Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Second Quarter 2018 Earnings Call. This call is being recorded. 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 earnings presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on Page 1, the firm reported net income of $8,300,000,000 and EPS of $2.29 on revenue of $28,400,000,000 All were records for the 2nd quarter, even excluding the benefit of tax reform.
Our return on tangible common equity was 17% and also included in the results were 2 notable items, which I will call out in a moment, excluding which EPS would have been about $0.10 higher. The strength this quarter was broad based across businesses and highlights include average core loan growth excluding the CIB of 7% year on year, consumer deposit growth of 5%, which we believe continues to outpace the industry, card sales up 11% and client investment asset and merchant processing volumes each up 12%. We maintained our number one rank in global IBCs and CIB delivered double digit revenue growth across the board. Commercial Bank revenue was up 11% year on year with IB revenues being a bright spot this quarter. And in Asset and Wealth Management, AUM and client assets were both up 8%.
Turning to Page 2, some more details about the Q2. The firm delivered strong core positive operating leverage this quarter. Revenue of $28,400,000,000 was up $1,700,000,000 or 6% year on year. Net interest income was up £1,100,000,000 or 9 percent, reflecting the impact of higher rates and loan growth, partially offset by lower market NII. Non interest revenue was up over $600,000,000 driven by strong performance in markets and IB fees and also higher auto lease income.
NIR this quarter was negatively impacted by a rewards liability adjustment in card, And remember that last year included a significant legal benefit. Excluding these two items, NIR would have been up $1,600,000,000 and total revenue up 10%. Expense of $16,000,000,000 was up 8% year on year, with half of the increase directly related to incremental revenues, principally compensation in the CIB, transaction expenses and auto leads growth. About onethree related to continued investments in technology as well as headcount across the businesses. And the remainder was largely a loss on the liquidation of a legacy legal entity as part of our simplification efforts.
And if you exclude this item, expense was up only 7%. The legal entity loss together with the rewards liability adjustment in card are the 2 notable items I mentioned at the beginning for a total reduction of over $500,000,000 pretax. Credit costs of $1,200,000,000 were flat year on year and credit trends remained favorable across both consumer and wholesale. Shifting to balance sheet and capital on Page 3. We ended the 2nd quarter with CET1 of 11.9%, up about 10 basis points versus the last quarter as most of the capital generated was returned to shareholders.
Risk weighted assets were relatively flat despite solid growth in loans and commitments being offset across other categories. In the quarter, the firm distributed $6,600,000,000 of capital to shareholders. And last month, the Fed informed us that they did not object to our 2018 capital plan. We were pleased to announce gross repurchase capacity of nearly $21,000,000,000 over the next four quarters, and the Board announced its intention to increase our common dividend to $0.80 per share effective in the Q3. Moving on to Page 4 and consumer and community banking.
CCB generated $3,400,000,000 of net income and an ROE of 26%. Core loans were up 7% year on year, driven by home lending up 12%, business banking up 6%, card up 4% and auto loans and leases also up 4%. Deposits grew 5% and auto loan growth is slower than a year ago. We are seeing record high retention rates and customer satisfaction scores. Clients investment assets were up 12% with more than half of the growth from net new money flows and we are capturing an outsized share as our customers shift from deposit to investment.
Card sales volume was up 11%, and we announced several new cards as we continue to update our product offering. Revenue of $12,500,000,000 was up 10% year on year. Consumer and Business Banking revenue was up 17% on higher NII, driven by continued margin expansion as well as deposit growth. Home lending revenue was down 6% on production margin compression and lower net servicing revenue despite higher purchase volume in retail. And card, merchant services and auto revenue was up 6%, driven by lower card acquisition costs, higher card NII on margin expansion as well as loan growth as well as higher auto lease volumes.
This was largely offset by lower net interchange, driven by a rewards liability adjustment of about $330,000,000 reflecting strong customer engagement across our ultimate rewards offerings. As a result, the card revenue rate was 10.4% for the quarter, but our full year guidance of approximately 11.25% holds. Expense of $6,900,000,000 was up 6% year on year, driven by higher auto lease depreciation and investments in technology. Finally, on credit, charge offs were down $36,000,000 year on year, including a recovery of about $130,000,000 from a loan sale in home lending. This was largely offset by higher net charge offs in cards.
The card charge off rate was 3.27 percent, affecting seasonality and is in line with expectations and in line with our guidance. There were no reserve actions taken this quarter. Turning to Page 5 and the Corporate and Investment Bank. CIB reported net income of $3,200,000,000 on revenue of $9,900,000,000 up 11% and an ROE of 17%. In Banking, we maintained our number one ranking for the quarter year to date in global IB fees.
It was a record first half performance, and we grew share across all regions. IV revenue of $1,900,000,000 was up 13% year on year, outperforming a market that was down slightly as we saw robust activity, particularly in M and A and ECM. It was a record second quarter for advisory fees, which were up 24%. Benefiting from a number of large deals closing this quarter, we gained share and ranked number 2 globally. Equity underwriting fees were up 49%.
We ranked number 1 globally as well as in North America and EMEA and gained share a competitive environment, driven by ITOs and convertibles in the 2 most active sectors, health care and technology, which are areas of strength for us. Additionally, we saw good momentum in private capital markets as clients are exploring alternative sources of capital. And debt underwriting fees were relatively flat versus a very strong prior year quarter, supported by healthy acquisition related activity, and we ranked number 1 in DCM globally and across all sub products. Looking forward, the overall pipeline remains strong. Moving on to markets.
Total revenue was $5,400,000,000 up 13% year on year or up 16% adjusting for the impact of tax reform and was driven by strong results in equities, solid performance in FIC across categories and with performance picking up in the second half of the quarter. Fixed income markets revenue was up 12% adjusted on the back of good client flow and decent volatility and with commodities making a notable recovery from a challenging prior year. It was a record second quarter for equities with revenue up 24%, driven by strong client activity and favorable trading results and with particular strength in cash, prime and flow derivatives. Treasury Services and Security Services revenue were each up 12%, driven by higher rates and deposit balances, and Security Services also benefited from higher asset base fees on new client activity and higher market levels. Finally, expense of $5,400,000,000 was up 11%, driven by higher performance related compensation, volume related transaction costs and investments in technology.
The comp to revenue ratio for the quarter was 27%, consistent with the prior year quarter. 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 was a record for the 2nd quarter, up 11% year on year, driven by higher deposit NII and strong investment banking activity. Gross IB revenue of $739,000,000 was up 39%, driven by several large transactions, a strong underlying flow of business and the overall pipeline is robust and active.
Expense of $844,000,000 was up 7% as we continue to invest in the business, both in bankers and in technology. Loan balances were up 4% year on year and 2% sequentially. C and I loans were up 3% year on year and sequentially due to increased M and A related financing with strength in our expansion markets as well as in specialized industries and despite lower tax exempt activity. CRE loans were up 4% year on year and flat versus last quarter as there continues to be a lot of competition for high quality assets and we are selective given where we are in the cycle. Finally, credit performance remains strong with a net charge off rate of 7 basis points.
Moving on to Asset and Wealth Management on Page 7. Asset and Wealth Management reported net income of $755,000,000 with a pre tax margin of 28% and ROE of 33%. Revenue of $3,600,000,000 was up 4% year on year, driven by higher management fees on growth in long term products as well as strong banking results. Expense of $2,600,000,000 was up 6%, 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 $4,000,000,000 with positive flows across multi asset equities and alternatives, partially offset by outflows in fixed income.
Additionally, we saw net liquidity inflows of $17,000,000,000 AUM of $2,000,000,000,000 and overall client assets of $2,800,000,000,000 were both up 8% with the increase being split about equally between flows and higher market levels globally. Deposits were down 7% year on year, reflecting continued migration into investments, while we are also capturing the vast majority and down 3% sequentially on seasonal tax payments. Finally, we had record loan balances up 12% with strength in global wholesale and mortgage lending. Moving to Page 8 and Corporate. Corporate reported a net loss of $136,000,000 The result included a pretax $174,000,000 loss on the liquidation of a legacy legal entity previously mentioned.
But it is of note that while this loss through expense affects retained earnings this quarter, it is offset from a capital perspective, so it's capital neutral. Before I wrap up, you may note we have no outlook page here. Although both revenue and expense are trending higher market related, given we're only halfway through the year, we're not updating our outlook at this point. So to close, macroeconomic backdrop continues to be supportive. Consumer and business confidence and sentiment remains high, client activity levels are robust and the markets are open and active.
We are pleased with the firm's results this quarter. Our broad based financial performance clearly demonstrates the power of the platform. Revenue grew strongly, double digits year over year in many cases. We realized positive core operating leverage despite significant investments and credit trends remain favorable across both consumer and wholesale. This was a clear record for Q2 whichever way you drive it.
We remain focused on consistently delivering for our customers and our communities and investing for the long term. With that, operator, can you open up the line to Q and A?
Our first question comes from Ken Usdin of Jefferies.
Good morning, Ken.
Hey, good morning, Mary Anne. Can I ask you to talk a little bit about the card business and you mentioned the strong customer engagement with regards to the rewards markdown? Can you just walk us through what's the drivers of that? And this is a one time event and does it affect the card revenue rate outlook?
So I'll start at the end because that's pretty simple. It obviously affected the card revenue rate in the quarter. You can see that that was 10.4% and you can see on the page we've adjusted for the impact. But the 11.25% for the year remains true, which is to say that while this may be slightly larger than normal, it's not exactly a one time item. We regularly review our liability as we observe the mix of our portfolio and the behaviors of our customers.
On face value, I know rewards is often talked about as a competitive matter. I mean, this is less about competition per se. In fact, we have record low sales attrition, which in a competitive environment is really very good. And it's more about a customer's awareness of the value proposition of awards and them being engaged in redeeming them, which for us is net a positive thing because engaged customers spend more and we're seeing that. They try less and we're seeing that And they will bring us more of their share of deposits and investments that will be a decent relationship.
So I would say it's a little larger than normal. We do it pretty regularly. So it's not one time, but it's not completely typical.
Got it. And in the press release, Jamie mentioned in the first paragraph about increasing competition. Is that a global across all businesses comment? Or are you seeing it narrowly in specific areas? Thanks.
Okay. I think it's global I mean, it's pretty global across all businesses as a general matter. I mean, there are some obvious areas where it's pretty acute. And in the retail auto space, for example, we talked about commercial real estate, for example, mortgage clearly with capacity in the system, for example. All of those areas are pretty competitive for a variety of reasons, given whether we are in the cycle in the economy and the like.
But I would say it's broad based. It's everywhere. That said, we are holding our own and in many cases gaining share. So we're doing pretty well.
Our next question is from John McDonald of Bernstein.
Hi, Mary Anne. I wanted to ask you what you're seeing this quarter in terms of consumer deposit trends, a little more color on both the pricing beta and volume balances. Kind of wondering if you're seeing a lot of competition from the online competitors like Marcus whether those are affecting your deposit balances with consumers being attracted to those high yields and are they affecting your pricing decisions?
Okay. So I would say you talk to consumer deposit. So I'm talking retail now, not the sort of high net worth base. I'll come back to that. Consumer deposit is up 5% year on year, slowing down as we would have expected.
While you have seen online competitors and even some regional competitors make some moves in the large bank space. We haven't really seen that yet. When we look at the sort of deposit slowdown and we unpack it, it feels to us like the vast majority of the root cause is customers moving into investments. And in the case of retail customers, actually into managed accounts. So it doesn't even appear to be rate seeking.
Spending more would be the 2nd driver and to a much less extent are we seeing behaviors that look like they're rate seeking at this point. So we're not seeing that kind of migration out of the company to online or other competitors at this point. And so at this point, reprice is still not happening. That said, we are on a journey clearly. In the higher net worth space, we continue to see the migration into investment assets we've been seeing.
And again, we continue to recapture the vast majority of those. So at this point, things are playing out as we would have expected and we're not actually losing deposits on that to any third parties.
Okay. And just to follow-up on that, can you remind us what's the opportunity you see with the rollout of Fin and what advantages you expect to have in that arena?
Yes. So I would look at Fin as one of many sort of digital innovations that we're doing. And I would look at it also in conjunction with broader digital account opening. And although we've now launched FIN nationwide, I think it's fair to say it's still very nascent and we're still learning. So we're going to continue to observe.
It's got very high Net Promoter Score by the way. So customer experience is good. But it's still quite young. We haven't
really marketed it yet either.
No, we're just starting. I would say digital account opening on the other hand is a pretty good success story. And we are seeing a lot more account opened digitally across the channels and we're seeing of those decent chunk of net new to the bank and where we're seeing existing customers open new accounts, we're getting incremental money. We are seeing our digital effort pay off. And even more broadly than that, we could go into QuickPay and Zelle and the like.
But I wouldn't focus overly on Fin as an isolated thing, but think digital more broadly.
Our next question is from Jim Mitchell of Buckingham Research.
Hey, good morning. Maybe first, if
you could
just hey, good morning. Could maybe just talk a little bit about loan growth, obviously seems to have picked up in the fed data over the last month or 2. What are you guys seeing on the ground? And do you think it's what have seen so far is a good indicator for maybe a more sustained pickup in growth?
Yes. I would say that we would characterize that if you use you use the commercial bank C and I loans as kind of bellwether, there has been decent demand. And I mentioned it in my remarks, but decent demand, not exclusively, but partly on the back of a very robust and active M and A environment. And so the demand is there. I would say growth is solid and in line with our expectations.
And we will continue to hope to see that growth as we go through the year. And there may be other tailwinds. We've yet to see the full effect of tax reform flow through into profitability and free cash flow. So I would characterize loan growth as solid and our expectations for the outlook to remain solid, but benefiting from a very active capital markets environment.
Okay. And maybe as a follow-up, when we think about NIM going forward, I mean, I think it was couple of years ago that you talked about maybe normalized being somewhat the 265 to 275 range or 246 now. Is there a certain loan to deposit ratio you think you need to have or level of rates? How do we just trying to think through how we think about NIM going forward?
Yes. I mean, we are at fed funds of 175 to 200 right now. So we're not anywhere yet close normal rates. And so when we think about what we've talked about normalizing NIM, we're thinking about it more through the cycle adjusted for new liquidity rules and everything else. So we have a number of further rate hikes to go before we would reach that point.
But we are on a core basis and remember we have a fairly sizable market balance sheet. But on a core basis we are continuing to see NIM expansion in line with expectations and moving up towards that. So we would expect to see expansion year over year moving towards that level, but not getting there yet.
Our next question is from Erika Najarian of Bank of America.
Hi, good morning. Good morning, Erika. My question is on the regulatory process this year under the new leadership. I'm wondering if there's anything that you could share with us that you've observed in terms of change, whether or not it was how receptive or not the regulators were during the comment period for the SCB and also during the CCAR process? Was there any marked or observable change in the processes this year versus previous years?
Yes. So I would say, on the comment period of the SEB, obviously during the comment period the regulators are quiet. So it wasn't a two way dialogue during that period. We would expect the two way dialogue to start now that the comment period is over and the industry and bilateral letters have been submitted. I will say going back to comments I think I've made previously that I remain constructive about the willingness for the current leadership to pay attention and take on board those comments.
And if you look at the proposal that was sent out for comment, not only did it have a large number of questions that they were asking for feedback on, but the actual proposal was very similar to what we had been understanding was the intention in speeches that go back a fair way, which is to say that it feels like we're still making the sausage rather than this is a done deal. And so we're very optimistic that the comments will be taken on board. And you know what they are. Volatility was evident in spades in this test. Opateness, G SIB, we can go through them.
I'm sure we will. So we remain optimistic that the comments sorry, the bilateral discussions will start now. I would say or the industry wide discussions will start now. I would say on CCAR, it felt status quo to prior years. It is not to say that it's not constructive, it's just it's in SLA base goes prior years.
And just my follow-up question is the pushback that I'm getting from a lot of investors on bank stocks is that, we are long in the 2s and in the economic cycle. Clearly, the strong activity levels that you posted this quarter and the credit metrics that you posted would suggest otherwise. And I'm wondering, both Jamie and Mary Anne, how you would respond to that pushback that now is not the time to invest in banks because we are late in the game from an economic standpoint?
Yes. I mean, I would say 2 things, which is while this cycle is older than potentially typically cycles have been, growth over the last decade has been lower through the recovery. So there is plenty potentially of room to play. And as we look at all the economic data, not just here in the U. S, but also globally, there are no real signs of fragility.
And I know people are staring at a flat yield curve and we would say that that flat yield curve is a bear flattening, good flattening from bank profitability perspective and not some looming risk of a recession embedded in it. Term premium is still negative, real policy rates still at 0, credit very benign. That said, we are in cyclical businesses, no doubt. And so we are preparing and we will be ready when the cycle turns and no doubt there will be impacts from that. But through the cycle, I think we've proven that our business model will produce strong shareholder returns and among best in class performance.
Our next question comes from Mike Mayo of Wells Fargo Securities.
Yes, just I wanted to follow-up on that last question, if Jamie could respond too. I mean, Mary Anne, you said the macro is very supportive. You sound very positive. On the other hand, the 10 year treasury yield has a flash warning signs to a variety of parties. So Jamie, we had the tax cut.
We've been waiting for the extra boost to the economy, whether it's capital expenditures or whatever. Do you think the economy is accelerating? It's still on steady footing? It's the same or maybe it's slowing down? And how should we think about the tenure?
How do you think about the tenure? And how do you manage to a flatter yield curve?
Yes. So just real quickly, I mean, Maren said it's almost 9 to 10 years of growth of 2%. Averaging 20% over the 10 years, it really should have been closer to 40%. There's a lot of evidence that there's lack in the system and it's being finally going back to workforce. The consumer balance sheet is in good shape, capital expenditure going up, household formation is going up, home billings are in short supply.
The banking system is very, very healthy compared to the past. Consumer confidence and business confidence are very high, albeit off their highs, probably because of some of the trade. So, if you're looking for potholes out there, there are not a lot things out there and the growth is accelerating. And then of course, things are always a little bit different. My own perseveres, but the 10 year is the 10 year.
I wouldn't say that it has to happen the way it's happened every time last time. I just think that's a mistake. And the Fed is reversing the balance sheet. I think it's very easy. The rates can go up.
The 10 year rates can go up in a healthy environment. And in history, we've had rates going up where you have a healthy environment. It's not always true that a 10 year going up is bad.
Right. I would also say that the shape of the curve is correlated Fed funds in a tightening cycle and that is what we're seeing. So while there are other factors weighing potentially on the 10 year in terms of still very accommodative central bank policy, particularly in the Bank of Japan and the ECB, Obviously, trade is not necessarily constructive just in terms of the narrative for short term underfunded pensions going into bonds. There are some technicals, but fundamentally what you're seeing in terms of the flattening is pretty typical of a tightening cycle. And as long as it's accompanied with solid to strong economic growth, it doesn't concern us at this point.
And in fact, as we've been pointing out, we are still levered towards front end rates from a profitability perspective and we do expect the curve to steepen over time.
All right. Thank you.
Our next question is from Glenn Schorr of Evercore ISI.
Just wanted to follow-up on the competition conversation. I just want to see your loan growth decelerated, but it was in line with your 7% to 8% goal, your loan beta capture, what you're getting on the pricing side is actually a little bit beta, what better than what you've given up on the spot side. So that all seems fine, but this is the first time I remember putting that comment about the competition. Are you still okay with the 7% to 8% goal? And maybe just an add on to that, I'm just curious if part of the competition is anything to do with the private credit market that seems to be growing pretty strongly.
So I would say just a tiny little correction that our outlook was 6% to 7% core loan growth exceeding the CIB. We're at 7% now. Things are still moving ahead in line with that. I would also just point out that it is an outlook not a target. So while we still feel like that is our outlook at this point, we obviously are going to make the right decisions based upon the environment that we're in.
Competitively, the private credit market for commercial real estate for leverage lending, it's competitive. But so are our sort of mainstream competitors. So it's just that the environment is pretty constructive and everybody is trying to get to access to the high quality assets. And so margins are under pressure and we will make sure we're getting the right return for the risk we're taking.
Got you. Okay. And then the follow-up on the expense side, if you did 16 times 4 would be 64, your outlook was 62, but a lot of those were good expenses on better volumes. And are you still on track in your mind for the overhead ratio goals? Because I don't want to overly focus on the dollar amount.
It's a
couple of things. The $62,000,000 remember the $62,000,000 was before the impact of expense growth up. So the actual full year outlook was $63,000,000,000 about $63,000,000,000 including them. This quarter included one time item, the $174,000,000 on the legal entity liquidation. We knew about that.
So obviously, so it was in our number, but you can't annualize it. You can't sort of times it by 4. So you're absolutely right. As you look out for the full year, to the degree that we would be above our outlook of 63%. It will be largely driven, if not exclusively driven by higher performance related compensation on higher revenues.
With the only other caveat that as you probably know, we are waiting as I'm sure you are for when the FDIC surcharge is taken away. The FDIC anticipated that would be in the middle of the year this year, but that is now potentially at some risk to moving out into the 3rd or 4th quarter. So while that could have an impact on this year, to answer your broader question, are we still on track for our expense overhead ratios? Yes.
Our next question is from Saul Martinez of UBS.
Hi. Good morning. So just following on the theme of economics and policy, to what extent do you see trade friction, geopolitical concerns, those things starting to impact client sentiment, whether it's institutional or corporate clients? And ultimately, do you see that or how do you gauge that as being a risk to global growth and U. S.
Growth?
Yes. So I would say, so far where we are is that trade is firmly part of the risk narrative. So it's definitely, as Jamie said, on the psyche of people, but it is not at this point causing them to change the strategic actions and decisions that they're making, but clearly part of the conversation. And as currently outlined, it's more of that than it is a real impact to sort of the global macroeconomic outlook. But that isn't to say that uncertainty can't ultimately lead to more challenges or slower growth because confidence is a really important part of not just business investment cycle, but also the financial market stability.
So at this point, it's more of a risk narrative than it is an actual driver, But it is important that that uncertainty is taken off the table.
Okay. And if I could just ask a quick follow-up and apologize if you addressed it earlier, a lot of multitasking this morning. But on the market side, you did much better than what Daniel suggested in his update in terms of year on year being flattish overall. Can you just give us a sense of what changed in the last month of the
Got better. Yes. I mean, yes, in the last quarter, it got better. But let me just give you the context. The context is, as you recall, as we ended the Q1, there were some bouts of volatility and clients became more cautious and that carried over into the first half of this quarter.
And so while activity was fine, it wasn't as strong. In the second half of the quarter, that generally faded. Activity levels picked up. And I would say there were more catalysts. And ironically, one of the more catalysts when you're thinking about trading volatility or intraday volatility or volivol, Trade is part of that.
Emerging market idiosyncratic events are part of that. The European sovereign Italy situation. So there's just more in the market and just generally more client participation. Our next question is Sorry, just to finish that to make sure that no one is confused, it was pretty broad based. It was pretty consistent throughout the second half of the quarter and it wasn't a lot of one off large trades.
And our next question is from Betsy Graseck of Morgan Stanley.
Jamie, I wanted to ask about the China investment. I know that you put in the press release that you announced this quarter plans for a more significant investment in China. I just wanted to needing regulatory approval from folks over there, etcetera? Yes, needing regulatory approval from folks over there, etcetera?
Right. So, Guy, I'm just going to make a Board of Business comment for a second. We don't run because I didn't really answer Mike Mayo's question. We don't run the business guessing about when there might be a recession, because we know there's going to be 1. We already priced through a recession.
We like to blame clients, bankers, cards, accounts, products, services. That's how we run the business. Some of the decisions you make are portfolio decisions. You can add to your mortgage portfolio or you can sell it. You can reduce your growth in auto loans if you think the credit is bad.
And of course, we will do that when the time comes. But that will still be adding accounts. And so to me, I don't worry as much about the 10 year bond or all these various things. We try to manage those risks. We want more clients, almost every business we're in, we want to do a very good job for them in products and services.
China, it's a long term story. We're not looking for any immediate thing. Over in the next 12 years or so, China will have internal markets, think of their bond market, stock market, probably very close equal to size of the United States of America. Therefore, we want to be able to do everything we do here in China. We can do a lot of that in Hong Kong today, but we can't do in Shanghai.
So, we've applied for licenses, both and obviously, we need permission ultimately from our regulators and from their regulators. So, it's totally in their control. And it may or may not be affected by trade, but I look at this as a point in time, it is what it is, eventually we get these licenses and eventually hopefully we'll be a large to own competitor in Shanghai. Remember, we already do a lot of that business out for Chinese companies around the world, for Chinese company in Hong Kong, and we do a lot of people going into China. So we're looking for the full set of licenses to do what we need to do for Chinese companies.
And ultimately, I think it would be good for China to have a company like JPMorgan Equity, debt, credit, transparency, governance issues inside China.
But right now today, the ability to operate in Shanghai?
Well, no, look, we already do deposits. We do certain banking. What we can't do is equity, debt and trading of equity and debt. Okay. So if we get this license one day at 51%, we'll be able to make the and these licenses will be able to do basic equity underwriting, equity sales and trading, research, debt underwriting, debt sales and trading.
We could do all of that today in Hong Kong. Remember, Chinese companies, they can do it in Shanghai or they can do it in Hong Kong or they can do it in London or they can do it in New York. We just want the full capability.
Our next question is from Gerard Cassidy of RBC.
Good morning.
Good morning.
Mary Anne, can you share with us and correct me if I'm wrong, I think you guys have given us some color in the past about the impact of the Fed taking down their balance sheet over the next 3 to 5 years by a couple of $1,000,000,000,000 that it will impact your deposit side of the balance sheet. Can you give us an update of where that stands today?
Well, so the Fed has been on a pretty well telegraphed path, reducing their balance sheet by about $60,000,000,000 a quarter. We talked about the fact that if you take $1,500,000,000 out of the system, if you look at as the Fed was going its balance sheet, about half of that will ultimately impact deposits and our share of it would be $0.10 So we've talked about potentially that kind of $50,000,000,000 to $75,000,000,000 of deposit outflows over the several years it would take to reduce that, but primarily they would be not exclusively, but primarily non operating and therefore limited impact on liquidity or basis. And so it's playing out textbook right now.
Okay. And then as a follow-up, I know you've touched on this increased competition. Can you give us maybe some more details in the commercial real estate and the residential mortgage area. What you're actually seeing? Is it just pricing or is it now loan covenants?
Is it loan to values? Any further color there?
So residential mortgage, correspondent in particular is pricing. Pricing, pricing, pricing. And so we will see share if the pricing goes to what we could consider to be not sufficient to return shareholder value. In the commercial real estate space, I would say it is primarily pricing. So spreads are under a lot of pressure.
And the competition that I said, it's GFEs, it's insurance companies, it's non bank financial institutions. It's a little bit less credit terms, but still pretty robust, albeit that we are seeing a tiny shift to the right in LTVs. We're not going there by the way. But I would call it pretty modest. So I'd say generally terms are holding up quite well.
And the competition issue, I think it's good for the country, the United States that we have a fully competitive bidding card, mortgage, retail, asset management, commercial banking, investment banking, sales and training. There are strong competitors everywhere. It's just recognizing that. That's all it is. It's a good thing.
It's called capitalism.
Our next question is from Al Alevizakos of HSBC.
I've got one question and the follow-up. I do care about the geographical speed of the IV performance. You mentioned that there were certain catalysts and you actually mentioned both the Italian situation, but also the emerging markets. So I want to know whether the strength was driven by the U. S.
Or whether there was a specific kind of areas where weaker or stronger. And my follow-up is 3. But It'd be really helpful if you guys weren't on your cell phone.
Sorry, Al. I'm really, really sorry, but we actually were you were breaking up. And so I didn't catch most of that question.
Where is the IB doing well internationally, U. S, Asia, Italy?
Okay. So I would say across regions. Equities, strong performance across regions. While there were more catalysts this quarter, so you mentioned Italy, I think, none of those were particular drivers. So we did fine on all of those events I mentioned.
So I would say broad based gaining share we think in some areas in equities, cash and prime in particular and holding our own elsewhere and I would say solid performance across the fixed spectrum.
And investment banking? Investment
banking, yes, gaining share in investment banking. But obviously, you can't look at any 1 quarter.
Thanks for that. And the second part, and sorry that you couldn't listen before, is do you feel that you started picking market share from the European competitors in the U. S, especially the ones that they are deleveraging?
Well, I mean, I would say that if you just go back over the course of the last couple of years, you have seen some share shift from European banks to U. S. Banks broadly. In the prime space, I would say U. S.
Prime incumbents are gaining some share, but it's not a particularly new trend and it's not the dominant trend.
Our next question is from Matt O'Connor of Deutsche Bank. Hey, Matt.
Good morning. To follow-up on the
net interest margin, you mentioned ex the markets business, it was still increasing. And I was wondering if you could size the magnitude of the NIM increase linked quarter on a core basis ex markets?
Yes. So linked quarter reported down 2 basis points because of lower markets NII and higher market asset $20,000,000,000 Core up 8 basis points.
Okay. That's helpful. And then just separately, within CIB, the net charge offs went up. Is that just some of the cleanup in energy? I know you mentioned that there was reserve release related to energy, but you had a little blip in the charge offs there and just want to get some color on that.
So in the CIB, the charge offs were given by two names and the principal one was the remaining piece of the Steinhoff loan we sold this quarter. We had a reserve release against it that was larger.
Our next question is from Gerard Cassidy of RBC.
Thank you. Just a follow-up, Mary Anne. On the capital return that you guys were approved for in terms of the share repurchase, is that going to be spread out evenly over the next four quarters? Or is it going to be more front end loaded?
So we haven't disclosed that, but if you look at our historical pattern, it's pretty even.
Our next question is from Betsy Graseck of Morgan Stanley.
Hi, Betsy.
Hey, just a question on CECL. I think Jamie mentioned in the past that CECL is not a big deal for you guys and maybe you could explain why and what kind of prep work and what you're thinking about as you work to adopt that over the next couple of years?
Sure. Well, I mean, look, CECL is not a big deal insofar as we're getting ready for it. I will tell you that we haven't disclosed an adjustment number on the basis that we're still working through the modeling and the data and it is more complicated perhaps operationally to get everything lined up than you might think. We're going to intend to be running some stuff in parallel next year. So we'll be able to give you much more color next year.
Generally speaking, as you move to light of loan losses, it won't shock you to know that we will have an adjustment to our reserves through equity. It will be driven most likely by any of the portfolios that have longer weighted average life versus incurred loss models. Card would be the most notable to a lesser extent, unfunded wholesale commitments. But it will be manageable in the context of the firm. It goes through equity.
And then if you think about the economics, the cash flows, the NPV of these loans doesn't change.
That was what my comment relates to.
Yes. It doesn't change the economics of the loans. You upfront a little bit of reserves, you get paid for over time. We don't think it's going to fundamentally shift the dynamics, but that will play out.
We don't make economic decisions based upon accounting.
Are there any asset classes where it's shorter under CECL than under incurred loss model?
It's hard because it's life of loan. So it's hard to have a shorter it's difficult to imagine that a life of loan could be shorter than an incurred loss. So no, not really. But for us, the reason why it's pretty limited, not to say there's no other impact, but the reason why it will be mostly driven by the areas I mentioned is because in most of our wholesale space and so many of our other products, we are covered for multiple years, if not close to life at this point.
Our next question is from Erika Najarian of Bank of America.
Yes, I thought I joined the party too. I was feeling a little left out. A quick question follow-up on card retention. You mentioned that rewards redemption is a sign of engagement. I'm wondering if you could share with us once redemption hits a certain level in terms of the number of points, so the number of points remaining may not be enough to redeem a trip or whatever, What is the retention level then?
I'm not sure that I totally follow the question. I just
don't They're constantly creating rewards points. And
they're constantly using it. It. And when they use
rewards points, some points cost us more than other points. And the pace of what they use can change economics a little bit. But basically, it's still kind of what we expect over time.
Yes. And remember that like in a very, very oversimplified model of the universe, we would want an extraordinarily high level of redemption. We are giving these rewards to customers because we think that they are and they indeed are perceiving great value in them. And so we're just continuing to observe that as the mix changes.
Very helpful. Thank you.
And we have no further questions at this time.
Thank you very much, you guys. Thanks for joining. We'll see you soon.
This concludes today's conference call. You may now disconnect.