Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's 2018 Investor Day. 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 Head of Investor Relations, Jason Scott.
Okay. Good morning. Good morning, everyone. Welcome to Investor Day 2018. I'm Jason Scott, Head of Investor Relations for JPMorgan Chase.
I know most of you have been to our Investor Days before, you're used to this, but you're probably noticing a few differences this year. New floor, shorter day on the agenda, one presentation instead of 5, frankly more Q and A on the schedule and prepared materials. I mean, look, we know we got a good thing going, but still we like to disrupt ourselves, challenge ourselves, see if we can do it a little bit better for you. And I know change is tough. So look, if you're excited about this, if you're nervous we're taking away a bunch of stuff from you, even if you're just super curious how we're going to pull it off, don't worry, you'll still hear a lot of strategic priorities, performance updates, financial outlook and of course targets.
And we're going to try to deliver to you a little bit more efficiently. So for those of you in the room, instead of breaking in the middle of the sessions to grab a bite, this year, we're going to end the day with our traditional management lunch around noon. I hope everybody sticks around. As usual, members of senior management will be at the lunch table, so you can ask them all the questions then that you didn't get a chance to do during the sessions today. So just a couple of things before we begin.
Please turn off your phones or silence them right now. Don't forget to look at the forward looking statements in your materials. So with that, hopefully, I've piqued your interest just a little bit about what's to come and you're ready for Investor Day 2.0. Thank you very much for coming and we'll start with a quick video on the firm.
We're respected, we're trusted, we're wanted, our customers like us. Wherever I go around the world, presidents, prime ministers welcome with open arms. What a company JPMorgan Chase is.
Our size and scale is an advantage for us.
Our ability to deploy our resources, relationships with other big institutions, but most importantly, the expertise and passion of our people is truly unparalleled.
We want to continue making sustainability a
was given the recognition.
Supporting our communities is a fundamental business responsibility.
Thank you so much. You guys are unbelievable. I'm a lettering artist from Detroit. I just wrapped a project that tells a story of the investment JPMorgan Chase has made in Detroit. What's differentiates JPMorgan from other banks?
We are
What the clients What the clients really like are companies like us that are going to be with them in the good times and in the bad times.
The fact that we are global and at the
same time as local as we are, that's what makes a difference for a lot of our clients.
Asia Pacific is the fastest growth region in the world.
JPMorgan is committed to China.
I just really want to thank you for your treatment of our clients, the passion and the energy that you all bring to this amazing company.
We're understanding not only that we're using the latest technology, but we're really making an impact.
Thank you, Chase Have a company that treats everyone respect. Respect also means you spend extra time with the people who are different than you. That's the door to diversity.
JPMorgan Chase, they're setting an example to show how to get involved with our military families and our veterans.
Companies that have women in leadership positions do better.
Happy employee appreciation.
Like this? Yeah. Thank you.
You are the greatest ambassadors for this firm.
Chase Sapphire has sent me
to discover what's next in travel.
I don't think there's any brand right now that's more successful than Chase.
This year was amazing. We take on big challenges
and we'll never forget to deliver on it. I'm proud how we
keep transforming our business.
Who doesn't like to make an impact?
So who? I think the big accomplishment for 2018 will be to become truly client and customer obsessed.
Hashtag team winning. We are going to rock this year.
You've done a great job for your clients. You have worked hard. You've cared. We are thrilled. We are proud.
Thank you very much.
Okay. Good morning, everyone, and I'd like to be the 2nd person to welcome you to Investor Day. I hope you like the videos. So by now, as Jason said, you will see that we're going to do Investor Day a little differently this year. We want to be responsive to feedback that we got from you, to be more efficient with your time, but also to try and lend a little bit of a different perspective to how we discuss the strategy of the company with you.
And so instead of having 5 presentations, we will have one formal presentation. We will address all of the usual firm wide and business performance topics, but we'll also spend time on a couple of firm wide strategic priorities that transcend our businesses. We hope you find it compelling. We do. You'll have access to the full operating committee who is there, a number of other senior leaders in the company who will be here all the way through the Q and A.
They'll also be here at lunch, so you can seek them out as well for their views. And we thought in particular doing this presentation with an English accent would be a nice touch, and it seems I was out of the room when they all voted. So I'm going to dive right in. I'm going to start on Page 1. So our operating model, as you know, has been tried, tested and proven in both good times and bad.
We are, in fact, complete, global, diversified and at scale, and those are attributes that increasingly matter across all of our businesses. We've also spent the last many years evolving the company from one that was heavily business and product aligned to one that we can say with confidence today is truly centered on our customers. It is in our DNA. It's in everything we do, and it's in every decision that we make. We've always known that if you build it, they will come or if you build it well, they will come, and you can see that across our businesses in market share gains and consistent customer satisfaction scores.
Our user experience centers around mobile first, digital everything and secure everywhere. But we also want to give our customers choices, so our strategies are multichannel. People are looking for their banking experiences to be deeply integrated into how they live their lives every day and payments is at the heart of that. Of course, underlying and enabling it all, we are investing in world class technology and data capabilities that we think will differentiate us. And we will keep adding bankers.
We'll add branches. We'll add products. We'll open offices. As Jamie says, organic growth is hard, but it's also the best. And finally, last but not least, we continue to approach controls, capital and expense with the discipline that you expect of us.
So our brands have never been stronger, reflecting a relentless focus on the customer on Page 2. JPMorgan Chase is honored to have placed in the top 10 of Fortune's most admired companies and was named one of the most innovative companies of the year this year. We're also very pleased with the recognition we received for all of our work in Detroit, with Fortune having ranked us as the number one company changing the world. And while we don't normally like to brag, the accolades on this page are real. Chase was named Bank Brand of the Year, the number 1 in retail banking for 5 years in a row and the number 1 primary institution for millennials.
With our brand being number 1 or tied for number 1 across all key brand categories. And JPMorgan was also named best global brand and number 1 global research firm. So this is who we are, and we operate with strong local, national and global capabilities to serve our customers anywhere they are or anywhere they want to be. Starting with our national footprint. We have a presence in 125 cities and all top 50 MFAs in the U.
S. In our wholesale businesses, we have 3,000 bankers across the country. We cover 21,000 clients and 34,000 real estate owners and branch network, as you know, is the branch network, as you know, is still incredibly important to our customers and we have 5,100 branches. Given our international reach, we also are well positioned to help our clients with their global needs. We do business in 100 markets around the world.
Over 50% of middle market companies are globally active today and additional 10% expected to be so within the next 3 years. The majority of the world's wealthiest families are our clients as well as almost every central bank and sovereign wealth fund. In the CIB, custody and fund services covers more than 75 emerging markets, and treasury services offers FX capabilities in 120 currencies. And we have investment bankers, markets and research professionals covering thousands of global companies. Through our scale, we have built the best global banking platform for our customers.
So before we look forward, let's do a review of 2017 starting with our financial performance on the next page. And just a note on this page that we have adjusted for the impact of tax reform for us and also for our peers. We continue to deliver strong absolute and relative performance and are at the top or among the best in class across all of these measures, with the highest revenue and the lowest overhead ratio of the group and with positive operating leverage even as we increase our investments. 2017 was a clear record year for us both in terms of net income as well as EPS, which grew by 13% year on year and 5% CAGR over the last decade, the best of the group. We created significant shareholder value, and you can see at the chart on the bottom left that we delivered a return that was meaningfully differentiated from the pack.
And finally, we've grown tangible book value per share strongly and consistently, and we expect that to continue. We are operating from a position of strength across all key dimensions on Page 5. Of note, most of the ratios on this page are consistent year on year. If you start at the bottom, you can see that we did have a meaningful decrease in stress loss rates year on year and an increase in our net payouts. And if you go to the top, as we discussed last year and as we expected, we did reach an inflection point of capital in 2017.
Turning to Page 6. So there have been no new external developments on the capital run this year here in the U. S. What you see here is that we have narrowed the capital corridor in which we expect to operate to between 11% 12% CET1. And given a reasonable expectation for growth, this is consistent with payouts over the next few years of 100% plus or minus, which is broadly in line with analyst expectations.
Over the next two quarters, you will see our ratio go up as our approved CCAR payouts will be below 100% on higher earnings given tax reform, after which we intend to move down into our target range over time. We haven't changed the order of priority for using our capital. It has been and it will always be our first priority to invest and grow our business, and we're doing as much of that as we prudently can. It would also have been our preference not to be in a situation today where we did have significant excess capital, but we are where we are, and we expect to continue to buy back our stock as we still see good value in it given the power of the franchise and the earnings potential I'll show you. We've made no change to our capital allocation methodology, and we've made no change to the allocated equity to each of our businesses for 2018, which you can see on the right.
And from here, we would expect the capital for each of our businesses to be more stable and to be a function of their growth. Moving on to the next page and spending just a moment on GSIB. So we have been very disciplined and made great progress in managing our GSIB score over the last few years, but the low hanging fruit has gone, and it's increasingly difficult to create the capacity to grow. We ended last year above 700 points, and we expect continued upward pressure. And we are not the only ones in this position.
Many of our peers are similarly situated. You can see on the right that the 2017 green bars that represent the distance left to the next GSIB bucket in most cases have shrunk considerably. While we do intend to remain within the 3.5% bucket at the end of 2018, we may allow the G SIB score to rise above the threshold temporarily, but that should be of no consequence given our capital levels at this point. So the issue at hand is that over the last 4 years, the U. S.
Economy has grown by over 11% with no change to the fixed coefficients of the score, and I think you would agree no increase to systemic risk. The Fed has acknowledged that a bank's Ctrip score may be affected by economic growth and they do have the ability to recalibrate those coefficients and to quote them to ensure that changes in economic growth do not unduly affect firm systemic risk scores. So if unaddressed at some point, this will become a barrier to growth. We estimate that recalibration of the score could alleviate this pressure by over 50 points for us and allow the largest U. S.
Banks to fully promote economic growth. So now we're going to shift gears a little. And I'm going to spend the next 30 minutes talking about our digital and payment strategies. We've chosen to discuss these with you because they truly transcend all of our businesses. We are looking through our customers' lens at how we can support all of the jobs that they need to get done every day in their lives.
Supporting all of these customer journeys can and often does cross our line of businesses. And over the last several years, it has been a key driver of transitioning the company from one that was historically product aligned, and we are increasingly integrating and blurring the lines between our businesses. So the business case for digital everything is compelling, and you can see that on Page 9. Our customers are demanding digital capabilities in all of their interactions with us, both consumer and wholesale alike. They are changing how they engage and consume products and services.
It's a generational shift. Think streaming films versus DVDs. Banking is no exception. And as such, they are choosing a provider based upon their digital capabilities. The percentage of customers who would walk away from a bank that does not offer above par digital services is quite high at about 60%.
Based upon a survey of our FX clients, 61 percent of traders are extremely likely to use a mobile application to trade in 2018, nearly double from last year. And 76% of corporate say that digital capabilities are very important when selecting a banking relationship. On the next page, digital experiences drive increased levels of engagement. And leveraging our scale, that higher volume is much more profitable. And leveraging our scale that higher volume is much more profitable.
Digsby engaged customers are also more satisfied, evidenced by higher net promoter scores, higher retention rates and a higher share of wallet. And finally, of course, digital investments also drive business efficiencies and reduce costs. In a fully digital world, the marginal cost of transactions incrementally is close to 0. For example, we have seen the cost per deposit 94% lower through quick deposits. And in trading, the marginal cost of many trades approaches 0 as we electronify.
And while lower costs may increase competition, we counter that with the power of scale. So our customers are at the center of everything we do across all of our businesses. Moving to Page 11. We are executing on a clear strategy that is consistent across the firm with 4 common pillars: choice, what they want, when they want it, how they want it. We aim to engage with our customers, supporting everything they do with a complete set of products and services delivered through every channel, not just mobile, but e ATMs, web, aggregators, APIs and virtual assistants.
To be integrated into their daily lives in consumer, this means being a part of everyday activities that require payments. And in wholesale, it means engaging in all parts of the life cycle from onboarding through issuance, trading and settlements, being able to seamlessly support them as their needs become more complex. Safety and security, people look to their bank to provide them with trust and confidence. E's, they want banking relationships today to be as easy as other great consumer experiences in their lives. And user experience is now front and center broadly in our strategies and in our businesses.
We have dedicated client experience champions across each business. We're moving towards real time services, leveraging new technologies to get better, faster, quicker, cheaper. Personalization. Our customers increasingly expect us to know them well, leveraging the data that we have to provide them with advice and insights that they just can't get anywhere else, tailoring the right products for them. And we can do all of this leveraging our scale advantage.
So it all starts at the beginning with better on boarding experiences on the next page. The first opportunity that we have to delight or to upset a client is when they walk in the door either physically or virtually. And we are focused on making that first experience simple, fast and convenient, on creating streamlined documentation and approval processes, expedited and increasingly digital account opening and enabling data to be collected just once but used across
multiple processes. And although
we are still working on it, multiple processes. And although we are still working on it, we have seen our investments in technology and training dramatically shorten the time for on boarding across our businesses. In the CIB, many of our clients have multiple banking partners who they work with simultaneously. So on boarding and user experience really matter, giving us an opportunity to differentiate ourselves in real time. And we are investing here in biometrics such as Touch ID and facial recognition along with other technologies.
Through Data Once, we have shortened the time to open an account by 90% for Treasury Services clients, also allowing them to manage their documentation and onboard digitally. Through the introduction in business banking of a single application for multiple products, we have seen a significant uplift in new multiproduct relationships. And remember, when small businesses choose Chase for multiple products, it leads to significantly higher deposit balances and revenue. Our JPMorgan Wealth Management advisor supported client onboarding time is down nearly 85%, And you can now also open a self directed investment account online in just minutes. Consumers are now able to open a bank account digitally also in minutes, both inside as well as outside our footprint.
But we are also focused on improving the in branch onboarding experience. So we have seen mass adoption of all things digital by consumers. Turning to the next page. We are already deeply embedded in our customers' daily lives at a scale and a frequency that we believe is unmatched. In Consumer, you can see circled at the bottom that nearly 47,000,000 Chase customers do their banking through our digital channels.
So if you think about a day in your life, you can go get cash, you can buy your groceries, you can split a bill for lunch with your friends. After that, you might deposit a check, review your investment portfolio, you might even get advice online digitally. All of that you can do securely without having to step into a branch or touch any paper. And you can do it on our number 1 rated mobile banking app or at Chase Online, the number one most visited U. S.
Banking portal. So digital touches all aspects of your engagement with us across all transaction types. And importantly, digitally engaged customers interact with us much more frequently, typically averaging over 15 logins a month. And they are more loyal, they spend more. So we've seen card spend more than double with us.
And for our primary bank customers, we get 40% more of their deposits and their investments. In the time that we have today, it's not going to be possible to outline all of our digital capabilities and strategies. So over the next few pages, we're going to provide some examples of the frameworks and innovations in every business, starting with a few examples in the consumer space on the next
page. The
solutions on this page, while they may be new or small, have already improved customer experiences and have the potential to enable new customer segments in new markets. Fin is still in R and D, but the capabilities are promising and the ability to open a new digital bank account simply allows us to serve customers out of footprint. And in order to be able to do this, we automated KYC AML, and we're now able to leverage that in digital account opening broadly across the consumer platform. Chase Business Quick Capital offers a great experience to access same day small dollar credit
and the
feedback from our customers so far has been outstanding. We're now looking to scale that offering. Chase Digital Mortgage is able to offer customers a significantly enhanced home loan process with mobile applications, e signature and underwriting digitally integrating our data with third party data. And finally, Chase Auto Direct is in the early stages of our efforts to transform the car buying experience, creating a single place where you can search for a car and also secure financing. Moving to investing on Page 15.
Nearly 2 years ago, we recognized we did not have competitive digital investment capabilities and announced $300,000,000 plan in digital wealth management solutions to close those gaps and we are well on that journey. Today, regardless of whether you're just getting started, whether you want to do it yourself or want to partner with an advisor, we are building tailored solutions for you. And we now have a new self directed online trading experience available to all Chase Wealth Management clients, and this will be coming to all of our Chase customers this summer. Through this, clients can open an account, trade securities at competitive rates, build their own portfolios and move money seamlessly between banking and investing a fully digital experience. And we've seen great adoption.
The percent of trades placed online has doubled to 55% since April of last year since we launched. And for those who continue to choose to work with advisers, we're also providing digital portfolio insights and easier to use interfaces so that our advisers can focus on creating better portfolios. These capabilities help you become invested and so they'll allow us to attract new clients. But importantly, less than 10% of Chase customers today have investments with us, and these capabilities will accelerate our ability to capture more of their investments. Digital solutions are also equally important for our corporate clients.
Turning to the next page. We have a digital continuum for businesses of all sizes and of all complexities. Every interaction between our clients and the firm will be connected, digitized and continuous across products and channels. And you can see at the top of the page here that we have multiple portals for end users to connect with us. Each of them is targeted to a different client segment that has unique needs.
But we're not only building our capabilities for the end user, say, fate of the treasurer, but we're also building them for developers, giving them direct access through APIs, making our products easy to integrate and to use and exposing them in a simple modern way, deepening our reach. On this page, we show the range of capabilities that support our corporate clients. It does start with the first experience through online account opening and self-service. We have the capability to allow them to make payments and move money real time and around the world. Our online solutions provide clients with complete visibility and control of their liquidity.
And real time data enables them to improve cash forecasting, consolidate their balances and optimize their returns on surplus cash. We provide custom reporting and analysis and in areas with much more complex workflow like in Capital Markets, we are building digital solutions for transactions issuing debt. And in our Markets business, we are also adapting to our clients' changing preferences, starting with Electrification on Page 17. Much of markets has already gone electronic. It shouldn't surprise you that within cash equities, nearly 100% of our tickets are electronic, representing 89% of client notional.
In macro, it's 97% of tickets driven by FX. But interestingly, even in FX, only 79% of volume in electronic because smaller ticket sizes lend themselves to electronification. And that pattern applies across the macro space and is why you see only 46% by volume on the page. Spread is a slightly different business and is evolving at a different pace. But again, these numbers hide the significant electronification in certain products like in credit index.
We expect these trends to continue in part due to secular drivers like MiFID II. And last year, you may recall that Daniel showed you a slide that highlighted the amount of revenue that could potentially be impacted by further electronification. But the conclusion of that slide was the same as the conclusion we reach here, which is, of course, there may still be some further revenue compression, but we think it would be relatively small. And electronification and digitization drives more value for our clients and opportunities for us to potentially gain share. So we've invested heavily in electronic trading, but it isn't just about execution.
Much as you wouldn't have a Chase Banking app that wouldn't show you your balance, we need to complete the offering here too on Page 18. We're transforming our markets business. We want to be relevant to our clients and we want to grow share to benefit from scale. We're already market leaders across the spectrum and what we can offer our clients today is incomparable. And here too, we are agnostic to channel, Whether our clients call us, log on to a browser, use a mobile device, integrate us into their platform using APIs or trade through a 3rd party.
We want to offer them choice. And we've developed this into modular components so that our clients can engage with us however they want. So for example, you could read research online, but you could then place a trade directly on your mobile device. Deep integration with these clients, of course, starts with direct booking of trades, but also extends to post trade and value added services including prime and custody and fund service, which taken together should translate to increased trading volumes for us. And to give you just a sense for the progress we're making, our biggest clients are using these services.
93 percent of our top 1,000 clients use JPMorgan Markets. We have seen 30% growth in users accessing pre trade and 60% growth for post trade analysis. And demonstrating success beyond execution, nearly half of our clients who use us for execution are also reading research on the platform. So to wrap up on digital, as I've said, digital capabilities will really differentiate players in our industry in the coming years. And in a digital world, we are always open for our customers continuously 20 fourseven.
And although we can only give you a flavor of what we're doing, we do have a complete strategy, a plan for every customer type for all of their needs in each business and around the world. We're executing with discipline and with urgency, but we're also making the most of shared platforms and capabilities across the firm to accelerate time to market and reduce costs. And while many of these investments may be table stakes, the combination of them all in totality, coupled with our scale is differentiated. In Consumer, we have a full suite of capabilities from digital banking, through spending, payments, borrowing to own a car or a home and ultimately advice and investing. And in wholesale, we can similarly support businesses of all sizes and complexities from small businesses through global asset managers and multinational corporations.
So we'll move on to payments, which is a natural extension of the digital conversation and payment is in many ways one of the most important jobs to be done by our consumer and wholesale customers alike every day in everything that they do. And it's why our payment strategies matter so much to us. Payments are at the heart of being deeply integrated with our customers. And at its most basic level, if you think about a checking account, it's not just a checking account, it's actually a payments account. And payments drive significant value to our core franchise to our retail and operating deposits.
On the next page. So the opportunity here is large and it's growing. Payments is a business that has strong and stable returns. We're already mature and a market leader operating at scale across the continuum. In wholesale, we have a global footprint to serve our corporate, financial institution and government clients and the market today is very fragmented.
But cybersecurity and regulatory requirements are becoming ever higher hurdles and they will drive industry consolidation and we have everything we need to capture an increasing share. So for context, the global payments wallet today is nearly $300,000,000,000 It's expected to grow 7% annually and our share today is less than 3%. In Consumer, of the total $10,000,000,000,000 of payments, a quarter of them are still paper based and this represents a significant opportunity, with credit and debit spend also expected to grow over 5% annually. Diving deeper into the consumer payment ecosystem on Page 22. We've built our consumer payments franchise over a decade.
We've been systematically investing and innovating and it's working. You can see on the right hand side of this page that we've outlined a few of the statistics that illustrate the tremendous reach that we have. The payments ecosystem we've built allows for deep engagement. 75% of CCV customers are active across card payments, digital wallets and overall money movement. And over 70% of our credit card customers have embedded our cards in mobile wallets, recurring bills or merchant payments.
So you can think of our payment assets laid out on this page as foundational but complete building blocks. And we also have truly impressive partners including Amazon, British Airways and Starbucks to name just a few. So let's go through 2 of the most recent developments on the next page. Starting on the left with QuickPay and Zelle. QuickPay went live in 2010 and we integrated it with Zelle in the middle of last year, connecting our customers with those of 18 other major banks with real time funds availability and backed by the security that the U.
S. Financial system can bring to bear. Our Zelle volume of $41,000,000,000 represents 12% of the high growth P2P market and it represents more than half of the overall Zelle volume and more than Venmo in total. Since launching Zelle, our transaction volumes to non chase customers are accelerating at more than twice the pace of chase to chase transactions, which itself is growing at over 40% a year, demonstrating the real value proposition of at scale networks. On the right hand side, we acquired WePay last year to support our 4,000,000 small business customers in their shift towards integrated payments and to become a major player in this segment of the market, which is growing at 4 times the average.
We will deliver a differentiated payment experience for small businesses and for software partners, including immediate onboarding of our products. Software providers will instantly be connected to our small businesses, and our small business customers will be able to seamlessly integrate our banking and payment products with the software that they use in their daily lives. So where do we go from here? Starting from the left, you can see that we have all of the payment capabilities our customers need. And moving to the right, the real opportunity is on the far right by moving from transactional support to personalized integrated experiences curated for our 61,000,000 households.
We can leverage both our proprietary data as well as external data to develop a deep understanding of our customers and to let them know through all channels at all times all of the products for which they are approved and to reinforce the value of being a Chase customer. And through ChaseNet, we can connect customers with merchants, which drives higher authorization rates and reduces fraud for merchants. And we are building Chase Pay as a platform, where our customers will be able to easily pay for anything using all of our payment capabilities and get access to relevant merchant funded offers. Our goal here is to make the act of paying seamless and rewarding. And in recent pilots with Chase Pay, we've seen our repeat customers actually increase their spend and their engagement with us.
Shifting to wholesale on Page 25. It's not just consumers, but the needs of corporate treasurers are also changing as they are trying to support global growth, increase operational control and improve cash visibility and efficiency. And our strategy can be described across the 4 pillars that you see here. Zooming in a little bit on pillars 23. Global scalable platforms enable end to end functionality across payments, liquidity, analytics and service.
And although here I am talking about wholesale payments, as we move increasingly toward platforms, we are truly able to leverage the power of the company, building capabilities once and leveraging them multiple times. Over the last 3 years, our goal has been to transform the payments technology landscape into a modern efficient platform to provide seamless and consistent experiences and the ability to deliver innovative solutions. An example, our global payments platform, Graphite, will first replace 7 legacy international payment platforms and then later will be deployed here in the U. S. It will enable us to be much faster to market for new products and also to reduce infrastructure costs.
But it's not just our core platforms that we can scale and leverage, it's also our data and our approach to innovation. In the CIB, we have a single data platform making all of our data payment data available, accessible and integrated. And while it's true that anyone can use machine learning, if you combine those techniques with the volume and complexity of transactions that we see at $5,000,000,000,000 of payments a day in more than 120 currencies, it gives us a unique competitive position to significantly enhance our fraud detection and sanctions processing, and in doing so to provide great service and greater protection to our clients. Through the in residence program, we work with FinTechs on co creating products to address client needs and our API strategy allows us to expand our open banking offering across wholesale. So here too we also have a full suite of payment assets for wholesale businesses.
The breadth of our products enable us to deliver unique end to end experiences. We have global reach and clients can select us as a single provider. We're working to offer payment solutions across all payment types and in all regions. So if you consider an e commerce client where our merchant acquiring business can help them to accept payments in digital form from consumers through their app, where our treasury services business is able to provide settlement of receivables, processing of vendor payments, reconciliation of accounts as well as liquidity management to optimize cash balances. We can also provide supply chain finance to clients who need it.
This is a journey we've also been on for over 5 years. On the next page is just one example of how we are bringing emerging technologies into the equation now, in this case, blockchain and the interbank information network. One of the most costly and time consuming elements of executing cross border payments today is in correspondent banks having to research and respond to compliance inquiries of each other. And today that process is manual. It lacks transparency and delays payment.
Think about sanctions or AML. So leveraging JPMorgan's Quorum blockchain technology is enabling a platform for encrypted peer to peer messaging between banks. The decentralized permission based network where information can be exchanged or confirmed rapidly and securely. Today, payments that are flagged for compliance reasons can be delayed for up to 2 weeks, but this technology can reduce that to minutes. And the pilot is working.
Today it involves us with 2 third party correspondent banks, but there is a lot of appetite among banks and corporates alike to join the party. And the interbank information network represents just the first step in our ability to improve end to end wholesale payments, but there's no end to the number of use cases for safe and efficient information exchange. So all of this is to say that payments is a space that is going to experience a lot of disruption and we are embracing that. And in many cases, we are uniquely positioned to benefit. On the next page.
One of the most significant developments in this space is real time payments. This is the first new core payment system being developed in the U. S. In more than 40 years, and we are leading its development across the industry. Payments will be instantly available 24 hours a day, 7 days a week, 3 65 days a year.
And we have the underlying infrastructure to enable this. It's built and it's ready. We are working with clients now to integrate with their business models, and we expect to have clients live on the platform in a matter of months using real time payments to settle pains, issue refunds and move money anytime and instantly. And we are building this across our businesses, connecting our wholesale clients to our expansive consumer base, truly demonstrating the power of the combined firm. The reach of our consumer franchise is an embedded differentiator.
It's attracting businesses to change to this new payment method and to do that with us. Furthermore, we are able to share our technology capabilities across businesses and are collaborating with and shaping industry discussions. So everything that we do, of course, digital payments and beyond, is underpinned by robust security and controls on Page 29. People are constantly attacking us and they're getting smarter and more sophisticated. And while there are obviously no guarantees in this space, we spend a lot of time and money to be well defended, nearly $700,000,000 a year an investment that is leveraged across the whole company.
And our approach to managing cybersecurity risk isn't justified by our ability to prevent and detect an attack, but also to minimize its impact, respond to and recover from potential threats. We are constantly monitoring the activity within our own environment as well as across the external landscape. And here too, we are embracing new technologies such as in machine learning. We're partnering closely with our peers and with governments globally to collaborate on threat detection and response. To wrap up on payments on the next page.
The conclusion is as follows. We are the only U. S. Bank with scalable businesses in every major payment vertical, allowing us to serve the 360 degree needs of customers in every segment. And although customers are different across our businesses, their needs are somewhat similar and we are partnering across the firm to deliver solutions to them all.
We've been systematically investing and innovating in this space to build a complete and unique set of assets that does position us to deliver differentiated solutions. And our ability to cross leverage our consumer and wholesale core platforms and businesses itself creates incremental momentum. Today, we operate at scale in each of our payment strategies, but I showed you that the opportunity ahead is large and it's growing and we are looking to gain share. So this brings us to the midpoint of the prepared remarks and it may feel a little early for a break, but we do want to give you some time to absorb what we've said. And before you leave the room or go grab a coffee, I did want to just ask our senior leaders in the digital and payment space to stand up and to introduce you to them because they will be here during our Q and A session.
They'll be here at lunch hosting tables. And so if you are interested in more detail and there is a lot more detail then you can seek them out. So quickly, in digital, you can see Bill and David, Jed and Kelly and then payments, Matt, Jen and Tarkas. So please feel free to seek them out and have a talk about what you've just heard. We'll be back in 15 minutes.
Can you take your seats, please? Thank you. I'm back. Me again. Okay.
So welcome back. We have about another 45 minutes. In this part of the presentation, we will go through a brief but I think complete update for each of our businesses. And then we'll end where we always end by going through the financial outlook. So I will start with the CCB.
As you know, we have a powerful consumer franchise. We have relationships with about half of all of the households in the U. S. We bank about 4,000,000 small businesses and we have the largest active digital customer base. In serving those customers, we leverage firm wide assets and capabilities, including the JPMorgan brand and investment expertise in Chase Wealth Management, and small businesses have access to treasury services.
The goal is to deepen relationships with our customers by being the easiest and therefore the go to bank to do business with. As I said, it does start with digital account opening, the ability to pay with Chase wherever, whenever and support all of our customers' financial needs and aspirations through banking and lending relationships. Coming into 2018, we feel on the front foot with strong momentum across the board. Beginning with consumer banking on the next page. At the top of the page, you can see that our strategy is working.
70% of our households use Chase as their primary bank. And since 2012, we've been an outperformer in retail banking customer satisfaction. And in breaking news as of yesterday, we're delighted to now be ranked number 1 in retail banking advice in the U. S. By J.
D. Power. We've grown average deposits and client investment assets by over 60% 70% respectively, and we ranked number 1 in retail deposit growth with nearly 9% market share. In the chart on the left, over the last 5 years, we have led the industry in deposits with a 10% CAGR, gaining over 200 basis points of share as our customers ascribe value to their end to end relationship with us. On the right, our strategy is one of multi channel engagement and we are investing in both our physical presence and in our digital capabilities.
Today, 70% of households are digitally centric or multichannel. And as mentioned, these customers tend to have higher spend and higher deposit and investment balances with us. So while we have a prominent place on their phones, we are also connected to them in a deep and personal way through our branches and our people. And 75% of deposit growth comes from households who use our branches. Spending a minute on our branch strategy then on Page 34.
We continue to believe that a physical distribution presence is critical to the long term strategy of this business, but we will always look for ways to optimize the network, enhancing our distribution density by constantly opening new branches as well as moving and consolidating them. Retail distribution is like a muscle, you have to exercise it or it will waste. We have optionality in our footprint. We have the flexibility to exit about 3 quarters of our branches within 5 years, but we also have the optionality to extend control for more than 10 years in over 80% of them. And I want to remind you that only 9 of our seasoned branches today are not profitable.
There's still a lot of opportunity for us to expand, particularly in growth markets in which we do not currently have a consumer presence. And you saw our announcement. We are excited to expand into 15 to 20 new markets with a total deposit base of $1,000,000,000,000 We're going to build up to 400 new branches, add nearly 3,000 jobs and bring the full power of JPMorgan Chase to bear. And expanding our footprint, as you know, also provides direct benefits to all of our other businesses, CTC being a feeder to the private bank farther up the wealth spectrum, and the commercial bank will now be able to provide core operating services to governments and universities in these locations. And given our digital tools, customers are changing the way they use our branches and in turn we are exploring innovative formats.
Moving next to card and merchant on Page 35. We are the number one credit card issuer. And since 2012, we've improved our card net promoter score by 18 points, grown sales by over 60% and added nearly 200 basis points of share. We're also the number one wholly owned merchant acquirer. We've grown our merchant processing volume by over 80% and added more than 600 basis points of share.
We have a balanced portfolio of both proprietary and co brand cards, including new products. And in 2017, we finished the renewal of our co brand card relationships, having completed the renegotiations with Disney, Hyatt and Marriott. And when you look at these partners, they represent some of the most admired companies ranked by Fortune. Looking forward, we are focused, as we said, on best in class digital and mobile capabilities as well as integrated payment experiences, but we are also very focused on increasing engagement with our customers. And Sapphire Reserve has been a great proof point there.
And to quote Bloomberg, they've built a lifestyle brand. It's a part of your identity. It's like the clothes you wear. And we are seeing more than 50% higher spend with these customers, which is not surprising given the value proposition of the card. These Sapphire Reserve customers, and you can see their characteristics on the page on the left at the bottom, They're not only profitable as a single product relationship, but they are an extremely attractive base into which we will deepen.
And we are seeing an impressive more than 90% renewal rate for these cards. While we've only piloted CPC and mortgage offers to these customers so far, the results were very promising and so you should expect more of that in 2018. In total, we have more than 40,000,000 card households and only 14,000,000 of them have more than one product with us. So broadening those relationships and making sure we remain top of wallet are key areas of focus as we look forward. Next on home lending.
A decade since the crisis with housing at its core, we have executed on our strategy to reposition this business focusing on high quality customers and improved controls. The majority of our regulatory and control agenda is behind us and we have seen a significant increase in customer satisfaction since 2012, driving growth and market share gains. On the left side of the page, we've been growing our core loans, derisking and maintaining strong credit discipline. Delinquency rates have declined significantly and net charge offs today are negligible, which all positions us to go after the big embedded opportunity of being the go to home lender for Chase customers. We are underrepresented today with a market share of 5.4%.
And through our investments in technology and people, we are focused on gaining share. €30,000,000 of our households have mortgages and only €5,000,000 of them have it with us. In order to capture this opportunity, we are increasing our adviser base. We grew advisors by 10% in 2017 and we have plans to add 500 new advisors over the next 5 years. We've also spent the last several years ensuring that our operational systems are ready to support an expansion.
And now we deliver a simpler, faster and better customer experience. And standing here this time last year, Mike talked about a digital mortgage pilot. And by the end of this year, all mortgage applications and processing will leverage our digital end to end solutions. Moving to auto on Page 37. In auto finance, we are the number 3 bank lender.
And although our share is down a bit, we prioritize risk discipline over share. Our growth in auto across loans and leases has predominantly been driven by partnerships with our key manufacturers like Subaru, Jaguar Land Rover, Mazda and Maserati. And these partner dealers drive higher volumes and efficiency for us. In 2012, we were under indexed relative to the industry on leases and we're now in line. We exercise great caution in growing here and only do leasing with our manufacturing partners with appropriate residual risk sharing and appropriately conservative accounting.
Going forward, we'll continue to invest in these partnerships, leverage our full suite of capabilities to deepen dealer relationships and of course provide an improved digital experience to our customers. So ending CCB with Business Banking on the next page. Back in 2012, we weren't punching out our weight in small business. Through a relentless focus on improving products and services, we've seen a substantial improvement in Net Promoter Score and we've gained 250 basis points of share, which while leaving us in a number 3 position puts us on a more equal footing with our peers. The strategy is clearly working.
There's a lot of opportunity and we intend to continue to deepen relationships and grow. Year over year, we saw small business card sales up 12%, gaining 20 basis points a share. And here too, we will add up to 500 bankers in support of small and middle market business growth over the next 5 years, including entering new markets. So moving then on to the Corporate and Investment Bank on Page 39. Spent the last few years simplifying the business, optimizing against multiple constraints and focusing on efficiency.
Today, we are well positioned as a global scale player with a complete set of products for our clients. We've been consistently investing in our platforms in modern technology and here too have seen significant improvements in client satisfaction and share gains. And we are well positioned to benefit from wallet expansion driven by emerging markets over decades. We are focused on embracing change in this business and evolving the business across three horizons. 1st and foremost, maintaining a day to day discipline, running a best in class business across all dimensions, while at the same time optimizing our current model to improve and integrate the way that we serve our clients, but ultimately to transform what we are doing today by reimagining the future.
Given that markets has been a particular area of focus in 2017, we'll start there on Page 40. The strategy for markets hasn't changed. We've stayed consistent and committed to the long term viability of the franchise. But a lot of airtime has been given to low rates and low volatility. And despite quiet markets last year, equities and fixed income markets delivered a 13% 12% return respectively.
And of course scale really matters here given that marginal profitability is quite high. Now bear with me because I want to make a nuanced point on this page. On the right, last year we showed you this view of the market franchise and you can see the largest revenue category is what you might call CapEx flow business, where the model is to earn commissions or bid offer spread by intermediating risk. And in that flow segment, you clearly see the big drop from an exceptionally strong 2016. So we dig deeper underneath that to understand what's going on with the client franchise.
Is it healthy? And we have an internal measure for client activity. And to simplify the concept, just think of a lending business where you can take your revenue and separate it into rate and volume. And you can think about our internal client activity measure as being a proxy for the volume related part of that equation. So mix adjusted, but with relatively stable margins.
And on that measure, you can see that client activity has grown quite steadily over the last few years and was reasonably stable in 2017. Of course, the ability to monetize those flows does matter and margins are impacted by volatility. So we clearly care. But the upshot of this is that we feel really good about the quality of the underlying client franchise. It is healthy.
And when market conditions normalize, it will support strong revenue performance. So staying on markets and moving to Page 41. If you look at the top right, it's all about completing the platform for our clients. And last year or sorry, the last few years we made great progress, but we do continue to work on this. Last year, we retained our number one ranking in fixed income markets and we tied for number 1 in equities for the first time.
The competition is back and complacency is the enemy, but you can also see on the left side of the page that we did a good job preserving our market leadership in FICC from a high watermark in 2016 even as the wallet declined. We have a very positive story to tell on equities. 5 years ago, we were behind and we've been focused on closing that gap. We finished building out our prime brokerage platforms in Europe and Asia. And last year, we grew global prime balances by 28%.
We now have a competitive and complete platform, and our clients are demonstrating their desire for us to be their prime services provider, where we have over 13% share now, up from less than 11% 5 years ago. And we re upped our focus here in 2014 and are now seeing the multiplier effect carry through to our cash and derivatives businesses, up 4% 18% respectively in a wallet that has declined over that same period. So going forward in markets we talked about it, it's all about innovating in our platforms to deliver a great customer experience and that's totally within our control. Moving then on to Banking on Page 42. In Banking, a key priority for us over the last few years was to fill coverage gaps and improve the strategic dialogue at the CEO and Board level.
And we feel much closer than ever today to having a fully complete top tier banking platform, although here too there is still opportunity for growth. As small share gains can add up quickly and we remain focused on closing gaps. We'll do this by making sure we continue to hire senior bankers in targeted areas and prioritize the right clients, with a key area of focus being on our global industry and cross border collaboration. Moving on to Treasury Services on the next page. Over the last several years, Treasury Services has been challenged by the impact of low rates as well as business simplification.
But in 2017, we delivered strong growth and believe we outperformed peers. 2018 is positioned for the same. Last year, revenue was up 15%. And although rates were a driver, organic growth was also a meaningful contributor. We grew operating balances by 10% and managed expenses down, while maintaining technology investments in strategic platforms across the space, including graphite, which I talked about earlier.
And as a result of those investments, we are making progress and we are gaining share, and we have substantially closed the gap to number 1 in wallet this year. And Security Services results are showing the same trend on the next page. In this business, you will recall, we spent the last few years being focused on the stability of the platform and addressing client experience issues, which required significant investments and both our existing and new clients are feeling the benefit of those investments. In 2017, we turned the corner. We know that because the feedback from our clients has been very strong.
We are seeing very high levels of retention and based on our latest surveys, we have the highest level of client satisfaction in years. We continue to be focused on aligning our investments with the priorities of our clients. And here, again, we want to complete our set of products and services. The financial performance of this business in 2017 was also strong with revenue growth of 9%, and we finished the year with record levels of asset under custody at $23,500,000,000,000 But before I move on, we now have the highest firm wide transaction services revenues, if you add across TS and SS, and we clearly have the broadest combined platform capabilities in the industry, reflecting the benefit of diversification. So moving then on to the Commercial Bank on Page 45.
We take a long term disciplined view and we have industry leading differentiated capabilities, a local delivery model and specialized expertise. Our goal here is to deliver superior client experience, providing simplicity, speed and transparency. And we're not standing still. Are investing across the platform to add greater value to our clients. On the next page.
2017 was a great year for the commercial bank and we are starting 2018 strongly. We are working to drive new relationships, adding bankers at a clip of over 100 a year for the last several years. And although digital is important, this remains a people and a relationship business. And the momentum that we've seen on our client calls has allowed us to add over 1,000 new relationships in 2017. And remember, client selection is one of the most important things that we do here.
So these are companies with management teams and cultures that we like and in industries that we like. We entered 6 new markets in 2017 and we're now in all top 50 MSAs, marching steadily towards our $1,000,000,000 expansion market revenue target. Moving on to the next page. Expansion is only one part of the story, but deepening relationships with the clients we already have is equally important. And we can support businesses of all sizes.
The needs of successful fast growing companies rapidly outgrow our regional banking competitors. And our ability to grow with them provides real value creating deep long lasting relationships. Not many others can serve clients the way we serve ours, and you can see it on the page. Commercial Banking clients have $135,000,000,000 of AUM managed by Asset and Wealth Management. And they generate nearly 40% of all North America IB fees.
Half of our C and I clients are covered by one of our specialized industry groups. We support more than 2,000 of them internationally in 24 cities around the world. 80% of them deposits with Chase and 90% of them use treasury services. Obviously, a core part of the commercial bank is lending with loan growth outpacing the industry on the next page. In C and I, the industry saw a deceleration in loan growth in 2017, which we believe is reflective of high levels of liquidity, access to capital markets and where we are in the cycle.
Optimism among our clients continues to be very high, and we've seen loan growth with a 7% CAGR since 2012, maintaining proven client selection, risk discipline and credit quality that's among the best we've seen. We're not seeing any signs of today. From here, a reasonable expectation for C and I loan growth for the industry would be broadly in line with GDP. And given our investments, we expect to continue to perform better than the industry over time. Shifting to commercial real estate.
We have a great story to tell here and have grown the portfolio strongly, but with discipline since the crisis. And our CRE business is built to target the least cyclical segments of the market. The majority of our growth has been in commercial term lending, where we compete on speed and execution certainty and we focus on the markets that we know. This is a diverse portfolio with average loan sizes that are small and strong debt service coverage. And in real estate banking in 2017, we had limited new construction exposure and kept within a tight credit box.
Here too, growth rates have slowed as rates are rising and again as it is late stage in the cycle. So finally shifting to Asset and Wealth Management on Page 49. Client outcomes is our core focus in Asset and Wealth Management. Everything starts and finishes with the strength of our investment performance, coupled with excellent client experience and constant innovation. We have a leading franchise with over $3,000,000,000,000 in client assets, more than $120,000,000,000 in each of deposits and loans, we are ranked the number one private bank in North America for the 9th year in a row.
We're building out our digital and mobile capabilities, providing human and digitally enhanced advice, developing investments for everyone, solutions across the world spectrum and both active and passive strategies. And finally, executing on a simplified for growth strategy, excelling where we can be a leader and exiting where we don't have an advantage. Moving to the next page. Asset and Wealth Management has been a consistent growth business. And in 2017, this business reached record levels for client assets, revenue and pretax income.
You can see our client assets have increased on a 6% CAGR since 2012. One indicator of where this business is going is flows and we're very proud of ours. Looking at the bottom left, you can see that we're gathering between $1,000,000,000 $2,000,000,000 on a weekly basis. However, as fiduciaries of our clients' assets, our goal is not to be the biggest, but it's to be the best, and we define that as focusing on the client experience and on investment performance, which you can see on Page 51. Consistent long term performance drives client outcomes and the value our portfolio managers generate is evident in our strong five- and 10 year numbers, which you see on the left hand side of the page.
These are some of the industry's best, benefiting from a diversified business across geographies, client types and asset classes. And when Mary stood here last year and showed you the same chart, the 1 year performance was more challenged across the board. The environment at that time was tough, low volatility and high correlation. And she told you that we believe the answer to the debate on active versus passive was active and passive with people still playing a critical part in the equation. And the last few weeks alone has demonstrated the opportunity for active strategies to generate alpha and our 1 year performance is better across the board.
And on the top right, it is because of that consistent performance that clients continue to entrust us with their assets. We've seen positive client flows every year since 2004 and we ranked number 2 in total net long term asset flows over the past 5 years, generating nearly $400,000,000,000 of flows. And on the bottom right, we continue to innovate and refine our strategies. In 2017 alone, we launched over 70 new funds, a third of them in our beta strategies business, while also merging and liquidating over 70 funds to help simplify the platform.
On to
the next page. Across Wealth Management, we aim to be the bank of choice. The client relationship starts with banking, and we've seen strong deposit growth with 10% CAGR over the last 5 years as well as with higher average balances. Lending relationships give us the most intimate understanding of our clients' needs, and we have seen lending, including our mortgage book, also grow strongly. And we're doing this in a very controlled way with a consistently low net charge off rate.
So while we have demonstrated leading long term performance and continue to grow on both sides of the balance sheet, there's still further room to expand on Page 53. Last year, across our Asset Management and Wealth Management businesses, we generated the best pre tax income of our publicly reported peers with the lowest number of advisers. That's the opportunity. Also on the right, we have improved the productivity of our client advisers by more than 50% and believe they are more productive than peers. Our job here is to deliver the whole firm to our clients.
And in order to do that, we need to have more people telling our story. So we will continue to hire advisers and to focus on their productivity to allow us to serve our clients better. So that concludes the line of business updates and brings us to the final section of the presentation, And I'll briefly set the scene for that on Page 55. The strong synchronized global growth story we saw in 2017 has carried into 2018. Global GDP continues to be at multiyear highs.
Consumer and business confidence and sentiment are very strong. We are close to full employment in many developed markets, which is all laying the groundwork for higher wages and the return of inflation. In terms of credit, the environment remains benign. And altogether, the risk of recession does not seem particularly high. All of this data remains constructive and supportive and this is the backdrop for the outlook section.
But as you know, we always prepare for a range of outcomes. So we'll start with loans and deposits, 1st with loans on Page 56. We've been steadily growing our core loans at 9% year over year if you exclude the CIB. And we said before that loan growth in the CIB is an outcome of optimizing our client relationships. It's not a strategy.
We've seen solid loan demand across consumer and we expect that to continue. But as previously mentioned, there has been some deceleration in the commercial bank in both C and I and CRE given where we are in the cycle. So all in all, we expect firm wide core loan growth to be about 6% to 7% in 2018. Moving to deposits on the next page. Deposit growth in total has been strong, but you need to get below the headline numbers to understand the underlying trends.
We continue to grow our retail deposit franchise more than twice the industry based upon the investments that we've made in our brand, in marketing, digital capabilities and in branches. And while we have seen the early signs of an industry wide slowdown, we do expect our deposit growth to remain solid and above the industry. As expected given the level of rates, Asset and Wealth Management has seen some deposit migration into money funds. But remember, we have one of the largest money fund complexes in the industry, and we've retained the vast majority of these balances. And moving to the bottom on wholesale, you can see that we continue to grow our operating deposits, while maintaining discipline on non operating deposits.
So while the impact of monetary policy normalization to date has been benign, we do anticipate changes to deposit flows on Page 58. Normalization will likely have 2 dampening impacts on deposit growth. First, Fed balance sheet shrinkage by $1,500,000,000,000 will weigh on growth rates for the industry overall, but not dollar for dollar. And we see this as a wholesale phenomenon. As you can see on the left hand side of the page, as the Fed balance sheet grew, the impact on deposit growth was all
in wholesale and largely non operating.
So on the way down, we would expect deposits outflows to also be predominantly wholesale non operating. We're expecting limited impact to retail deposits or to our liquidity position. 2nd, as rates rise and the gap between money market fund and deposit rates widens, history would suggest that we will see a migration of balances out of retail and into funds. And while we would expect our funds to benefit from those flows, this will dampen retail deposit growth. We are just reaching that point where the slowdown is starting.
We do believe it will continue. Moving on to net interest income on the next page. Since 2015, to date we have realized about $7,000,000,000 of incremental NII. It's mostly been rate driven, including the benefit of deposit reprice lags. Growth was also a factor, but less so than rate.
And market NII has been and is expected to continue to be a headwind. So in 2018, those themes are broadly consistent, and we expect that to translate to $54,000,000,000 to $55,000,000,000 of NII this year, assuming implied. Looking beyond 2018, the key message is that on a net basis, rate benefits may largely be over, balance sheet growth and mix will become the more significant driver of NII. And given my earlier comments on the likely changes in deposit flows, loan and deposit growth rates will have a degree more uncertainty. And when all is said and done, cumulative basis could also have a meaningful impact on run rate NII.
But I'll show you on the next page that we haven't changed our point of view on that. So you can see in the green line on this chart that so far this cycle we've seen less than 20% beta. And if you look up to the orange line, that's broadly consistent with what we had seen in the last cycle at this stage. So while there is a lot of debate about deposit reprice, we haven't seen anything yet that would lead us to change our opinion on how this will likely play out, which is to assume an appropriately conservative more than 50% deposit reprice beta for this cycle. And you can see in the last cycle with the cluster of orange dots on the top right that rates paid increased 70 basis points after the Fed's last hike, so much of the catch up will likely happen towards the end of rate normalization as product migration continues.
If you dig under the 20% headline base number, each of our businesses is clearly in a very different place. It's a continuum. We've seen very little price movement on retail deposits. And on the other end of the spectrum, the change in rates paid for our largest wholesale clients has been much higher. So while we do stand by our current assumptions, there are differing points of view in the industry on whether reprice will be higher or lower than in the previous cycle.
And the case for higher betas assumes that liquidity and funding requirements as well as improved technology will spur the demand for U. S. Deposits and will allow customers to move money more easily and therefore to be more price sensitive. The case for beta being lower is that increasingly customers are actually less price driven and ascribe more value to great experience, best in class technology and product solutions. And so while the topic is getting a lot of attention, we think of the value we provide to our customers much more broadly with deposits being important, but only one piece of the equation.
Moving then on to non interest revenue on Page 61. We've been running hard to stand still on fee based revenue for a number of years, absorbing significant headwinds. And in 2017, we reached the inflection point. NIR was up slightly for the first time in 4 years, as growth offset the cyclical impact of a smaller mortgage market, lower markets revenues as well as continued investments in card. While the mortgage market is estimated to be near its trough and therefore home lending NIR should be relatively stable from here, We do expect some reversal in 2018 of both card headwinds as we have largely lapped the impact of investments and of markets revenue given the performance of Q1 to date, albeit with all the normal health warnings about markets for the rest of the year.
Together, these will likely contribute $1,000,000,000 plus to NIR in 2018 and that's before contemplating the regular BAU growth, which the drivers at the bottom of the page should support solid growth of up to $2,500,000,000 So in 2018, we expect NIR to step up a little from 2017 with growth of about 7% year on year, after which returning to a growth rate of about a 3% CAGR market dependent. And you may recall that last year, we also showed you a chart that normalized for NIR from 2011 and also showed an underlying 3% growth rate. Shifting then to expenses on Page 62. This year we feel that the overall environment presents us with the opportunity to significantly accelerate and increase our investments across the board. And it's not just because of tax reform, but also given the strong economy, higher rates, driving revenue growth, positive operating leverage and hopefully as we face a more constructive regulatory backdrop.
We consider our investment agenda to be limited only by the opportunities in front of us and our ability to execute well against them. So looking at the chart and starting on the left with 2017 adjusted expense of $58,500,000,000 First, you see about $1,100,000,000 of efficiency, including lower FDIC costs being offset by about $1,000,000,000 of growth, including the impact of FX or exchange rates. And these are just the first order measurable efficiencies. Beyond that, as you know, the company is growing broadly and consistently across most measures. And the second order impact of that growth is also self funded.
Next, we are investing an incremental $2,700,000,000 this year. And below the green bar, you can see those investments broken down by tight. The biggest portion, unsurprisingly, is about $1,400,000,000 of incremental technology investments across our businesses. The majority of it in our core platforms and digital, but with the remainder in cyber and controls. 2nd, you see about $400,000,000 of real estate related investments, which for now we hold in corporate, the largest portion of which is the estimated cost this year of our new headquarters, but the remainder being investments across a number of other global facilities.
3rd, about $400,000,000 as we add new revenue producers. And 4th, dollars 300,000,000 of incremental marketing expense in CCB. The balance, which is small, includes a number of other smaller investments, but also includes the impact of our recently announced $20,000,000,000 investment plan in our customers' communities and employees. And above that green bar, you can see that investment number broken out by line of business, but by line of business the themes are consistent. Last but not least, dollars 700,000,000 of incremental auto lease depreciation as we continue to grow.
Adding across, you get total expense for 2018 of less than CAD62 1,000,000,000 Shifting to credit on the next page. We expect 2018 and medium term net charge off rates to remain relatively flat across businesses with the exception of card, which we spent time talking about. In card, seasoning of newer origination vintages will drive loss rates modestly higher, up at higher risk adjusted margins. And you can see circled for 2018, we expect to be at the low end of that range. Accordingly for the firm, you should expect net charge offs and reserves to be modestly higher in 2018 driven by card, but emphasizing that this is seasoning not normalization or deterioration.
So to bring this all together, starting with return targets on Page 64. On the top left, you can see that each of our businesses has revised their medium term return targets upwards, reflecting the benefit of tax reform, but also reflecting growth. Moving to the firm wide RoTCE walk at the bottom and starting with our 15% return target from last year's Investor Day. We add higher revenue reflecting a normalized rate environment, add to expenses still in line with 55% overhead ratio, but acknowledging our investment agenda. Credit and capital are about to wash year on year and you get back where you started to a 15% return target for tax reform.
Moving to the top right and also in the walk, you can see for the company that tax reform would all other things being equal be a nearly 300 basis point benefit to RATCE. And we don't know at this point how and when competitive dynamics will come into play and to what degree they will impact the continuum of businesses and products that we're in. It's still early and to date we have not seen any notable or measurable impact to our businesses. We do believe that a portion of these benefits should and will be passed on to our customers over time, but time is an important dimension. However, a reasonable portion should be retained as we have absorbed significantly higher costs in the form of capital, liquidity and controls over the last 5 years.
And remember, you didn't see those increased costs being passed through to our customers. So closing then on the earnings simulation on the next page. We're going to look at the range of outcomes first on a pretax basis this year, starting with 2017 at $39,000,000,000 to $40,000,000,000 From the top, a number of factors can and will drive the quantum of NII in any 1 year. So while acknowledging a degree of uncertainty, we think a range of $6,000,000,000 to $8,000,000,000 of incremental NII over 3 years is a reasonable expectation. And expecting our non interest revenue to step up in 2018 and afterwards grow at about 3% a year, obviously market dependent, could be about another $6,000,000,000 to $8,000,000,000 of revenue growth.
And assuming that we continue to invest in our businesses, but also achieve a 55% overhead ratio, and also assuming that credit remains relatively benign through this horizon, we're just adding a possibility of some incremental stress. And if you do that math, you get to a range of $44,000,000,000 to $47,000,000,000 pretax. I want to remind you though it's a simulation not a budget and obviously based on a number of assumptions that could prove to be wrong. But we think it's a reasonably sensible central case at this point. So I showed you on the previous page that if you use the old tax rate, unsurprisingly, you would get close to that $30,000,000,000 of net income and a 15% return.
And if you incorporate the lower tax rate and couple that with the consideration of competitive forces, we believe a 17% return on tangible common equity is achievable and is a good base case in 2 to 3 years. So in conclusion, we do feel really great about how the company is positioned and how we are performing. And while the current environment remains constructive, we are confident in our model through the cycle. We are complete, global, diversified and at scale with a long term strategic focus. We will continue to invest to accelerate our capabilities and to innovate and grow with our customers and our clients at the center of everything that we do.
So I think you've had enough from me. I will take another 15 minute break and then we're going to start the Q and A with myself and the 4 CEOs on stage and over to you.
We will now take a 15 minute break.
Okay. Welcome back everybody. We're just through quite a bit at you and gave you a lot to chew on. That was really awesome. That was really good.
I mean, how good was it? Okay. So actually, if you can put that on the surveys, like strong clapping, that's great. There are surveys in front of you and we do want you to fill them out honestly. And if you don't have a chance to do it today or you're listening online on the webcast, then we've got an online version that will be available tomorrow.
Maryann noted it. We listen to your feedback. We take it to heart. We want to make this as good as we can and make it better every single year. So before we get to Q and A here, just a couple of logistical items.
1, you will be receiving an email before the end of this session with your lunch table seating. So please be checking, those will come through. If there's an issue, come find 1 of us, IoT, the event staff will be able to help you out with that. Lunch will take place on the 49th floor, so one floor down from where we are right now, the stairway right out there. The coat check, checked in up here, it will go down to 49.
And so when you leave here, don't leave your stuff in the room. We're not coming back to 50 in this room. Please take everything with you. And then lastly, just before we get going, when you ask a question, remember, we do have a bunch of people listening online the webcast. So please wait for a microphone, state your name, introduce yourself and your company.
So good. Now moving on to the Q and A. We've got about 2 hours to do this. Jamie will close it out. But first, on stage, we have a number of very familiar faces.
Obviously, Mary Anne Lake, our CFO, who has just given you guys a ton of good information. On the other side of her, you have our Co Presidents and Co Chief Operating Officers, Daniel Pinto and Gordon Smith on the other side, Mario Otos, CEO of Asset and Wealth Management and down at the end, Doug Patnaud, CEO of Commercial Banking. So remember, as Mary Anne noted, we also have a number of other senior leaders in the room who may chime in seated over here and on the other side of the stage. We'll have these folks up here for about an hour, CEOs and Mary Anne to answer all your questions, whether it's on the firm, any and all of our businesses. I know you're not going to be shy.
You're never shy with me and my team. So I know you guys have tons of questions for them. Topics that I know are on everybody's mind, markets, investment banking. So Daniel, how is the Q1 shaping up in markets and how is the environment looking for the rest of the year? And how about the pipeline?
Yes. So first, thank you, Marianne, for doing the heavy lifting. So have a lot of more time this year to continue manage our businesses. And now we are moving from English accents to Argentine accent. So let's start with market.
So clearly, the year has started well. So flows at the beginning of the years were strong. Client activity was strong. So and then that accelerated into the volatile time in the equity market by increasing even further the market decline activity and clearly, spread is always a function of volatility. So therefore, that's how to and clearly, if you walk into that relatively prepare for what the market was going to bring, so that was fine.
So we have seen is the market is correcting quite fast after the sell off. So we are now 2%, three percent from the top back again, which is also surprising. And volatility is coming down back again. So the bigs is around 15%, 16% from reaching a peak of 33%. So essentially, the activity in the last few days is slowing down a bit.
And you have to keep in mind that March last year was very strong. So overall, so we think that the performance our performance in markets for this quarter across the business, it will be between mid to high single digits up on a strong quarter of last year. Particularly with a strong performance in FX, emerging markets and equities. So that's market. In banking, the backdrop, the overall environment is extremely positive.
When you see global synchronized growth, you see CEO confidence and business confidence. So it's all very positive. So when you look at M and A announced, it's substantially year to date, year on year. Though when you look at and it's substantial in the U. S, it's substantial in Asia, though cross border flows, they are low.
They are lower, like 26% lower year on year. But when you look at wallet, as you are the ones that follow the logic, so the wallet year on year, year to date is down around 18%, 20%. So that is a reflection of some slowdown in activity towards the announcement around mid last year. So but when you look at what had happened in the first, the announcement, as I said, early this quarter and the strong announcement in the last quarter of 2017, we think that these sort of slowdown in the wallet will catch up. And our view is that overall across M and A equity and the wallet for the year will be from flat to slightly up.
That is also in line with I saw the acquisition numbers the other day, they are thinking about around 4% up year on year. They're more or less flat to up. Few single digits is probably what is going to happen. But it feels good, the pipeline is very strong across And when you go to the different asset classes, that is the one that has a bit more of a challenge because you have some positive factors and negative factors. But overall, we think that the wallet in-depth will be flat, slightly down, but not much up in equities, flat to up in M and A overall for I have said.
So I don't know if Dao wants to Yes.
I mean, the investment banking story for commercial banking is one of I think perhaps one of the best examples of how we're delivering world class broad based capabilities to CB clients. And if you recall, we've been on this steady march to $3,000,000,000 First of all, our target was $1,000,000,000 We hit it and we raised the target to $2,000,000,000 We're marching to 3,000,000,000 dollars Last year, fees were up and it was a unique year and that there were very few large transactions
for us. And as we
head into 2018, we feel we see a pretty robust pipeline. We think 2018 will look more like other years where we had large M and A activity, large capital markets activity. The big story for us last year was we had over 50% growth in our middle market investment banking. That's the hard result of hard work, bottoms up account planning, longevity, quality coverage over time. And there's tremendous potential there.
And I
think the animal spirits that sort of are embodied in this economy and what we see out there hopefully translates into small businesses selling their companies, going public, accessing the capital markets, and we feel like we're pretty well placed. So, as we enter 2018, I think it's I think we're in a better place than we were last year in terms of the IB pipeline.
Okay, that's it.
So great presentation. Just wanted to follow-up on a couple of comments that were made around the digital technology investment spend. And here a little bit across each of the business units with regard to the key priorities that you have and how we should think about where those investment dollars are going in terms of driving pretax margin. Is pretax margin going to be initially hit maybe in the near term with an improvement as either revenues lift or the expenses come down? It's probably different in each of the businesses.
And I think you highlighted, Mary, in a one $400,000,000 increase in tech, which is around a 12% or 13% increase in the tech budget. So pretty material and just wanted to understand line by line, if you don't mind.
Do you
want me to start?
Yes, sure. So in the consumer space, and you have Phil Wallace, who's Head of our mobile and digital efforts just behind you there, Betsy, tremendous momentum as you start to see in the numbers. And I'm sure it wasn't lost on all of you when Marianne made the point that the kind of marginal cost of the digital transaction can be as low as close to 0. So we are seeing some really significant efficiencies. Much of it we're putting obviously back into investing and growing the business.
But we look at every aspect of the customer experience. We look at where we think there's opportunities to drive more digital engagement, but without overcomplicating the apps. So if you go back to the early days of the dotcom era and you look at kind of what became people's homepages, you ended up with just a plethora of activity. So we try to design everything around the kind of core activities that we think the customer wants to complete. We look at exactly what's happening in the marketplace.
You've heard stories, Mike Weinbach's over there, about how we're digitizing the front end of the So
we
So we have a very robust investment process that we go through. We look at those opportunities, and they are largely driving down our costs in the kind of core structural side of the business, to give you a simple example. But you saw the slide, I think it's around as you're looking at your around pages 33, 34, 35, something like that, you saw the magnitude of growth that the consumer businesses have had since 2012. We've since that time in terms of kind of core people working on the business dropped from about 180,000 to about 135,000. Now significant piece of that meaningful piece was the improvements that were made in the whole mortgage industry and in our business specifically.
Across every business line within CCB, we drove efficiencies significantly as a result of the digital and mobile activities that we see. And the other thing I would say just from a marketing perspective is if you go back a number of years, we've worked pretty hard, most companies, to say how do you drive down the number of contacts that the customer is having with you? Why? Because it costs you reliably $4 to process each and every transaction. Customer calls into the call center depending on the duration of the call.
Now we see customers interacting with us daily and multiple times a day, and it's where Zelle is very powerful for us. And what does that do? It lets us expose to customers more opportunities for products that they might be eligible for and helps us to be in that first two pages on your phone's home screen. So I have not, in all my years in these businesses, seen the rate of change as great as it is now, and the impact of the mobile and digital transformation is really meaningful.
I would just chime in here because you asked a very specific question about how does it affect each of the lines of business and is it sort of an ROI that you might have to wait for a year or 2 to see the results of. I don't think any of us think about it in that way. We think about this as table stakes for what we need to do for our client base. So they expect to be able to interact with us 20 fourseven. So you've basically taken the time that you used to interact with a client, call it an 8 hour workday.
And if you expand that to to work with them whenever, however and in multiple forms. So everything we do has to bring what we've normally done in house to them so that they can figure out how they want to interact with us. So we do that, we make those investments. And we don't do it just for a product or a service, but really for the complete nature. So some of the things that were on some of those pages 34, 35, 36 ish area, talked about how you integrate the investments with the savings, with the borrowing and how do I not do an application for a borrowing in one area and then have to do it in another area?
How can we get smarter about helping a client to understand when they do a little of this, they can also do a little of that? And giving them back that data so that they can make smarter and better financial decisions for themselves will hopefully enable them to want to be clients for life. So we're working on establishing a framework so that they can be clients for life. We know more about them sometimes than they know about themselves. When they go to fill out a form and say, how much do you make, how much do you spend, they normally put in the salary they make.
They don't put in the after tax number that they pay. And of course, all of you, if you're asked how much do you spend, you are willfully underestimating what you actually spend on a daily basis. But we happen to know that. All of Gordon's data knows that. When you can combine that and just feed it back to that client, they can make better, faster, wiser decisions and hopefully have a healthier financial life over time.
So when we think about things that we do in Asset Management, we think about taking all of the JPMorgan century worth of knowledge in investing and be able to package it for the client that walks in with their first job and their first paycheck and say, is it too early to invest just $10 No. If you start at age 22, 23, 24, we can get you to be a financially savvy investor and have a much better chance of a high probability successful outcome by the time you get to retirement, if we can get you to start early and have those successes. Being able to take all of that and put it in there is not something we're going to measure an ROI on, on any particular day. It's what we have to do. And then it just it makes an exponential impact on the effect of the brand and pulling the whole firm together.
Saul?
Hi. Saul Martinez, UBS. I guess to ask the question slightly different way is about the $10,800,000,000 of tech spend, is there a way to put parameters around how much of that is to basically keep the lights on to maintain existing systems and platforms and how much of that is for new can you make can you make the argument that technology should drive down your structural efficiency ratio over time to something below the 55%? Because obviously, if I look at the trajectory of your medium term efficiency ratio is very different, applies a very different cost curve than what some of your peers are saying. So is there an argument to be made that the efficiencies that you get from that can at least help self fund some of the new initiatives?
Yes. So maybe I'll start with just sort of big picture and then anybody can jump in. So I'm sure that you will recall that previously we talked about our sort of $9,500,000,000 of technology spend, over $3,000,000,000 of which was on investments. And so it doesn't take much to add the $1,400,000,000 and get close to 5. So about $5,000,000,000 of our technology spend is in we would call to be incremental investments that are really transforming the environment, but they run the gamut.
So obviously, digital is a piece, but you've got the core platforms we talked about, payments platforms, asset wealth management platforms, the mortgage platform, investing in WePay, all of those things. You've also got data analytics. You've got cloud enablement. You've got automation and efficiency of our existing processes, on and on and on. So we while we don't necessarily always do everything to have an incremental specific ROI, the portfolio of those things will transform the way that we serve our clients and the way we operate and will make the unit cost of everything we do ultimately more efficient for sure.
And we've already seen that, as Gordon said, and it's one of the reasons why we are able to self fund the growth, the underlying growth. You see all our drivers growing 5%, 6%, 7 percent a year every year, 10 years. And while our cost base hasn't been static, it's not been growing at that rate in totality outside of incremental investments. So no doubt, I would also say it also depends on your strategy for investing. And so we said this is a moment in time where we really think that these investments will differentiate the long term performance of this company.
And I can't speak for everybody else. I'm sure they're doing much of the same. But we'll do every dollar we think we can spend well to sort of protect the competitive advantages we have at this moment because they will differentiate us. Having said that, that 55% overhead ratio isn't a target that we're a slave to either to the upside or the downside. And so as we reduce those unit costs and start taking out some of the legacy infrastructure because we are a bank that's been in place for 100 of years, then we'll continue to update you.
Meanwhile, we're at 57% now, so let's get to 55%.
And just to take your point about the keep the lights on, we work with Lawrie Beer, who's just on the table next to you there. There's no such thing as just kind of keep the lights on and put that to one side. Laurie and her team and the other technologists, we're relentlessly driving efficiency in that group, and we'll either drop that money to the bottom line or we'll invest it. On the investments, we have a very rigorous process that we go through. Every single investment has a payback laid out, what's the NPV going to be, what are the returns look for the program.
We take a very, very small amount on things that might be quite new, call them R and D if you like, where we'll be unsure about what the return will be, but we'll be very prescribed about how much money we want to spend on those things. But we're looking at both those categories in a great deal of detail. And certainly every dollar that goes into the investment pool,
we have a
very good sense of what the return is going to be.
Okay. Mike?
Mary Anne, you had one comment. You said scale matters because marginal profitability is high.
So if
you can describe the firm's marginal profitability and if each business line head can describe your marginal profitability? And what's new about the scale that you have? And for each of you, a risk related to that. So Gordon, smaller banks say they can be close followers. Can be free riders in all your tech spending, if you could respond to that.
Dan, I think the counterargument for you is loyalty is a basis point. So it's great that you have that, but people can still cut prices. Dove for you in terms of the terms of lending. And then lastly, Mary, do you give it all back in slower pricing in your segment in terms of the benefits of scale?
Okay. So the marginal profitability question in totality is complicated because it differs across all of the different things that we do depending upon where we are in the investment cycle around the sort of digital continuum. So you saw that the marginal profitability, and we've shown you this, I think, for each of the last 3 years or 2 years, I can't remember, the marginal profitability in markets is really quite high. And one of the reasons why share and scale in markets is a key differentiator and why we will remain committed to being complete and to the long term viability of that franchise. And equally, in everything that we are investing in, we are improving the unit cost and the margin of profitability, therefore, goes up.
We still have a lot of things that we do manually, and so we're working on that too. So it's a complicated question. We don't have a single marginal profitability that we're willing to share.
So in terms of maintaining or not the market share, so there are things that we can control and things that we cannot, and there is one that we can't. So we in markets, for example, so we do have clearly, the clearly, the competition is super hard, but we are more profitable than everyone else. So we have the more complete platform than everyone else. We have the money to invest heavily in preparing and producing products and services that it will be best in class. So and after all that, someone decides to trade with someone else that we cannot control.
The only thing that we can control is to create a client experience and a product quality that is best in class. And then people will trade with us. Even in a year like last year, where volatility dropped and we have an exceptional performance in 2016, we didn't lose a lot of market share. We lost like 20 basis points. So it's very marginal.
We lost a bit in fixed income and we got some more in equity. So our trading platform is right. Then when you look at transaction services, we are transforming the whole business and we are getting more market share there for sure. So what Theresa is doing in custody is impressive. Last year, he has moved from a few years ago, hoping that we were not going to lose to feeling that we're going to win every single deal that we compete and we want to compete, and we won the bulk of it last year.
So we feel very good. You heard about payments. You heard our investment bank platform. So we have a platform that is at scale and is global and is complete that obviously everyone else have their strengths too, but I feel quite good. We have a hard hand, can always be complacent.
So clearly, we have to be careful here, but we are in a good position in any kind of market environment to win and we have so far.
So let's take your marginal profitability point from an expense perspective. If I take out cost of funds credit costs, the marginal cost of the next customer is getting close to 0. It's astounding efficiency that we're beginning to drive through the consumer businesses. To the second part of your question to me and maybe the 7th part of your overall question is if I think about people can replicate what they do, what we do, yes, they can. And I think the thing that and I hope all of you will take away from this, hubris kills companies.
I think Andy Grove was quoted as saying only the paranoid survive. We focus relentlessly on driving the company forward. We cannot for one second sit back and feel like we've got an advantage, we can ease back, we can have a nice couple of years. So I think you'll find across the entire company, there's a relentless focus, almost kind of competing as if we're an underdog to kind of try and keep the momentum going that we have. So yes, people can catch up, although I think it's exceptionally difficult then to capture You saw the slide where it kind of makes me at You saw the slide where it kind of makes me at least, maybe no one else I can think of at least one other person that probably winces at this.
We only have $5,000,000 of the mortgages of our Chase households. We ought to better do much better than that, and we will. So I look at the opportunities that are ahead are still very significant, but we have to keep our foot to the floor.
So for Commercial Bank, I'd say 2 things. On C and I, our scale and our broad based capabilities are our competitive advantage. And Maryann alluded to acquiring over 1,000 clients every year. Often it's the case, it's an all or nothing proposition. They're moving all their banking business to us.
So it's not just the lowest price to the loosest structure that wins. They like our people better. They like the industry expertise. They like to be able to use us to go public. They want to bank personally with Mary.
It's a composite of all those capabilities that allows us to win and decommoditize our practice. And then if you think about sort of the cost marginal cost of incremental business, almost half of our domestic equity capital markets and half of our domestic M and A revenue are CV clients for Daniel. So, he has built the factory, it's incremental volume, the CIB has no capital tremendous scale advantage. The other side of the commercial banking business and real estate, we talked a lot about commercial term lending. We're the number 1 multi family lender.
So that scale has given us the ability to invest in our lending platform. We spoke last year about this creos, this digital loan delivery system. It's originally intended all around the client, helped deliver the credit decision in half the time and probably a third of the time of our nearest competitor. It's brought our unit cost to deliver credit down materially. It just delights the clients and that was a meaningful CD led technology investment that took real capital and some technology risk to execute and implement and it's a great example with being number 1 gave us the size and scale to be able to digest that and create an even big dig and even build a bigger moat around the CTO business.
Yes. And then when you get to the Asset and Wealth Management business, it's really a tale of 2 cities. So we always talk about fees. Fees have been coming down since I started in this business. They will continue to come down.
It's what value add you give to be able to have people want to pay for those products and services. And so divide the business into the business that Brian and Barry run on the Wealth Management side is a business that has a very low next marginal client cost. But we are highly, highly disciplined about the type of client and how they get served. When you're a billionaire client, you have an entire team of JPMorgan around you, someone who's helping you to figure out all of your lending requirements so that we can make multibillion dollar loans to a single individual. And they have their own investor.
And they have their own wealth adviser. And that's because that client warrants it. You can't take that same model and apply it to the first client that walks through the branch or even when they first make their first million. So we're very disciplined about how that works and the model around it. But the continuum of it benefits greatly from scale.
When you take the other side of the business that Chris Wilcox runs, JPMorgan Asset Management, that's very different. Your marginal dollar in any one strategy is de minimis, but you have capacity constrained strategies. You have new strategies that have at least a 3 year time horizon in which you're going to create your track record, etcetera. So it's a much more complicated area. And that's where we continue and you saw the slide up there when Mary Anne talks about the fact that is not the business that we seek to be the biggest.
And in many ways, scale works against you on the asset management side. We seek to be the best. If when you seek to be the best, the byproduct is you become very big in certain areas that you can handle that capacity and scale, then that works. And that's what's happening. We are benefiting from the fact that we have all of the asset classes necessary to weather today's storm, so that you have to be in cash in flexible fixed income all the way through your equity strategies globally into your alternative space, credit infrastructure, etcetera.
And then a client no longer comes to you and says, I want that check the box one little strategy. They want the solution to their dividend income problem or their growth problem or their liabilities that they have out in 20 years from now. And we're able to deal with that and they will pay for that. They will pay for the value that you add. And if you just look at this year for all of you and the strategies that you've seen alpha finally come back, you're talking not just about that little 25, 30 basis points of alpha.
You're talking 300, 400, 500, 600 basis points of alpha in certain strategies where now people are saying like, well, I have a very serious fiduciary responsibility to not just have farmed it out to something that I wasn't thinking of. So there's a very complex answer on the two sides of the business where scale benefits you, but you have to be very careful in each product, each service and each segment that you navigate through.
Okay. Marty down here.
Mary Anne, are you here? Hi. Two questions. 1, with the benefit you're getting with tax reform, when you look at the composition of your payout between dividends and share repurchase differently, just because the tax reform may or may not be permanent. So would you think of the dividend maybe a little bit differently than share repurchase, 100%?
That was 1, 2 or 2?
That's 1.
Okay. So look, obviously, as we look at the landscape going into CCAR 2018, we're still sort of operating under the same set of guidelines and rules that we have been before. But we've also not changed our sort of point of view that we would like to continue to board, obviously decision but continue to grow our dividend quite strongly. So we're not sort of spending a lot of time thinking about whether the tax reform impacts are permanent because the company's profitability and earnings potential is great. And so we would like to continue to have the opportunity to increase our dividend.
And obviously, we like our stock at these prices, but we would also like to be able to grow into a stronger dividend. So all of that will play into the equation, notwithstanding that there's still a 30% theoretical soft cap that we will just at least keep a mind on.
Second question is, you talked about the mix of deposits and deposit betas. So deposit betas will definitely be picking up. And that's what we talked about, the 2 of us about gamma and how gamma plays out.
Yes.
We're in the second half of this rate hike where deposit betas are supposed to be almost 100%. But the benefit comes from the rates just being higher and you get the free funding impact. So you're re pricing your portfolios to higher rates. Will you be aggressive and take advantage of that restructuring your portfolio when you have the opportunity? And don't you think there's more liquidity so those net free funds will be a little bit stickier than what we've seen in the past?
Yes. So if I don't answer your question, let me know. So listen, we as you know, we have been we have a disciplined strategy to how we think about our investment portfolio. And while it is the case that we've seen rates rise, we still think I mean, term premium is still low, it's not negative. And so we're still being quite disciplined about how we think about moving and adding duration to portfolio, but we will continue to do that as the cycle normalizes and we take the whole sort of balance sheet into consideration.
I don't know, John Horner is sitting here. He's our Head of CIO and Treasury. So John, do you want to add anything?
Sure. And again, I'm not sure if I'm answering the end of the question. So we are still have a decent amount of dry powder left for higher rates, and we have been set for that. The one thing I would mention from an interest rate risk perspective though is the number one characteristic of a bank balance sheet would be the negative convexity of that. And so that's always an important part of how we manage it and how we've been prepared going forward.
And as Mary Anne did mention though that with term premium still negative and we are have very fairly strong views on the future of the economy and what we have in 20 eighteen-nineteen and do expect the Fed to continue on the road. We will be very cautious as we wait and watch particularly around the term premium and how we feel about going out from a duration perspective.
And not just in duration, but the ability because you have excess capital to take the losses and instantly be able to create higher yields. So it's a way to deploy some of your excess capital, you can get paid back pretty quickly as the market rates now are higher than where your portfolio rates are. Well, as you can also just take capital and use it.
All of which we take into consideration when managing the balance sheet.
Yes. Nat O'Connor back in the far corner.
Yes. Nat O'Connor, Deutsche Bank. Thank you. Can you talk a bit more about what you're seeing real time within commercial loan demand? And I guess I'm thinking specifically going across small business, Gordon, middle market, Doug, obviously, large corporate, DCM, we talked Daniel a little bit about.
But is there signs of a pickup, maybe it's not translating into volumes right now, but there are more conversations as customers are trying to work through tax reform and they're trying to plan for more growth or is it still too early to tell?
You mean you've seen all
the Fed data, it's pretty sanguine, flat or low single digit percentage growth and sort of feels that way coming into this year. It's too soon to say whether we're seeing green shoots from tax legislation. The one thing I would remark on is, Board confidence, management sentiment is as high as we've seen in a long, long time. We actually do a client survey. It's called the Business Leaders' Outlook.
We just got the results and there was a dramatic step change and optimism about the global economy, the local economy, the prospects for their own business. But those animal spirits haven't yet translated into loan demand. And there's several theories. You haven't seen as much cash M and A. I mentioned earlier, you haven't seen any large transactions.
It was usually brought large funded C and I loans into the system. Most of our smart clients, I mean, we've been telling clients to term out debt for 10 years and those that didn't prove us wrong, but there's I think most have tried to get in front of a pro cyclical, pro growth agenda and Washington try to term out any permanent parts of their capital structure. So all of those things have sort of weighed on C and I loan growth. But the sentiment, I think, at some point will break through and hopefully we see clients start to spend money. But right now, it's not evident in the numbers and we watch that stuff by industry type.
We look at revolver utilization across our businesses and still haven't seen anything notable.
I mentioned at the beginning, when you look at M and A, it's very, very strong announcements. The number of big deals over $10,000,000,000 is 60% bigger than what it was at this time last year. So and it's all across. Europe is lagging a bit, but the environment there is very good too. So we are quite positive on the business going forward on the pipeline, the pipeline of IPOs and all that.
So it's a very good high growth, high confidence environment.
Where we've seen loan growth is where we've I mean, we see some in our core footprint, but our above trend loan growth has come from our expansion investments and our investments in our industry coverage. So, definitionally, we're new in San Francisco. Those are market share gains. So as we move up the food chain in all of our new geographies, remember, we added 52 locations since 2010. That's a big greenfield growth opportunity for us and that's allowed us to outperform the C and I numbers, the Fed numbers just in terms of loan growth.
It's just new customer acquisition in new markets as we take share. I'd say the same thing about some of the industries where we've added new bankers to concentrate on technology, life sciences, agriscience, etcetera.
And then just a follow-up on pricing, if I can. Are you seeing any signs of increased competition within the commercial? Like I would think maybe some of your peers that don't have the same capital market capabilities that you have and to be more competitive to the debt markets, they might cut pricing on some of the commercial loans?
For C and I, spreads have stabilized the last several quarters. I mean, there was a sort of steady race to 0. But it's in the last few quarters, it's stabilized at a pretty healthy level. And we'll see whether in the wake of tax reform and the sort of the change in product economics, whether that gets computed away again. But right now, there's a fair amount of rational thinking.
There are exceptions on deal by deal basis. In commercial real estate, it's still it's hyper competitive and there's still a tremendous amount of pressure on spread. Much of it's driven by the agencies and you have a lot of non bank lenders, Lifeco's and others that are really competing aggressively on price. And we haven't sort of found that bottom yet on loan spreads in
the real estate space.
Okay. We've got Glenn over here.
Hi, thanks. Glenn Schorr, Evercore ISI. Mary Anne, maybe a follow-up to the net interest income conversation. So I heard John the incremental NII, I heard John the deposit beta conversation. The question I have is, is there any level of rates where it starts flipping from being a positive factor to a negative factor?
And specifically, I think it's on Page 55 of the outlook, you talked about low consumer and corporate debt service burdens brought on by low rates. So does that mean there's a certain level of rates where that starts to be worrisome? Have you seen signs of inflation anywhere being a problem?
Signs of?
Have you seen any signs of inflation being a problem anywhere?
No. So look, I mean, it is obviously the case. So we've been in this rate environment for such a long time that to the degree that people have had the opportunity to repair their balance sheets and turn out debt and get prepared. And I think that while, of course, it goes without saying that when rates are higher, there will be parts of our customer base that will have increasing burdens, but they've had a lot of time to get themselves prepared for it. So it's not to say that there will be no impact, but we're not seeing anything right now that would lead us to believe that as we go through this normalization cycle, we'll see meaningfully different trends in our sort of credit portfolios.
So at this point, until obviously, we don't know exactly how things will play out, gradual increases, inflation under control and everything should be in good shape. So I wouldn't say there's any level of rates at which we're right now expecting any sort of negative implications. At the margin, there will always be people who will have more price sensitivity and so I'm not to say that that's not going to have any impact.
Chris Kotowski from Oppenheimer. A question mainly, I guess, for Daniel and Doug. And that's that one of the phenomena we see in the economy is just companies staying private longer. I mean, the number of public companies is way, way down from where it was 10 years ago. And then secondly, you've had so much growth in like the tech sector of the economy that isn't debt intensive.
So is that constraining the wallet in terms of lending, trading, basket and issuing debt and equity for companies? Or is it not really an
impact? Clearly, we have, at the moment, probably half of the public companies that we used to have like 10 years ago, 15 years ago. That clearly is probably more of a consequence of regulation or over regulation rather than an economic reason to go one way or the other. So is that constraining the wallet Probably to an extent. And at some point, if regulation change and the environment is more benign, a lot of more companies of those will have to use public markets and take advantage of it.
So you can see it as probably a headwind in the past and a possibility or a tailwind in the future. So you
see it more as an opportunity.
More as an opportunity.
I haven't really I actually think it's been a good thing for us. I mean, the emergence of the knowledge economy, they are less lending intense, but there's deposit rich, payments rich and investment ultimately investment banking rich type clients, health care, life sciences, technology. And then when you think about liquidity for private companies, I think we're one of the few banks that actually can advise somebody dispassionately about liquidity options. So if you don't want to go public, we can do an ESOP, which is a common form of liquidity. We have an ESOP advisory team.
You could do a leverage dividend. We feel like we're best placed to sort of guide family owned businesses, private companies on the right capital structure, how much leverage they can put on, or they can sell the company. And we have Daniel's got a dedicated investment banking team that's covering smaller businesses. And so all of that's wrapped with Mary's team around estate and tax and private banking, so that we can really give all these private companies a pretty dispassionate view on the best way to see liquidity. And it's not the wallet, because they're not going public really doesn't it's really not part of the calculus for us.
It's really given the best advice and how to think about if someone wants liquidity, which way they should go, and we've got best in class capabilities on every branch of the decision tree.
Ken?
Ken Usdin from Jefferies. First, just Marion, quick clarification. Your charge off comments, is the right base to use the ex student lending number, the $4,900,000,000
Yes.
And the same thing on the rate when you talked about stable rate, it would be starting point would be ex the $500,000,000
Yes.
Okay. So the bigger question, Gordon, I wanted to ask you a little about if you could talk about the card business a little bit more auto as well. Given that it is the majority of credit in the credit losses especially, can you just talk about just how the environment is playing out both for growth and for credit quality inside card? And any changing dynamics you're seeing with just in the business given a lot of the competition and changes over last
couple of years? Thanks. Yes.
So let's talk about the 2 separately because they are quite different. I think at this stage in the economic recovery, the absolute level of losses on any basis still look exceptionally strong. So very encouraged about the health of the consumer, how the loss rates are trending amongst the lowest loss rates we've ever seen, right, other than just over the course of this last few years. So nothing that would suggest as a rapid run up in losses to come, but they will migrate slowly and we've given that advice and direction. In terms of as you look at the overall quality of our base very strong.
You go back to kind of 2,000 the period from kind of 2,000 and 8 to 2012, some of you around long enough to remember WAMU. So both with and without WAMU, we saw a substantial reduction in the sub prime component of our portfolio during that period kind of 8% to 12%. Since 12% to current, subprime is very consistent over that whole window. So it's not a space that we target, obviously, that you end up with some near prime and prime customers who gravitate down over time, but very consistent. So very happy with the stability of the overall car business and the performance.
Jennifer Piepersand, who's done a terrific job as the CEO of the car business, is just over here on the left hand side of the room. You're right. And the business has great momentum. Auto Finance, you saw we dropped about 40 basis points of market share. That we just watched very carefully, very pleased with the momentum that we have overall in the auto business.
Some exciting new opportunities for us to be able to take that 61,000,000 households, use the power of data, help our manufacturers to better target the right car to the right customer at the right price. So just at the beginning really of that journey there. But we've also kind of pulled away a little. In these meetings in the past, I told you that we've moved away from subprime and we moved away a number of years ago and really cut our exposure there. We also moved away from the really long duration, I think 84 months.
And if you think about the roughly 40 basis points of share loss, about 30 of it comes from that. So we are we hold these business reviews with every business every month. And Mark O'Donovan who's sitting over there, gentleman with a red tie. We'll look at those situations. We saw nothing in the credit data that suggested we should exit the long duration.
Generally, we just did not feel comfortable with it at this point in the credit cycle and we pulled back. So we are constantly looking at those things on a daily, weekly, monthly basis. But again it looks very stable, very solid and it's encouraging to see that there's kind of a stability in terms of the number of new cars sold. It really has kind of stabilized to come a little bit off its peak and at this point in the cycle looks good. Mark, would you add anything there?
I see you
can add.
No.
Thank you, Jason. Gerard Cassidy, RBC Capital Markets. Mary Anne, coming back to the net interest income comments that you made. Last year's Investor Day, I think the number you gave out was $11,000,000,000 incremental NII due to rising rates and growth. This year, the number is now 7,000,000,000 dollars Is it safe to assume that the drop is primarily due to the rate environment as we go forward?
So if I take you all the way back for a second. So when we first of all, when we gave the longer term view of NII, it was at that point, obviously, we were starting at 0 and rate was going to be a very significant part of the driver, if not the majority of the driver. So while the when was an uncertain, the amount was more certain. So if it was $11,000,000,000 back in, I think, February of 2016, dollars 11,000,000 in 2017, And we've seen $7,000,000,000 so far to date with another $6,000,000,000 to $8,000,000 to $8,000,000 to go. So it's broadly consistent.
So from my vantage point, the comment we made about after 2018 rate is less of a driver and it's more about mix It's more to say that if you go from here to neutral rates, you have about $2,500,000,000 more of rate left to go. Now obviously, it's going to take time for that to play out, and there'll be different dynamics. In 2018, of our incremental NII, we're seeing about that order of magnitude driven by rates in total, so long, short and reprice. So I would say they're all pretty much consistent. We've used different implied curves at different points in time.
But in the law of big numbers, 7 plus 6 to 8 is approximately to 13. Great.
And then Gordon, as a follow-up,
you talked about the back
and forth here. The 61,000,000 households and you have 5,000,000 that have mortgages, can you and you do jumbo mortgages for Well,
sadly, we have 30,000,000 that have mortgages, they're just not with us.
Okay, yes. So how do
you increase your penetration? Because you do jumbo very well. I assume all $61,000,000 are not jumbo mortgage customers, and they're going to be lower FICO score kind of customers. Can you share with us some of the plans that you have to increase that penetration?
Yes. We haven't had any questions this year on bank branches. So I'm surprised.
We will be
much more integrating the mortgage experience into the bank branch. We're making good progress on that. As you know, the realtor is an exceptionally local business as is branch banking, hence the community piece of consumer and community banking. So much more integrated there. We'll be using big data to help us identify customers who are ready for mortgage, who are looking for mortgage.
And then I used the example earlier and I can't I think when Betsy asked her question, underemphasized the importance of customers constantly coming to your app so that they are constantly connected to the company. And so we'll have the ability to be able to say to any given customer during the course of 2018 when you're coming in to look at your regular banking product that you're already eligible for a mortgage, you're already eligible for X amount at Y cost. It doesn't have to be a sale. You're just letting the customer know that that's available, depending on how Bill Wallace, who I introduced earlier in his team, engineer that interface with the user, but you might just think about it as something you could tap on, on the home screen of the banking app. It will take you straight into a greatly simplified, we have teams working on this now greatly simplified mortgage application process.
So then I've taken a retail banking customer and I have go back to the multichannel that Marianne talked about. I've integrated more fully the home lending capability into the branch and I've integrated it much more fully into the mobile device. And so a customer will build in their own mind when I'm ready for a home, I'll go check with Chase. I'm already a customer. So those are some of the things that we're working on right now.
Lots of opportunity there.
Brian?
And I can see you very clearly, Brian.
Yes. I'm actually going to ask a question to Mary, so
So just meeting Matt, so I'll see you on all.
Brian Ferrant from Autonomous. I get asked a lot about the ultimate ambitions for digital wealth and whether it's another example of offering great products, great advice to clients or whether it's early innings of kind of a business into and of itself competing head to head with Schwab and E*TRADE, etcetera. I realize there is a spectrum of answers there, but maybe from your perspective, what is the long term ambition of digital wealth products you're starting to roll out?
Yes. I don't think any product or service that we deliver here is a stand alone answer to a client throughout their life cycle. So I think that digital is, again, just to repeat all of the things that we're saying up here, digital is a way for you, the client, to interact with us when you want, where you want, middle of the night, all alone, whatever, get your advice or just explore on your own. And your journey can be that stay there for a while or it gets more advice. You have to have that in today's world to be able to deal with clients and interface with them.
So you can't not have it. Having digital advice is not like shouldn't be thought of as a separate stand alone thing. And one of the things that you see in some companies is there's this like intrinsic fight of like is it going to be the advisor's client or is it going to be the robotic? It should never be that. It should be that every client could have some of everything because the more they have that they can do themselves or that can be done on a sort of generic regular way basis because that's a part that's sort of a set it and forget it.
And the rest is wrapped in more complication. I need that money for liquidity. I am thinking about buying a home, but not yet. So I need to put that in a different bucket. Help me to put this.
How do I structure it? What kind of accounts do I set it in and in trust? How do I prevent against protection against creditors, etcetera, etcetera? All of that is why the branch becomes the place where you think about everything from your first investment to your first loan all the way through to your retirement. And I just don't see a world where any of it is a separate line and or a separate line of business that sort of competes against another line of business.
So this whole table of people over here in the digital space, what they're thinking of, which is how do you take all of the different products and services that we have and put them, as Gordon says, into apps that become very user friendly that you give the information once to us. And we know so much about you. We know so much about if you have your paychecks coming into us, if you pay your payments out, we can see where your payments go. We can see how frequently they go. We can see where you get other sources of income from.
That's a very hard thing for any one individual entity who doesn't have all that JPMorgan Chase has to offer to be able to pull together. You take that and then you start to say, clients like you at age 25 are generally doing this. Clients like you at age 45 are generally doing this. Clients in this stratosphere don't do this. You should just know you're an outlier.
It's fine. You can do it. And all of that makes you a smarter consumer. And that's all we want. We want smarter consumers who can make better decisions.
And if we can get that information, package it, feed it back to them and allow them to do that, they will, by definition, have a higher chance for a better outcome.
Thank you. And Gordon, maybe one for you on the auto and the more detail you gave around the manufacturing partnerships. Can you just give the next level of how this works? Is this like co branding cards or are these JVs? How does the structure actually work?
Who actually owns the business long term?
Yes. Well, it's not like the co branded card scenario, but it is a very close partnership. I'm going to get Mark just gone through the process here of renewing a number of our largest relationships. But it lets us have a strategic long term relationship with a given manufacturer that we get to understand much more clearly what it is they're trying to achieve, what their model lineup is, how we integrate our infrastructure more closely to them and understands what the need is that they're trying to deliver for their customer. And so we actually capture a significant amount more of their share than we would do otherwise.
Yes, Mark.
No, I would just add. So it's a more strategic aligned interest rather than just kind of what I call hand to hand combat when you're competing against a lot of other lenders day to day at the dealership. But think of it as just like Mercedes Benz Financial or BMW Financial. So we're the equivalent, the captive, if you like, for those brands that Mary Anne called out earlier. So in many cases, manufacturers go through an analysis around do those companies or holding companies want to have their own lending arm or do they want to think about an alternative structure like going to a bank like us.
And we've managed to build 5 or 6 of these partnerships, which actually gives us quite a bit of scale and quite a bit of advantage to do that. And we're the only bank that has that kind of scale in the industry.
And I'd go back and say, remember that 61,000,000 households and our ability then to be able to make very unique offers to those households in advance of them actually wanting to buy a car and doing that in partnership with our strategic partners in the space. So it's a really neat opportunity that we've got lots of small room to grow here, very modest market share.
What are you at 4.5 or?
4.5 percent. And similar to home lending, we have we only have 3,800,000 customers that are of our Chase customers. So it's a massive opportunity of growth if we just look in our own backyard. And to Gordon's point, I think marrying the marketing arm of what we have here to our customer base with what those manufacturing partners can bring from a product offering perspective is one of the biggest areas that we see ahead of us in terms of growth opportunity and an ability to grow share.
Thank you.
We got Keith over here as far as last we can do Andrew.
Hi, Keith Horowitz from Citi. So Mary Anne, you
did a good job of kind
of talking about how digital really kind of help some of these businesses be differentiated. But it seems to me that one area that's not that differentiated in the market is pricing of credit risk. It seems like it's pretty much being done the same way across by all competitors and really the differentiation is more about risk appetite. Mary said that you know more about your customers than they do. So it seems to me, maybe Gordon and Doug, is this a good opportunity for you to somehow kind of capitalize in terms of pricing of credit risk versus your competitors where you have more information, you have the digital capabilities to better assess credit risk than your peers?
It's very hard except when you get into a downturn to see who's actually good at pricing credit and who's not. So I think over the course of the last number of years almost everyone thinks they're really, really good at it. So I think we will see what is it Warren Buffett says when the tide goes out. So we'll see how all of that works. But I think our capabilities are quite differentiated.
I think we have really unique data elements on our customers because we see so much of their business. So again, I come back to that. We're not just a mono line in any one of the 6 businesses that make up the consumer. So we see a great deal more of the customer, their financial strength, how they're living their lives. I think that's actually pretty powerful when it comes to helping us manage credit.
And as I said, credit is about constantly, constantly managing the details. It isn't about or it should not be about a seismic shift in strategy. That generally means something went wrong. So I think I can't sit down and say I can genuinely take these 5 players and compare them directly. But we have a terrific risk team under Ashley Bacon, who's over here by the pillar with very sophisticated tools and really astounding amounts of data.
So I think we have a pretty meaningful advantage as we think about credit management.
The only thing I'd add to that is we obviously have specialized models to price individual loans, but what we're really pricing is the allocation of capital against the relationship where we have multiple revenue streams. So we look at relationship return relative to the credit that we are providing to the client and the risk that comes with that. In terms of just using the data lake that we have as a company, it's massive. I think it's unmatched. I think we have in our lab, so to speak, many data use cases, which tie back to how did we sharpen our risk decision process and using the composite of information we have as a company to monitor credit as well as decision credit.
I wouldn't tell you that it's all in practice yet, but certainly it's the case in consumer, but in the wholesale, so it's stuff we're working on in wholesale and hope to sort of bring it to life soon in the business.
Andrew? Is
that it there in front?
It's Andrew from SocGen. So just thinking about net interest margin and your guidance there, so you're saying that's going to be less of a driver of NII growth going forward. You've also said that deposit growth should be slowing down, maybe even negative due to positive tightening. I'm just wondering on your liability spread there, are you signaling liability spread? Are you signaling compression debt because of greater reliance on wholesale funding, which would be more expensive?
Or are you saying that your net interest margin, the lower expansion there is just due to a higher deposit beta?
Yes. So I would say so first of all, just to fully point it out, I didn't say that we're expecting profit growth to be negative, just to be slower going forward and that there's 2 different sort of impacts that will come into play. The first is large, we think, going to be sort of fed balance sheet piece of it. While we won't be exactly right about this, largely, we think that's going to be a wholesale non operating phenomenon. And so you should know that when we think about our wholesale nonoperating deposits, we treat them very differently with very high betas, low liquidity benefit and all of the rest.
And then on the retail side, if you look at the empirical evidence, it would slow deposit growth rates for the industry, not necessarily take them to 0 or negative. And we think we would do better than that because we have been doing better than that very consistently over the years. So and then when we think about the so that's the sort of deposit growth rate piece. And then as I think about the net interest margin, what the guidance I gave you is for neutral rates. Obviously, for a period of time, we may go beyond neutral rates.
But as we look at the balance sheet with a 65% loan to deposit ratio, that would be consistent overall with getting to a NIM of in the mid-250s at some point in the near future, and we'll see from there.
Okay. So the main driver of NIM expansion being a bit slower, what would that be exactly then?
The name Yes.
And when you say market neutral interest rates, what exactly do you mean by that?
So we so that was using a 3% short end, 3.25% long end rate, whereas we would expect at some point to go above that for a period of time.
Okay. Last question right here from Guy, and then we will move on.
Thanks. This is Guy Moskalsky with Autonomous Research. It's a sales and trading question. So Mary Anne talked about how as the rate and volatility cycle normalizes, we should see some improvement in that monetization margin was kind of the concept that you used across sales and trading. And then Daniella talked a little bit about just how it's been the 1st couple of months of the quarter.
But more broadly, where are we in that cycle or normalization process? And should JPMorgan as an institution actually expect to lose some market share as that cycles up just because you have such a big share of the core get the kind of core underlying flows?
So I think that margins are more a function, in my view, of volatility than the absolute level of interest rate. So the absolute level of interest rate is good for trading because it puts into play not just the back end of the curve, also trading around the front end of the curve because of the volatility that happens in that portion. I think that the market share winning or losing is unrelated to the time in the cycle. It's more about the pros and services that you provide to your clients and the quality of the liquidity that you provide. So I mentioned last year that it was a very benign environment of low volatility.
We didn't lose it. We hardly lost any market share. So I think that the key for us is continue investing in our trading platforms, using better technology to make our salespeople smarter in front of the clients, improving algorithms of execution, becoming better and better by using new technology like artificial intelligence, and then having the best possible and then continue being as disciplined the risk management as we have in order always to be prepared with these kinds of volatility happens. So if we do all that, I don't see any reason why we should lose any market share. So but time will tell.
But so far, so good.
Thank you.
Okay. Thank you all very much for doing that. Hopefully, that was good. Let's get Jamie now.
So I'm going to really talk for like 10 minutes and cover a couple of quick things and then open to questions or any comments you have. I'm going to try to cover the things that have some that haven't been covered yet. First of all, leadership of the company. I think one of the most important things at this company is the ongoing leadership. I hope you've got a good team today that we have really great ongoing leadership.
You all have got to know some of the folks who are up in stage today, but obviously a lot of people seeing these tables are also exceptional. But I think the most important thing way beyond anything is that the company has built in succession. And you know it yourself because you've seen these people in action. So it could be just about anyone on the stage, it could be others down the road, it's got built in succession when
it happens to well or having in
5 years. Maybe the people will be different, but they're here. And I think it's really important for the sake in the future of a company, if you're an investor, if you're a regulator, you feel pretty comfortable that the team is great, that's going to be running the company going forward. I feel blessed to have them. I think the operating committee, I think the folks at these tables are just all exceptional in every way, shape and form, character, culture, capabilities, honesty, openness, etcetera.
I feel really good about it. I hope you also do too. They also have very long tenure here. Someone gave me a number that I think the 50 people in the room were from the company, average tenure is 17 years. I think that's important.
So obviously, we have some fresh blood, which I think is important too, but 17 years of people who've been here, they know the company, they know the clients. You all know as a client sometimes you change client coverage and the pivot to call is different, it's devastating to clients in almost any business you're in, so we feel good about that. Corporate governance, obviously, everything I just said also goes through the Board. These are Board level decisions. So nothing I said is completely supported by our Board of Directors unanimously.
And you showed the Board meets every time without me. The Board goes through all these issues. The Board goes through major risk categories, tries to make sure we're thinking properly about the company going forward. I agree with the comment here about public companies. I think this is a serious issue.
I know some investors who don't. We've gone from 8,000 public companies to 4,000 public companies. There are some good reasons. You get private capital longer, etcetera, but there are a whole list of bad reasons. Litigation, regulation, cost of doing certain things, the shareholder means, which should become a complete waste of time.
We should call it what it is, it's a waste of time. It's become a joke and they're being hijacked by people who have only political interests and don't have any interest actually in the future health of the company. And I also don't feel ever conflicted nor is the Board about corporate social responsibility. So Peter Scheer is here too. We have to take care of our customers to win in the marketplace.
We have to take care of the employees to win. We're the ones who take care of their customers. We have to do well for shareholders. If you show me a company is not financially successful, I'll show you a selling company. It's a sine qua non of health that you have some kind of financial success.
But we also don't think that taking care of your communities is a bad thing. Companies like ours have been doing that for 30 or 40 or 50 years. I don't know what's new about it. I would actually say JPMorgan Chase and going back to Bank 1 for Chicago probably early on in philanthropic was about art or education, etcetera. I think we're taking to a next new level.
You've seen multiple announcements, not just Detroit, but work skills initiatives, getting minority kids in inner city schools through into college, infrastructure building, affordable housing, you name it, in ways we can uniquely provide capabilities. I think that's a really important thing we're going to continue doing. Healthcare,
I just want
to mention, I think it's true for a lot of your companies. We are already in the Healthcare business. So when I read a lot of these things about this new venture we're doing with Berkshire Hathaway and Amazon, the fact is and it's true for your company, we already buy healthcare for and on behalf of our employees about $1,500,000,000 a year, which we spend probably the 80% of that number. And every year we go through it, we go through some kind of discipline, how does this cost, what are the wellness programs, should we have nursing stations, do we get flu shots, do we make sure you get your physicals, how can we get you to live longer. But the health care system in America is the best and the worst, okay?
It's the best in the world, we have some of the best R and D, innovation, medical services, technology, pharmaceutical, etcetera, it's the worst. Our society is obese, 25% of medical costs relate to lifestyle choices, smoking and obesity, okay, which drives cancer, high blood pressure, heart disease, depression, etcetera. 20% is end of life, most of which is kind of unnecessary, people don't really want it, having just been through it with my parents. People think that fraud could be 10% or 15%, that administrative costs you hear outrageous numbers like 25%. I mean, you look at it and there's something wrong, we need to fix it.
We'll fix it with anyone who can help. It's not forward against anybody. We already do it as a not for profit. We just want to take it to a higher level. And we think that with and it started with Todd Combs, who's my Board, who works for Warren, Warren himself, Jeff Bezos, who is obviously a friend of the family.
We just thought pulling our resources, our talent, our brains. For example, most of us went to high deductibles. Remember, we all went to high deductibles, we said that was going to help you shop. Well, I hate to tell you, none of you changed anything you do. It didn't work.
Part of it didn't work, we didn't give you the data, right? You can go rotate a cuff surgery, here's the 5 local hospitals, here's their cost and here's the outcomes. We didn't give you the data about how you can reduce your drug costs, we didn't give you the data about a whole bunch of different things. So at a minimum, and this is early on, this will be years before we see an effect, but at minimum, I think we'll have a much better outcome for our people. We actually think the wellness programs now are saving 50, 75 lives a year, 50 or 75 lives at this one company alone.
And that's just screenings and physicals and stuff like that. And so at a minimum, we think it will be better outcomes for employees, probably at a lower cost. At a maximum, maybe we can help figure out how to do something better for the country overall. And then I just want to a couple of points, I'm going to open it up. We obviously make a lot of decisions, but you also know that one of the things we do is that and everyone in this room go through it, we go through business reviews.
Those business views are never narrow. They're never about one thing. It's about matter of fact, there's a little piece of paper that gets sent out. It says, it's got to be everything important. It's got to be anything important, everything important, compliance, controls, risk regulatory issues, technology systems, competitors, but the technology side and other and growing sales forces and what are the details?
What works? How it doesn't work? What's the most efficient way to do it with the competitors do? Some things are table stakes. Some things we're building.
We're going to do it like investors stuff, self directed and advisory. We haven't decided exactly how to price it yet. We're going to test that. We're going to figure out how we're going to do it. So some have real detailed NPV, some you have to simply do to do a better job.
And as a bunch of people sit up here, it's $10,500,000,000 but you also know we're going to do whatever we have to do to win in the marketplace. We don't care about 12 months. We don't care about budgets. We don't care about whether you look as investment. We are fanatics about numbers and analysis.
We're not fanatics about accounting. And Catherine Kaminsky is here from accounting firm PwC. We love accounting. We'd like to be as conservative as possible. But part of it will drive you to do the wrong thing.
So for example, we don't tell Mark O'Donovan, grow your book. If you're not going to be paid properly for credit risk or lease risk, shrink your book. We don't care. We're not going to be stupid. And particularly when you have a choice where you can add the risk and not add the risk.
In other areas, I'm going to say like Doug Pettenau area, he's got clients that he's got to manage through a recession. We want it. We know the losses are going to go up. We're not going to panic in the recession. We just hope and we think our credit will be quite good and stuff like that, but it's the whole relationship.
Any one of you can go by credit in the marketplace at market, any one of you. And honestly, a lot of people say, well, why is the bank there at all? If you're buying credit risk, why do you have a bank? You don't need to have a bank. It's not you're buying credit risk, you're developing a business over time serving clients with service and products.
And if I remember correctly, middle market or revenue streams from NII are like 40% of the average revenue stream. It's 60% other stuff, okay? And when you take that other stuff and take some of all of our businesses, that other stuff is going to kick out 70% or 80% of our earnings next year, regardless of the environment. It doesn't matter. We know we have a credit cycle, but some of these businesses will have huge flows of money and obviously they go up or down based on a whole bunch of different things.
But when the people in this room invest, they invest relentlessly. Technology does not have a 12 month cycle. And you have to always do the right thing And then you modify your course. We built SAPPHIRE. Why is why in the credit card business, do marketing expenses have the expense in 12 months, but the benefits come over 7 years?
Whereas other businesses, marketing expenses are expensed acquisition costs over the life of the product. That beats me. I don't know, but we're going to make an NPV decision. Even Mark mentioned about taking loss in your bond portfolio. Obviously, if you do it tax efficiently, you could take losses and have higher yield going forward.
And if it's a tax efficient smart card, we do stuff like that all the time. We will be driven by the economics and trades like that. And so it's kind of just relentless looking at these things, managing the credit. Trading, Daniel didn't mention I don't think he got mentioned, he saw the flows of business here. We've had trading losses on average in the last 3 or 4 years, I mean, what 2 or 3 days of 225 trading days, something like that.
And that's astronomical. And when I first got this company, it's probably 100 out of 2 25 days. And you can't do that unless you have the flows and the volume and the risk management and doing a good job with the client. And those clients, they do move for basis points. You better make them the best bidder ask or they're gone.
But on the other hand, if you have scale and execution, size and quality, you can do those kind of things. And every person here, every single person up here is building big data, we've been doing big data for years. So in risk, marketing, underwriting, now an idea generation, we've got 1,000 robots reducing error rates and stuff like that. These things are real. And so we do risk management for payments, whether it's consumer credit card, which you're used to, you do that swipe, it goes through 50 to 500 algorithms, that's true for wholesale payments.
So trip wires and kill switches, so when you all send money somewhere, while it's kind of your responsibility to make sure it's accurate, we do everything we can to make sure it is being sent to place which never be sent an amount that's never been sent with other weird things that make us stop payments. So we can help protect the financial system. And so we make relentless investments. And obviously, we come up here and tell you our best thoughts about stuff, but we'll modify that over time. And so I'd say the company is in a really great position.
And the last thing I'll just mention is and Daniel mentioned everyone in the operating committee, the things that kill companies at the end of the day, complacency, arrogance, hubris, lack of attention to detail, lack of investing in the future because you're trying to margins up a little bit, absurdly sometimes and that's what kills bureaucracy, which I think is a deadly disease at a company. So those are the things you always got to watch out for in any company that's doing well that somehow starts to lose the plot a little bit. So am going to stop there and open the floor to any questions you all may have. Yes, that's it. Jamie,
hi. Question, since we met last in November, obviously, taxes have changed. I wanted to get a bit of a sense from you personally on how you think that's going to help your customers? Does it enable you to take more risk because their credit is better? And then speak a little bit about from a capital return perspective, why stick with the 30% divvy cap?
Is that relevant in this higher ROE business model that you've got now?
The first one, these folks do extensive work on clientele who would benefit or get hurt. So there will be some BB credits to get better because they don't want to hit those EBITDA credits. There will be we're going to get worse like certain municipalities and not for profits and stuff like that. And we do that extensively. And so we do think, but does it change fundamentally?
No, not at all. I mean, you can do that client by client or stuff like that. It may change a little bit investment grade issuance this year or high yield issuance or something. But so we do worry about it, but we don't see all the work we've done, there's nothing I put in a dramatic category. Competitive taxes and just take a corporate and individual, okay?
The corporate side, and I'm just going to give my own statement this one. I don't understand the concept that the United States would have been better off with an uncompetitive tax system. It absolutely blows my mind. That would be like saying that Gordon Smith can be better off with uncompetitive digital system. The U.
S. Tax system 20 years ago, the rest of the world was at 40% federal and state and we're at 40%. Now the and the world has been coming down to something like 22% the United States stayed at 40%. The net effect of that is 1,000,000,000,000 of dollars was left overseas and 5,000 net companies were acquired net, net that were headquartered here now owned by foreign companies. So the federal government is paying attention to inversions.
Everyone else was escaping out the back door because it was more advantageous for foreign company to buy a U. S. Company. The 20% tax rate will help with the trade deficit. And so what you see a lot of companies do is say, what can we do?
And we came out with a broad range of things from LMI lending to opening branches, etcetera, both because of regulatory and taxation. I think it's a great thing for America. And the benefit will be cumulative over time. That's what it will be. I think on the individual side, you and I could have done things differently.
We could argue a whole bunch of how that should have been done and not been done. But I think that they did the right thing to do. They also stopped a lot of companies from what I'm going to say is bad tax avoidance was unfair in the United States. So much lower tax rate is competitive. Most of these companies are doing other stuff.
We're fine because they like the lower rate. I think in terms of dividends, look, we have we still have CCAR and rules and regulatory requirements have said that may be relaxed, but until you're relaxing, I can see companies change their 30%, 35% or something like that. I personally believe it will be relaxed and the banks will go to a higher number, okay? That's my own personal belief. We don't have to answer that today.
It will make absolutely no difference if we answer that question today. And obviously, earnings will be going up. One of the bad things about the retention of those earnings is I would have bought back a lot more stock when it's at tangible book value. But I knew we retained too much money, but that's what was happening as Miriam says. It is what it is, just deal with it.
And but I do think you'll see people do that and or raise dividends more than grow into the dividend increase or something. Doesn't fundamentally change value to the shareholder. It's just what pocket it sits in for a while. So but ideally, Maryann mentioned, we prefer to spend our money to grow. That's what we prefer to do.
So I wouldn't do any stock buyback if I could avoid or I only do what I thought the stock was really cheap. But the fact is, right now, you can't do all that. And therefore, that's why you can have this return of capital through stock buyback. It's still an efficient way to do it, but it's not the most efficient thing. So eventually, if you're earning bank is earning 15% intangible capital and dividend is 5, may buyback stock of 5, it will grow at 5.
If you can grow at 7 or grow at 10, I'd rather do that. Mike?
So your stock is at an all time high. You look happy, the sun is shining and you're building a 70 story new building.
That worries me too actually. New headquarters buildings, usually you should short the stock at that point.
So let's go along those lines. The skyscraper index, I think it's called. So how do you prevent from being coming too complacent? I mean things are going right at the moment. But as you saw in Bear Stearns, there'll be a decade anniversary coming up here, March 16 of that purchase.
And they built they got their new headquarters building, and then you acquired them for what about $1,000,000,000 when they were worth $20,000,000,000 just the year before. So you've seen this play out, you've been involved in the peak with the headquarters building. So how do you prevent your management team from becoming complacent? You're also spending $1,400,000,000 of additional technology. How do you know if that's actually paying off?
We on the outside have to rely on your processes. And what are your other thoughts about what could go wrong here?
Yes. So the headquarters, this building, I think, was built in 1950. And the fact is it's hugely inefficient, it's got 6000 people, it's built for 3,500. The new tower will be bigger, but it will fit 15,000. Big brand new trading floors, new technologies will be much more efficient.
We're going to make it beautiful, it'll take 5 or 6 years. So when I get I mean, I told the operating committee went through this building, you all, I made them all individually vote, because I don't want to hear any shit about it. If it were up to me personally, I didn't want to move my office. Like I'd be very happy staying exactly where I am. But we're going to make a very nice headquarters over there for the people.
So we have a real function headquarters in the short, but it was the right thing to do for the company in the long run. And that is how we make all decisions, period. What's the right thing to do and then we do it. We look at all the options, we look at the upside. And about complacency, I mean, look, it's a mindset.
I just this is not a complacent group. We're very honest with each other. We don't we go through the good, the bad, the ugly. In fact, if you went through our management budgets and business views, it's far more the ugly than the good. We know it's good.
We want to celebrate. We have a lot of cocktail parties in this room to thank people, stuff like that. But it's what is this one doing better? What's them doing better? Why are we lose share there?
How come Thailand share went down? How come their FX share is higher in this city? How come Fin is doing X? How come digital is doing Y? And you can see the stuff we're building.
So you can't look at the $10,800,000,000 technology budget and say, well, how are you getting every bang for the buck? I have never ever, ever seen people behind this And of course, Daniel and Gordon are now directly responsible for Laurie. Now what's the effectiveness of programs? What's the effectiveness of this? It's hard to do.
But the really important thing to me isn't that. It's not just their job. So Bill Wallace is all those business meetings, okay. David Hutchen has to do his. Brian Carlin has to do his.
They have to know their business people with the tech people go through what they're building, why they're building it, how much it costs, what's it going to take, what we think the benefits are, is it integrated, is it right, there are cheaper ways to do it, there are faster ways to do it and you have to do it. And it's not pushed under the rug, it's not hidden, it's done in every single business view and it's also done across the company. So some of the big stuff like the data centers, that's done certain utilities are done across the company that have been efficient. We're always testing, we're always learning, we're always modifying, willing to change course anytime.
Well, a follow-up then. So Slide 2 lists the Fortune's Most Admired Companies, and you're up there. What are the companies
I'm meeting it for a bank.
But what are the companies that are ahead of you doing that you aren't doing right now?
I think look, I think if you spoke to most of those CEOs because Berkshire is in there and Amazon is in there and they would say the same that I'm saying, invest for the future, don't worry about just the accounting effect. These are long term decisions. Warren Buffett would say, sometimes like in the insurance business, take your salespeople and don't have the right insurance, have them go play golf. You don't want the right insurance. So it's just that discipline that gets built into people.
And I mean, I think you'd be really shocked if you went through some of these business reviews that we do in every business, really shocked. I doubt a lot of companies do it. A lot of companies people come from other companies say, Holy shit, you do this all the time? Yes, all the time. And again, the other thing, which you're the analyst, you could also evaluate the quality of the people.
So you can ask me, but you can also make your own evaluation. And I happen to know you think you're pretty damn good. No, he told me that.
I got Matt O'Connor way over in the back left.
Thank you. So after years of ever increasing regulation, it's clearly an effort out there to review the regulation that's out there, whether it's simplify, clarify, reduce. Can you talk about the areas that you think would be most impactful to the broader economy and most beneficial to JPMorgan? What do you want to see?
Yes. So we've been fairly consistent because you read sometimes in the press, the banks want to adopt Frank, that's just not true, okay? So we had a crisis. There were problems should be looked at across the by I think you should look across the whole tabletop. There's actually a discussion, I think it was in the paper today about the failure to look at the whole setting, all the non banks, shadow banks, money funds, like what's going to happen in the next crisis, not just at the banking system, which is quite healthy.
So we've always supported higher capital, higher liquidity, higher transparency, proper regulation, etcetera. I think the road map you should look at is the thing that treasury put out. They actually put out 3 or 4 outlines of how they look at regulations. I'm going to use the word calibration for the most and coordination. For the most part what they've laid out is, it was SLR properly calibrated, should include deposits and that cause a distortion that's going to actually increase risk.
And that you could say the same things for Volcker or G SIFI, of course, I think G Sify is one of the stupidest things I've ever seen in my whole life, but and I'm not going to back off that one, I'm sorry. It has nothing to do with reality. But the fact is American Gold Plating, if you look at the Basel, I'm sympathetic to the European banks too, but we took Basel and added everything TLAC, SLR, this thing, GSIFI, you name it and they took Basel and took 72% of it. And they're also more aggressive in how they do RWA and how they do operational. So one day they need to come a little bit closer.
And so I think and take mortgages, okay, 7 people are engaged in mortgages, so that we don't have final mortgage securitization rules. The servicing and origination rules are so difficult that increases the cost of mortgage by 20 basis points or 30 basis points. And the litigation on FHA was so bad that the availability of mortgages to young people self employed prior default is very low, which is why you have household formation much lower than prior recoveries. So when the regulators say that they didn't hurt credit, yes, they did in mortgages, in small business, small business mortgages of CCAR. And those things, if you relax a little bit, you actually have a healthier system without taking any additional risk.
This is not going back to subprime. This is just fixing some of the things that were done. By the regulators all know this should be fixed and coordinated. So a lot of these things were done around the world without a lot of forethought about coordination and the duplicate effect of these things. You all have asked the question people have asked the question, why swap spread?
They're not negative anymore, but they were trading 20 basis points or 30 basis points below treasury one point. That is abnormal and has adverse effects in the economy. LCR may have adverse effects when the crisis gets going next time, because banks will be able to intermediate the way they did. So it's in all of our interest that we just look at this like adults, have conversation, figure it out and if things need to be modified, modify them. And that may in my view over time that will lead to freeing up capital liquidity in
the system.
I also think they should pass rules that make it easier for smaller banks. I'm quite sympathetic to that. Okay. Andrew?
Hi. So you made some colorful comments about Bitcoin a while back. I think you retracted them.
I did not retract them.
Okay.
I said, I regret having said it. Okay. Not the same thing. And that's all I'm going to say about Bitcoin because they begged me not to say anything because somehow it's all people talk about if you talk about it. And it's basically relevant to JPMorgan Chase.
Okay. Okay. Perhaps you could talk about related topic of blockchain then. It seems like we've been talking for quite a while about how it could be utilized in a beneficial way for banking.
When are we going
to see some tangible benefits coming through?
The way I would look at that, first, I would look at both digital blockchain. This has been going on forever. We are using technology to do better job for clients. So if you go back years ago, my dad became a broker, he used to call in the order to the post at the New York Stock Exchange. They write it down, they go do it in the order, they call you back, so we bought your shares.
And then all these tickets had to go to the paying agents, the transfer agents, the counterparts and stuff like that. And of course, it's all digitized now. The cost of that is pennies as opposed to $0.35 a share, through processing lower error rates. That's true for all of our businesses. It's from big computers, it's been for data, it's been for fraud.
And digital is just the next wave of technology transforming businesses and making it cheaper. Blockchain is a technology. And we're already using it in several areas. But the thing about blockchain, remember, because I think you've put there is permission, you got to give a proof of deal. So let's say let's make leave our firms wanted to do use blockchain to make it cheaper to do loan trading, which is I think we think will happen.
Just documented and who gets the custody and what the covenants are and corporate actions all in one place and reduce rates. But you still have to get both to sit together and actually decide what the protocols are going to be. Then we have to write the code, then we have to test it. So I think a blockchain will be rolled out as people can do those things and groups come together, set up the protocols and find a way to do it. It will continue to do what's been happening anyway the last 50 years.
That technology is going to drive down the cost of doing business. Maybe it will ramp it up a little bit. I don't know. We'll see. And it's not usable in all cases.
It takes so far, you guys have told me it takes 10 minutes to finish the blockchain, which makes it impossible to use for equity trading. Where you're doing a 1,000 trades, FX trading in a second. And so you got to look at where it's going to be used or not. We think we're very optimistic it will be one way we can drive down cost. But so will faster computers, so will cloud, so will GPUs from the video, so will big data, so will bots, so will ML, all that's going to help drive down costs.
Marty over here down the right corner, and then we'll come back to
him. Marty Mosby of Boating Sparks. Jamie, when we looked at the digitization and you talked about just then, it's been decades in the happening. When I was at a regional bank, we loved to compete against the bigger banks because of the personalization that we could bring to the table. Digitization has now brought that to the bigger banks.
The vision that you all started decades ago with technology today, do you see that competitively with personalization and digitization, have you reached that goal to be able to be kind of all things to all these customers. So it seems like an accomplishment of something that did start decades ago that now the competitive forces are changing.
Yes. So first of all, we try to run our company like we're like a local branch in local region. So we have market leaders, presidents in every major town we're in. They are they run a group. If you go to a regional bank, when you walk in that branch, they do your private banking, your commercial banking, your personal banking.
That's true here too. And so obviously, using technology to do a better job is really important to do that. That's like a Synchrony9. Other competitors will have they can go to Fiserv and they go to other people who offer similar things, but not as customized, not as fast, not as rich. So yes, we look at it as a competitive advantage if we don't get arrogant about it.
And remember, we can't be what want to be the customer. We have to be the customer they want us to be. So I'm always get very cautious when you see people put signs of the same, we're going to drive and I get the bank one that we're talking about channel choice. And what channel choice was, and Mike may remember this, that channel choice was, is that it's cheaper for us if the client does X, and therefore, we're going to make Y harder to do, like going to the branch and they go here. No, we want to offer a customer choice.
We want to educate them these things. We want to make it easier for them to use our services and understand it and obviously offer advice. So it won't be long before you'll be able to talk to your banker on here. So, hey, you know that thing you told me about or get a mortgage advice, so you don't have to have a mortgage loan officer in every branch, you can call up and see it here and you can actually look at the same documentation, etcetera. So, yes, I do think it's a competitive advantage, but I think it's wrong to assume that regional banks won't have it too because they get offered it in a different package.
And then do you think that what you've built here is exportable internationally? So do we are we building a competitive advantage also against the banks internationally that eventually you could export it that way?
Well, in retail, the answer is no. Because if you look at I wouldn't say never, but if you look at most banks, if you go if you take Chase Bank to India or somewhere, we'll be losing money for 40 years. And there's no reason to go bank with us. And so I think you have to be very, very careful. If we bought something maybe, if somehow some of the digital stuff you can use around the world without remember, if you go around the world, you still need regulations, legal, compliance, audit, risk, underwriting, credit, data, credit bureaus, it's just not the same.
You have to build all that. So I don't think it's going to be a competitive advantage in retail. I think absolutely in Asset and Wealth Management, investment banking and parts of commercial banking, absolutely it's competitive advantage. Having that network effect, being able to do for a Grand Rapids manufacturer who has sales offices or purchasing offices in Singapore or Vietnam that we can bank them on both sides and do FX on both sides and pay employees on both sides with absolute competitive advantage. So you're going to see it in TS, you can see it in custody, you can see it in prime broker, you can see it in all the investment banking businesses.
And some of that technology, the way it's being built is usable everywhere because it's kind of modularized. So you can go get it off the shelf and use it anywhere you want.
Yes. Gerard right up here and then Jim.
Thank you, Gerard. What's the biggest FX trade, Daniel, done in here? Is it still 400,000,000 dollars So someone did a $400,000,000 FX trade.
Thank you. Derek Cason, RBC Capital Markets. Circling back, Jamie, to tax reform, we all know that the migration patterns in this country are to the warmer climates. Now with tax reform, we have high salt states that may support more people leaving. How are you guys view I know it's early, but over the next 5 or 10 years, how are you guys looking at in places that you're located where the SALT's taxes are very high and how that might impact your business?
Well, I mean, in the great scheme of things, it will never impact our business. So I don't sit there and worry about it at all. And I think they did the right thing. They preserved the state. And I know a lot of you from New York don't like this, but the fact is there's no reason for the federal government to be subsidizing you.
And 80% of
the benefits of SALT
went to people making over $500,000 a year. The way they set it up, they pretty much preserved it for people making under $200,000 or $300,000 a year. So I think that pretty much preserved it for people making under $200,000 or $300,000 a year. So I think that was a fair kind of trade off and probably a thoughtful way to do it. I do think you'll see the states do other things to help make up for it, ease the burden, either reduce their own fiscal costs, reduce taxes and higher paid people, because there will be some migration out of the states.
That's been going on forever, by the way. There's a report that came out recently showing Illinois, Connecticut, New York. There's going to be migration. Part of these people retiring, part of these people just get frustrated at the high rates. But and this will accelerate that a little bit, but it's not a major material thing to us.
And we're always looking for places to do business. So we brought the subject many times, but should we have a wherever Bezos may find a second headquarters, I may go to his 2nd place and Tom will move 50,000 people there too, if we get the same deal. I also have to confess that on the list for Amazon was Columbus, I think Phoenix, Dallas, Chicago, yes, we're not, but these are plays we'll have 20,000 people. And the second they give benefits to those people, you can damn well be sure I'm going to be calling the governor up. And I mean it, by the way, I'm not kidding.
You got to fight for your company folks, just keep that in mind, if you don't, no one else does.
Jamie, looking back 5 years, which of your businesses do you think you made the biggest impact on in terms of widening the moat? And looking forward 5 years, which business do you have that opportunity with out of all the businesses that you run?
So, we do look back every now and then say something we totally missed. So I'm going to give you one, there are probably 10 that we talk about sometimes like we had Chase Merchant Services. We took it over our half from First Data. We did great. The thing is doing great.
But we never thought about the business. Like it was just getting the machine, getting the credit card swipe, doing the deal. We were more e commerce than physical stuff like that. So we started to expand. We never said, what does that person in the store really want?
And what they want is to use their data to make it simpler to process cash in the same stuff, Square. We missed it, the whole thing, lock stock and barrel. And I say, shame on myself. I also, by the way, any one of us could have picked up that thing. And that type of thing happens all the time, by the way, where we're trying to be really honest about what we missed and stuff like that.
But going the other side, in general, I don't think I think all of the businesses up here probably have a better mode today in general across the board. And then the company, capital, liquidity, brand capability, the resource we bring to bear, whether it's on Detroit, whether it's on systems or it's on a problem, We go through if you sat through our risk committee meetings, we do 100 stress tests a week. We have a lot of really smart dealers and people think if everything can go wrong and I wouldn't take you through what some of those are because they're really nasty type of situations, but none of them will damage JPMorgan. I mean, we'll be able to survive just by anything. So but when we get into the detail, we do find areas that we just missed.
And we want to focus on those. I think it's important for all the management people, there's room to focus on that. Don't focus on everything we did well, focus on what we didn't do particularly well.
How about going forward, where do you have the most opportunity to widen the mode?
I was watching this presentation. I had read it before, obviously, that Marion gave and the folks up here, every single one of them. Some will be faster than others. They have different dynamics and different characteristics. But I'll show you one thing, we aren't going to go back and forth and up and down because we may or may not have a recession because interest rates go up 100 basis points at all.
That won't change anything with our plans. And we'll just grow right through that and to continue to serve clients and build and do those wonderful things.
Bill? Bill Rubin with Calamus Investments. So a lot of discussion, a lot of focus on digital technology, obviously, it's critically important. But I can't help but think about the Silicon Valley and similar type of high-tech software and digital consumer products companies. Every year they seem to make a little more inroads into financial services.
I imagine they probably don't want to get into credit risk as you and other banks do. But what's the so far it's been an opportunity for the banking system to work with them. But going forward, could it become a risk?
Yes. So some are going to credit risk, I mean, directly and in a scary way because they got clobbered last February and it'll happen again. So if you're a regulator and first of all, we want to level playing field and I'm a little concerned about that. I'm also concerned a little bit, it's not a big deal, it's systemic now, but some of these P2P lenders or whether you're a hedge fund or Calamos or anyone and you're making credit risk decisions, when the shit is the fan in the marketplace, you ain't going to be there. So that middle market client that you took away from Doug, he's going to be begging Doug to take him back, because we were there in good times and bad for these folks.
Very different being a bank. We have a moral obligation that a hedge fund or P2P doesn't have to stay with those clients in tough times and which we're there for oil, we're there for in 2008 and 2009 and stuff like that. So but we all the whole team here goes through we will collaborate, we'll compete, we'll buy. If we have to spend $1,000,000,000 to win, we'll spend $1,000,000,000 and I'm really not kidding you. So don't underestimate what I just said.
We will do whatever it takes. We have a lot of money and a lot of capability. And so I'm not sitting here afraid of it, but I do think we talk a lot about all these people coming this way. And so you have betterment, wealth investing, you have student lending, you have all these various things that we will be there too. Some are going to stay away from it, just we're not sure they're a good business, but we have constant reviews not by company, but by think of it by payments or something like that.
We think there's a chance of this intermediation, which is why JPMorgan, Gordon's team, Bill Wallace, EWS created the opportunity for Zelle. We realized we had the capability to do a P2P real time, okay. It was JP Morgan with the TCH other big banks created real time payments institutional with messaging systems attached to it. So whatever it takes, we're going to do. And so I think some of them are going to make inroads somewhere and that's life.
I'm in favor of that by the way. I think it's called capitalism. It's a good thing and we run scared of it.
And separately,
I'm going to partner with, I'm going to say, 100 100 different companies now that we own a piece that we do dub with, we're testing, we're working on. You saw they mentioned a few up here, but there would have been another 50 or 60 that we're working with or testing.
On the productivity and efficiency side, on Page 3 of the slide deck, you talk about non North American companies or business representing about 23% of revenues, but over 30% of employees. Is that an area where you could perhaps get some more productivity efficiency?
No, that's because we have 30,000 employees in India that do work for the whole company. So that and across the whole spectrum, they do programming and cyber and payments and a whole bunch of different stuff. So not really we're pretty fanatical, but trying to be efficient. And I don't push people on this 55%. It's not rational to say that in a competitive business, we're earning a 17% return or 15% return that you're going to save all this money on something and keep it all yourself.
Jeff Bezos says your margin is my opportunity. Now that's called competition. And so it gets passed on to the customers in terms of lower price, lower spreads and it's true in every single one of these business. If you look at them, they do more and we do a lot of things for free. So it is a gross exaggeration.
In the wholesale business, you pretty much pay by product, okay, for what you do. In the consumer business, a lot of the products in Surgicare are free, online bill pay, advice, debit cards, credit cards, checkbooks, alerts, and then you pay for the account. And so that's why when we do online investing, we're going to be thinking about how we're going to add that to this product set in a simple way. I tend to over complicate these things, but in a simple way that the customer wants that they'll say, I love this. Remember, if you're a great client, we can do it for free, right?
So it isn't like we say compete with Silicon Valley, just like who thought Jeff Bezos would go into movies. And he just gives away for free to Prime because Prime pays for itself. He's just trying to make a happy Prime customer. Well, we do a little bit of the same by giving a lot of things away for free as part of a package. We look at the price of the whole package, not necessarily the product.
We're getting much better by the way having, we call them product managers everywhere. So there's someone saying, hey, to compete with Zelle, I mean to compete with Venmo, it's not just real time and safer and they don't necessarily have real time on most of their payments, but we need to do split the bill. We need to do some social. We need to do things that those folks want to do to switch them over to Zelle or QuickPay. And we've been testing free coupons, dollars 5 coupons and $10 coupons and free trips to Hawaii or whatever, so to see what works.
Guy, over here.
Yes. Hi, Jamie. The 17% ROTCE that you lay out medium term for you as you think about achieving that level of profitability, what's the biggest single risk factor that you worry about to a meaningful degradation of that?
Yes. So, first of all, I mean, Mary mentioned this, but in the new competitive environment, there are certain things where we don't which we think may reprice right away. So I don't think about banks. Think about things that are done on an after tax return in the marketplace that may be priced right away. You do this, you don't do that, you look at this after tax return and that's what it is.
And we have a little bit of that in part of our products and services. There are things which I don't I can argue what we price at all. Think of chocolate. Why is it going to reprice just because tax rates went down, it's a global business. And so we're we go we run the whole gamut as do other businesses about things that may reprice.
But and of course, we do clients and you look at the whole client thing that may not reprice. It also may not reprice because what the rest of the competition is doing. Some banks are under earning, they may just want to use that to earn. And so therefore, there'll be less price competition that might be in another industry. So my view is we're going to have some of that, not all of it.
It's going to take place over time. We'll tell you what it is. And I think the 17% is probably right in the short run and stuff like that. I think the biggest risk, JPMorgan, again, we have to run the company not for the 17% or for next year or stuff like that, but for I'll ask you guys a question too. But for this could be a cycle, there could be recession, I don't know when it is.
I'm not worried about rates going to 3.25% or 4%. If I were you, I'd worry about 5%, 6%, 7%, 8%, who said it doesn't happen. So we want to stress test all that stuff. But the war and I'm not going to talk about geopolitics, but bad policy, things like Brexit, which will have an effect, there are bad policies to take place, it could be really damaging to countries. And you've seen it over and over.
I think competitive tax reformers are one of the ones that damage the United States of America. So I always look at bad public policy as being the thing that would catch us the most off guard and the effects it has.
And just as a follow-up, one
of the things that you threw out there, which in the long run, you don't worry about is recession, sure they happen. But for years years, you would always reel off a list of expected credit loss rates kind of
by loan class. Do you still
feel that those are fundamentally the same as they all
Yes, we still do. We didn't put up there. So we run the credit book through the cycle, which means we expect to over earn in certain times and under earn others and we're not like a bunch of babies and it happens. That is our business. It's no different than the cost of gas for certain businesses, the cost of cheese for pizza businesses, the cost of it doesn't do any good to sit there and bitch and moan it.
It is what it is. As long as through the cycle, doing a great job for clients, earning their respect, getting performance up, giving products and service, while making proper investments. And so the credit cycle is there and we always talk about the best case, the worst case, the high and the low, because the worst thing that any management's teams can do is to see themselves, yes, we're earning 15%, but that's when you're over earning. We want to earn 15% on average, okay? And that's we haven't quite done for a while.
So and the reasons with NII and the yield curve and all that. But yes, we still look at the worst and we changed that number. So the credit card number is 3.25 for next year because our credit portfolio is pristine. I think these numbers are accurate. Gordon and I before the credit crisis, thought the worst it can be, think of an 82% or 74% number, would be 8%, like we'd peak out in a quarter at 8%.
And I think it peaked out at 10%. So we were wrong, okay? And mortgages, we're dead wrong on. But so we don't think credit card will peak out at 10 this time. We think it will peak out at more like 8 because the portfolio is pristine.
And we think the mortgage will act the way we expect it to, it will peak out, but it won't be at 2% or 3%, it will be at 30 basis points because you can actually test back test some of that stuff over time. But that's still the credit cycle is still one of the biggest cycles that we deal with. And the worst thing is obviously stagflation, inflation with the recession and things like that are the worst case for a bank.
Yes. So over here behind Gordon.
Can you talk a little bit about the international strategy and where you see you talked you mentioned retail banking doesn't make sense, but where do you see the biggest opportunities either from a product or a geographic standpoint? And any update on how you're positioning for Brexit?
So the way one of the things I like, you see our management meetings, as Daniel showed a chart years ago, that was that we were number 1, 2 or 3 in 2016 to 2017. Now we're we've 30 1, we're number 1, 2 or 3 in 80% of them. But that's where the opportunity is. So in some cases, we can't honestly say to ourselves, we're going to gain share in that. It's going to be tough.
Competitors are tough. They're all back in a major way. So it isn't like we think it's slim pickings. And we always said to ourselves, by the way, it doesn't matter whether they're back on, they are going to be back. You will have competition.
So don't rejoice too much that some disappeared for a while. And so in some of Daniel's businesses, it is country by country. So in Asia, we can do better in equity. In Thailand, we can do better in FX share. In Vietnam, we could do better in X.
In China, we could do better in Y. And it is at that level. And we can add a bunch of countries and add a bunch of share. We have a huge network effect. Part of that is building platforms that serve the client better, etcetera.
So it's now 3 yards and a cloud of dust, country by country, industry group by industry group, sales force by sales force every place. That's what it is. In TS custody, I think it's I mean, if you said to me, can we gain a lot of share over the next 10 or 15 years? Absolutely, absolutely. Steady grind it out and a lot of its technology and systems and services and stuff like that, because there are only so many banks who can do it.
We'll spend whatever it takes to build the technology. Prime broker, we've our U. S. Share is about 17% now, like number 2 in the U. S, but we were nowhere in Europe and Asia.
And we're still really low in Asia. So that's how
we're looking.
They're number 2 globally. They're number 2 globally now, but high in the U. S. And very low in Asia. And my point is, we were looking at the business years ago and even the business that Bear Stearns had built, which is one of the best things we got out of it and Teresa who runs custody now did a great job running that business for a while.
We did a great job in building the platforms. We forgot to ask for the cash commissions, which always pays for. And so there's a lot we can do. And Mary's business, I think, has and the other thing, emerging markets are going to go twice as fast as developing markets, when you go twice as fast as developed markets. We know that.
They'll be competitive, but when Daniel builds, that's what he's building to. So it's okay to go in certain countries and it'll be years before we make a profit, but we're going to do it. And it helps with the network effect. And in Mary's business, I think it's pretty unlimited, same thing. The number of billionaires in the emerging markets can grow 3 times as fast as the developing markets, twice as fast than the United States.
The amount of assets under management in the world are going to double or triple in the next 20 to 30 years. The amount of assets that need to be managed, the good thing for you are going to double or triple. The emerging markets will be huge opportunities. And we already have plans, which I don't know, some are up there in adding bankers in wealth management around the world aggressively. But there again, the management trick here is not to say, go just hire bankers because we don't want the folks just go hire a bunch of deadhead bankers who are terrible.
We want to hire really quality people, onboard them, think it through. We want to have the culture and character, we want to train in our stuff, we want to get more efficient at over time. So the turnover is not too high, but the clients are happy. And if you do that right, can we double that in the next 7 years? Yes.
Triple it in the next 14 years. Quadruple the next 21? Absolutely, because we're small. And so I go on and on and on, but that's what you should be thinking about when you're if you have those opportunities. And it's hard work.
It's hard work. I always tell the most sales forces, it's hard enough it's easy not to grow. Hiring people is hard, onboarding people is hard and the existing sales forces hate to add to a sales force, because they think it's possibly to take away from their bonus pool or take away from that client that maybe they should have to call on. So it's hard for management to force that, but that's what management do is force growing the sales force without damaging the existing people there. And by this is true in every sales force I've ever seen.
Bob, you have some? Can I ask you all a question just real quick, show of hands? How many of you are in favor of companies forecasting quarterly and annual earnings, not showing the transparency here, earnings, any company. How many of you think would be a good thing if we got all companies to drop it? Raise your hands high.
How many you think would be a bad thing? Okay. The ACE has it. I'm going to try to get people to drop it. I think it's one of the problems for this.
Can I tell you why it's stupid? We'd like to know. Earnings are a factor of all your input and output prices, volumes and even the weather. When it snows in New York, equity trading volume is down, okay. And so you can Mary Anne can get up here and talk very openly about the sales force, the size, the spending we're going to try to do, what we're trying to accomplish, what we think it all is up NII, but we can't forecast accuracy earnings, because earnings, you got the cost to achieve, you got the cost interest rates, you got the episodic businesses, you got the margins, you got and what it does inside a company, okay, it doesn't force transparency, it forces people inside the company to bullshit up the chain.
And the damage is done over an extended period of time because we just put in this ROTCE measure for our performance stock stuff, which we put in place and almost every investor was in favor of it, because we surveyed every investor thought it was a good thing to do, performance based restricted stock. Now of course, I can get restricted stock my whole life. I'm going to do exactly the same thing with performance based or not. It's effectively performance based. It goes up or down based upon performance over time.
I've never sold a share. And I told some of the major investors, I said, here's why it's stupid, because at 14%, forget JPMorgan, you have a management team that says, hell, if we just get it from 13.9 14%, the payout goes up 5% or 10%. And that can create inside if I can change the earnings of the company by $1,000,000,000 or $2,000,000,000 next year with a couple of phone calls to John Warner over here. Literally, just extend your duration, change this, enable the credit exposure And that's what they start to do and it distorts. And it doesn't add to transparency because earnings themselves are not relevant, because earnings are based on what you've done over the last 7 years.
They're not they have not a dampening to do with the digital net last quarter. And so I think it does damage. I think part and I hear a lot of people CEOs complain about the quarterly earnings pressure and I think they should be transparent. I think some are not honest either. I think they are terrible at running their companies and that's not why they feel pressure.
They feel pressure, maybe companies aren't doing so well. But anyway, I think it's a good idea to dump it. So we're going to I'm going to try to get people to dump it. What?
Are you going to report earnings quarterly?
No, no, I would definitely report earnings quarterly. I also think CNBC I think CNBC and all these people should report actual numbers versus last year's actual and stop reporting actual versus estimates, like a fake number. Some of you update, some of you don't, Some of you have no idea what you're talking about, some of you do. I just think the whole thing is ridiculous.
Well, I
guess, I would think investors
would like it, right? Because investors would like it if you got rid of earnings forecast because then you can get more opportunity set on the investor side.
Yes. I think it might be. I think that companies are like, and I think a lot of the long term investors are preferring you describe yourself. You're very transparent about what you're trying to do, but not beholden to that number.
I
mean, widen your estimates itself and probably your multiple would be
a little more volatile, but
I don't think it would change anything. I think the cost of capital itself is a fictitious number, just so you know.
All right, Bob, on the heels of that, what do you got?
I forgot my question. Bob, just the Trilogy. When you look at Alipay or WeChat and they have 1,200,000 users and they've kind of leaped over credit cards, Is there anything you take away from that?
Yes. So a bunch of these people at that table over there, I don't know, they've analyzed WeChat and Paytm and Alipay and some of them, I don't know if that group or some of them took a tour around the world to go check out what I'll tell you around the world, I'm a favorite of them doing because it's eye opener. Remember those countries can bypass tons of other stuff that's been set up in place. So it's not exactly the same, but those services are great. And WeChat started as a chat, but they added shopping and payments and all that stuff and now it's one of the biggest payment mechanisms.
Paytm was the same thing. And there's no reason when you go on this phone, this is going to be the battle of all time, like who dominates all those services and still not known. And everyone wants to be the place that is the one place you go to do that. And whether there could be one place or not, I don't know. But we analyze all of them.
And to the extent we can add services that make sense, that would make clients happier, we're going to do them. We can build our own chat. We can build our own Facebook. We could build I tell people, I'm really not kidding. We don't want to, but we could build whatever we have to build to compete.
And if I had to come stand in front of you and say we're going to spend $5,000,000 to A, B, C and D, because that's what we got to do to compete, that's what we're going to do. I hope the management team in the room hears me loud and clear too. We will do whatever it takes. And we don't want to do is make sure we're thinking clearly about these really complex those are really complex issues.
Chris?
Well, you mentioned Amazon before, company that's gone 20 years without really making any money. Would you go that far? Or is there ultimately a profit discipline that has
to We are very disciplined and I don't know if you're right about Amazon, okay, because I haven't studied them in detail maybe earlier. But my guess is they make a lot of money doing things and they make investments that cost money. And to just lump it together and say they're losing money isn't exactly fair. So I just don't know. If I were them, I'm sure they and then obviously, we all know about AWS.
So no, we have to be profit disciplined. I think a finance company is in a different position. I think a finance company losing money will go bankrupt, because there's a confidence game, you got regulators, you got earnings, you so I think you have to be financially successful. What I'm talking about is making the investments for the future you have to do. So I got to and I go back to bank order JP Morgan, it's always the same thing.
What are you going to do next month and next quarter? Well, hell, neither of those companies open a retail branch in 10 years. How can you run a great company if you don't have open a retail branch? We talked about 400 branch sites. There are probably 5,000 that should have a JPMorgan to change branch one day.
But you can't just go through there overnight. But to me, we should be rational and very thoughtful. And some of these things take they have long lead times. So I tell people when it comes to training people, opening branches, building technology, you can't just jump in and do it. You got to have the team that can do that and execute.
There's also a reason, by the way, you can't get rid of the team when times are tough. And you've seen people over and over in every business. Okay, well, we're not going to grow anymore. Get rid of the people who hire, train, recruit salespeople. So then 4 years later, when we start it, it's almost impossible.
Same with opening branches. You don't even have the people know how to do it. I'm a little worried about software as a service in the same way too. Okay? Like what's going to happen 10 years from now when you've done all these things and no one here actually knows what's happening over there.
So I to me, we have to be conscious about the whole ecosystem we're going to do. But no, we're not going to lose our financial discipline because we need to make an investment like that we think we have to do or want to do.
Okay, good.
We got time for maybe 1, maybe 2 more. Anybody? Okay. It's a wrap.
Folks, thank you very much. Thank you for all doing the presentation. We'll see you at lunch downstairs.