Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's First 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 Chief Financial Officer, Mary Anne Lake. Ms. Lake, please go ahead.
Thank you, operator, and good morning, everyone. Just to let you know that Jamie is actually on the road with clients today, so he's not able to join us this morning, but sends his regards. So now 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 $8,700,000,000 EPS of $2.37 dollars and a return on tangible common equity of 19 percent on revenue of $28,500,000,000 benefiting from broad based strength and performance, but also lower taxes and seasonality.
To let this quarter's performance in its context, on a core basis, pretax earnings grew 13% year on year, benefiting from higher rates, solid growth across other revenue drivers and continued investments in our businesses. And even excluding the benefit of tax reform, net income was a clear record this quarter. Included in the results you see on the page, approximately $500,000,000 of mark to market gains on certain investments previously held at cost due to the adoption of a new accounting standard. These gains are reported in CIB markets revenue. Against that, there were a number of other smaller, but nevertheless notable items, including changes in credit reserves, FCA, investment securities and private equity losses and legal, which together substantially offset those gains.
Underlying results continue to be strong. Average core loan growth, excluding the CIB of 8% year on year. Card sales and merchant processing volumes up 12% and 15%, respectively. We maintained our number one rank in global IDCs and have net income of $1,000,000,000 in the commercial bank. And in Asset and Wealth Management, we saw strong long term flows across all regions and 10% AUM growth.
Turning to Page 2, some more details about the Q1 results. So before we get into the numbers and the performance drivers for the quarter, I do want to remind you that there has been a couple of adjustments to the numbers on the page, which are in line with the guidance that we gave during the Q4. First, being the impact of the new revenue recognition standard. You will recall this will have the full year impact of grossing up non interest revenue and expense each by approximately $1,200,000,000 The impact for the quarter of about $300,000,000 is included here and prior periods have been similarly restated. 2nd, as a result of tax reform, certain tax equivalent adjustments that are included in managed revenue are lower on a relative basis and for that prior periods have not been restated.
This impact, which was also about $300,000,000 for the quarter, reduced revenue, was split about fifty-fifty in NII versus NIR and offset in tax expense. So with that, revenue of $28,500,000,000 was up CAD 2,700,000,000 or 10 percent year on year. Net interest income was up CAD 1,100,000,000 mainly reflecting the impact of higher rates. Non interest revenue was up $1,600,000,000 year on year. And while it includes the mark to market gains on the first page, it also includes approximately $400,000,000 of losses on investment securities and legacy private equity investments.
Adjusted expense of CAD16 billion was up 6% year on year, reflecting higher compensation expense as well as business growth, including auto lease depreciation. Credit costs of $1,200,000,000 were down $150,000,000 year on year. Consumer charge offs were in line with expectations and guidance and there were no changes to reserve this quarter. In wholesale, we had a net reserve release of about $170,000,000 driven by a single oil and gas name. We'll see that our effective tax rate for the quarter ended a little above 18% compared to the 17% guidance we gave, driven by a combination of higher pretax earnings as well as geographical mix.
We're expecting full year effective tax rate to be close to 20%. Shifting to balance sheet and capital on Page 3. We ended the Q1 with CET1 of 11.8%, down about 30 basis points versus last quarter. Capital generated was offset by net capital distributions and changes in AOCI. So the reduction was driven by higher risk weighted assets, reflecting the increased level of market activity, which similarly impacted all other ratios.
In the quarter, the firm distributed $6,700,000,000 of capital to shareholders. And last week, we submitted our 2018 CCAR capital plan to the Federal Reserve. But as you know, we can't provide any details of that at this stage. So before moving on to the lines of business, on Page 4, I'll briefly address this week's new capital news. 2 Newcastle NPRs were released this week, the stressed capital buffer and EFLR.
Starting with the stressed capital buffer, the proposal was broadly in line with the narrative and expectations that have been set. There is a comment period. We intend to fully participate in the process and are encouraged that there is an openness from current leadership to really consider feedback from the industry. On the positive side, we support the convergence of stress and DAU Capital and in general support simplification of the framework. We agree that firms should be required to hold adequate capital to withstand severe stress, calibrated to firm specific exposures and risks.
We also agree that many of the changes to the construct of the test, for example, not having to hold capital for full distributions during a stress environment, better reflect reality and board approved policies. That said, stepping right back, if we are fundamentally reconsidering the construct of minimum capital levels, then all of the building blocks should be in play, including the duties of surcharge to ensure they all hang together. And to reinforce points that we previously made, 1st and foremost, the fixed coefficients need to be recalibrated in light of the economic growth we've had. 2nd, the underlying premise for the surcharge and more particularly U. S.
Gold placing is somewhat unnecessary for a firm that is compliant with all of the post crisis reform that directly addresses systemic risks, which includes the severity of the CCAR stress, incorporating material G SIB specific instructions. Beyond that, obvious challenges with the current proposal include the significant volatility and the opacity in the Fed results, as well as challenges around implementation. So getting to the numbers, you can see on the page our estimated historical stress capital buffer derived from the Fed results. And while for 2017, it would imply no impact on our minimum capital levels, you can see that in years prior, the buffer would have been higher. And you know that in 2018, the scenario was in many ways more severe and the lower tax rate has a net negative bias.
Further, there will potentially be a need for larger management buffers if it is necessary to accommodate significant volatility. So acknowledging everything that we don't know, it's fair to say that our minimum level of capital, including a management buffer, would likely be higher under this proposal, but likely still in the range of 11% to 12%. Briefly on ESR, as you know, we are not currently bound by leverage. And primer stating this proposal would reduce the ESR minimum. So my primary comment on this is to reiterate my earlier comments about the need to be willing to re examine the GCIB surcharge, regardless of the fact that it reduces the number.
Overall, we've been waiting for these proposals and we look forward to participating in the comment process. Moving to Page 5, and let's start with Consumer and Community Banking. CCD generated $3,300,000,000 of net income an ROE of 25%. Core loans are up 8% year on year, driven by home lending up 13%, business banking up 7%, card up 5% and auto loans and leases up 6%. Deposits grew solidly at 6% year on year.
We believe we continue to outpace the industry, which as we previously noted is experiencing a slowdown as consumers are increasing their allocations to investments, but also based upon our data they appear to be spending more, reflecting a continued high level of confidence. Client investment assets were up 13% year on year with half of the growth from net new money flows and with record flows this quarter. And active mobile users were up double digits. Revenue of $12,600,000,000 was up 15% year on year. Consumer and Business Banking revenue was up 17% on higher NII driven by continued margin expansion and deposit growth.
Home lending revenue was roughly flat and portfolio loan spread and production margin compression were predominantly offset by higher net servicing revenue. And charge, merchant services and auto revenue was up 18%, including higher auto lease income, but it was driven by card on lower net acquisition costs, higher loan balances as well as margin expansion. The card revenue rate was 11.6% in the quarter. Expense of $6,900,000,000 was up 8% year on year, driven by investments in technology and marketing, higher auto lease depreciation and continued underlying business growth. The overhead ratio of 55% was roughly flat quarter on quarter, despite seasonally higher payroll taxes and higher marketing expenses.
Finally, on credit, the trends across our portfolio remain favorable. Charge offs were driven by card and were in line with guidance, and there were no reserve actions taken this quarter. Recall last year included a net impact of a little over $200,000,000 related to the student loan portfolio sale. Turning to Page 6 and the Corporate and Investment Bank. CID reported net income of $4,000,000,000 on revenue of $10,500,000,000 and an ROE of 22%.
This quarter in banking, we maintained our number one ranking in global IB fees, as well as our number one ranking in North America and EMEA. IBCs were $1,700,000,000 down 10% from a record quarter last year, as strong performance in M and A was more than offset by lower debt and equity underwriting fees. Advisory fees were up 15% year on year as we saw good momentum and some large deals closed. We ranked number 1 in global M and A wallet and game share in every region. And for the quarter, we announced and completed more deals than any other bank.
Equity underwriting fees were down 19% in a market that was also down and versus a strong Q1 last year, which included a number of large deals. This quarter we ranked number 3 in a very competitive environment. And debt underwriting fees were down 18%, driven by a slow start to the year, primarily due to increased market volatility, which reduced issuance. Despite these headwinds, we maintained our number one ranking globally. And looking forward to the rest of the year, across products, the overall pipeline remains strong.
Moving on to markets. Total markets revenue was $6,600,000,000 up 13% year on year reported. However, as mentioned, this includes the mark to market gains we called out on the front page and also includes a reduction of about $150,000,000 reflecting lower tax equivalent adjustments year on year. Accounting for both of these items, market revenues would have been up about 7%. Fixed Income Markets adjusted revenue was flat versus a strong Q1 last year, with rates and spread markets reverting to more normal levels following significant outperformance last year being offset by strong emerging markets and commodities performance.
It was a record quarter for equities and revenue was up 25%, a well diversified story driven by broad strength and continued momentum throughout the quarter with increased volatility benefiting all of equity derivatives. In addition, we saw share gains in cash and continued client activity driving growth in Prime as the investments that we've made in the business are paying off. Treasury Services and Security Services revenue were both $1,100,000,000 for the quarter and up 14% and 16%, respectively, driven by higher rates and balances. Security Services also benefited from asset based fee growth on both market levels and new client activity. Finally, expense of $5,700,000,000 was up 9% year on year, half being higher compensation expense with a comp to revenue ratio of 29% and the remainder primarily driven by higher transaction costs in markets.
Moving to Commercial Banking on Page 7. Another very good quarter in this business with net income of $1,000,000,000 and ROE of 20%. Revenue was up 7% year on year, driven by higher deposit NII as we continue to benefit from higher rates, partially offset by lower IB revenue. Sequentially revenue was down 8%, largely driven by the impact of tax reform. Gross IB revenue of CAD 569,000,000 was down 15% year on year on a lower overall industry wallet and fewer large transactions versus last year.
That said, the underlying flow of business remains robust. In fact, it was a record quarter for middle market clients and the pipeline looks strong. Expense of $834,000,000 was up year on year as we continue to invest in the business both in bankers and technology. Loan balances were up 6% year on year and flat sequentially. C and I loans were up 5% on strength in our expansion markets as well as specialized industries, but down 1% sequentially, roughly in line with the industry.
CRE loans were up 7% year on year and up 1% quarter on quarter as the competition is significantly elevated. For both, while client sentiment is high in the wake of corporate tax reform and we remain hopeful that this will support higher demand later in the year, We're not seeing that yet and we are maintaining pricing and credit discipline. Finally, credit performance continues to be very good with 0 net charge offs this quarter. Moving on to Asset and Wealth Management on Page 8. Asset and Wealth Management reported net income of $770,000,000 with a pretax margin of 26% and an ROE of 34%.
Revenue of $3,500,000,000 was up 7% year on year, driven primarily by higher management fees on growth in AUM, as well as higher NII on deposit margin expansion and loan growth. Expense of $2,600,000,000 was down year on year as the Q1 of last year included nearly $400,000,000 of legal expense. Adjusted expense would have been up 8%, driven by higher external fees on revenues as well as higher compensation. For the quarter, we saw net long term inflows of $16,000,000,000 including $5,000,000,000 in active equities, with strength across all regions benefiting from strong long term performance. We saw net liquidity outflows of $21,000,000,000 largely driven by a combination of recent M and A activity and the impact of cash repatriation due to tax reform.
AUM of $2,000,000,000 and overall client assets of $2,800,000,000 were up 10% and 9%, respectively, on higher market levels globally as well as net inflows. Deposits were down 9% year on year, reflecting the migration into investments which we've previously discussed, but were about flat sequentially on seasonally higher balances. Finally, we had record loan balances up 12% with strength in both mortgage as well as other loans globally. Moving to Page 9 and Corporate. Corporate reported a net loss of $383,000,000 The net loss of $187,000,000 in treasury and CIO was primarily due to losses related to security sales.
The net loss of $196,000,000 in other corporates reflects approximately $100,000,000 after tax loss on legacy private equity investments as well as a net tax expense on adjustments and true ups to certain reserves. And you'll recall that last year included a legal benefit and last quarter, of course, included the impact of tax reform. Finally, turning to Page 10 and the outlook. Given Investor Day is only 6 feet behind us, we've not changed our guidance for the full year of 2018. So to wrap up, we are pleased with the firm's performance this quarter with all of our businesses showing continued and broad strength in an overall environment that remains supportive.
And while acknowledging the tailwinds of tax reform and higher rates, the consistent performance of business drivers is translating into top line growth and positive operating leverage, with revenues and pretax income both up double digits year on year. So with that operator, we can take some questions.
Our first question comes from John McDonald of Bernstein.
Hi, good morning, Mary Anne. Wanted to ask about LIBOR. We saw a big increase this quarter. Can you remind us how LIBOR affects you, pros and cons? Where do you have LIBOR sensitivity on the asset side?
And where do you have it on the funding cost sensitivity to LIBOR? And how should we think net net about that?
Yes. Okay. So I'll sort of end with the upshot, which is that net net, the impact to our results in the quarter was a very modest positive. So a pretty small number, but on the positive direction. And we've actually seen this a little bit before, I can't remember, a year or so ago.
We are more sensitive, as you know, to the front end of rates, but principally to IOER and prime. So while we do have exposure to LIBOR repricing, it's both on the asset and liability side, as you mentioned. And we also have exposure to a combination of 1 month and 3 month LIBOR. So if you look sort of net across the asset and liability side, they materially offset. We don't have sort of significant mismatches.
And so as a consequence, obviously, we benefit from a higher level of absolute short rates, but the basis widening hasn't been very meaningful to our NII. And I mean examples of assets that we price off liable will be the commercial banking loans and obviously, unhedged or hedged fixed hedged long term debt, sorry, on the liability side.
Okay. And then just as a follow-up, wondering about the drivers of the 7% expected growth in fee income for this year. At Investor Day, you mentioned you've got some bounce back from headwinds in card end markets, but also core growth of, I think, about $2,500,000,000 you mentioned. So what are the drivers of that overall 7% fee income? If you could just give us some color there, that would be great.
Yes. So let's start with sort of 3 relatively big drivers. So yes, as we have now sort of lapsed the big Sapphire Reserve, high premium vintages, our net acquisition costs are substantially lower. And so that is a tailwind plus we are seeing regular way BAU growth in the cards, NIR sort of drivers. Similarly, markets, as we talked about, after the Q1 performance, that's a driver.
And then there's the ongoing sort of growth in the auto lease income space, which is significant. Outside of that, you look at underlying drivers across the board in terms of new accounts and debit trends and card sales and asset management fees is a driver too. So there's obviously an element of market dependency to it. But a bit of the sort of outside year on year increase is seeing the somewhat tailwind of card and markets, both in the trading and in the asset management space.
Our next question comes from Glenn Schorr of Evercore ISI.
Hi, thanks very much.
Hi, Glenn.
Hello. There's a comment in the prepared text on lending and commercial banking being intensely competitive and led to no real growth. Yet I saw your the comments about 5% 7% C and I growth and CRE growth. So I wonder if you could just flush that out a little bit more about the competitive landscape. And I guess that's a pricing issue mostly?
Yes. So I'll start with year over year, we're still getting significant benefits from our investment in expansion markets. And also, as you know, we had a pretty we have a pretty unique sort of offering in terms of commercial term lending. And so for a period of time, in both of those spaces, we've been materially outperforming the market. And so we're still seeing the benefit of that in our year over year numbers.
Quarter over quarter and the trouble with C and I loans is there can also be some volatility associated with held for sale mortgage portfolio seasonality sorry, mortgage warehouse seasonality and stuff like that. But quarter over quarter, what we're seeing is just the impact of the sort of overall industry wide slowdown and the fact that you're right, not just pricing, it's just generally we continue to be very selective and cautious given where we are in the cycle. But we're not expecting flat for the year. We're expecting growth in the mid single digits for the year, and we still believe that there should be demand. And in the CTL space and commercial real estate more generally, that's where the competition really has stepped up very significantly and that really is where pricing has become clearly competitive and there's been compression.
Thanks. And I just want a quick follow-up on your all the comments related to capital proposals. The simple question I have is hearing you loud and clear on everything related to risk based capital. But the clear improvement on the leverage side and the SLR, does that theoretically, I know there's just a proposal right now, would that theoretically free up more activity in repo land and other short term investments that soak up leverage capital but not risk much risk based capital?
I mean, so generally, across the sort of whole industry, I'd expect the answer to the question is yes. But remember, for us, that we haven't been constrained by leverage, Tier 1 leverage or SLR over the last several years. And it's a result, obviously, of the business mix we have and the operating model that we have that we can can socialize some of our forecasted resources across the company. And so we wouldn't expect that our hedges will change materially.
Our next question is from Mike Mayo of Wells Fargo.
Hi. Hi.
Can you just give a little bit more of your expectations for consumer and specifically digital banking, the active online users were up 5% year over year. But for the quarter, it was up 12% annualized. And I know there's always risk in analyzing a number. So is that change in online users seasonal or is it structural? Just a little more color on that.
Okay. So I'll give you my best thoughts. I would say it's a little bit more structural than it is seasonal and we've been seeing continued growth in both digital and especially the mobile channels. And it's a lot to do with adding features. And as we talked about at Investor Day, making it compelling for people to digitally move money, which makes them become much more engaged and all of the good things that come with that.
In addition, we talked also, I think at Investor Day, about the fact that we've recently added digital account opening. And so I couldn't give you exact amounts of what is driving which ones of those is driving what, but we would continue to expect a bit of a structural acceleration. Certainly, we hope for
that. And then a follow-up on that. So is this money stickier or not? And if you could elaborate more on the deposit beta. I know you've pretty cautious saying that money could flee more easily because if it's digital it goes, on the other hand, does it become more sticky because you have these connections?
Yes. So I think we sort of talked about the fact that digitally engaged customers are more loyal, that they spend more and they bring us more deposits and investments. So we gave you the fact that I think at Investor Day we see more card spend, both debit and credit, but we also see higher deposits and investments for digitally active customers. So overall, it's really good for our franchise to have these other answers, by the way. With respect to deposit betas, we talked before about the 2 thesis.
The first, which is the one that we generally subscribe to, is that a combination of the ability to use technology, the transparency and expectation of higher rates as well as potentially over time the value of retail deposits or liquidity that we would expect higher reprice. And we haven't changed our expectation on that, but we haven't seen it yet either. So we're going to have to watch that movie play out. There is the other side of that argument that other people, many people subscribe to, which is the customer experience, investments, the convenience, the brand, rewards, all become increasingly important and customers are less price sensitive. So I guess we'll all know it when it finally unfolds.
As you know, we can take a little bit more of a conservative view. But where we are right now in the normalization cycle specifically for sort of retail, checking and savings is we haven't yet seen that unfold. We have seen migration in asset wealth management balances and that's to be expected to be a leading indicator. So this will unfold over the course of the next year or so.
Our next question comes from Matt O'Connor of Deutsche Bank.
Can you provide an update on your interest rate sensitivity with the recent move in rates that we've had?
I'm sorry, say it again?
Just an update on your interest rate sensitivity from here.
Okay. So we've seen 2 things happen, I guess. We've seen obviously, we rolled forward a quarter. I think our earnings at risk disclosed at the end of last quarter was $1,700,000,000 You roll forward a quarter and that comes down a little as you sort of realize the rate benefit. But we've also seen, as you know, somewhere in the sort of mid-40s basis point increase in rates sort of front and long end, which will also have a somewhat significant impact.
So 1.7 will be down quite meaningfully, I would expect, at the end of the Q1, but you'll see those disclosures in our Q.
Okay. And then just separately, within the trading businesses, not a surprise, there's a big increase in the average VAR. Obviously, there's a lot of volatility in the number of the products out there or the markets out there. But just any way to think about like how much the VAR increased and you had some increase in trading revenues, but maybe not as much as one would think when you see the VAR up that much. Is there any correlation between those 2 from a magnitude point of view?
Yes. I think it's extremely difficult to draw a straight line between VAR and all of its complexities and revenues in any one quarter. And if I could sort of unpick it for you first and by the way, just to reiterate that it's still at relatively low levels relative to historical norms when we've been in more normal trading environments with higher levels of volatility and inventory and the like. So I would just unpick it and say of the increase, more than half was related to volatility. And obviously, some of the volatility was somewhat significant.
We wouldn't necessarily expect to see that level continue, albeit that we would expect to continue to see periods or episodes of significant volatility and a bit less than half has to do with positions principally but not exclusively as a result of higher levels of client activity in the CIB and you saw those balance sheet also go up and risk weighted assets and so on.
Our next question is from Erika Najarian of Bank of America.
Hi, good morning. Good morning.
So, my first question to you, Mary Anne, is if the stress capital buffer becomes final as proposed and now the industry has a BAU CET1 minuteimum that could move year to year. How does that change your outlook on how to think about dividends and buybacks from here?
Okay. So I mean, I would start a little bit with so when you say as written, if you take the last year's spot first capital buffer, you've seen that from history for us that could be significant. So there are 3 observations on the path. The first is, when we think about capital planning, I think rightly you would expect us and we do think about over more than a 1 year cycle. And while we have very significant earnings capacity, we don't want to be sort of up and down and sideways and side up and sideways.
So I think there will be some implications of the potential for volatility in the calibration of management buffers. And so whether it's in higher or lower STB or whether it has to be taken into consideration so that we aren't caught sideways from a test result that is with respect once a year and a little bit opaque. The second thing I would highlight to you is for what it's worth, you saw our Investor Day sort of, I won't say guidance, but sort of indication that we were we would expect to try and have payout that or around 100% plus or minus. And you see our ratios are a little bit below 12%. So I think that puts us on reasonably solid footing regardless of the precision of it to sort of understand how the rules play out.
Finally, I hope and I believe, I suspect that through the comment period, the implications of volatility will be properly explored and that hopefully there will be some sort of mechanism considered to accommodate move or otherwise allow for things not to be ripped sorted around based upon the specificity of the test. At a margin, I guess the 4th point, but not something that we overthink is having the 4 quarters of dividend explicitly included notwithstanding that the soft cap is lifted kind of makes it dollar for dollar capital. So at the margin, I guess that makes people think carefully, but we would still want to pay out a strong healthy dividend on growing earnings.
Got it. And my follow-up question, I wanted to follow-up to your response to Glenn's question on SLR. I think there was some excitement from your investors. If you look at your 4Q banking sub SLR, I think it was 6 point 7% off of a 6% minimum and that would clearly go to 4.75%. But just to make sure I understood your response, even if you could add low risk weight exposure according to that constraint, that leverage exposure feeds into the size component of the GSIB surcharge calculation.
And so for there to be more freed balance
sheet, you also really need to recalibrate the GSIB surcharge.
Did I get that? Yes. I mean, the
other sort of slightly cruder first order factor is, the other sort of slightly cruder first order factor is we're running 70 basis points above our minimum. So if you reduce the minimum by another 100 or 200 basis whatever the number is, we already had excess capacity. And so when we think about the use our resources, we obviously think about them to maximize SEA. And so we haven't felt extraordinarily constrained, I would say. So with that kind of just sort of basic, we haven't been maybe as constrained as maybe others have been, and that is what it is.
And so while we'll continue to make every decision incrementally based upon marginal FCA, but you are right. You have to take into consideration all the knock on impacts. I mean, our stock price alone impacts GZ.
Our next question is from Betsy Graseck of Morgan Stanley.
Hi, good morning, Marion.
Good morning, Betsy.
Question on LIBOR. I know you discussed it relative to the loan book. I'm wondering if you could give us some color on how the LIBOR changes impacted trading?
Yes. So look, I would say that in the fixed income space, it was a sort of discussion and it was a feature or a factor. And even in equities, to be honest, that it was part of the discussion. But I wouldn't say that we could point to it materially impacting our trading results.
And then the follow-up is just on the mark to market gains that you called out, the $505,000,000 It looks to me like you've called it out as mark to market gains on certain equity investments.
And I
just wanted to understand, why it's really showing up in fixed income instead of equity trading line. Is that the correct interpretation of the slide?
Yes. So think about many of these investments are years old, many years old. And think about them as strategic investments that relate to business activity, for example, illustratively, like in financial market infrastructures or clearing houses or exchanges or so on. Also some strategic investments potentially related to other parts of the business. So it just happens to be the case that those investments years ago relate and continue to relate to fixed income more than equity.
And they were previously held at cost. And as there are observable prices, as you know, this quarter, we have to affect that. It's really the nature of the investment.
Our next question is from Jim Mitchell of Buckingham Research.
Hey, good morning. Maybe just a question on the TCJA. I know this we're all wondering if it's going to have an impact on loan growth, but what about credit? Do you think that that has any positive impact? I guess, particularly on the corporate side with higher cash flows going forward with lower tax rate?
How do you think about reserving and your expected loss rates going forward?
Yes. I would say across the board actually, all the way from the core business through middle market, we're expecting sort of higher earnings, more free cash flow. And generally speaking, that would improve the sort of credit quality of the portfolio. And we will only really see that come through as we get financials and see that in the financials and are able to reflect that in our internal ratings. But we would expect to see some positive lift as a result of that over time.
So no doubt it helps, but it helps in a rising rate environment. So there are lots of factors and minuses. But yes, it's a tailwind to credit overall.
Right. Okay. Thanks. And then maybe just following up on asset yields. You saw overall asset yields jump pretty nicely given the higher rate environment, but securities portfolio yields were down.
Is that sort of a shortening duration or just a mix issue? Shouldn't we expect securities yields to be moving higher in this environment?
Yes, you should. What it is actually is the tax equivalent adjustments that I mentioned. So you're seeing the sort of relative impact of lower tax growth ups in the muni portfolio in Investment Securities. If you were to adjust that, they would have been up in line with rates.
Our next question is from Ken Usdin of Jefferies.
Thanks. Good morning. Hey, Marianne, you mentioned that on the consumer side, you had no incremental reserving actions. And I'm wondering if you can just kind of give us a state of the consumer to that extent. Are you feeling just better?
Or was it also related to kind of just the growth math starting to look a little bit better in card and auto?
So I would say we still feel really good about the consumer and really good. And so while you can look at the sort of overall sort of levels of consumer indebtedness and look at the fact that they've reached a peak and student lending is driving that in a large part, It's also clearly the case that people have had a long time to repair their balance sheets and term out debt at low rates and become more liquid. And so sort of debt service burdens are still manageable. And so over and confidence is high and tax should be a benefit, generally speaking. So overall, we still feel good and it's showing a little bit in our sort of consumer spend data where we're seeing that confidence continues to sort of spur a bit in spending.
With respect to reserves, so our expectation and our belief about the strength of consumer continues to be optimistic. And then further, of course, you know that our portfolio particularly is skewed towards higher quality credit. And so we aren't seeing any signs of fragility or deterioration across the portfolio across the board. So we're talking good.
Got it. And on my follow-up, the card revenue rate was nice to see it really spike up 11.6%. And then you guys have been talking about it getting to 11.25% by mid year. Any updated thoughts on just that trajectory and where you expect that to go over time now?
Yes. So I mean, much like we talked about with card charge offs, right, there is some seasonality. So the Q1 revenue rate would normally be seasonally higher. Having said that, you're right. We did see some revenue outperformance in the card space a little bit.
And so at this point, if you were to ask me 11.25%, it's certainly a very, very solid expectation probably higher for the year.
Our next question is from Sal Martinez of UBS.
Hi.
Mr. Martinez, your line is open. Please go ahead.
Can you hear me?
Yes, we can hear you.
Can you
hear me? Oh, I'm sorry about that. Sorry, a little scattered this morning. I have a lot going on. But yes, and I apologize if you already addressed this question, Mary Anne.
But can you just talk to the how you're feeling about the pipeline in Investment Banking? Obviously, it was a little bit of a soft quarter for you and for everybody. And just how are you thinking about the pipelines, deal activity in light of Daniel's I think Daniel's guidance at the Investor Day or expectations that advisory and ECM might be up a little bit, ECM down a little bit. I don't know if you guys have any updated thoughts on the outlook.
Yes. I mean, I just first of all, I would just talk a tiny bit about the quarter because I think it's important and it's instructive. First of all, last quarter was a last this quarter last year, I'm sorry, was a record. And so not that we don't always want to repeat or beat those, I still feel like we did pretty well. And it's a little bit like the fixed income story.
Last year, equities and equity markets and DCM was up as M and A was less strong and this year that turned around. And I would say, as we look at the results in ECM and DCM that were down, there were a few we were under indexed to the largest fee events for a combination of reasons, some outside of our control and some regrettable, and also some deals that we had hoped to close moved into Q2, which is all to say that actually if you look across the board, M and A still looks strong, ECM and ECM pipeline also looks strong. Overall, the pipeline is well ahead of this time last year. So as long as the market remains constructive, we should continue to see reasonable momentum across products. But as you say, thematically, M and A and Equities likely to benefit more strongly than DCM in a rate rising environment.
And so confidence of strong activity levels. We saw announced volumes are up. We printed a number 1 wallet M and A quarter. So as long as market volatility, regulatory driven uncertainty doesn't escalate, we're feeling pretty good about the Q2 and into the year.
Great. Thank you very much.
Our next question is from Gerard Cassidy of RBC.
Good morning, Mary Anne.
Good morning.
Can you give us any color on when you look at your franchise, your consumer franchise, is there parts of the country that are more competitive for deposits, whether that's Metro New York versus California versus Texas? And could you give us some color on what you guys are seeing geographically on deposit growth and the competition?
Yes. So I mean, I'll make some thematic comments. And if you still have questions, you can maybe speak to IR because I don't have everything in front of me. But I will tell you this, we compete with everyone across the board. We compete with the large money center banks.
We compete with regional banks, with local banks. And so there's plenty of competition in all markets. And we monitor the market dynamics, as you say, at a pretty granular level. And so we will respond accordingly. And I think we do pretty well across the board.
And I wouldn't call any one out as standing out or any one out as clearly being more challenging, but that's an ongoing sort of iterative dynamic process. So we compete everywhere we compete, we compete with a lot of people who want these high quality liquidity deposits and they want these relationships and so do we.
Okay. And I apologize if you addressed this. I had to jump off the call for a minute. The deposit beta, where does it stand today for you folks? And on Investor Day, you gave us a very good trajectory of where you think it's going to.
Are you still on that trajectory of where you think you should be?
Yes. So with the positive data, you have to sort of dig deep because there's a sort of full spectrum. We are, as an industry, firmly on a repriced journey, no doubt. And so the sort of state of play and the maturity of that reprice journey depends upon the specifics of the business and the client. And so at the wholesale sort of top end, reprice is really reasonably high.
Not to say that there's nowhere left to go, but it's reasonably high and pretty consistent. And as you go down through into the middle market space and small business and all the way down to the retail space, it's still relatively early days given the absolute level of rate. And so we continue to see the journey. As I said, we've seen migration in Asset Wellness now for a few quarters. As people are sort of reassessing Deposits versus investments, we're retaining those investments, so we feel good about that.
But that is generally a precursor to what we will see in retail at some point in the future and not yet. But what effect is the final part of your question, which was, are we still feeling like the trajectory we showed you is our central case and the answer is yes at this point.
Our next question is from Chris Kotowski of Oppenheimer.
Yes, good morning. You touched on this in a tangential way, but let me ask it a different way. If we look at your card fees on a consolidated basis, back in 2014, 2015, before you had the Saphyr launch, it was running around $1,500,000,000 a quarter. It bottomed out late 2016 early 2017 at 900,000,000 and now you're up to the $12,750,000,000 Should we expect as Sapphire completely matures, should we expect that to go back to the $1,500,000,000 $1,600,000,000 a quarter or is that ancient history and not indicative of anything?
So I can't really comment on dollars. Let me I'll tell 2 things. The first is that we've given you for 2018, anyway, our expectation of the revenue rate that will be now likely above the 11.25% we previously said. I will tell you we are largely we have lapped. We have lapped the Sapphire Reserve quarters now, right?
So the big quarter is 100,000 point premier quarters. Those were in Q4 and the Q1 Q4 of 2016, Q1 of last year. So I would call that in the rearview mirror now. And from here, we grow with the growth in the accounts and the businesses and the spend. So as we still expect to grow, but remember also in that rebaselining and I can't remember which period you called out, but also remember we have gone through a whole renegotiation of all our cost co brand relationships too that have an impact.
So growth will be an offset. We've had some structural step down for the reprice of the co brand, albeit there's still great partnerships and we consider them very valuable. Sapphire was lapped and from here hopefully we just continue to grow.
Okay. All right. That's it for me. Thank you.
Our next question is from Al Alvesakos of HSBC.
Hi. Thank you very much for taking my question. I was wondering, equities clearly was strong in the quarter. But I was wondering if you could give us some geographical split. I'm particularly interested, since I'm based in Europe, to see if you witnessed any impact from the new regulation, especially MiFID II, in either cash or derivatives?
Thank you.
Sure. So let me just start like at the top of the house and say that we've been talking about globally investing in bankers and salespeople and technology and building out our platforms across the cash and prime space. It is the case because we were not competitive in sort of international synthetic prime years ago, and we now have a among best in class sort of platform that has been part of the growth drivers that I would say EMEA International Prime has been a bright spot. Generally, limited to. So I would say that there was a concern about pullback in trading.
We saw a bit of hesitation, particularly I think fixed income, less so in equities, but the market is generally being quite resilient. And so we're still relatively early days. And within the results that we have articulated to you, we've seen material increases in EMEA electronic trading, which we think will be likely somewhat permanent, where people are choosing to do high touch cash trading, we're seeing some concentration among players, which is also to say that we are seeing the industry wallet decline and margins compressed. But for us, in particular, we're also benefiting from higher volumes. We think we're gaining some share and we're benefiting from some of that concentration among top players.
So net net, yes, I think there's been some pressure on the in scope wallet, but less so than you would think for us. And in early days, we'll just keep watching it.
Thank you.
We have no further questions at this time.
Okay. Thank you, guys. Thanks very much.
This concludes today's conference call. You may now disconnect.