Please stand by. We're about to begin. Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's second 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, Marianne Lake. Ms. Lake, please go ahead.
Thank you, operator. Good morning, everyone. I'm going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on page one, the firm reported net income of $8.3 billion and EPS of $2.29 on revenue of $28.4 billion. All were records for a second quarter, even excluding the benefit of tax reform. Our return on tangible common equity was 17%, and also included in the result were two 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 assets and merchant processing volumes each up 12%. We maintained our number one rank in global IB fees, 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. In asset and wealth management, AUM and client assets were both up 8%. Turning to page two for more details about the second quarter. The firm delivered strong core positive operating leverage this quarter. Revenue of $28.4 billion was up $1.7 billion or 6% year-on-year.
Net interest income was up $1.1 billion or 9%, reflecting the impact of higher rates and loan growth, partially offset by lower markets NII. Non-interest revenue was up over $600 million, 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. Remember that last year included a significant legal benefit. Excluding these two items, NIR would have been up $1.6 billion and total revenue up 10%. Expense of $16 billion 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 lease growth. About a third related to continued investments in technology as well as headcount across the businesses.
The remainder was largely a loss on the liquidation of a legacy legal entity as part of our simplification efforts. If you exclude this item, expense was up only 7%. The legal entity loss together with the rewards liability adjustment in card are the two notable items I mentioned at the beginning, for a total reduction of over $500 million pre-tax. Credit costs of $1.2 billion were flat year-on-year, and credit trends remained favorable across both consumer and wholesale. Shifting to balance sheet and capital on page three. We ended the second 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 $6.6 billion of capital to shareholders. 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 billion over the next four quarters, and the board announced its intention to increase our common dividend to $0.80 per share effective in the third quarter. Moving on to page four on consumer and community banking. CCB generated $3.4 billion 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 although growth is slower than a year ago, we are seeing record high retention rates and customer satisfaction scores.
Client investment assets were up 12%, with more than half of the growth from net new money flows. We are capturing an outsized share as our customers shift from deposits to investments. Card sales volume was up 11%, and we announced several new cards as we continue to update our product offering. Revenue of $12.5 billion 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. 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 million, reflecting strong customer engagement across our Ultimate Rewards offerings. As a result, the card revenue rates were 10.4% for the quarter. Our full year guidance of approximately 11.25% holds. Expense of $6.9 billion was up 6% year-on-year, driven by higher auto lease depreciation and investments in technology. Finally, on credit, charge-offs were down $36 million year-on-year, including a recovery of about $130 million from a loan sale in home lending. This was largely offset by higher net charge-offs in card. The card charge-off rate was 3.27%, reflecting seasonality, and is in line with expectations and in line with our guidance. There were no reserve actions taken this quarter. Turning to page five and the Corporate & Investment Bank.
CIB reported net income of $3.2 billion on revenue of $9.9 billion, up 11%, and an ROE of 17%. In banking, we maintained our number 1 ranking for the quarter and year-to-date in global IB fees. It was a record first half performance. We grew share across all regions. IB revenue of $1.9 billion was up 13% year-on-year, outperforming a market that was down slightly, as we saw robust activity, particularly in M&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. We gained share in a competitive environment.
Driven by IPOs and convertibles in the two most active sectors, healthcare 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. 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 subproducts. Looking forward, the overall pipeline remains strong. Moving on to markets. Total revenue was $5.4 billion, 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 FICC 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 Securities Services revenue were each up 12%, driven by higher rates and deposit balances, and Security Services also benefited from higher asset-based fees on new client activity and higher market levels. Finally, expense of $5.4 billion was up 11%, driven by higher performance-related compensation, volume-related transaction costs, and investments in technology. The cost to revenue ratio for the quarter was 27%, consistent with the prior year quarter. Moving to commercial banking on page six.
Another strong quarter for this business with net income of $1.1 billion and an ROE of 21%. Revenue was a record for a second quarter, up 11% year-on-year, driven by higher deposit NII and strong investment banking activity. Growth IB revenue of $739 million 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 million 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&I loans were up 3% year-on-year and sequentially due to increased M&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 seven basis points. Moving on to asset and wealth management on page seven. Asset and wealth management reported net income of $755 million, with a pre-tax margin of 28% and an ROE of 33%. Revenue of $3.6 billion 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 $2.6 billion was up 6%, driven by continued investment in advisors and technology, as well as higher external fees on revenue growth.
For the quarter, we saw net long-term inflows of $4 billion, with positive flows across multi-asset equities and alternatives, partially offset by outflows in fixed income. Additionally, we saw net liquidity inflows of $17 billion. AUM of $2 trillion and overall client assets of $2.8 trillion 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, where 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 eight. Corporate reported a net loss of $136 million. The result included a pre-tax $174 million loss on the liquidation of a legacy legal entity previously mentioned.
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. To close, the 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 a second quarter whichever way you slice 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&A?
At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We kindly request that you ask one question and only one related follow-up. If you would like to ask additional questions, please press star one to be re-entered into the queue. Our first question comes from Ken Usdin of Jefferies.
Morning, Ken.
Hey, good morning, Marianne. 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? Is this a one-time event, and does it affect the card revenue rate outlook?
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. 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. This is less about competition per se. In fact, we have record low sales attrition, which in a competitive environment is really very good.
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 fight less, and we're seeing that, and they will bring us more of their share of deposits and investments as we deepen relationships. 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. In the press release, Jamie mentioned 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 pretty global across all businesses as a general matter. There are some obvious areas where it's pretty acute. 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 where we are in the cycle in the economy and like. I would say it's broad-based. It's everywhere. That said, we are holding our own and in many cases, gaining share. We're doing pretty well.
Our next question is from John McDonald of Bernstein.
Hi, Marianne. I wanted to ask you what you're seeing this quarter in terms of consumer deposit trends with 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, and whether those are affecting your deposit balances with consumers being attracted to those high yields, and are they affecting your pricing decisions?
Okay. I would say you talked consumer deposits. I'm talking retail now, not the sort of high net worth base. I'll come back to that. Consumer deposits up 5% year-over-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 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. It doesn't even appear to be rate seeking. Spending more would be the second driver, and to a much less extent are we seeing behaviors that look like they're rate seeking at this point.
We're not seeing that kind of migration out of the company to online or other competitors at this point. 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. Again, we continue to recapture the vast majority of those. At this point, things are playing out as we would have expected, and we're not actually losing deposits en masse to any third parties.
Okay. Just to follow up on that, can you remind us what's the opportunity you see with the rollout of Finn, and what advantages you expect to have in that arena?
Yeah. I would look at Finn as one of many digital innovations that we're doing, and I would look at it also in conjunction with broader digital account opening. Although we've now launched Finn nationwide, I think it's fair to say it's still very nascent and we're still learning. We're going to continue to observe. It's got very high net promoter scores, by the way, so customer experience is good. It's still quite young.
We haven't even marketed it either.
No, we're just starting. I would say digital account opening, on the other hand, is a pretty good success story. We are seeing a lot more accounts opened digitally across the channels, and we're seeing, of those, a decent chunk are net new to the bank. Where we're seeing existing customers open new accounts, we're getting incremental money. We are seeing our digital efforts pay off. Even more broadly than that, we could go into QuickPay and Zelle and the like. I wouldn't focus overly on Finn as an isolated thing, but think digital more broadly.
Our next question is from Jim Mitchell of Buckingham Research.
Hey, good morning.
Morning, Jim.
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 two. What are you guys seeing on the ground? Do you think that what we've seen so far is a good indicator for maybe a more sustained pickup in growth?
Yeah, I would say that we would characterize it. If you use the commercial bank C&I loans as a kind of bellwether, there has been decent demand. I mentioned it in my remarks, but decent demand, not exclusively but partially on the back of a very robust and active M&A environment. The demand is there. I would say growth is solid and in line with our expectations. We will continue to hope to see that growth as we go through the year. There may be other tailwinds. We've yet to see the full effect of tax reform flow through into profitability and free cash flow. 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.
Maybe as a follow-up, when we think about NIM going forward, I think it was a couple of years ago that you talked about maybe normalized being somewhere in the 265-275 range. You're at 246 now. Is there a certain loan-to-deposit ratio you think you need to have or level of rates? Just trying to think through how we think about NIM going forward.
Yeah, we're at Fed funds of 175-200 right now, so we're not anywhere yet close to normal rates. When we think about what we've talked about normalizing NIM, when we're thinking about it more through the cycle, adjusted for new liquidity rules and everything else. We have a number of further rate hikes to go before we would reach that point. We are on a core basis. Remember, we have a fairly sizable market balance sheet. On a core basis, we are continuing to see NIM expansion in line with expectations and moving up towards that. 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?
Yeah. I would say on the comment period for the SCB, obviously during the comment period, the regulators are quiet. 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. 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, we're very optimistic that the comments will be taken on board. You know what they are. Volatility was evident in spades in this test. Opaqueness, GSIB. We can go through them. I'm sure we will. We remain optimistic that the comments, the bilateral discussions will start now. 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 felt like status quo to prior years.
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 tooth in the economic cycle. Clearly, the strong activity levels that you posted this quarter and the credit metrics that you posted would suggest otherwise. I'm wondering, both Jamie and Marianne, 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.
I would say two 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. There is plenty potentially of room to play. 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. 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 zero. Credit, very benign. That said, we are in cyclical businesses, no doubt.
We are preparing, and we will be ready when the cycle turns, and no doubt there will be impacts from that. 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.
Hi, Mike. You might be on mute.
Hi. Can you hear me?
Yes.
Just I wanted to follow up on that last question, if Jamie could respond too. Marianne, you said the macro is very supportive. You sound very positive. On the other hand, the 10-year Treasury yield has flashed some warning signs to a variety of parties. 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? How should we think about the 10-year? How do you think about the 10-year, and how do you manage to a flatter yield curve?
Just real quickly, Marianne said it. We've had almost nine 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 slack in the system, people going back to the workforce. The consumer balance sheet's in good shape. Capital expenditures are going up. Household formation is going up. Home builders are in short supply. The banking system is very healthy compared to the past. Consumer confidence and business confidence are very high, albeit off their highs, probably because of some of our trade. If you're looking for potholes out there are not a lot of things out there, growth is accelerating. Of course, things are always a little bit different.
My own personal view is that 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. The Fed is reversing the balance sheet. I think it's very easy that rates can go up, the 10-year rates can go up in a healthy environment. In history, we've had rates going up where you have a healthy environment. It's not always true that the 10-year going up is bad.
Right. I would also say that the shape of the curve is correlated to Fed funds in a tightening cycle, and that is what we're seeing. 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, where obviously trade is not necessarily constructive just in terms of the narrative. For short-term underfunded pensions going into bonds, there are some technicals. Fundamentally, what you're seeing in terms of the flattening is pretty typical of a tightening cycle. As long as it's accompanied with solid to strong economic growth, it doesn't concern us at this point. 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.
Hi, Glenn.
Thanks very much. 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%-8% goal. Your loan beta capture, what you're getting on the pricing side is actually a little bit better than what you're giving up on the spreads side. 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%-8% goal? Maybe just an add-on to that, I'm just curious if part of the competition has anything to do with the private credit market that seems to be growing pretty strongly.
I would say just a tiny little correction that our outlook was 6%-7% core loan growth, excluding 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. 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. So are our sort of mainstream competitors. It's just that the environment is pretty constructive, and everybody is trying to get to access to the high-quality assets. Margins are under pressure, and we will make sure we're getting the right return for the risk we're taking.
Got you. Okay. To follow up on the expense side, if you did 16 times four, it would be 64. Your outlook was 62, but a lot of those were good expenses on better volumes. 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 things. Remember, the 62 was before the impact of expense gross up, so the actual full-year outlook was $63 billion, about $63 billion, including them. This quarter included a one-time item of $174 million on the legal entity liquidation. We knew about that, obviously, so it was in our number, but you can't annualize it. You can't sort of times it by four. 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 third or fourth quarter. 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.
Hi.
Good morning. 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? Ultimately, do you see that, or how do you gauge that as being a risk to global growth and U.S. growth?
Yeah. I would say, so far where we are is that trade is firmly part of the risk narrative. It's definitely, as Jamie has 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. Clearly, part of the conversation. As currently outlined, it's more of that than it is a real impact to sort of the global macroeconomic outlook. 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 the business investment cycle, but also the financial market stability. At this point, it's more of a risk narrative than it is an actual driver. It is important that that uncertainty is taken off the table.
Okay. If I could just ask a quick follow-up, and apologize if you addressed it earlier. A lot of multitasking this morning. On the market side-
My bad
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 quarter?
Got better.
Yeah. In a nutshell, it got better. Let me just give you the context. The context is, as you will recall, as we ended the first quarter, there were some bouts of volatility, clients became more cautious. That carried over into the first half of this quarter. While activity was fine, it wasn't as strong. In the second half of the quarter, that generally faded. Activity levels picked up. I would say there were more catalysts. Ironically, one of the more catalysts when you're thinking about trading volatility or intraday volatility or vol of vol, trade is part of that. Emerging market idiosyncratic events are part of that. The European sovereign Italy situation. There was just more catalysts in the market and just generally more client participation.
Our next question is from-
Just, 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, it wasn't a lot of one-off large trades.
Our next question is from Betsy Graseck of Morgan Stanley.
Hi, Betsy.
Hi, good morning. 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 understand the timing. Is this something that's over the next year, or this is a longer-term three to five-year? If you could give us a sense as to how much is in your control versus needing regulatory approval from folks over there, et cetera.
Right. I'm going to make a board of business comment for a second. Because I didn't really answer Mike and Mia's question. We don't run the business guessing about when there might be a recession because we know there's going to be one. We already priced through a recession. We like to gain 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's bad. Of course, we will do that when the time comes. But we'll still be adding accounts. 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 want to do a very good job to them in products and services. China, it's a long-term story, okay? We're not looking for any immediate thing. In the next 12 years or so, China will have internal markets, think of their bond markets, stock markets, probably very close equal to size of the United States of America. We want to be able to do everything we do here in China. We can do a lot of that in Hong Kong today, we can't do it in Shanghai. We've applied for licenses, obviously, we need permission ultimately from our regulators and from their regulators. It's totally in their control. It may or may not be affected by trade, I look at this as a point in time. It is what it is.
Eventually, we'll get these licenses, eventually, hopefully, we'll be a large, strong competitor in Shanghai. Remember, we already do a lot of that business out for Chinese companies around the world, for Chinese companies in Hong Kong, we do a lot of people going into China. We're looking for the full set of licenses to do what we need to do for Chinese companies. Ultimately, I think it'll be good for China to have a company like JPMorgan do equity, debt, credit, transparency, governance issues inside China.
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? If we get this license one day at 51%, with these licenses, we'll 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 capabilities.
Our next question is from Gerard Cassidy of RBC.
Good morning.
Good morning.
Marianne, 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 three to five years by a couple of trillion dollars, that it will impact your deposit side of the balance sheet. Can you give us an update of where that stands today?
The Fed has been on a pretty well-telegraphed path reducing their balance sheet by about $60 billion a quarter. We talked about the fact that if you take a trillion and a half dollars out of the system, if you look at as the Fed was growing its balance sheet, about half of that will ultimately impact deposits, and our share of it would be 10%. We talked about potentially that kind of $50 billion-$75 billion of deposit outflows over the several years it would take to reduce that. Primarily they would be, not exclusively, but primarily non-operating, and therefore limited impact on liquidity or betas. It's playing out textbook right now.
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?
Residential mortgage, correspondent in particular, is pricing. Pricing, pricing. 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's primarily pricing. Spreads are under a lot of pressure, and the competition that I said, it's GSEs, 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. I would say generally terms are holding up quite well.
On the competition issue, I think it's good for the country, the U.S., that we have a fully good competitor.
Yes
mortgage, retail, asset management, commercial banking, investment banking, sales and trade, 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 Alevizos Alevizakos of HSBC.
Hi. Thank you for taking my question. I've got one question and a follow-up. I do care about the geographical split of the IB performance. You mentioned that there were certain catalysts, and you actually mentioned both the Italian situation, but also the emerging markets. I want to know whether the strength was driven by the U.S. or whether there were some specific kind of areas that were weaker or stronger. My follow-up is three. Do you feel that you're picking up much strength as from a certain people? Especially home.
I'm sorry.
It'd be really helpful if you guys weren't on your cell phone.
No, sorry, Al. I'm really sorry. Actually you were breaking up. I didn't catch most of that question.
Well, where is the IB doing well internationally, U.S., Asia, Italy?
Okay. I would say across regions.
Yes.
Equities, strong performance across regions. While there were more catalysts this quarter, so you mentioned Italy I think, none of those were particular drivers. We did fine on all of those events I mentioned. I would say broad-based. Gaining share, we think, in some areas in equities, cash and prime in particular, and holding our own elsewhere. I would say solid performance across the six sectors.
Investment banking?
Investment banking. Gaining share in investment banking. Obviously you can't look at any one quarter.
Thanks for that. 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 de-leveraging?
Well, 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. 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. I was wondering if you could size the magnitude of the NIM increase linked quarter on a core basis ex markets.
Yeah. Linked quarter reported down two basis points because of lower markets NII and higher markets assets, $20 billion. Core up eight basis points.
Okay, that's helpful. 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.
Charge-offs is better.
Charge-offs. In the CIB, the charge-offs were driven by two names, and the principal one was the remaining piece of the Steinhoff loan that we sold this quarter. We had a reserve release against it that was larger.
Our next question is from Gerard Cassidy of RBC.
Hi, Gerard.
Thank you. Just a follow-up, Marianne.
Sure.
On the capital return that you guys were approved for in terms of the share repurchase-
Yeah
is that going to be spread out evenly over the next four quarters, or is it going to be more front-end loaded?
We haven't disclosed that, but if you look at our historical pattern, it's pretty even.
Very good. Thank you.
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. 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, look, CECL's 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. 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. We'll be able to give you much more color next year. Generally speaking, as you move to life 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.
It'll be manageable in the context of the firm. It goes through equity. If you think about the economics, the cash flows, the NPV of these loans doesn't change.
Which is it might come related to.
Yeah, it doesn't change the economics of the loans. You upfront a little bit of reserves, you get paid for it 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 on 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 loans, it's difficult to imagine that a life of loan could be shorter than an incurred loss. No, not really. 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 for many of our other products, we are covered for multiple years, if not total life of loan at this point.
Our next question is from Erika Najarian of Bank of America.
Well, we're top tier, so hiya.
Yeah, I thought I'd joined the party, too. I was feeling a little left out.
Okay.
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.
Yeah
in terms of the number of points. 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 think.
They're constantly creating rewards points.
Yeah.
They're constantly using the rewards points.
Got it. Yeah, if you think-
When they use rewards points, some points cost us more than other points.
In a-
The pace of what they use and change the economics a little bit. Basically, it's still kind of what we expect over time.
Yeah, and remember that in a 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. So we're just continuing to observe that as the mix changes.
Very helpful. Thank you.
We have no further questions at this time.
Thank you very much, you guys.
Thanks for joining.
Bye-bye.
We'll talk real soon.
This concludes today's conference call. You may now disconnect.