Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Third Quarter 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, Mary Anne Lake. Ms. Lake, please go ahead.
Thank you, operator. Good morning, everyone. I'm going to take you through the presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on Page 1, the firm reported net income of $8,400,000,000 and EPS of $2.34 on revenue of $27,800,000,000 with a return on tangible common equity of 17%.
The results this quarter were strong. Record net income for a 3rd quarter even excluding the impact of tax reform, with key drivers being higher net interest income across businesses, reflecting continued rate normalization and solid growth in both loans and deposits, as well as very strong credit performance across all portfolios. Highlights include average core loan growth excluding the CIB of 6% year on year, card and debit sales as well as client investment assets and merchant processing volumes in consumer were all up double digits. We gained share in Global IB fees and across all regions year to date. And in Asset and Wealth Management, AUM and client assets were both up 7%.
Turning to Page 2 and some more detail about our 3rd quarter results. Revenue of $27,800,000,000 was up $1,400,000,000 or 5 percent year on year. Net interest income was up $945,000,000 or 7%, reflecting the impact of higher rates net of lower market NII as well as loan and deposit growth. Non interest revenue was up $425,000,000 driven by market NIR and higher auto lease income, partially offset by markdowns on certain legacy private equity investments. Expense of $15,600,000,000 was up 7% year on year.
More than half of the increase relates to investments we're making in technology, marketing, bankers broadly defined and real estate. And the remainder is driven by revenue related costs, principally higher auto lease depreciation and transaction expenses on higher volumes. Credit trends remain favorable across both consumer and driven by changes in consumer reserves. Driven by changes in consumer reserves. Briefly on Page 3, turning to balance sheet and capital.
There's little to say here other than as you can see, capital and risk weighted assets remain basically flat quarter on quarter with a CET1 ratio of 12%. Moving on to Page 4 and Consumer and Community Banking. CCB generated $4,100,000,000 of net income and an ROE of 31%. Core loans were up 6% year on year, driven by home lending up 10%, business banking up 5%, card up 4% and auto loans and leases up 3%. Deposits grew 4% year on year, continuing to outpace the industry, although slower than a year ago.
According to the recently released FDIC annual survey, we grew at nearly 2 times the average, and we were the fastest growing bank in 9 of our top 10 markets. Chase also earned the number one spot in customer satisfaction in the JD Power U. S. National Banking Satisfaction Study. Client investment assets were up 14% as we saw clear record net new money flows more than doubling year on year with flows accounting for more than half of the growth.
Card sales volume was up 12% with strength across our portfolio, and we also saw very strong debit sales performance, up 13%. Revenue of $13,300,000,000 was up 10%. Consumer and Business Banking revenue up 18% on higher NII, driven by continued margin expansion and deposit growth. Home lending revenue was down 16% as higher rates drive loan spread compression and a smaller market pressuring production margins. In addition, net servicing revenue was down including the MSR.
Card, merchant services and auto revenue was up 10%, driven by higher card NII on margin expansion and loan growth, higher net card fees on lower acquisition costs, substantially offset by lower net interchange and also on higher auto lease volumes. Expense of $7,000,000,000 was up 7%, driven by continued investments in technology and by auto lease depreciation. The overhead ratio was 53%. Finally, on credit, starting with reserves. This quarter, we built reserves in card of $150,000,000 largely driven by growth.
And we released reserves in the home lending purchase credit impaired portfolio of 2 Year on year charge offs were down $137,000,000 Year on year charge offs were down $137,000,000 driven by a recovery from a reperforming loan sale in home lending this quarter of about $80,000,000 together with an approximately $50,000,000 charge off adjustment in auto this period last year. Excluding those charge offs were about flat, but we are seeing improvement across all portfolios, except for card. And in card, while charge offs are up as newer vintages season, they are up less than expected as credit performance remains very strong. At this point, we expect hard charge off rates for the year to be below our guidance at about 3 10 basis points. Now turning to Page 5 and the Corporate and Investment Bank.
CIB reported net income of $2,600,000,000 and an ROE of 14% on revenue of $8,800,000,000 up 2%. In banking, we maintained our number one ranking year to date in global IV fees, as well as in North America and EMEA and gained share across regions.
For the
quarter, IV revenue of $1,700,000,000 was flat to a strong prior year, and we outperformed in a market that was down meaningfully as we saw robust activity, particularly in ECM. Equity underwriting fees were up 40%, gaining share across all products with continued strength in IPOs, particularly in technology and healthcare. Advisory fees were down 6% compared to a 3rd quarter record last year, outperforming the market and gaining share year to date. And debt underwriting fees were down 11%, although better than the market, as our strong lead left positions drove share gains. Looking forward, the overall pipeline remains strong, up solidly from the prior year across products.
Moving to markets, total revenue was $4,400,000,000 down 2% or up 1% when adjusting for the impact of tax reform, so another good performance. Fixed income markets revenue was down 6% adjusted with no single predominant driver. We saw mild weakness in rates, financing, credit trading and securitized products as a result of compressed margins and tighter financing spreads in range bound and competitive markets. This was partly offset by higher activity levels in emerging markets on volatility and commodities returning to more normal levels relative to a weaker prior year. Equities continued the momentum from previous quarters and was up across all segments on the back of strong client activity.
Equities revenue was up 17%, reflecting continued share gains in cash and prime and strong performance in corporate derivatives. Treasury Services and Security Services revenue were $1,200,000,000 $1,100,000,000 up 12% and 5% year on year respectively, driven by higher rates and balances. And security services also benefited higher asset based fees on new client activity. Quarter on quarter security services revenue was down principally on seasonality and the impact of a business exit. Finally, expense of $5,200,000,000 was up 8%, driven by higher legal expense, higher compensation expense as we invest in technology and bankers and volume related transaction costs.
Moving to Commercial Banking on Page 6. Another strong quarter for this business with net income of $1,100,000,000 and an ROE of 21%. Revenue of $2,300,000,000 was up 6% year on year, driven by higher deposit NII. Gross IB revenue of $581,000,000 was flat, although we saw a strong underlying flow of business and pipelines remain robust and active. On deposits, while we continue to benefit from the normalizing rate environment, as expected, balances are down year on year, basis are trending higher, as we are seeing some migration at the top end to higher yielding investments.
Expense of $853,000,000 was up 7% as we continue to invest in the business in banker coverage and technology initiatives. Loan balances were up 4% year on year and 1% sequentially. In C and I, demand remains muted in the wake of tax reform, as while client confidence is high, balance sheets are strong and liquid and the environment is competitive. For us, C and I loans were up 4% year on year and flat sequentially, in line with the industry. But if you decompose it, we're growing strongly in our expansion markets and specialized industries, growing solidly in our core markets, but are seeing notable offsets in tax exempt activity given the mix of our business.
CRE loans were up 3% year on year, a little less than the industry as we are seeing increased competition and continue to be very selective. Finally, credit performance remains strong with net recoveries of 3 basis points. Moving on to Asset and Wealth Management on Page 7. Asset and Wealth Management reported net income of $724,000,000 with a pretax margin of 27% and an ROE of 31%. Revenue of $3,600,000,000 was up 3% year on year, driven by higher management fees, net of fee compression, on higher market levels and continued growth in long term products.
These were partially offset by lower mark to market gains, including on seed capital investments. Additionally, banking results were strong. Expense of $2,600,000,000 was up 7%, driven by continued investment in advisers and technology as well as higher external fees on revenue growth. For the quarter, we saw net long term inflows of $8,000,000,000 with positive flows across all asset classes. In addition, we saw net liquidity inflows of $14,000,000,000 AUM of $2,100,000,000,000 and overall client assets of $2,900,000,000,000 were both up 7% with more than half of the increase being driven by slows and the remainder on higher markets.
Deposits were down 8% year on year, reflecting migration into investments with us and down 5% sequentially, including seasonality. Finally, we had loan balances up 12% with strength in global wholesale and mortgage lending. Moving to Page 8 and corporate. Corporate reported a net loss of $145,000,000 Treasury and CIO net income was up year on year, primarily driven by higher rates. Other corporate was a net loss of $241,000,000 including markdowns on certain legacy private equity investments of $220,000,000 pretax.
For the whole company, legal costs were a modest negative with a benefit here in other corporates being more than in the CIB. Moving to Page 9 and outlook. We recently gave you updated outlook, so unsurprisingly that still holds and it's here on the page. Only 2 things of note. Our expense outlook assumes that the FDIC surcharge ended this quarter.
So clearly an extension would pose a risk. And on tax, there are a number of questions in the rules, which we expect to be clarified by the end of the year. We will have to work through them, but would not expect any changes to be material. So to close, we are growing across most of our businesses. We're investing heavily in all of them.
We're investing in technology, bankers and beyond. Credit is in great shape and the earnings power of the company is evident. We are particularly proud of the strength and improvement in customer satisfaction broadly and our continued investments, which drive leadership positions and market share gains. This quarter, we announced Sapphire Banking and our digital platform, UInvest. We opened our 1st branch as part of our expansion strategy in Washington, D.
C, announced additional expansion into Philadelphia and Boston, and also announced our Advancing Cities initiative as we invest for growth in the clients and communities that we serve. With that operator, please open up the line to Q and A.
Your first question comes from the line of Glenn Schorr with Evercore ISI.
Good morning, Glenn.
Good morning. So at the Investor Day, I remember asking you the same question, so I apologize. But you had a slide that talked about consumer and corporate balance sheets being in great shape and having a low debt service burden. The 10 years up a modest 35 basis points since then and the world's freaking out that it's the end of the cycle and that's going to choke a recovery. Your results are your results, but they're some will say backward looking.
Are you any impact, A, at the modest increase in the curve now? And B, I'll ask again, is there a level of rates where you would start to see an impact of slowdown in what you're willing to lend rising in credit costs, things like that?
Yes. So I would say I would sort of pick up on the tone that you had in your question, which is the level of rates is not surprisingly high. And so from our vantage point, we're not seeing anything in terms of looking at our client dialogue or for that matter at the credit trends that would suggest that this is problematic. With higher rates, and we do this all the time, we obviously look at all of our portfolios and stress them for shocks of up 100 basis points, even up 200, although clearly where we are now, risks are more asymmetric, but more symmetric. But there doesn't seem to be any extraordinary stress that becomes evident even if you obviously, the margin you're going to get more, but it doesn't seem to be overwhelming.
And it speaks, I think, to the fact that low rates have been around for a long term time. People have had the chance to get prepared. There is a lot of liquidity. And in the corporate space, in particular, people have been able to hedge. So is there an absolute level of rates where things will be problematic at some point, but we don't think we're anywhere near there.
So I'm not saying that there couldn't be select downgrades. I'm not saying that at the margin, there may not be some incremental stress if rates continue to go much higher, but that's not where we are right now.
Okay. Thanks very much, Mary Anne.
Your next question comes from Steve Chubak with Wolfe Research.
Hi, good morning.
Good morning, Steve.
I wanted to start with a question on the UInvest launch. As we think about the strategy for the business, I'm just I want to understand is the goal to compete with the incumbents to win new clients or are you simply trying to augment the existing offering for JPMorgan clients? And it's really just our effort to understand the long term strategy given that the pricing is quite competitive, but at the same time, the marketing effort has been fairly minimal so far?
Yes. I mean, remember, you invested it's early. Jamie just said, I don't know if you heard it, yes and yes. Clearly, we are trying to add products and capabilities and value to our existing clients in an effort to continue to drive loyalty and engagement and also earn more share of their wallet. But we do think that the proposition is compelling and that the pricing is disruptive and we should also expect over time to be able to attract new accounts.
So yes and yes, but it's early days. We're going to continue to develop UInvest, its capabilities to iterate it and improve it. So far, it's early but good.
Got it. Thanks for that, Mary Anne. And just one follow-up for me relating to the commentary on the deposit side. You spoke of some of the headwinds to deposit growth, and these are more industry trends, including yield seeking behavior on both the commercial and asset management side. And I know you've given some helpful guidance in terms of the impact of Fed QE unwind as well in the past.
I'm just wondering is the yield ticking behavior you've seen so far consistent with your expectation? Do you still expect to grow deposits as we look out for the next couple of years?
Yes. So, the answer is generically, yes, as we would have expected. Obviously, we have no crystal ball as to the sort of timing and part of these things, but it is playing out arguably a little slower than we thought, but like we thought. And I would say that our outlook for deposit growth is for it to be slower but still positive.
Your next question comes from the line of Betsy Graseck with Morgan Stanley.
Hi, good morning.
How are you?
Hi, Betsy. Good. So first question the outlook for your asset yields, in particular, the securities portfolio. I know you've given guidance on that before, but given the sharp backup that we got over the last couple of weeks, how is that impacting your forward look on that?
Yes. So I mean, on the asset side of the balance sheet, just a big rule of thumb is that a little less than half of our loans are variable indexed to prime and LIBOR. And so what we've been seeing in any one quarter, there can be noise on one time items or mix or whatever else. But largely speaking, for every rate hike we've been seeing on the front end, we're seeing our assets reprice about half of that or loans reprice about half of that, and that's what we'd expect. Similarly, if we see sustained increases in the long end of the curve, then we would see that play through into our investment securities yield.
Obviously, this quarter, while there was a meaningful increase on a spot basis, on an average basis, that wasn't the case and particularly not for mortgages. So it had a modest impact on investment security yields this quarter. But again, if it was sustained and more sizable, we would see that part through, yes. And that's We would rotate the assets into higher book yields over time.
Okay. And then my follow-up question has to do with a blockchain that you launched this quarter. I think it was on September 25, you launched a blockchain for international payments. And I know at Investor, you talked a lot about the investments you were making on that side. Should we be viewing this as a competitor to Swift?
Is that how the vision is for this blockchain?
So this is the Interbank Information Network, which we talked about at Investor Day, and now we have, I think, 75 banks and growing signed up to it. I wouldn't necessarily look at it exactly like that. I would say this use case, at least for now, is very much around reducing the friction in the wholesale payment space in terms of inquiry and information sharing and not at this point about processing payments. So we are still exploring use cases across the board on blockchain. I'm very excited about this and the uptake.
It will be, I think, meaningful, but I wouldn't think of it that way, not yet.
Your next question comes from Erika Najarian with Bank of America.
Hi, good morning.
Good morning, Erika.
My first question expands on what Glenn had asked. So clearly the bank stocks have been hit along with the broad market. And I guess you're telling us one of 2 things. 1, either the economy is slowing down or the relationship between bank revenue growth and solid economic growth in the U. S.
Is broken or not somehow as correlated as expected. And I'm wondering, given your fairly strong results across the board, where is the market wrong in terms of how they're thinking about either the economy or bank revenues related to a strong economy?
Yes. I'll just start by saying, I mean, there's a lot of sort of macro uncertainty, noise and overhang that have been affecting the markets over the last few days. So overthinking any one driver or sort of conclusion, I think, might be challenging. I would say that as we look at the economy, we don't see it slowing down. It seems to be continuing to grow pretty solidly.
There is divergence around the world. So it's led by U. S. Strength, but still expecting there to be more convergence going forward. So I actually think that our outlook is still quite optimistic on the global economy.
Not to say, to Jamie's point, that there aren't some risks out there. And so as we and also just to talk about monetary policy for a second, everything, given that growth outlook, is really sort of lining up for a December rate hike and for more hikes into 2019 and the continuation, hopefully, of a steeper yield curve. And that all should be constructive for bank stocks. It is definitely the case that as we've been talking about for years now, as the Fed is shrinking its balance sheet and liquidity is coming out of the system, yes, we are seeing deposit growth flow. And there's a natural feedback loop as you reprice liabilities, you'll have a natural asset based response.
And so you might have slower growth on the asset side relative to the past, but it should be at higher spreads. And that should be how it plays out. So there's really no change, I don't think, in our expectation of the drivers.
And just as a follow-up, I picked up in part of your response to an earlier question, Mary Anne. As we think about your wholesale loan trends year over year, which continue to outpace the banking industry, Could you tell us a little bit more about the dynamics in terms of competition from non banks, particularly in private middle market lending? And I guess we're really wondering what you're observing in terms of competition more on structure rather than rates and whether or not some of the liquidity that you noted could be drained out of the system would change those competitive dynamics near term? And sort of what is JPMorgan's indirect exposure that remains on balance sheet on these sponsor backed transactions? Sorry, I know that was a lot.
Yes, I'll try and remember all that. First of all, I would just clarify that when you say wholesale loan growth has been outpacing the industry, I would say that from my recollection over the course of the last several quarters, we've basically been staying in line with, if not maybe even slightly less than in line with the industry. But it is nuance. You need to get beneath it. There are areas where we would fully expect to be growing more strongly than the industry, and those are in our newer expansion markets where we've been investing.
We're reaping the benefits of those investments, and we're growing from a smaller base and deepening into the market. In our core markets, the mature markets, in line to maybe not even quite as we are being cautious given where we are in the cycle. So I just want to clarify that.
We haven't changed our standards.
We haven't materially changed our underwriting standards, no. And if anything, I would say we're just being cautious at the margin. And with respect to competition outside of banks, it's definitely true that non banks are gaining share. And it's also true that they are structure wise going to be willing to do and are willing to do things that we are not. And so for our best clients, we aren't largely going to lose on price.
We would be willing to work on price, but we would walk away on structure.
And we don't have a lot of residual exposure to sponsors that are doing that kind of lending.
That's right. Right.
Your next question comes from Mike Mayo with Wells Fargo Securities.
Hi. Can you hear me?
Yes.
So Mary Anne, look, I mean, RoTCE of 17%. You seem to have some deposit market share gains. But year over year for the Q3, expenses are up more than revenues. So can you highlight the dollar amount of investment spending and how that's changed and where you are in that progression?
Yes. Actually, just before we get into expense for a second, if you step back, just a couple of things is, I wouldn't look at any 1 quarter when I'm thinking about like operating leverage, not to overplay seasonality or anything else, but I would look at the whole year and tax reform is an important part of that. So if you look at year to date on a reported basis rather than a managed basis, year over year, year to date, we have about 200 basis points of positive leverage. So tax reform is a big factor. And then obviously we had some private equity losses, which are episodic in this quarter's revenue print.
So I think that there's strong growth across the businesses. The expense number and investments, our expenses are up over $1,000,000,000 year on year, are in line outside of FDIC and revenue related costs, in line with the guidance we gave at Investor Day. So think about that sort of $2,700,000,000 of year over year investment, and we're working through it. So we're on track. It's different from revenues insofar as it's more linear.
And so expenses are in line. And leverage is positive leverage is, I think, pretty strong.
All right. And just one separate question for you, Jamie. Your CEO letter highlights the expectation that interest rates would go a lot higher. So I guess we're along the track that you laid out, but doesn't seem like the market is digesting as maybe as well as you might have thought the market would digest. So it's basically what you expected.
So what's different between your expectations and how the recent market has been reacting?
I think I noted that the market may not take it that well if rates go up and because it will surprise people a little bit that people shouldn't be surprised. And of course, so many things have changed since we've been through this before, like monetary policy, liquidity ratios, capital ratios, etcetera. So I would also point out that about probabilities that rates can go higher. People should be prepared for that. They should not be surprised about it.
So I'm always surprised and people are surprised. And the why is more important. Are you still growing? The economy is strong, rates are going up. Most of us consider it a healthy normalization.
And going back to a more of a free market when it comes to asset pricing and interest rates, etcetera, and we need that. So to me, overall, it's a good thing, particularly because the economy is strong. And so I do expect rates will continue to go up. We don't bet the company in that. That's just my own expectation.
I have a much higher odds of being at 4% than most other people. But again, the economy is strong. So as long as they're normalized and strong economy, that's a good thing. The economy could be strong for a while. I mean, Marianne pointed out wages going up, participation is going up, credit has been written as pristine, housing is in short supply, confidence both small business consumers is extraordinarily high and that could drive a lot of growth for a while in spite of some of the headwinds out there.
I also think, I mean, not exactly, but if you went back and looked a couple of years ago what the 2 year forward 10 year rate would look like, it would look much like this. And so it's just that it's been because the COBRA is having a hard time pushing up that people are now focused on it. But this is what we would have expected, should expect and higher.
Your next question comes from Jim Mitchell with Buckingham Research.
Maybe just a quick question on deposits. We're starting to see some slowing of growth, if not outflows in some areas as rates rise. How do you but you guys still have a loan to deposit ratio that's in sort of the mid-60s and you've been gaining share on the retail side. What's your sense of, I guess, competition for Yes. So,
Yes. So when we think about this year, well, it's not really about competition particularly. When we think about the deposit base and the retail consumer relationship, Deposit and rates paid is an important part of it, but it's increasingly less important, not that it's not significant. And so when you think about the value that we give to our customers, it's not just that, but it's also all of the customer experience initiatives that we've had. It's about convenience, about digital mobile capabilities, it's about launching new products, new services, simplifying the environment for them.
So there's a lot of different investments and things to play, which might make this kind of normalization cycle look a little different. And so the way we think about it is we look carefully across the spectrum of deposits, retail and wholesale, at what we are seeing in terms of flows and balances and elasticity for our customers on our balance sheet. And that's how we think about our strategy for deposit reprice. And it's sort of largely behaving as we would have expected.
I'll just make a macro point too. As the Fed reduces its balance sheet, just say by $1,000,000,000,000 over the next 18 months or whatever, what they indicate they're going to do, that's $1,000,000,000,000 out of deposits. That will have an effect kind of macro competition and stuff like that. And we try to estimate the big points that come out of wholesale, that come out of retail, it's kind of hard to know. So but that will change the competition a little bit for deposits.
Okay. Fair enough. And maybe
a follow-up on that investment spend. Do you I mean, obviously, it went up with the tax cut helping to accelerate some investments. Do we think of it going forward stabilizing at these high levels? Or is this sort of a one off increase and we might see that come down? Or do we keep increasing?
How do we think about the investment spend needs going forward a little further out?
Yes. So I would say 1st of all, obviously, we'll give you more thoughts on forward looking guidance at a future date. But just generically, I wouldn't really put tax reform as being a primary reason for what we're doing on investments. I would say that we have identified the opportunity to accelerate capabilities that are consistent with our clients' strategic long term goals. And so we've been leaning into that this year.
And so it was a pretty sizable step up this year, acknowledging that. We wouldn't necessarily expect to see that continue. But we're going to carry on investing in technology adding bankers, opening branches, launching new products, so that we're sort of defending the long term growth and profitability of the company. And in the absence of giving you guidance, I would just point you to the fact that we're still targeting not targeting, but we're still expecting an overhead ratio to be around about the mid-50s over the medium term, which on revenue growth implies we'll continue to And there's also volume related costs associated with that.
Your next question comes from John McDonald with Bernstein.
Hi, good morning. Mary Anne, I was wondering on the regulatory front, do you have any visibility into the future interaction of CCAR process with the new loan loss accounting rules, CECL, particularly in the context of distressed capital buffer potentially being implemented? Because it seems like we could have some overlapping pro cyclicality and then the potential to freeze that into the run rate capital. So just kind of wondering, is there any visibility yet on that? And is that a big area of uncertainty for you?
So you hit the nail on the head with both your question and your what that could imply. It is a big area of uncertainty. We do not have clarity on capital broadly as it relates to CECL, including whether there will be permanent capital relief and or how that will play into CCAR. It is one of the most open thing open questions we have. So right now, what we know is, as far as I know anyway, that we don't have to put the CCAR impact in until CCAR 2020.
So it's not a sort of imminent question, but it's an important one and we don't know the answer.
It seems to me that every single time there's a chance to make things more procyclical or less, we make it more procyclical.
That's the danger for sure. So we would encourage the dialogue on clarifying capital treatments writ large to be at the forefront of Sandozeta's mines. Got it.
But it also won't change our strategy. That's just accounting.
Got it. And then just as a follow-up, I was wondering how rising rates are affecting competition and capacity in the mortgage business and whether the regulations in mortgage have made you open to reconsidering getting back into some areas that you exited after the crisis?
Well, yes. So mortgage being a cyclical business as it is, we are on higher rates expecting the overall market to be down about 10% year on year. We are down in line maybe a little more than that, but for us it's a tale of 2 channels. We are flat year on year in the consumer channel, so decent consumer engagement and purchase market share, and we're down meaningfully in correspondent because we are pricing for the risk and higher rates. With respect to would we be willing to reconsider our position on mortgage, the narrative, the dialogue is constructive, but there hasn't actually been any resolution to the bigger challenges.
So if we can get that resolution, then I think the answer would be largely yes.
Jamie? I was just at mortgage. The mortgage company is earning money, is doing quite well. Delinquencies are way down. We're competitive.
We start Chase what is called Chase My Home. So you can digitally track your mortgage process and there's a lot of good stuff coming. And so in the big picture, it's pretty good. Obviously, refis and new home sales will probably be down to the rates a little bit.
Right. And you're right, there's
excess capacity in the market right now and that will clear
it will clear itself out over the course of the year. Margins are under pressure as a result, but they will stay light. Okay. And margins are under pressure as a result, but they will stabilize.
And that is an area, by the way, where all the riskier lending has gone to the non banks pretty much.
Your next question comes from Al Alevizakos with HSBC.
Hi, thank you. I would like to ask a question on the CIB. Especially, I would like to focus more about the outlook that you gave that the spreads are getting tighter. And I would like to know regarding the credit and securitization business where we've seen issuance being quite slow during the summer and then continuing like that in September. You see that there is a risk off mode in the market?
And how would you believe that the revenues would actually move going in Q4 and then in the New Year? Do you think that generally fixed income wallet would actually be going down? Thank you.
A risk of what, sorry?
The what, sorry?
No, no. The risk
of wallet will go down.
Yes. So I would just say on the margin point, it's been the case that for particularly in the sort of more liquid space, you see margins coming down consistently over the years. And we can continue it's not necessarily that this is some sort of step change or new phenomenon, but it's competitive. And so that's what we're seeing. On the SPG side, pipelines aren't strong at this point.
So we expect 4th quarter to feel much like the 3rd.
I just want to make a long term point here too. In the next 20 years or so, the total fixed income markets around the world are going to double. And that is just an important thing to keep back in mind. So when you run the business, you're running the business to capture your share of that doubling. Of course, margins over time will come down and the way you do it will be transformed by electronics, etcetera, but it's a pretty good future outlook.
Okay. Thank you.
Thank you. Your next question comes from Ken Usdin with Jefferies.
Thanks. Good morning. Good morning. On the commercial on the consumer credit side, I should say, you made the point about card losses remaining low and towards the low end of what you had thought for the year. I also noticed that you also added to the card reserve and noted higher losses.
So can you just give us the to and fro about just what you're seeing in the underlying on card and losses and trajectories? Thanks.
Sure. Okay. So, as you know, we've been talking for a couple of years now about the fact that we did some targeted credit expansion in the card space a few years back. And naturally, as that seasons, it will and risk adjusted returns that are healthy, but underwriting loans with higher loss rates, which means as that seasons that the overall portfolio loss rate will naturally increase. So the higher the percentage of newer vintages are, the higher the loss rate will be in accordance with our underwriting standards and that good risk adjusted return.
So that's something we've been tracking and guiding to and expecting. The build this quarter was more about loan growth than it was about the seasoning of the charge off rates, but it was a bit of both. My comment about the performance though is, if we had looked at the 2018 card loss rate as we did at the beginning of the year, we said we would have expected it to be closer to 3.25%. But there are 3 things driving it to be slightly better. The first is the pre expansion vintages are holding up very well.
So the sort of pre-twenty 15 vintages continue to hold up very well. The second is that as we have continued to observe the newer vintages, we've been rigorous in terms of at the margin, doing risk pullbacks and ensuring we're managing the performance really well. And the third is that we've been improving our collection strategy. So a combination of factors have allowed us to deliver apples to apples, the charge off rate for the portfolio that's a little better than we would have expected coming into the year.
Yes. Great color. Thank you. And I
think
to better move through the cycle number.
Yes.
So you should explain that to them too.
Yes. And obviously, in this portfolio, as we go through the cycle, we would expect charge off rates to continue to rise. And that's one of the reasons why I emphasize that the pre expansion vintages continue to be that kind of you'll remember we hit that 2.5% charge off rate, which is extraordinarily low for this kind of portfolio. And we're still there for those pre expansion vintages. So naturally, as the cycle matures, we will see that rise, but we aren't seeing it yet.
Yes, makes sense. And can I ask you just on the other side, can you talk a little bit of auto in the same context too, where the losses have been flat as a pancake? Can you talk about that? And also just that leasing side of the book, which we more see in the other income? Are you still seeing the same potential for growth in both the on balance sheet and the leases?
Okay. So on the loan side in auto, I would say that we have we are losing share as we see competition from credit unions and captives that may have economic frameworks that are different from ours, we are not going to chase volume. We're going to get the appropriate return for the risk. So we are our credit reflects our discipline on pricing and underwriting standards. And so it is continuing to be flat to a little better.
On the leasing side, we do leasing with our manufacturing partners. We are seeing very strong growth. We're very careful about how we think about residual risks and reserving on that portfolio, but it's very high quality growth. And that looks set to continue.
Your next question comes from Saul Martinez with UBS.
Hi, good morning. Good morning. Just want to follow-up on the question on operating leverage and how should we think about the outlook for positive operating leverage, which is more philosophically, because your efficiency ratio is currently not materially above the 55% through the cycle expectation. So I mean, should we be thinking of positive operating leverage as part of the investment narrative? Or is the goal really to invest in favorable business outcomes, operating leverage does what it does and really doesn't drive business decision?
Yes, more or lesser than the former. So obviously, we have a view of what we think the right return profile for these businesses should look like, And we're investing to deliver those returns through the cycle and over the long term. So we don't have an operating leverage target in mind when we set our investment strategy nor do we, for that matter, have an expense target in mind either. So again, we saw a reasonable step up year on year this year because we saw the opportunity to do that well. I wouldn't necessarily expect to see that kind of growth.
But again, operating leverage is more of an outcome, input.
And mix.
Yes, and mix.
Got it. Okay. Fair enough. And if I could just ask a quick follow-up on CECL. I know you don't manage the accounting outcomes.
And I think, Mary Anne, you mentioned a number of areas last quarter where CECL could have an impact. But any update just on CECL preparations? And when you think you might have an estimate of what the effects could be?
Yes. So, I appreciate that you guys have been asking about this now for a while. And I hate to tell you that the modeling, the data, the methodologies are complicated. So operationally, we are working through that across all of our businesses. We continue to expect to be running in parallel through some parts of 2019 across some of our portfolio so that we can make sure that we fully understand the potential implications.
We don't have a number for you, but I will tell you this. Same as I said, I think, last time. The biggest driver is likely to be card because of the size of the portfolio and the 12 month incurred loss model today. So the weighted average life of the portfolio driven by revolvers would be longer than that most likely. There'll be some other impacts, pluses and minuses.
Research reports have been written, Dave. I think on average, for those that have been written, have suggested that not just for us but across others that the reserve increase could be 20% to 30%. And while I don't have a number for you, it's not implausible.
Your next question comes from Matt O'Connor with Deutsche Bank.
Good morning. I want to
follow-up on
the discussion about increased competition in FICC. And I guess the language in the release kind of implied there was some increase in competition. Your comments on the call here kind of says it's been competitive for some time. I guess I was trying to square the 2. And I would just add, coming into this year, you had the number one fixed share.
And incredibly, you've been the biggest fixed share gainer, I think, year to date, when we look on a global basis. So you've been building on top of that share. And I'm just trying to gauge if there's been kind of a change among competition trying to get some of that share back and maybe if that's just starting to accelerate.
Yes. I mean, I think if you go back a number, a number of years when we were all having those like deep and meaningful debates about whether we should be changing our sort of SIC operating model and we were committed to the sort of full spectrum complete platform. You roll forward to 2016, there was outperformance in fixed income and coming in and people had made changes to their operating model and operations and the competition came back pretty fiercely, I would say, into 2017. And then in 2017, the market didn't play nicely, particularly the volatility and volumes were less robust than they have been in 2016. But we haven't seen the competition let up.
So people are back and wanting to enjoy. Jamie just talked about it. The fixed income wallet will double. And there are pretty much everyone everywhere wants to enjoy some of that. And so the competition, it's a combination of it's been very competitive for a while and it continues to be so.
So I don't think it's a step change, but it does obviously feel particularly when volatility has been reasonably contained outside of specific emerging market kind of areas that everybody is competing for these thin margins.
And then just broadly speaking, I mean, if we look at both FICC and Equity Trading, obviously, you've had the leadership position in FICC. You've been gaining a lot of share in equity, including this year. And what do you think the biggest driver of that is? Like it doesn't feel like it's the capital or liquidity advantage? Is it all the technology spend that you've been doing?
What are a couple of reasons you would just chalk it up to high level?
Yes. So I mean, if you think about the we're sort of gaining share, most notably in cash and prime. And if you go back a number of years ago, we were pretty open and honest about the fact that we weren't where we needed to be in either of those two scenarios. And we have been consistently investing in the platform. And it is technology.
You think about Prime with building out of the Prime platform, particularly internationally, has been a game changer. And we had a best in class competitive offering over the course of the last couple of years. And now we're getting the momentum of being able to deliver that to clients. And similarly, we've been investing in the cash side. So it's across the complex, but we're getting the benefits of private bank and with the commercial bank, the sort of feedback loop private bank and with the commercial bank, the sort of feedback loop is also quite powerful.
So it is a little bit to do with our operating model, our platform as a company.
And really great research.
Yes, great research.
Your next question comes from Brian Kleinhanzl with KBW.
Thanks. Yes, I had a quick follow-up question on the security services. You mentioned that there was a decline sequentially based on seasonality in the exit of the business. But is there any way to size that to kind of get to what the underlying growth trends were in that segment?
Yes. I mean, so from an underlying growth perspective, I would look year over year rather than sequentially. I sort of point out the sequential point because of seasonality. We also exited U. S.
Broker dealer business. So that obviously has an impact. It is also the case, so if you think about the year on year growth of 5%, we have been growing more than that, led by very strong growth in NII. For this business, this is a wholesale business where deposit is a high. So we would expect that growth to level off.
And in this quarter in particular, just the specifics of our internal transfer pricing is that LIBOR OIS narrows and it does have an impact. Year over year, continue to expect us to grow asset, asset based fees, NII solidly but not as strongly, and transactions. So I don't know whether it's going to be high single digits or mid single digits growth year on year.
Okay. And then just one separate question on the noninterest bearing deposits. I mean, it came down I think quarter, was that mostly just on the corporate side? Or was there also some pickup in the deposit gammas on the retail side as well?
Yes, not on the retail side, not yet. I mean, there's not a sufficiently compelling rate differential to be driving intra product migration on the retail side yet, but we are seeing it on the wholesale side.
Your next question comes from Gerard Cassidy with RBC.
Thank you. Good morning, Mary Anne.
Good morning.
I apologize if you've already addressed this, but can you give us the outlook for the pipeline for commercial loan growth or commercial loans and investment banking? And I know it's very early in the quarter, but with the trading volatility, we've seen any color that you can share with us on that as well.
Okay. So commercial loans, we're 4% up year on year, flat to 1% up sequentially. At this point, as we look forward over the near term, it feels like that kind of steady growth, GDP plus GDP, is what we're going to get. And remember, everybody has a different mix, but one of the things that happened quickly with tax reform is that the sort of government health care hospital not for profit space was less compelling from a loan sense and now are going to be more compelling in the capital markets. So we're seeing that impact our growth down.
So I would say that kind of not quite mid single digit growth feels like a decent outlook, all other things being equal. In terms of the capital markets, well, I would say that the 3rd quarter pipelines coming out into 4th quarter and momentum sets us up for a decent 4th quarter, honestly, across products. Clearly, volatility depending upon how long it stays around and what the drivers are can impact business confidence. We're not necessarily expecting that. So I would still say the outlook across products is good, with ECM obviously being the one that would be most likely impacted.
But even there, I think it might be more of a sort of temporary set of pauses that people see how everything is digested. And honestly, on markets, it's no good ever comes of trying to predict what a quarter will look like after a couple of weeks. Volatility is not necessarily a bad thing. It can be constructive in some ways and less in others. So yes, there's no good coming of a prediction at this point.
I will say one thing about markets just to give you guys a tiny view, which I know you know, but just because of tax reform and another one off item in the Q4, flat year on year comparably would be up.
Very good. I appreciate that. The second question is, when we look at the weekly H8 data on Fridays, the smaller banks in this country are growing their loan books much faster than the larger banks. You obviously had good loan growth this quarter, but it doesn't match up to what the smaller banks are producing. So the question is, what impact do you think the CCAR process has had on you when you compare your underwriting pre financial crisis?
I know you're not changing your underwriting standards, but do you think the larger banks are more conservative as a general statement and it's reflected in these very strong credit quality numbers you and your peers are posting today.
I mean, so it's difficult to generalize. And obviously, everybody has a sort of different appetite. It might be fine if you're getting properly paid to grow more quickly. We are sticking with our guns in terms of our underwriting and risk appetite on credit. The other thing I think you have to bear in mind, and again, it depends on the particular situation of any competitor, is that we are materially and increasingly bound by standardized risk weighted assets.
And so while we don't overthink that and we do honestly think about economic capital, at some level, we have to generate a positive return for shareholders and shareholder value. And it's on these very high credit quality loans that we're producing, it's expensive.
Your next question comes from Marty Mosby with Vining Sparks.
Thanks and good morning.
Good morning, Marty.
I wanted to take a little bit different slant on deposit betas. Just kind of ask a 3 part question. 1, is the increase in deposit betas that we've seen over the last couple of Fed moves surprising at all or abnormal, in your opinion, to normal historical trends?
Okay. So I would say, if you look at the first four hikes, it was relatively muted deposit reprice across the complex. It accelerated for the last three hikes. I'm excluding September, given obviously when it happened. So we are seeing an acceleration in betas.
And it started at the top end of wholesale and it will migrate through the complex over time. I would say it's in line to arguably better than we would have modeled. But remember that this cycle did start in a very different place. So while if we looked at history, we might have seen repriced in totality having been higher at this point, we started at 100 basis points of rates, not 25. So I think that plays into it too.
So generally in line with expectations is what I would say.
Okay. That's what I would say. So let's go to the next question. Given that rates have been low for so long going up until we started increasing we repriced almost every security and loan we had on the books. So the actual upward potential to reprice portfolio yields to current market rates has got to be larger than what we would typically have seen historically.
Do you agree or disagree with that idea?
I would say yes. Obviously, it depends on how you position the company over that period. But we've talked about it before. We were and have consistently been relatively short of the market. We've been keeping dry powder so we could invest as the long end of rates goes up, and we still are looking at that.
But obviously, there's convexity in the portfolio, too, so paying attention to that. Yes, I agree.
So the stretch between just portfolio yield, so asset yields can actually reprice faster
than what we've seen historically. So the combination of
those two things in our estimation, between it gives us a threshold if we estimate for JPMorgan of somewhere between 80% to 90% deposit betas before you actually kind of break through and start eroding net interest margin. Currently, you had about a 40% deposit beta this quarter. So you have a lot of headroom still to go before margins start to really erode given deposit pricing. So just wanted to kind of get a feel for that estimate of 80% to 90% given where you're at today.
Okay. So obviously, I don't know exactly your sort of mental model, but let me tell you this. I think you're right. I don't know about the 80, 90 specifically, but you're right about net interest margin if you look through any short term noise. So we would expect the trend for our firm wide ANCOR NIM to be to trend or grind higher over time, but it does depend on the path and pace of reprice.
So if we continue to see deposit betas stay low or lower than potentially a linear kind of move, you'll see margins increase. And then as they accelerate back to target, you might even see it compress. But if you see through that, over the long run, yes, net interest margins will be higher. And that will be driven mainly by balance sheet growth, mix and long end of rates. At Investor Day, you might remember we told you that beyond 2018 net net there was little rate left to go and it was going to be more about balance sheet mix and growth and long end of rates a little compounding, but the path does matter.
So you can see core NIM in particular will be very vulnerable to the price to the pace of reprice. There are
no additional questions at this time.
Thank you, everyone.
Thank you.