing if you unpick all of our trends, you see the phenomenon of 3 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. And then 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.
And I'm sorry, his line has disconnected. Our next question is from John McDonald of Bernstein.
Hi, John. Hi, good morning. Good morning, Mary Anne. 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?
And then also in the Q4, what you saw on leverage lending market? Much did you have to take in terms of maybe marks on leverage loans and hung deals? A little bit of color there would be helpful.
Sure. Okay. So I would say that obviously the Q4 was challenging and there was a lot of market moves, a big sort of broad sell off. And 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. So there were a lot of negativity, we think too much negativity priced into the 4th quarter And 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. So yes, we could see slower growth, but still growth in the U. S. And across the globe.
A slightly more constructive narrative on trade and 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 or being relatively supportive. And the fact that a lot of people were on the sidelines through the Q4 and investor appetite is out there for good value where it can be found. So I would say just early days in the Q1, there are still obviously risks to the outlook and any of those things could go in a worse direction. But so far things just feel a little bit more positive and that's constructive. And therefore, you would hope to see normal seasonal strength in January.
On leverage loans, you know, sort of just diving into the sort of potential for that to be hung bridges. It is true that there was a significant market correction with spreads widening across higher bonds and leverage loans in the Q4. Clearly, stepping back, while the industry leverage finance commitments are up, they are materially down from before the crisis and very different. So credit fundamentals look pretty good. Having said that, and by the way, we passed on a lot of deals in the Q4.
We've maintained our sort of protection in terms of flex pricing and flex protections. And 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 Q4. I would also say that coming back to the Q1 that actually the market could be quite constructive for fixed income into the Q1 given a more dovish spread supporting corporate margins, corporate default rate is going to stay pretty low and we do have time. So none of the deals that we have need to be brought to market in a hurry and 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 like weakness across the board in credit, in FX, in rates, which I assume like 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. And more importantly, you mentioned strength in emerging markets.
Can I ask whether that was primarily in Asia or LatAm? Thank you very much.
So it's no good ever comes of talking about how we think things are going to pan out in the Q1 other than just the general comments I've already made, which is the environment should be more constructive and we are expecting decent volatility in client activity and we'll see how that pans out. With respect to emerging markets, Latin America was a big piece for Asia too.
Thank you very much.
Our next question comes from Mike Mayo of Wells Fargo Securities.
Hi, Mike. Hi. Can you hear me?
Yes.
I guess I'm a little torn between the year and the quarter, so 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. But the Q4, are you happy with the Q4 given expenses, credit, fees?
I am totally happy with it. The franchise is strong. We're investing in new products and services, but we're not immune from the weather, volumes and volatility. We're not immune from market prices and assets going up or down. And I like the loans up 6%, assets up 6%, 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. I really don't pay that much attention to being buffeted a little bit by the fact that volumes are low in the last 3 weeks of December. I honestly could care less. And I look at more like in equities, we've gained share and we're now bumping up to number 1.
Those folks have done a great job across cash, derivatives, prime broker, etcetera. And fixed income has maintained our share and we're adding products and services around the world and
we don't know
We don't know what's going to happen next quarter and I don't care.
And we take the same position. We had strong first half of the year and we said long may it continue, but it may not. And 1 quarter doesn't make a trend. And 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.
And even in those businesses, we are holding leadership positions and gaining share. And 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. So the weather is lousy at the end of the year. And Jamie, you were just appointed to your 3rd year as Chairman of the Business Roundtable. So in that role, what are you doing to help JPMorgan and I guess the other banks in terms of China, the government shutdown, immigration, some of these headline issues that Mary Anne talked about having hurt the CIB in the 4th quarter?
Yes. So December is terrible, but if you look at January, you have half of it back generally in spreads and markets and stuff like that. And as BRT, I don't do anything to benefit JPMorgan. 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.
But 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. And it looks to us like they're marching along at least to this March 1 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. So, 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. And bad policy can slow down the growth of America. And I pointed out over and over, it takes 12 years to get the permits to build the bridge. I mean, and to put to date here to put a man on the moon.
It is time that we reform ourselves and not blame anybody else for own lack of that we don't have kids getting out of school of educations, where they get jobs, that our innovation has slowed down, the government R and D spending is down. I always think you just look at yourself and looking to do better and there's plenty of this country to do better to help grow it 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 $6,500,000,000 to $15,000,000 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 and progress, but I just want to make sure that I'm not making that wrong assumption.
Yes. We're not expecting anything to be elevated.
Okay, cool.
That number goes up or down all the time just based on episodic, what gets 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 and I, the 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 call
it? Yes. So it's internal and it's like 5 names, 4 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 100 of individual names based upon And so when we say that we're looking at this and saying that things are idiosyncratic, it's not just looking at the 5 situations that drive the biggest dollar value. It's also looking at the 100 of downgrades and the 100 of upgrades and seeing if there's any trends or net worrying signs there and honestly not now. And so 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. And we look for reasons to put up reserves, not to take them down.
I don't mean the paranoid survive. We're more paranoid than you are.
Right. Last one. Obviously, markets all went down in the Q4, and we had some freeze ups, if you will, in high yield first time in like 10 years. But 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.
But I don't want to put words in your mouth.
And half the people weren't even here the last 2 weeks in December.
That's right. The plumbing was working. We didn't see any sort of algo or technology issues. We didn't see any volumes that can be coped with. While I said that there was a little bit of a lack of debt to the markets and liquidity, that's typically the case when you'd have one way trends in the market and a lot of people similarly situated.
So I would say that relatively functioned well, but challenging.
Our next question is from Andrew Lim of Societe Generale.
Hi, good morning. Thanks for taking my questions. I just had a follow on question from the less than high yield marks question. I mean, 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 fixed revenues mainly was due to lower volumes?
There were no marks.
There were no marks. In our bridge book right now, we have for the vast majority, we have good cushion and we expect to be able to clear and price through the market. And for anything that's even borderline, it's completely not material.
I think some other people did have a few marks.
If you
look at what happened to Flex pricing like mid December when things were the worst, yes, some of these things are very close to the end of their Flex pricing. And 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.
Interesting. Thanks. And then my follow-up question is that, obviously, the debt capital markets had a tough time, but your wholesale lending, the growth accelerated quite nicely. And did you get the impression that corporates had a general shift there to seek borrowing from banks such as yourselves because they were shut out of the market?
I mean, 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. But 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 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 Matt O'Connor of Deutsche Bank.
Good morning.
I want to circle back 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. But 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.
But you always talk about some areas of flexibility. So maybe what are those? And if you could kind of size or help quantify some
first of all, that you saw that from 2013 through 'sixteen, we had a pretty structural expense reduction program associated with simplifying our businesses. So 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. And when we are investing in technology and data, one of the reasons to do it, customer satisfaction, product innovation aside, is for efficiency. So we are seeing some of that come through.
We'll continue to drive that
down. But the efficiencies and the investments are all in the number that Marion gives you, which she says up 5%, roughly mid digits for the year.
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. And so 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.
So 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. So 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. And then 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 kind of 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 what I'm getting at is, are we at the point where like just a couple of lumpy loans is going to drive a few 100,000,000 reserve build?
Or is it just maybe this is a bit unusual still?
So, first of all, I just want to point out that in the card space, we hope we continue to grow healthy mid single digits. There's a seasonality to card quarter. And 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. And so 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. And then we're arguably at the best point in the cycle. So 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. Yes. Is that a JV problem or No comment there.
Just a lot of talk on macroeconomics and the policy backdrop in volatile markets. But as you mentioned earlier, you guys are in a pretty unique position and that you have pretty consistent dialogue with a lot of economic agents, whether it's corporates, governments, institutional investors and whatnot. But just a sense of what your clients are saying, what are they concerned about? And 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?
So I mean, I think that we would look to the sort of macroeconomic data, which still generally supportive and say things should be good. But for sure, sentiment is not immune to external factors. And so manufacturing data has been a little weaker. I would say CapEx is sluggish on fears around global growth. Government shutdown and trades are not particularly helpful.
Uncertainty is not good for anyone. So 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 to get stronger or less strong market. So 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. And right now, it's good, right? Sentiment in consumer and we just got back some sentiment from a whole bunch of our middle market companies that, while neither are at their high, they're still very high.
All right. Okay. 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 and I suspect we'll get more color at Investor Day, but just want to get your sense of the sustainability of growth. And 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. So I mean, 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 2 cities. We're doing quite well in gaining a bit of share in the retail purchase market and we're holding our pricing discipline in Correspondent and losing share there. So there's a challenging market backdrop.
Card was doing well at and it's a factor of all things we talked about investments in digital, product, rewards, all of the above. So we would like to believe that we'll continue to hold our own there. Auto is extremely competitive. We play in prime, super prime space and we're seeing competition from people who have different economic drivers in our site, credit unions and capsids. And so we're willing to lose share to maintain returns there.
You buy the cake C and 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 the investments we're making. But 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, yes, we are tightening. We are being very cautious about new deals and selective about those.
So it isn't the case anymore that we would say we're seeking to grow all that we ever would. Loan growth is an outcome of a number of factors, mainly the strategic dialogue with companies, but also the environment we're in and it's extremely nuanced. And in many of our businesses, we're going to protect profitability and credit discipline over growth at this point.
So let me just reemphasize that. We tell our management that we have no problem seeing loan books shrink. We are not going to be sitting here ever in our lives and say, you got to grow the loan book, you got to show loan growth. Remember Warren Buffett used to say, in the insurance business, sometimes true in the loan business, you're better off to sell sports, go play golf and they are to make new loans. We are not going to be stupid.
And the other thing you have to always keep in mind, it's not the loan, it's the relationship you look at in total. And so when it comes to middle market or all these other things or 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 that loss is going to go up.
Our next question is from Betsy Graseck of Morgan Stanley.
Hi, good morning.
Good morning.
Are we playing golf all day yet or is that still far away?
No. Credit is pristine. Mortgage credit is pristine, middle market is pristine, underwriting standards have been pretty good other than a few little pockets that Miriam has mentioned and but 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. And levered lending, we're not worried about our loan book.
I think you're going to have a logical conversation about the kind of the non bank loan book, but that's not our concern and it is what it is at the time.
And I think where businesses are notably a little bit less relation driven. So think about kind of loan only relationships, commercial term lending, real estate banking, mortgage to a lesser degree also. We are seeing we are losing or ceding share where it makes sense to do it.
Yes. And competition there, we've done this before, is back everywhere and that's a good thing for America. And that means the pricing is a little tough and that you have to compete.
Yes. So we're still off the golf course. All right, that's good. Just wanted to understand a little bit more on the expense side. I know it was a 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, but 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 have to do that.
Why would 1Q be a little bit different, I guess, is really the question?
Yes. So, I wouldn't fully annualize the Q1, but think about we've added bankers and advisors across our businesses. So you're going to get some annualization impact particularly Q1 over Q1. 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 and that will be in our run rate in the Q1.
So front office auto lease, some of the technology investments we've been making, the annualization of those will be more pronounced Q1 to Q1 than Q4 to Q4 because many of them were in our run rate in the Q4. And then outside of that, there's a bit more in real estate as we sort of execute on our head office strategy. And then marketing, foundation contribution, those things are going to be timing. So the Q1 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 at both year on year, not the same level as last year. And 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.
Good morning, Brian.
Hi, Marion. Just a quick question on the balance sheet. I'm sorry if you gave this already, but can you kind of walk through the idea of lowering down the deposit with banks and kind of moving into repo, what you saw in the quarter? And then kind of is that just something that was temporary that's expected to reverse in the Q1? Thanks.
Yes. So I mean it's fair to say that mining market rates traded above IOER throughout the 4th quarter and more pronounced at the end of the quarter. And so through the quarter end 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. And so for us it was yield enhancing opportunity to redeploy cash and a mix change rather than adding duration. And that continues to be the case into the Q1.
It contributed to our NIM expansion in the 4th quarter. We continue to have a bit of that mix shift in the Q1 and it's a market opportunity. Okay.
And then 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. Could you just give us some color there what drove a negative gain on sale?
Yes. So in the quarter, as we were looking at optimizing our balance sheet, we actually did a sale of conforming loans to GSEs about $5,000,000,000 The impact of that was to have a loss on the sale of the portfolio given that they've been originated at lower rates. So 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 and L, you'll see a benefit in net interest income because the interest rate risk of that has been transferred to the Treasury Department. So 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, when we 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. So we'll earn that back over time net of the company.
Our next question is from Steven Chubak of Wolfe Research.
Hi, good morning. So 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 investor conference talking about how the banking industry is over earning on credit, not particularly a controversial remark, but in the past you've guided to a medium term loss rate on a blended basis of roughly 65 bps. That does contemplate continued low losses in commercial.
And just given that we're late cycle, I was hoping you can 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?
So we're not talking quarter over quarter, you're just talking in general trends.
We're talking bigger picture.
Right. So Mary and the show year over year we considered normalized losses and for years we've been doing better than that. In credit card, middle market, large corporate, mortgages come back down to a very low number. And at one point, it's going to go up. And so I'm not we're not telling you it's going to happen next quarter.
Right now, it looks like it's kind of steady state. But at one point, we will not be
surprised to see it go up.
I don't know if it could be the 2nd quarter, 3rd quarter, 4th quarter. And I don't know if we're late cycle. We don't exactly know where we are in the cycle. And so we just won't be surprised to see it go up. And the number we look at it by product, we don't look at it in a total, so I can't actually maybe varying grades that
No, no. And I think 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. But 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.
And 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. So 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. But we'll have a more comprehensive discussion at Investor Day about range of plausible outcomes.
All right, looking forward to that. And just one follow-up for me on the IV outlook. Mary Anne, I was hoping I could unpack just some of your comments around the how the IV backlog, you cited that as being quite strong. But just looking at the individual businesses for M and A, ECM, DCM, especially given some of the economic pressures outside the U. S, what informs your outlook across each of those?
Yes. So, I would say that, first of all, we did see, given the conditions in the 4th quarter, a number of deals that got pushed from the Q4 into the Q1, particularly in ECM and TCM. In M and A, there was a little bit more balance. So every deal that got pushed or struck there, there were more that came to take its place. But as a result, as we go into the Q1, pipelines across the board are elevated relative to last year and pretty strong.
And at the end of the day, we talked about it earlier, confidence is still high. Companies are still motivated to drive growth. And so the environment should be constructive for continued M and A. Technology, healthcare, the biotech innovation, technology innovation momentum in ECM that we've been benefiting from and the IPO pipeline should continue market dependent. And notwithstanding December, actually a sort of lower outlook for rates in the U.
S. Should broadly be a tailwind for fixed income in the Q1 and the first half. So the second half of the year, I think, is going to be determined by how things shape up over the next several months. But looking into January, again, if the market remains generally constructive, we should see tailwinds across the businesses.
I think I just had to add to that. So backlogs, generally you want them high because it's good. But they're all like an accordion too. They come and go. So that's not a forecast for the future that you definitely get those revenues, they didn't get delayed, particularly things like IPOs that you've already seen.
And 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 full year.
60 basis points full year. And first time ever, it went up in all 4 main markets.
Our next question is from Marty Mosby of Vining Sparks.
Hi, Marty.
Good morning.
Jamie, I was glad that you mentioned that we don't know the rent 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. And then 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. So the question about a normal rate of loss, we really have 2 dichotomous answers. We have a good answer, which is when we're expanding and the economy is 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.
Yes. You're exactly right. At one point, you're going to over earn and one point, you're going to under earn. And we try to when we look at the business, we kind of try to price through that. So we try to earn fair returns through the cycle.
And I totally agree with you, we know what's going to they're going to change at one point. And we tried to do a better job underwriting too, by the way. We do work hard and make sure we underwrite other people's debts we can.
Which then limits the volatility when you go into that bad period, which is what you want to do. You underwrite, make sure you're defending against that cycle.
Exactly. And the other one you have is the reserves. You put them up, you take them down. So our total reserves were $14,000,000,000
Yes, looking at that.
No, but at one point, they were 30. Dollars So we went from in the great recession, we went from $7,000,000 to $30,000,000 back to $14,000,000 And I call that ink on paper. Right. It doesn't mean anything. It just but so when you go into that recession, your losses go up and your reserves have to go up.
And we're completely aware of that.
Although I think you'll say for obvious reasons that we wouldn't expect any near term recession, if there is one, to look anything like it did before. And even if it did, given the credit quality of the portfolio, performance would be not only absolutely better, but we think strong on a relative basis.
So other than if you look at the consumer, the $13,000,000,000,000 that's outstanding, other than student, which is fundamentally owned by the government, the mortgage stuff that's been written is prime. So it's back to $10,000,000,000,000 but it's much better than what it was in 'seventy seven. And I think credit card, I've got the exact numbers, much more prime than it was in 'seven. I think auto is about the same, but auto actually outperformed in the More prime. Yes, more prime and outperformed in the Great Recession.
I think people in general has done a better job underwriting middle market and lever stuff than it did last time. So I think you don't mean if you start a recession soon, going into it, their credit portfolio is much growing than last time.
And 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 is showing is that actually the discipline and the reaction time to that deterioration is much quicker than when we saw the 1 to 4 family cycle in the last time where you saw deterioration, but 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 pulled back on multifamily. There's already been places where you've seen that discipline. So that discipline in itself puts a governor on economic growth, which is why we're having less growth or slower growth, but yet it also creates a, like you said, a stronger portfolio for that eventual downturn.
And I agree with you. I think the of discipline we see is in student and a little bit in small commercial real estate.
Our next question is from I'm sorry?
That's okay.
Our next question is from Gerard Cassidy of RBC.
Good morning, Mary Anne.
Good morning.
Can you guys 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 2006,007. And then 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 the leverage loan, but for some of the craziness that's going on outside the banking industry?
So, can you just give the big picture? I think $1,700,000,000 of leveraged loans, okay. So, term A is about half of that. These are very rough numbers, okay, most of which were 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.
And so, if you look in the banking system, if you look at the leverage lending bridge book in 'seven, it was over $400,000,000,000 Today, it's number like 80. In 'seven, there were commitments and no flex. Almost everyone has plenty of flex now. So 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. So it is far, far, far sounded today.
Even these CLOs, we look through underwriting institutes, they are far better underwritten with more equity, more sub debt, more mezzanine, stuff like that. And 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. And the issue there is in the next recession isn't going to be what the loss and 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. And 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. So a lot of these borrowers will be stranded.
And so that and that's not that's an opportunity or a risk or something like that, but it's not I wouldn't put it in the systemic category. And do you think that Again, if you go back to 'seven, it emerged in 'seven, there was $1,000,000,000,000 of bad mortgages that were kind of all over the place, CLOs, Sieves, there are no Sieves. The CLOs are much smaller. The leverage lending book is a much smaller book. Capital liquidity is much higher.
So it is nothing like 2,007. You will have a recession. It just won't be like you had last time in the bank affecting the banking system like it will. It will affect the banking system. We're a little bit carriers in the coal mine.
We're not immune to what goes on in the economy. And but it won't be anything like you saw last time for most of the large banks.
No, I would agree with that. And do
you think Janet Yellen and other Federal Reserve officials comments about leverage lending is more directed to the exposure outside the banking industry than inside the banking industry?
Yes, I do. Yes. Yes. Yes. Very good.
Again, I don't think they were saying it's huge and systemic. They're saying it's something that you should keep an eye on. And I think that the regulators do keep an eye on that.
Right. And then 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?
And 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?
So the migration into 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 into 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 Fed? So 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 2 year and 3 year bond yields for corporate government bonds much higher, some people are preferring to own that because they think they're being paid better than on corporate risk. So it changes a whole bunch of fund flows, which concerns people, but I'd say it's part of the process of normalization.
Our next question is from Ken Usdin of Jefferies.
Hi, thanks. Hi, good morning.
A couple of
Fed regulatory documents out in late December, one to codifying the 3 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 Mary Anne 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.
And following that, it's hard to follow. I would say that we've been pretty clear about the fact that our biggest concern around CECL was like properly understanding, not just for us, but for regulators to probably 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 voluntary SUIC to increase. So 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 season and company run stress test, but 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. So 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? And importantly, if it really is the case that we have to upfront significant amounts of capital for longer loans. I do really believe even though the cash flows and the economics, you know, consecutively 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.
And it will be a big number for a credit card. If you put up 3% now, when you build the loan book by $100 the number will be 6% or some number in the future will be much higher. So, I do think particularly smaller banks will react fairly dramatically how they run their loan books to do that.
So 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. But 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, I mean, we can actually face a stress before that. And so 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.
Yes, that's a fair point. And 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? But there's this kind of challenge to that that Mary Anne just mentioned about the unintended consequences. And so it would be interesting to see that if there is in fact a point where banks don't lean in as you just mentioned, Mary Anne.
Yes.
They will change.
And 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.
Hi, a follow-up on the net interest margin. Two sides of the question. 1 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 let up with some of the dislocation in the capital markets late in the year? And the other side, retail deposit betas, Mary Anne, 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 Maryann answers that, I can just go back to this cyclical stuff. One of the issues, it's not just CECL. A lot of things that have been built since crisis were really good, but there was more procyclicality built into it. And so 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. But if I was a regular, I'd be very cautious about constantly building pro cyclicality to the system.
And I gave you the example of these are loan loans where they're going from 7 to 30 or whatever, they went back to 14. It will affect how people respond in the downturns. And then it will cause people to pull back much quicker than maybe in the past in total.
Okay. So just on your question, so corporate loan spreads, I would say, we did see sort of pretty brutal grinding down in corporate loan spreads, but over the last actually couple of quarters, we saw them find a bit of an equilibrium and stabilize at levels. So 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. And honestly, I don't remember saying that I thought we would see an acceleration that was dramatic in retail betas in the short term. I mean, obviously, at some point, when the average developer rates and the spread between market rates and rate of pay gets to a certain level.
And if normalization continues, we would expect to see reprice lags sort of catch up. But we have not seen that yet outside of CDs in retail space right now.
And the way you calculate it, what was your retail deposit beta this quarter and how does that compare to the past?
So in checking and savings, the lease savings, it's nothing. In CDs, it's something that it rounds to a very small number.
All right. Thank you.
Thanks, Ali.
Our next question is from Gerard Cassidy of RBC.
Thank you. Just a quick follow-up, Mary Anne. 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. And is that slowing down the investment banking business?
And your thoughts on that, please?
Yes. So I would say that we've been 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. But 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 and A deals that need approvals from government agencies, it will be problematic in the ability to see those activity levels play out and see if we realize. So, I mean, it's one of many things that would behoove us to end this sooner rather than later.
Thank you.
And we have no further questions at this time.
Thanks very much, everyone. Thank you.
This concludes today's conference call. You may now disconnect.