Please stand by. We are about to begin. Good morning, ladies and gentlemen. Welcome to JPMorganChase'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 JPMorganChase's Chief Financial Officer, Marianne 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. 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 one, the firm reported net income of $8.7 billion, EPS of $2.37, and a return on tangible common equity of 19% on revenue of $28.5 billion, benefiting from broad-based strength in performance, but also lower taxes and seasonality. To put this quarter's performance into context, on a core basis, pre-tax earnings grew 13% year-over-year, benefiting from higher rates, solid growth across other revenue drivers, and continued investments in our businesses.
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 million 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, DVA, 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-over-year. Card sales and merchant processing volumes up 12% and 15% respectively. We maintained our number one rank in global IB fees and had net income of $1 billion in the commercial bank.
In asset and wealth management, we saw strong long-term flows across all regions and 10% AUM growth. Turning to page two for more details about the first quarter results. Before we get into the numbers and the performance drivers for the quarter, I do want to remind you that there have been a couple of adjustments to the numbers on the page, which are in line with the guidance that we gave during the fourth quarter. 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 $1.2 billion. The impact for the quarter of about $300 million is included here, and prior periods have been similarly restated.
Second, 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 million for the quarter, reduced revenue, was split about 50/50 in NII versus NIR and offset in tax expense. With that, revenue of $28.5 billion was up $2.7 billion or 10% year-on-year. Net interest income was up $1.1 billion, mainly reflecting the impact of higher rates. Non-interest revenue was up $1.6 billion year-on-year, and while this includes the mark-to-market gains on the first page, it also includes approximately $400 million of losses on investment securities and legacy private equity investments. Adjusted expense of $16 billion was up 6% year-on-year, reflecting higher compensation expense as well as business growth, including auto lease depreciation.
Credit costs of $1.2 billion were down $150 million year-on-year. Consumer charge-offs were in line with expectations and guidance, and there were no changes to reserves this quarter. In wholesale, we had a net reserve release of about $170 million, driven by a single oil and gas name. You'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 pre-tax earnings as well as geographical mix. We're expecting full year effective tax rate to be closer to 20%. Shifting to balance sheet and capital on page three. We ended the first quarter 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.
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 $6.7 billion of capital to shareholders, and last week, we submitted our 2018 CCAR capital plan to the Federal Reserve. As you know, we can't provide any details of that at this stage. Before moving on to the lines of business, on page four, I'll briefly address this week's new capital news. Two new capital NPRs were released this week, the stress capital buffer and eSLR. Starting with the stress capital buffer, the proposal was broadly in line with the narrative and expectations that had been set. There's 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 BAU 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 stressed 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 GSIB surcharge, to ensure they all hang together. To reinforce points that we've previously made, first and foremost, the fixed coefficients need to be recalibrated in light of the economic growth we've had.
Second, the underlying premise for the surcharge, and more particularly, U.S. G-SIB, 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's results, as well as challenges around implementation. Getting to the numbers, you can see on the page our estimated historical stress capital buffer derived from the Fed's results. 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. 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. 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%-12%. Briefly on eSLR, as you know, we are not currently bound by leverage, and prima facie, this proposal would reduce the eSLR minimum. My primary comment on this is to reiterate my earlier comments about the need to be willing to reexamine the G-SIB 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 five, let's start with Consumer & Community Banking.
CCB generated $3.3 billion of net income and 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. 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. Active mobile users were up double digits. Revenue of $12.6 billion 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. Card, 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 $6.9 billion was up 8% year-on-year, driven by investment 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. There were no reserve actions taken this quarter. Recall last year included a net impact of a little over $200 million related to the student loan portfolio sale. Turning to page six and the Corporate & Investment Bank. CIB reported net income of $4 billion on revenue of $10.5 billion 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 rank in North America and EMEA. IB fees were $1.7 billion, down 10% from a record quarter last year, as strong performance in M&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 one in global M&A wallet and gained share in every region. 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 first quarter last year, which included a number of large deals. This quarter, we ranked number three in a very competitive environment. 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. Looking forward to the rest of the year, across products, the overall pipeline remains strong. Moving on to markets. Total markets revenue was $6.6 billion, 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 million, reflecting lower tax equivalent adjustments year-on-year. Accounting for both of these items, markets revenues would have been up about 7%. Fixed income markets adjusted revenue was flat versus a strong first quarter last year, with rates and spread markets reversing to more normal levels following significant outperformance last year, being offset by strong emerging markets and commodity 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 Securities Services revenue were both $1.1 billion for the quarter, 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 $5.7 billion was up 9% year-on-year, half being higher compensation expense with a comp-to-revenue ratio of 29%. The remainder primarily driven by higher transaction costs in markets. Moving to Commercial Banking on page seven. Another very good quarter in this business, with net income of $1 billion and an 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 $569 million 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 markets clients, and the pipeline looks strong. Expense of $844 million 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&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 zero net charge-offs this quarter. Moving on to Asset and Wealth Management on page eight. Asset and Wealth Management reported net income of $770 million, with a pre-tax margin of 26% and an ROE of 34%. Revenue of $3.5 billion 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 $2.6 billion was down year-on-year, as the first quarter of last year included nearly $400 million of legal expense.
Adjusted expense would have been up 8%, driven by higher external fees on revenue as well as higher compensation. For the quarter, we saw net long-term inflows of $16 billion, including $5 billion in active equities, with strength across all regions benefiting from strong long-term performance. We saw net liquidity outflows of $21 billion, largely driven by a combination of recent M&A activity and the impact of cash repatriation due to tax reform. AUM of $2 trillion and overall client assets of $2.8 trillion 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 nine and Corporate.
Corporate reported a net loss of $383 million. The net loss of $187 million in Treasury and CIO was primarily due to losses related to security sales. The net loss of $196 million in Other Corporate reflects approximately $100 million after-tax loss on legacy private equity investments, as well as a net tax expense on adjustments and true-ups to certain reserves. 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 six weeks behind us, we've not changed our guidance for the full year of 2018. 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.
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 pre-tax income both up double digits year-on-year. With that operator, we can take some questions.
Certainly, ma'am. Our first question comes from John McDonald of Bernstein.
Hi, good morning, Marianne. Wanted to ask about LIBOR. We saw a big increase this quarter. Can you remind us how LIBOR affects you, kind of 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 about that?
I'll end with the upshot, which is that net, the impact to our results in the quarter was a very modest positive. A pretty small number, but on the positive direction. 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. While we do have exposure to LIBOR repricing, it's both on the asset and liability side, as you mentioned. We also have exposure to a combination of one month and three-month LIBOR. If you look net across the asset and liability side, they materially offset. We don't have significant mismatches.
As a consequence, obviously we benefit from a higher level of absolute short rates, the basis widening hasn't been very meaningful to our NII. Examples of assets that reprice off LIBOR would be the commercial banking loans and obviously, unhedged or hedged long-term debt on the liability side.
Okay. 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 and markets, but also core growth of I think about two and a half billion you mentioned. What are the drivers of that overall 7% fee income? If you could just give us some color there, that'd be great.
Yeah. I'll start with three relatively big drivers. Yes, as we have now lapped 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 card NIR sort of drivers. Similarly, markets, as we talked about, after the first quarter performance, that's a driver. There's the ongoing growth in the auto lease income space, which is significant. Outside of that, you look at our underlying drivers across the board in terms of new accounts and debit trends and card sales and asset management fees is a driver too. There's obviously a level of market dependency to it. A bit of the sort of outsized 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 in lending and commercial banking being "intensely competitive" and led to no real growth. Yet I saw the comments about 5% and 7% C&I growth and CRE growth. I wonder if you could just flesh that out a little bit more about the competitive landscape, and I guess that's a pricing issue mostly.
Yeah. I'll start with year-over-year, we're still getting significant benefits from our investment in expansion markets. Also, as you know, we have a pretty unique offering in terms of commercial term lending. For a period of time, in both of those spaces, we've been materially outperforming the market. We're still seeing the benefit of that in our year-over-year numbers. Quarter-over-quarter. The trouble with C&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. Quarter-over-quarter, what we're seeing is just the impact of the overall industry-wide slowdown and the fact that you're right. It's not just pricing, it's just generally, we continue to be very selective and cautious given where we are in the cycle.
We're not expecting flat for the year. We're expecting growth in the mid-single digits for the year. We still believe that there should be demand. 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 fiercely competitive and there's been compression.
Thanks. I just want a quick follow-up on all the comments related to the capital proposals. The simple question I have is hearing you loud and clear on everything related to risk-based capital. The clear improvement on the leverage side and the SLR, theoretically, I know that'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 much risk-based capital?
Generally, across the whole industry, I expect the answer to the question is yes. Remember for us that we haven't been constrained by leverage, Tier 1 leverage or SLR over the last several years. It's a result, obviously, of the business mix we have and the operating model that we have that we can socialize some of our scarcest resources across the company. We wouldn't expect that our behaviors have changed 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. For the quarter, it was up 12% annualized. I know there's always risks in analyzing a number. Is that change in online users seasonal or is it structural? Just a little more color on that.
Okay. 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. 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. I couldn't give you exact amounts of which ones of those is driving what, but we would continue to expect a bit of a structural acceleration. Certainly, we hope for it.
A follow-up on that. Is this money stickier or not? If you could elaborate more on the deposit beta. I know you've been 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?
Yeah. 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. We gave you the stats, 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. Overall, it's really good for our franchise to have these customers engaged, and we hope they also use our branches, by the way. With respect to deposit betas, we talked before about the two theses. 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 for liquidity, that we would expect higher reprice.
We haven't changed our expectation on that. We haven't seen it yet either. 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, the marketing, the digital features, the products, the services, the rewards, all become increasingly important and customers are less price sensitive. 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. Where we are right now in the normalization cycle, specifically for 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.
This will unfold over the course of the next year or so.
Our next question comes from Matt O'Connor of Deutsche Bank.
Hey, Matt.
Good morning. Can you provide an update on your interest rate sensitivity with the recent move in rates that we've had?
I'm sorry. Say again?
Just an update on your interest rate sensitivity from here.
Okay. We've seen two things happen, I guess. We've seen, obviously, we've rolled forward a quarter. I think our earnings at risk disclosed at the end of last quarter was $1.7 billion. You roll forward a quarter, that comes down a little as you realize the rate benefit. We've also seen, as you know, somewhere in the mid-40s basis point increase in rates at front and long end, which will also have a somewhat significant impact. $1.7 will be down quite meaningfully, I would expect, at the end of the first quarter, but you'll see those disclosures in our Q.
Okay. 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 a number of the products out there or the markets out there. Just any way to think about 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 two from a magnitude point of view?
I think it's extremely difficult to draw a straight line between VAR and all of its complexities and revenues in any one quarter. If I just sort of unpick it for you, 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 in inventory and the like. 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 had 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 sheets also go up and risk-weighted assets and so on.
Our next question is from Erika Najarian of Bank of America.
Hi, good morning.
Hi, Erika. Morning.
My first question to you, Marianne, is if the stress capital buffer becomes final as proposed, the industry has a BAU CET1 minimum that could move year-to-year, how does that change your outlook on how to think about dividends and buybacks from here?
I would start a little bit with, when you say as written, if you take the last year's spot stress capital buffer, you've seen just from history for us, that that could be significant. There are three observations I would have. The first is, when we think about capital planning, I think rightly you would expect us, and we do think about it over more than a one-year cycle. While we have very significant earnings capacity, we don't want to be sort of up and down and sideways and sign off on sideways. I think there will be some implications of the potential for volatility in the calibration of management buffers.
Whether it's in a higher or lower SCB 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, I won't say guidance, but sort of indication that we would expect to try and have payouts at or around 100%, so plus or minus. You see our ratios are a little bit below 12%. 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 smooth or otherwise allow for things not to be whipsawed around based upon the specificity of the test. At a margin, I guess the fourth point, but not something that we overthink is, having the four quarters of dividend explicitly included, notwithstanding that the soft cap is lifted, kind of makes it dollar-for-dollar capital. 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. 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 6.7 off of a 6% minimum, and that would clearly go to 4.75. 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 G-SIB surcharge calculation. For there to be more freed balance sheet, you also really need to recalibrate the G-SIB surcharge. Did I get that?
Yeah. That's definitely one of the factors. Just the other sort of slightly cruder first order factor is, we're running 70 basis points above our minimum. If you reduce the minimum by another 100 or 200 basis points, whatever the number is, we already have excess capacity. When we think about the use of our resources, we obviously think about them to maximize ROTCE. We haven't felt extraordinarily constrained, I would say. There's 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. While we'll continue to make every decision incrementally based upon marginal ROTCE, but you are right. You have to take into consideration all runoff on impacts. I mean, our stock price alone impacts G-SIB.
Our next question is from Betsy Graseck of Morgan Stanley.
Hi, good morning, Marianne.
Morning, Betsy.
Question on LIBOR. I know you discussed it relative to the loan book. I am wondering if you could give us some color on how the LIBOR changes impacted trading.
Yeah. 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.
The follow-up is just on the mark-to-market gains that you called out, the $505 million. It looks to me like you've called it out as mark-to-market gains on certain equity investments.
Yes.
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?
Yeah. 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, just 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. It just happens to be the case, that those investments years ago, relate and continue to relate to fixed income more than equities, and they were previously held at cost. As there are observable prices, as you know, this quarter, we have to reflect that.
Our next question.
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 we're all wondering if it's going to have an impact on loan growth. 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?
Yeah
with the lower tax rate? How do you think about reserving and your expected loss rates going forward?
Yeah, I would say across the board actually, all the way from small business, through middle market, we're expecting higher earnings, more free cash flow, and generally speaking, that would improve the credit quality of the portfolio. 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. We would expect to see some positive lift as a result of that over time. No doubt it helps. It helps in a rising rate environment. There are lots of stuff as a minus. Yes, it's a tailwind for credit overall.
Right. Okay, thanks. 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 a shortening duration, or is it 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. You're seeing the relative impact of lower tax gross-ups in the muni portfolio in investment securities. If you were to adjust for 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. I'm wondering if you can just give us a state of the consumer to that extent. Are you feeling just better, or was it also related to just the growth math starting to look a little bit better in card and auto?
I would say we still feel really good about the consumer. I mean, really good. While you can look at the overall 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. Debt service burdens are still manageable. Confidence is high and tax should be a benefit, generally speaking. Overall, we still feel pretty good and it's showing a little bit in our consumer spend data where we're seeing that confidence continue to spur a bit in spending. With respect to reserves, our expectation and our belief about the strength of consumer continues to be optimistic.
Further, of course, you know that our portfolio particularly is skewed towards higher quality credit. We aren't seeing any signs of fragility or deterioration across the portfolio across the board. We feel pretty good.
On my follow-up, the card revenue rate was nice to see it really spike up 11.6%, 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?
I mean, much like we talked about with the card charge-off rate, there is some seasonality. The first quarter 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. At this point, if you were to ask me 11.25%, well, it's certainly a very solid expectation, probably higher for the year.
Our next question is from Saul Martinez of UBS.
Hi.
Mr. Martinez, your line is open. Please go ahead.
Hello, 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. Yeah, I apologize if you already addressed this question, Marianne, but can you just talk to 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. Just how are you thinking about the pipelines deal activity in light of I think Daniel's guidance at the Investor Day or expectation that advisory and ECM might be up a little bit, DCM down a little bit. I don't know if you guys have any updated thoughts on the outlook.
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, this quarter last year was a record. Not that we don't always want to repeat or beat those. I still feel like we did pretty well. It's a little bit like the fixed income story. Last year, equities and equity markets and DCM was up, M&A was less strong, and this year that turned around. I would say, as we look at the results in ECM and DCM that were down, we were under- indexed to the larger fee events for a combination of reasons, some outside of our control and some regrettable, and also some deals that we had hoped would close moved into the second quarter.
All to say that actually, if you look across the board, M&A still looks strong. ECM and ECM pipelines also look strong. Overall, the pipeline is well ahead of this time last year. As long as the market remains constructive, we should continue to see reasonable momentum across products. As you say, thematically, M&A and equities are likely to benefit more strongly than DCM in a rate rising environment. Confidence is strong. Activity levels. You saw announced volumes are up. We printed a number one wallet M&A quarter. As long as market volatility, regulatory driven as well as uncertainty doesn't escalate, we're feeling pretty good about the second quarter and into the year.
Great. Thank you very much.
Our next question is from Gerard Cassidy of RBC.
Good morning, Marianne.
Morning.
Can you give us any color on when you look at 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? Could you give us some color on what you guys are seeing geographically on deposit growth and the competition?
Yeah. I'll make just 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. 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. There's plenty of competition in all markets. We monitor the market dynamics, as you say, at a pretty granular level. We will respond accordingly. I think we do pretty well across the board. I wouldn't call anyone out as standing out or anyone out as clearly being more challenging, but that's an ongoing sort of iterative dynamic process. 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. 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? 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?
Yeah. With deposit betas, you have to sort of dig deep because there's a sort of full spectrum. We are, as an industry, firmly on a reprice journey, no doubt. The sort of state of play and the maturity of that reprice journey depends upon the specifics of the business and the client. 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. 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 rates. We continue to see the journey. As I said, we've seen migration in Asset & Wealth Management now for a few quarters.
As people are sort of reassessing deposits versus investments, we're retaining those investments. We feel good about that. That is generally a precursor to what we will see in retail at some point in the future, and not yet. With respect to the final part of your question, which was, are we still feeling like the trajectory we showed you is our central case? The answer is yes at this point.
Our next question is from Chris Kotowski of Oppenheimer.
Yeah, good morning. You touched on this in a tangential way, 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 Sapphire launch, it was running around a billion and a half a quarter. It bottomed out late 2016 and early 2017 at $900 million. Now you're up to the $1,275 million. As Sapphire completely matures, should we expect that to go back to the $1.5 billion, $1.6 billion a quarter, or is that ancient history and not indicative of anything?
I can't really comment in dollars. I'll tell two things. The first is that we've given you, since 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 have lapped the Sapphire Reserve quarters now, right? The big quarters, the 100,000-point Premier quarters, those were in the fourth quarter and the first quarter, the fourth quarter of 2016, the first quarter of last year. I would call that in the rear-view mirror now, and from here, we grow with the growth in the accounts and the businesses and the spend. We still expect to grow.
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 card co-brand relationships too that have an impact. Growth will be an offset. We've had some structural step downs for the reprice of the co-brand, but they're still great partnerships, and we consider them very valuable. Sapphire, we've 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 Alevizos Alevizakos of HSBC.
Hi.
Hi. Thank you very much for taking my question. Equities clearly was strong in the quarter. 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.
Let me just start with 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 international synthetic Prime years ago, and we now have a among best-in-class platform that has been part of the growth driver. I would say EMEA International Prime has been a bright spot. Generally, MiFID II. 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 markets have generally been quite resilient. We're still in the relatively early days.
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 all to say that we are seeing the industry wallet decline and margins compress. 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. Net-net, yes, I think we're seeing some pressure on the in-scope wallet, but less so than you would think for us. It's early days. We'll just have to 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.