Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's 4th Quarter and Full Year 2017 Earnings Call. This call is being recorded. Your line will be on mute for the duration of the call. We will now go live to the presentation.
Please standby. At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon and Chief Financial Officer, Mary Anne Lake. Ms. Lake, please go ahead.
Thank you. Good morning, everyone. I'm going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on Page 1, the firm reported net income of $4,200,000,000 EPS of $1.07 and a return on tangible common equity of 8% on revenue of $25,500,000,000 The impact of U.
S. Tax reform is the one significant item we had this quarter. We recorded a $2,400,000,000 reduction to our 4th quarter net income. Excluding this, our performance would have been $6,700,000,000 of net income, EPS of $1.76 a share with an RoTCE of 13%. Similar to the last few quarters, our underlying results were quite strong in the 4th quarter and highlights included average core loan growth of 6% year on year, bringing us to 8% for the full year, and credit performance continues to be very strong.
A good holiday season fueled double digit growth in card sales and merchant volumes, each up 13%, and client investment assets were up 17%. We maintained our number one rank in global IB fees and we grew share and we had record net income and revenue in the Commercial Bank and record revenue and AUM in Asset and Wealth Management. Before I go into our results, let's spend time on tax reform on Page 2. The $2,400,000,000 impact of tax reform was largely driven by a deemed repatriation of our unremitted overseas earnings as well as an adjustment to the value of our tax oriented investments, including affordable housing and energy. These were partially offset by a benefit from the revaluation of our net deferred tax liability.
The impact is primarily in corporate, but as you can see, there was some impact to each of the CIB and the Commercial Bank. The capital impact is $1,200,000,000 higher at $3,600,000,000 or about 25 basis points of CET1. And our effective tax rate will be approximately 19% this year and 20% over the near term, think through 2020, after which it should start to gradually increase as certain business credits are phased out over time. While there is now an enacted bill and with that there's more clarity, there are still a number of open implementation as well as accounting questions that will require clarification. And as such, our estimated impact may be refined in future quarters.
That said, I know there are a number of important questions, which I'll try and get you clarity on. 1st, with respect to the deemed repatriation,
the operative word for us is deemed. In many ways, you
can think of our unremitted overseas earnings as the equivalent of bricks and mortar being required in order to meet local jurisdictional capital and liquidity requirements. So we do not expect to actually remit anything significant. 2nd, although the reduction in the corporate tax rate was 14%, you can see that the reduction in our effective tax rate is only about 10%, given the impact of the geographic mix of our taxable income, the disallowance of FDIC fees and smaller benefits associated with tax exempt income and other deductions as a result of the lower absolute rate. Moving on to the BEAT tax. This is an area where there do remain open questions.
However, at this point, we do not expect to have a BEAT liability. But if we are wrong, we would not expect it to be material. Next, the question of whether the benefit will be completed away and if so, over what time line. Pricing strategy will differ across products. It is true that we operate in competitive and transparent markets and this means that ultimately, you could expect some of the benefit for the industry will be passed through to our customers over time.
Competition is one key driver, but there are other factors such as scale, expertise, the breadth of your products and services and the investments that you're making in customer experience, and these matter a lot. And for certain of our businesses, pricing is not necessarily directly or immediately driven by fluctuations in the cost of capital. Think flow markets. And remember, we didn't get to price up the changes in market structure and capital and liquidity over the last several years. So it will be nuanced, it will be different across products, and time is a very important dimension.
Any competitive dynamics will play out over time. We are in the process of putting together a cohesive and comprehensive set of long term and sustainable actions for our employees, for customers and communities, in part in response to tax reform. Some of our plans may involve subsidies for lower income borrowers and support for small businesses. And for these customers and for some others, they may feel a benefit sooner. With respect to our capital plan, there are no immediate changes to note.
This won't change our overall strategy. And remember, the first half of twenty eighteen is governed by last year's CCAR. Finally, on the potential impact to our businesses, the modernization of the U. S. Tax code is a significant step forward for the country and a big win for the economy, and we include an estimated 20 to 30 basis points of growth in the U.
S. This year and next. However, clients are still digesting the tax bill and much like this rate cycle, we haven't seen this movie before, we'll have to watch it play out. There will be pluses and minuses by clients and pluses and minuses across the products. So overall, stepping back, tax reform is a positive.
And for our clients, there's more certainty, more clarity, and that should give them confidence to act. Moving on to Page 3, let's get into some details on the 4th quarter results. Revenue of $25,500,000,000 was up $1,100,000,000 or 5 percent year on year, as net interest income was up $1,300,000,000 mainly reflecting the impact of higher rates and continued strong loan and deposit growth, partially offset by lower NII end markets. Non interest revenue was down modestly as growth in auto as well as asset and wealth management partially made up for lower market performance. Adjusted expense of $14,800,000,000 was up 9% year on year, reflecting higher compensation expense as well as business growth, including auto lease depreciation.
In the 4th quarter, we took an impairment charge of a little over $100,000,000 related to certain leased assets in the commercial bank. And we increased our contribution to the foundation, adding $200,000,000 this quarter. Credit costs of $1,300,000,000 were up about $450,000,000 year on year. Charge offs were flat with an increase in card being offset by continued decreases across other portfolios. And although net reserve builds this quarter were modest, we saw releases in the Q4 of last year of approximately $400,000,000 Shifting to the full year on Page 4.
We reported net income for the year of $24,400,000,000 a return on tangible common equity of 12% and EPS of $6.31 Adjusting for the 2 front page significant items that we had this year, being tax reform this quarter and the benefit of the WahMu settlement in the 2nd quarter, our net income would have been another record of $26,500,000,000 with an ROTC of 13% and EPS of $6.87 Revenue crossed back over the $100,000,000,000 threshold this year, which feels good, dollars 104,000,000,000 up 5%. Dollars 4,100,000,000 of which was higher net interest income in line with guidance, benefiting from higher rates and growth, relatively modest deposit repricing, but pressured by lower market NII. Non interest revenue was up to $100,000,000 with higher auto lease income as well as higher fees across the Investment Bank, Asset Wealth Management and Consumer, adding $2,600,000,000 to revenues and more than compensating for headwinds in home lending on a smaller market, investments in card and lower markets. We ended the year with adjusted expense of $58,500,000,000 but as you can see, made a total contribution to our foundation this year of $350,000,000 in part in anticipation of tax reform. This brings our adjusted overhead ratio to 57% for the year, even as we continue to make very significant investments across the franchise.
Credit costs for the year were $5,300,000,000 down 1% as the environment remains benign. Moving on to Page 5, balance sheet
and capital.
We ended the year with CET1 of 12.1%, down almost 40 basis points versus the prior quarter, about 25 basis points of which related to tax adjustments and the remainder loan growth. All the other ratios as well as tangible book value per share also reflected a combination of $6,700,000,000 of capital distributions and the $3,600,000,000 impact of tax reform. Moving on to Page 6 and Consumer and Community Banking. CCB generated $2,600,000,000 of net income and an ROE of 19%. We continue to grow core loans, up 8% year on year, driven by home lending, up 13% and business banking, card and auto loans and leases were each up 6%.
Consumer deposit growth was strong, up 7%, and we believe we are maintaining our sizable lead over the market despite an industry wide slowdown given rising rates. Card sales and merchant processing volumes were each up 13%, driven by continued strength from card new products as well as ongoing momentum in merchant services. In December, we completed the acquisition of WePay, which marks a big step for us into the integrated payment space, allowing us to efficiently provide software enabled payments to small business clients. And we also completed the renegotiation with Marriott for our co branded cards, which will make us the largest issuer of the largest co branded hotel program in the world. For all intents and purposes, we've now finished the renewals of our co branded card deals.
Revenue of $12,100,000,000 was up 10% year on year. Consumer and Business Banking revenue was up 16% on higher NII driven by continued margin expansion as well as strong average deposit growth. Home lending revenue was down 15% on lower net servicing revenue driven by MSR as well as loan spread compression. Our originations were down 16% in a market down an estimated 25%. And we gained share, a trend we expect to continue given our investments.
And card Merchant Services and Auto revenue was up 11% year on year on higher auto lease income, growth in card loan balances and margin and lower net acquisition costs. For the full year, card revenue rate was 10.6% in line with our guidance and we still expect to reach 11.25 percent in the first half of this year. Expense of $6,700,000,000 was up 6% year on year, driven by higher auto lease depreciation and continued underlying business growth. The overhead ratio was 55% for the quarter, 56% for the year, as the business moved past the impact of investments and started generating positive operating leverage in the second half of twenty seventeen. Finally, on credit, card charge offs came in line with guidance for the year at 2.95%.
The increase in card charge offs was predominantly offset by pristine credit performance across other portfolios. In terms of credit reserves, the net $15,000,000 build this quarter was driven by a $200,000,000 build in card on growth, offset by releases in home lending of $150,000,000 and auto of $35,000,000 And as I noted last quarter, auto trends have stabilized and the industry feels to be on solid footing. Now turning to Page 7 and the Corporate and Investment Bank. CIB reported net income of $2,300,000,000 on revenue of $7,500,000,000 and an ROE of 12%. But revenue was impacted by 2 noteworthy items this quarter, and both of them had an impact in markets.
So I'll start with markets. Total markets revenue was $3,400,000,000 down 26% year on year. However, fixed income markets included the net impact of tax reform on our tax oriented investments, which was approximately $260,000,000 accounting for 6% of the year on year market decline. Additionally, Equity Markets included a notable loss of $143,000,000 on a single margin loan. This accounted for 3% of the year on year decline.
It's worth noting that the loss appears here in markets as we elected fair value option on this loan. However, when you do industry comparisons, be aware that others involved in this facility may not have made that same election and may have all of their losses in credit. So in addition, although not in markets revenues, $130,000,000 of credit costs this quarter was driven by a reserve build related to that same name. So adjusting for those items, our markets revenue would have been down 17% year on year, which is much closer to the experience up to the beginning of December when we last spoke publicly. Fixed income revenue was down 27% adjusted, principally driven by a tough prior year comparison and low volatility and tight credit spreads, which have continued into this quarter.
Equities revenue was up 12% adjusted against the record Q4 of 2016. And similar to the past few quarters, the driver of the increase was continued tailwinds from investments in cash, prime and corporate derivatives. Moving on to banking, we had a record year for total fees and for debt underwriting fees. We maintained our number one rank in global IB fees while growing share, and we also ranked number 1 in North America and EMEA. This quarter IB revenue was $1,600,000,000 up 10% year on year, driven by broad strength across Capital Markets.
Advisory fees were up 2% as we saw good momentum with some large deals closing. We ranked number 2 for the year in wallet, gaining share, and we completed more deals than any other bank. Equity underwriting fees were up 14%, with indices up across every region and several at or near all time highs. We maintained leadership positions in wallet and volume across every product globally this year. While we ended up number 2 in wallet, the distance to number 1 was only a few basis points.
And debt underwriting fees were up 12% as the market remained receptive to new issuance across high grade and leveraged finance and refinancing activity was strong. We maintained our number one rank, we gained share and this year we've had the most number of deals in the firm's history. The overall pipeline remains healthy and at levels similar to last year, as balance sheets are strong and market conditions favorable. Treasury Services revenue of $1,100,000,000 was up 13%. In addition to higher rates, we continue to see organic growth within the business as the investments we've made over the past several years have improved our clients' experience across the platform.
Securities Services revenue of $1,000,000,000 was up 14%, driven by rates and balances with average deposits up 12% year on year and higher asset based fees on record AUC given higher market levels globally. Finally, expense of $4,500,000,000 was up 8% year on year, driven by the relative timing of compensation accruals. The comps revenue ratio for the quarter was 27% for the year, 28% broadly in line with prior year. Moving to Commercial Banking on Page 8. There was another outstanding quarter for the Commercial Bank with record net income of $957,000,000 record revenue of $2,400,000,000 and an ROE of 18%.
And for the year, net income and revenue were also records. The business is firing on all cylinders and delivered an ROE of 17%. For the quarter, revenue included a benefit of a little over $100,000,000 associated with tax reform and in our Community Development Banking business. Even without this benefit, revenue would still be a record, up 14% year on year on higher NII from higher rates as well as deposit and loan growth across businesses. IB revenue of $587,000,000 was down 3% year on year, but still a strong performance.
For the full year, we saw record IV revenue of $2,300,000,000 up 2% with particular strength in middle market, which was up over 50%, compensating for a smaller number of large deals. Pipeline and momentum into the Q1 feels good. Expense of $912,000,000 included an impairment charge also of a little over $100,000,000 on certain leased equipment, which we expect to sell in the first half of this year. Excluding this, we saw expense growth of 9% as we executed on our technology and product investments. And this year, we added net 120 new bankers in the business and entered 6 new markets, giving us a presence in all top 50 MFAs.
Loan balances were up 7% year on year, 1% quarter on quarter. C and I loans were up 6% year on year, driven by continued strength in expansion of the market and specialized industries. While sequential growth was up a more modest 1%, we are seeing decent deal flow and pipelines are holding steady. Client sentiment continues to be strong, supported by corporate tax reform. CRE saw growth of 9% year on year and 1% quarter on quarter, in line with the industry.
Multifamily lending continued to see tightened pricing on elevated competition. We remain appropriately focused on client selection given where we are in the cycle and with particular caution around construction lending. Finally, credit remains among the best we've seen. This quarter, we saw a benefit of $62,000,000 largely driven by reserve releases in the oil and gas portfolio. And net charge offs were 4 basis points.
Leading the Commercial Bank and moving on to Asset and Wealth Management on Page 9. Asset and Wealth Management reported net income of $654,000,000 with a pretax margin of 30% and ROE of 28%. Revenue was a record $3,400,000,000 this quarter, driven by higher management fees on growth in AUM as well as higher NII on deposits and loans. For the full year, net income and revenue were records with a pretax margin of 28% and an ROE of 25%. Expense for the quarter of $2,300,000,000 was up 8% year on year, driven by a combination of higher compensation as well as a growth up for external fees, which is offset in revenue.
For the quarter, we saw long term net inflows of $30,000,000,000 with positive flows across all asset classes on continued strong long term performance. For the full year, we had long term net inflows of $68,000,000,000 driven predominantly by fixed income, multi asset and alternatives. Record AUM of $2,000,000,000,000 and overall client assets of $2,800,000,000,000 were up 15% 14%, respectively, year on year, reflecting higher market levels globally as well as net inflows. Deposits were down 10% year on year, down 2% sequentially, reflecting continued migration into investment related assets, the vast majority of which we are retaining, and new client flows remain healthy. Finally, we had record loan balances up 11% year on year, including mortgage up 14%.
Moving to Page 10 and corporate. Corporate reported a net loss of $2,300,000,000 which includes $2,700,000,000 of the tax reform adjustment. Treasury and CIO's results improved year on year, primarily due to the benefit of higher rates. So finally turning to Page 11 and the outlook. Before I get to specifics, remember, we do have Investor Day coming up in February, so we will be giving you a lot more guidance there.
So that leaves me with 2 structural things to talk about. The first, staying on the theme of tax reform, a lower corporate tax rate in 2018 will have the effect of reducing the tax equivalent adjustment or growth ups in our managed revenues. On a run rate basis, that reduction for the full year would be about $1,200,000,000 and more than half of that is in NII. Secondly, effective January 1, 2018, a new revenue recognition accounting rule came into effect, which requires certain expenses to be grossed up that were previously recognized as contra expense contra revenue. We estimate for the full year the impact will increase both revenues and expenses for the firm by another $1,200,000,000 the vast majority of which will be in Asset Wealth Management with a small amount in the CIB.
So for guidance, expect the Q1 NII will be down modestly quarter on quarter, reflecting a combination of the lower growth ups I mentioned, as well as normal day counts, which offset the benefits of higher rates and growth. And we estimate the Q1 effective tax rate will be about 17%, reflecting seasonality of stock comp adjustments. So to wrap up, the end of 2017 was constructive, characterized by strong equity markets, higher interest rates, good economic data globally, decent client activity, high levels of confidence and obviously the enactment of the Tax Cuts and Jobs Act. Against that backdrop, our underlying financial performance in the Q4 and 2017 was strong, benefiting from diversification and scale and consistently delivering for our customers and communities, gaining share across our businesses. Adjusting for significant items in the year, net income and EPS would have been clear records, driving a healthy 13% return on tangible common equity.
We're excited about the landscape and the opportunities for our clients in 2018. We will be there for them and the company is poised to continue to perform. With that operator, I will take questions.
And our first question comes from Erika Najarian of Bank of America.
Hi, good morning. So, I do expect you to defer the response to February 27, Mary Anne, but I just had to ask the question. The revenue outlook seems to be quite strong for the banking industry generally in 2018. And many investors were wondering, is the 55% overhead ratio a long term target for JPMorgan regardless of the revenue environment or could that potentially be better over the short term as we get a boost in the economy from the Tax Act?
So I mean, you are right. That's probably more of an Investor Day discussion. But what I would tell you is that when we have given that as our sort of medium term guidance in our simulation, we kind of imagined an environment that was more normalized in lots of ways. So we anticipated higher, more normal interest rates. We anticipated the continuation of somewhat benign credit.
And we anticipated continuing to invest in the businesses and you've seen us do it in 2017 and we would expect to do it and more in 2019 2018. So certainly there could be years when we would be below it and there have been years when we were above it, but I think it's still a decent pace for us to be aiming for in the near term.
Thank you. And my follow-up question to that is a lot of investors are excited about the prospect of stronger economic activity in 2018 leading to greater markets activity and greater lending activity. And if you look back into the 1980s, at least for loan growth, loan growth actually stepped down in 1987. And I'm wondering if you could share your insights on how you think those activity trends will shape up in 2018?
Yes. So I know that everybody is eagerly awaiting there to be direct and noticeable impact of tax reform, but we're only a couple of weeks into the year. And so our expectation, as I said before, just really stepping back, is that it will boost growth in the economy. People have different points of view. Our research team is saying buy up to 30 basis points in each of the next 2 years, but it could be better than that.
We do know that there will be puts and takes across our businesses. But in general, we would expect that the sort of certainty that people have been waiting for coupled with the confidence that we know they've had and the need for people to try and deliver growth to their shareholders should mean that things that they were going to do become more compelling and they might be willing to do more. So I think you'll see the capital market space potentially react more quickly. And I think loan growth may have a bit of a lag, but never say never. So we just need to, I think, be a little patient to see some of it play out.
But sentiment is strong, cash positions will be improved, profitability will be higher, things that were rich before will be more fairly valued now. And so I think it should be all very constructive. And certainly, we would take the upside and support our clients.
Our next question comes from Jim Mitchell of Buckingham Research.
Hey, good morning. Maybe a question on NII. Just I want to make sure I understand the moving parts. So if I think about your guidance for the Q1 of down slightly, you have 2 less days in the quarter that's maybe almost $300,000,000 sequentially. And then half of the impact from the Tax Act in terms of tax equivalent adjustments is be felt in NII?
Is that sort of linear and equal? So that's another $150,000,000 So if I do the math, is it about a $400,000,000 sort of apples to apples benefit from higher rates that you've seen? Is that the way to think about it?
It's a good model with just one clarification. So yes, a little more than half of the gross up adjustment is NII. Yes, it is broadly linear for the sake of argument. So 150 is not a bad estimate. It's actually more like $160,000,000 but pretty close.
The day count is actually not worth $300,000,000 It's worth a little bit less than $200,000,000 So you've got a sort of headwind, for one of a better word, of call it $300,000,000 and change. And then we would have had a combination of the impact of the December hike, which obviously each hike the impact of less, some growth and other puts and takes. So call it $350,000,000 of a headwind offsetting growth and the rate hike.
Right. And just a follow-up on, it seemed like deposit beta has actually slowed this quarter. And what's you're expecting that to sort of reaccelerate this year? How do we think about, I guess, beyond 1Q and the benefit of rates?
Yes. So I would say about deposit base, at this point, you really do have to think about it in a sort of bifurcated way. So firstly, I would say that the cumulative beta we've experienced and I wouldn't say we've seen it slow down, but it's remained disciplined generally. What we've seen so far in the rate cycle is very similar to what we saw in previous rate cycles. So it's not like we've learned stunning new news from which we can extrapolate and make changes to our expectations.
So we have no real change in the long term expectations for reprice. And it really is at this point bifurcated. So retail, checking and core savings, there's been little to no movement in the industry. But again, given the absolute level of rates, that would be in line with our expectations. And on the wholesale base, we're definitely in repriced territory.
It is accelerating with every hike and it's different across the spectrum. So obviously, more significant in the sort of TS security services space. So like my expectation, just given where we are in the absolute level of rates, is that on the retail space, we would still see a lot of discipline in the market in 2018. But ultimately, we haven't changed our expectations that whatever that time line looks like, we're going to get to an overall reprice of above 50%, but we'll have to see.
Our next question is from Betsy Graseck of Morgan Stanley.
Hi, Betsy.
And Ms. Graseck, your line is open.
Hi, sorry, I was on mute. Hi, good morning.
Good morning. It feels
like we have a once in a lifetime or at least in my lifetime benefit to earnings with this tax change. And we've got a lot of PMs asking the question, how are management is going to use that? I saw your comment in the deck that competitive over time, competitive way, blah, blah, blah. But I really wonder if you could help give us some insight as to how at a management level you're thinking about strategically using this benefit that you're getting in the various buckets of reinvest in tech, reinvest in people, reinvest in clients. Do you feel like it's equal across those or is there a skew that you're thinking about to take advantage of this?
Because how managements use this benefit is going to be critical for stock performance over the next 2 to 3 years?
Yes. So I'll give you a framework to think about it. If it's helpful, then you can certainly ask a follow-up question. But you are very familiar with the way that we think about sort of our strategy over time and our investment strategy in particular and investing in our businesses for growth and profitability has always been 1st and foremost in our minds. And to be honest, we've talked to you before about the fact that we don't constrain ourselves because we have budgetary targets on those activities if we think we can execute well and we see great opportunities.
So expect that the first thing that we would do is to continue to lean into the investment opportunities we have at large. So that's bankers, that's offices, that's global expansion to the degree that that's on the cards, it's digital capabilities, payments capabilities, it's across all of our businesses. And we've been working even before tax reform on identifying where those opportunities are, and we want to lean into that. We will also and Jamie said it earlier, we are really pleased that there are some immediate responses for employee benefits and we will be doing that plus more across our stakeholder constituents and there'll be more to come on that over the next few weeks. And we want to focus on that being, like, comprehensive and sustainable.
So we're really trying to be thoughtful about the things that will matter to our employees and to our customers. And then to the degree that we end up still with earnings that were otherwise above plan, then our normal capital strategy comes into play. We've been clear. We think that we are adequately capitalized that we should expect to have the capital ratio move down fairly over time. And our strategy on potentially continuing to see dividend increases and having repurchase programs that allow us to achieve our target ratio, That hasn't changed.
It just might be a bigger dollar number.
Our next question comes from Ken Usdin of Jefferies.
Hi, good morning. Just to move to, I guess, a business question. A couple of things just on the card business. Just looked like credit continues to be pretty good. You did build the reserve for growth as you mentioned.
But noticed that the card revenue rate was also still a little bit down. Can you just talk a little bit about your outlook for that card business as you look forward? Yes.
So I'm just dealing with the card revenue rate real quick because I think we sort of gave a little bit of this in the Q3 that given the Sapphire Reserve products and given the extraordinary success we had with that in the Q4 of 2016, There is an annual travel credit renewal that took place in the 4th quarter, which we already told you you would expect to see the revenue rate go down. It was contemplated, which is why our full year revenue rate of 10.6% was in line with our guidance. And as we lap the acquisition costs and reward costs associated with acquiring all of those Sapphire Reserve customers and for that matter our other new products, we're going to see that revenue rate get to the 11.25%, if not in the first quarter, in the first half of next year and stabilize out at or above that level.
Okay. And then just that's great to hear. That's intact. And then just consumer credit broadly speaking, autos continue to look a little bit better and cards still within recent expectations. So a lot of the focus on tax has obviously been on the potential for commercial lending to potentially pick up.
How are you guys just thinking about how the consumer behaves and what that means for both consumer loan growth and consumer credit? Thanks.
Yes. So there again, it's nuanced. So the first question generally that we're getting is the impact on the housing market, given certain specific changes in the tax code. I would say that overall net net, we would expect there to be not a significant impact on the housing market and demand nationally, although it could differ by state. So we feel like that's going to hold up nicely.
And then you're right, whether you're talking about consumers or whether you're talking about small businesses, think about small business environment. This is quite positive for them. So they're going to see higher profitability, higher free cash flow and to all intents and purposes, the equivalent of an upgrade. So we would be hopeful that much like the commercial space, that could be the catalyst to see them spend money and hire and we'll be focusing on that as we think about programs to help. So I think in general, it's going to mean that the already very good credit trends we're seeing will be good for longer.
Our next question comes from Glenn Schorr of Evercore ISI.
Good morning, Glenn.
Hello there. How are you? So first question on fixed income. And I guess the question is, if not now, when? I mean the industry has gone down, had this multi, multi year degraded in revenues for lots of structural and cyclical reasons.
We now have we're off QE in the U. S, we're raising rates in the U. S, Europe doing better, they are still on QE and have low to negative rates, but we're going to get some changes there. Can you talk about your best guesses in terms of the backdrop for this environment for such an important revenue item? Thanks.
Sure. So Glenn, I want to because I feel like in 2017, we spent so much time talking about year over year declines in comparable periods. It's helpful to, I think, step back and just look at the full performance for 2017 for fixed income and for equities and for markets in total. And so acknowledging that the Q1 was quite strong, if you look at the last three quarters, we were talking about reasonably quiet environment, low volatility, historically tight spreads, and yet those businesses individually and together delivered meaningfully above the cost of capital for us. So maybe not at the sort of outperformance level of 2016, but really good performance.
So discipline, scale, optionality, those are the ways we think about the fixed income business. And so although I don't I'm not going to I don't have a crystal ball. I can't tell you when there will be a catalyst for change. Fixed income is a little on the countercyclical side. There will be change.
And we're positioned to continue to be able to grow with our clients. So like our businesses are doing well and can't tell you when things will become more volatile. And obviously, that's always an emotional discussion, but it will happen. And when it does, we'll be there to serve our clients and to intermediate risk for them.
I appreciate that. Follow-up is on Steinhoff. And I know the A, you can't predict fraud. Yes. But I'm just curious on that as a business in general and lots of other banks were involved, but how many other similar types of books are there?
And can you talk to the nature of those relationships? Because hindsight is 2020, you're like, wow, that's a lot of leverage to give somebody on a highly active stock. But but it's usually just a customer flow, simple in and out facilitation business. So I wonder if you could just talk about it a little bit more.
Yes. I mean, this will guard our attention because of the sort of sudden and significant decline. And it is by far and away the largest loss in that business that we've seen since the crisis. And it will happen from time to time, maybe not this significantly or this suddenly. And remember that because we've got that in fair value, we brought that down, down.
So that's not a reserve. That's mark to market on a publicly traded equity at this point that is significantly down. And so I would say while we're obviously disappointed with the outcome, it's the business we're in. It's a large and diversified business that even after this loss is still very profitable. So it's noteworthy because of its size, its rapidity and its significance, but it's a profitable business.
And without sort of laboring the point, obviously, we go through talking about the potential for there to be rifles and sudden risk situations. And I'm thoughtful about that in our governance processes. And from time to time, it will happen.
Our next question comes from Mike Mayo of Wells Fargo Securities.
Good morning, Mike.
Hi. How are you doing? Good. I just wanted to follow-up on the tax question. Jamie says on Page 1 of the release that you'll have an accelerated spend for those tax benefits for employees, customers and communities.
I know you kind of answered that, but so how much of that benefit, I guess you paid $11,000,000,000 in taxes last year and that might have been under $7,000,000,000 with the lower rate. So if we assume a $4,000,000,000 tax benefit, if that's correct, how much of that would be passed on to the employees, customers and communities versus hitting the bottom line? And then the philosophical question, Jamie is there, if you can answer after you, should that be crucial for stock performance? How much you're allowed to fall to the bottom line?
Yes. So look, I'm not going to give you like some quantification, but you're not meaningfully wrong about the sort of assessment you made, which is a big significant positive. And much of it will fall to our bottom line in 2018 and beyond. And time is an important part to how this plays out. So we want to do really constructive, thoughtful things for all of our constituents, but it won't be the significant portion of that.
I would just add that we have take the $3,500,000,000 tax benefit next year. There are 2 major you should put in the back of your mind uncertainties. One is the code has to be actually written. And so there'll be a lot of noise going down the road about what that actually means for various industries and stuff like that. And the second, Mary, I spoke about extensively is competition.
Some of it, some will be competed away. So I'm going to I'm only telling you this because you got to put it in your mind. Don't get so exuberant that everything everywhere falls to the bottom line. The second is on our investment. Marion has already spoke that we already are fairly aggressive investing for our future.
In some places like pushing the string, we can't we can only go so fast in hiring new bankers and doing some things and we may accelerate some of that. And Investor Day will be quite clear if we change how we look at that kind of thing. And the other one is, what are we going to do special to help the United States of America as a result of tax change? And we think we should. We think it's very good that other companies have done it.
I think it's time that all of America share broadly, and we're going to have things that we think are good for some employees, but think of also sustainable growth for communities around the world. And so we're going to give you in the next couple of weeks some very thoughtful things that we're going to do. And it may very well bite into some of that $3,500,000,000 and so be it. That's what we're supposed to be doing. We're a bank.
We're supposed to help support and grow communities. And it will enhance our growth in the future too, by the way. So it isn't like a giveaway. It's kind of a thoughtful approach to how we should use some of this.
And I do want to just like, there are 2 other things just to add to what Jamie said, which is, if some of this is completed away over time and gets to lower cost of credit and lower cost of borrowing and improve pricing to our customers and allow them to grow their businesses and spend more strongly, there is a feedback loop. Similarly, if at the end of the day, it results in some higher dividend or repurchases, that also recycles back into the economy. So we're very optimistic for the performance of this company, which is extraordinarily client centric, that anything that's good for the economy and our clients will continue to drive long term profitability for the company.
So that
would be number 1. And number 2, not to be defensive, but you guys will appreciate this more than anyone almost is you can do your own math, but if you add up the cost of controls, market structure reform, capital and liquidity, much of which we're entirely supportive of, If you add up the impact that had on our returns over the last 5 to 10 years, I mean, it, in many ways, dwarfs this. So there will be an element of this that goes back into making sure that the banking system is properly covering the cost of equity, and it should.
One follow-up on that feedback loop. So you, Mary Anne or Jamie, a year from now, do you think that the tax code or other factors will result in increase in capital markets activity, increase in corporate lending and increase in CapEx, which we've been waiting for all decade?
Again, I think it's really important to note, people focus very much on what happens to market with the tax reform. And I think it's a very good thing. You've seen it with corporations, you've seen it with sentiment, you've seen it with people's plans and things. I think that's very good. I think the far more important thing is that 20 years ago, our corporate federal and state rate was 40%, the rest of the world was 40%.
Over 20 years, they came down to 20% and we stayed at 40%. Over that time, it's driven brains, capital, you see the reinvested money overseas. 1 of the accounting firms did a study that 5,000 companies that would have been headquartered here, either headquartered overseas or owned by foreign companies, which I'm not against, but it's a huge number. It's the cumulative effect of retained capital and increasing competitive American companies that will drive jobs and wages in the long run. I have absolutely no question that we will be far better off year after year after you haven't done this.
And it's just impossible to tell exactly what it means this month or this quarter or something like that. So we're going to be watching just like you and Wayne just like you, but I don't I hate guessing about the effect like on capital markets. I don't know. The fact is capital we look at capital markets, we have fabulous people in sales and trade, fabulous research, great technological capability. In the last 5 years, we've dealt with Dodd Frank, MiFID, all these rules and regulations, CEFS, what are the other ones called in Europe, and we've done okay.
I look at it as all big positive. We'll still be there buying and selling securities for our clients, issuing securities. And yes, I think if we're right about it in improving American competitive and growth in the global economy, it will drive cap market activity. Let's just wait and see.
Our next question comes from John McDonald of Bernstein.
Hi, good morning. Apologies if this was asked. I got cut off for a second. Mary Anne, I was wondering about charge offs and credit. Things look good this quarter.
For the full year, it came in line with your kind of $5,000,000,000 charge off outlook. I was wondering how you're thinking about the credit environment heading into this year. And if the environment remains strong, do you still have some seasoning that might put some upward pressure on charge offs even in a good environment?
Yes. So I would say if you look across the consumer spectrum of ex card, the credit performance is like really, really good and should continue to be really good in 2018. So 2018 feels like very strong credit performance in consumer. In card, we said at Investor Day that we would expect to continue to see charge off rates go up and we are growing loans. So a combination of those things will mean we'll have higher charge offs and some reserve builds.
I will tell you that we're not seeing anything that isn't in line with our expectations. So this is not normalization, deterioration. This is seasoning and maturation of the newer vintages and growth. And so if I sort of sent you back to what we talked about earlier in the year, it's probably closer to 3.25%, but in line with our expectations. So we're expecting very much more of the same in the consumer space.
And in the wholesale space, credit is really, really good. And some of the places where we have been watching for there to potentially be stressed, the fundamentals have improved. And we continue to obviously watch retail and to be cautious given where we are on certain parts of real estate banking, but not seeing any fragility right now in our outlook.
Okay. And then just a follow-up on card. You've had some good balance growth. Are you seeing any change in propensity to revolve from your customers? Or is your balance growth coming more from new customers?
Or is there any increase in kind of revolve rate?
So we actually had been on a pretty significant strategic drive to make sure that we had a DTC engaged customer base. If you go back pre crisis and look at the industry, there was lots of balanced markers and less engaged customers. So we worked really hard over the course of the last many years to drive engagement, which is why you can see that we have a larger share of spend than we do of outstandings, but we've grown both. So we are getting balances from new customers. We are working on making sure that the right customers are evolving, and we're making progress.
So year on year, we've gained share in both, and we'll continue to focus on REVOLVE.
Our next question comes from Steven Chubak of Nomura Instinet.
Hi, Mary Anne, I had a question on the tax guidance that you guys have given. The Slide 2 disclosure is really helpful, but I really wanted to dig into the comment on the B provision. You know that the ultimate impact for your business shouldn't be material. And at the same time, the guidance from some of your foreign bank competitors, suffice it to say, has been much more measured. And I'm wondering if the impact is not that material for you guys, but weighs more heavily on the peer set.
Do you actually see a market share consolidation opportunity emerging potentially with and in particular within the repo and sec lending side?
Yes. So I mean, obviously, the impact is differently situated for the foreign banking set. And I know that there as Jamie said, there is still a lot of work to be done in terms of implementation and finalization of the actual code itself. So I don't want to guess on how all that will play out. I certainly don't want to guess about the second order impact of potential consolidation.
All right. Fair enough. Well, maybe just try one more on tax, specifically relating to CCAR. I'm assuming that the test parameters for 2018 are broadly consistent with last year, which I think is most people's general expectation. You have the lower starting capital ratio from the tax hit.
Your peers will have the same thing. But within the new tax law, there's also a somewhat complicated element where it eliminates the ability to carry back NOLs against prior period income, which could impact your stress ratios. I'm wondering, does that at all inform your outlook for the upcoming test? And do you anticipate capital return capacity being more constrained just in light of some of those changes?
Okay. There's a lot. So if you assume that the 2018 structure is much like 2017 with a nice healthy caveat that DTAs, DTLs and the impact of them can be volatile based on the scenario. So with that caveat, I would tell you that not carrying back NOLs has a very particular interplay with foreign tax credits, which means it's not really going to affect us in a meaningful way. There are 2 things that would change, but they also offset.
So the 2 things that would change is your absolute level of losses would be higher as the tax rate is lower. But against that, so that would be a negative. But against that, your NOL carry forward would be lower, and that's a capital deduct. So in the law of very big numbers with health warnings, plus or minus at our low point, we think not a significant impact. And then if you were to take a look at our starting point capital, I'd just make 2 comments.
The first is, obviously, given all of the conversations we've just had, there is also the strong possibility that we will have higher earnings in the first half of the year and be able to accrete back portions, if not all of that capital. And secondly, for what it's worth, our actual spot capital ratios were higher than our CCAR outlook was. So both from a starting point and hedge perspective, I said okay, but that's a really complicated question and we need to like really work through it.
And there's a new sheriff in town and look, they're going to be looking at the whole picture. I think it's probably more important than this one item.
Our next question is from Gerard Cassidy of RBC.
Thank you. Good morning. Mary Anne, assuming the economy in 20 eighteentwenty 19 accelerates due to this tax reform, I think it may imply that we would have higher interest rates and possibly a steeper yield curve. Do you guys have any thoughts on what you might do to the interest sensitivity of the balance sheet? Would you change it?
Or did you want to just keep it the way it is?
Yes. So I mean we so what it's worth, you should know our house view on interest rates is for there to be 4 hikes next year. The Fed dots is 3, the market has 2. I would say tax reform and a stronger growth outlook will solidify the path of rate hikes. And so we've been factoring that into our balance sheet positioning anyway.
So I would not expect there to be a material change in our strategy.
Okay. And then in your release in the Q4, you guys said, how would the tax change affect your capital distribution plans and there's no change on the first half distributions are going to be based on the 2017 CCAR approval. Is that in terms of the payout ratio on this 2017 CCAR or the nominal dollars because obviously your earnings now are going to be higher in the first half of twenty eighteen versus what you got approved for in the CCAR 2017, which would imply if you kept the payout ratio constant, you would actually have a higher nominal payout in the first half of twenty eighteen?
Our capital plan approval is on a nominal dollar basis.
Our next question is from Matt O'Connor of Deutsche Bank.
Good morning.
Good morning, Matt. How are you?
Good. Thank you. It's probably a bit early to know how to kind of play this. But as you think about the winners and losers from tax reform, do you think there will be changes in terms of how you come to market, where you come to market? A lot has been written obviously on the impact to some of the high tax states and how money can flow from there to others.
And obviously, you're in some high tax states and also in low tax states. And just trying to think through how you might tweak your business model or the focus on some of your products in some of those markets?
Yes. So look, I would say, mean, in our sense, time is off end. So if you go back and look at what and obviously nothing is exactly like this, but if you go back and look at similar empirical evidence, it would say that any influences in terms of migration and flow of funds is pretty modest and pretty gradual. And so and if you think about something as first order as housing in high tax states, people are pretty situated where they live with their families and their jobs. And higher income borrowers are typically less price sensitive.
So I think lots and lots of things come into play. I think the area that we're getting that we're thinking about a little more is what's the optimal financing structure for clients given changes across the capital market structure. But even in that sense, while you could say debt may be more expensive, it's still probably cheaper than equity and equity may be more seen as fair value. But for JPMorgan, it's core to what we do. We do cross border execution, acquisition financing, liability management, bespoke capital structure strategies.
We do all of it. So even if the sort of mix and optimal structure change, I think we're pretty well situated. So it's early days to be able to say that we would have strategic changes, I think it's early days. And I would say that if that was to be the case, I would probably expect them to be quite marginal.
And then how about just more in aggregate on the consumer underwriting side. If you are feeling more positive about the economy and you're seeing the growth in consumer personal income before the tax cut here and that might accelerate, does it make you more open to loosening underwriting standards a little bit? I feel like in aggregate standards are still fairly tight versus where they were pre crisis and there could be some opportunity there for you and others?
Yes. I mean, I think that may be a fair observation, but I also think to Jamie's earlier point, as much as we would like to imagine that all of this takes effect immediately, you would need to see the benefits of the environment in the income and spending and profitability and creditworthiness of people before you would be able to lean into the changes necessarily. So maybe, but again, I think it's going to be something that will unfold.
And we haven't changed our standards very much. And the one exception that might change over time, which I hope it does actually, is in mortgage lending, where I think because of service requirements, capital requirements, reporting requirements, various litigation, uncertainty, it has tightened the credit box around people who probably deserve credit, younger people, first time buyers, prior defaults. And but that's going to take the agencies working together to set new rules and new guidelines. If that happens, that can actually be really good for growth in America. It doesn't really
That's pretty
immediate. Yes, it's not going
And pretty immediate.
And pretty immediate. And it's not going back to subprime, it's just open up the box and reducing the cost of the average mortgage and we're hopeful that the agencies will eventually do that.
Our next question is from Andrew Lim of Societe Generale.
Hi, morning. Thanks for taking my questions. I just want to take a devil's advocate approach for a bit. I've looked at the credit markets and the yield curve has increased right across the spectrum, especially at the short end actually rather than the long end. And I'm thinking that these high interest rates would feed into high credit losses at some point.
I'm wondering if that's part of your thinking, whether that feeds into your credit quality models. And if so, perhaps at what time would you think that deterioration in credit might start to accelerate?
So a couple of things. Just one thing because I think it's worth pointing out that there's been a lot of tension on a flatter yield curve. But you're right, it's driven by higher front end, which is a sort of good type of flattening, so to speak. And so that's what's been driving sort of NII growth for us. And we do expect that, that will, together with the Fed's normalizing expansion sheet, ultimately end up with a higher long end of rates.
So we're pretty optimistic about that. You're right that at some point typically you would see potentially higher rates depending on the speed and inflation and other factors would be proceed the potential for a credit cycle. I mean, I suspect this will be no different, but that is not something that we see in our models or in our outlook over the near term. So hopefully, the monetary policy will be gradual and as expected, and we'll continue to see the front end raise and everything be rational. And of course, there could be surprises.
But at some point, yes, but not in the near future.
Great. Could you say with that what the average maturity of your corporate loan book is or across the loan book in general?
I mean, it differs. So it's shorting
It's fully disclosed in the 10 ks, but it's different for every single product. And it also changes interest rates move around.
Our next question is from Saul Martinez of UBS.
Hi, good morning. Hi, Saul. So you on your tax Q and A, you mentioned what the impact of tax reform is across different businesses from a growth standpoint. But you also talk about the potential for competition being uncertain in terms of how it impacts different businesses and different products. Can you talk to that a little bit and speak to which products and businesses you see more scope for competition, less scope for competition?
And how does that influence how you think about investing across your different businesses?
So I would start by saying that I think we showed it at Investor Day last year and if we were to do something similar, maybe we will, it would look very similar today, which is if you go below our top line businesses to the businesses that, the vast majority of our businesses aren't more than covering their cost of equity by a fair margin today. So our investment strategy, it wouldn't be directly impacted by marginal changes in pricing and profitability up or down. We're going to continue to invest in everything that we can do well to improve the customer experience and grow the business. So I think we've been pretty consistent on that, not just today, but over the course of the last several years. And then I think it is uncertain.
And so I would just give you the obvious extremes, which is if you have 4 different organizations competing for a single large structured transaction and the cost of capital and tax is a direct input to pricing, I'm sure it will feature in the discussion. And if you are talking about a very, very scale, very, very high volume business with extraordinarily tight margins, It will probably have ultimately or at least in the very, very near term less impact. But again, I actually think people will be quite disciplined how they think about this.
And just to kind of give you an example away from finance. Utilities already have been put in a position because it's part of the rate base and after tax return, they're going to pass it on to consumers, probably 100%. That may be different by state, but think of it that way. And Marianne spoke about cap rates and stuff. And obviously, anything in the marketplace is being bid at and the after tax rate, you could see a pretty quick effect.
But go all the way to Hershey Candy Bar. It's not necessarily clear that if you sell candy or cereal or something like that, you can have an immediate re pricing effect because of a tax rate change. So we run that whole gamut of things. And so we just have to wait and see how it works out. At the end of the day, everyone benefits from more growth.
And to me, that's probably the most important thing. Yes.
No, that's helpful. One of the businesses that has been doing extremely well in terms of growth and profitability and momentum as the commercial banking business. And I feel like I ask this every quarter. But I guess the question is what you can do for an Encore. It's a relevant part of your earnings now and revenues and big part of the growth.
But can you just talk to the sustainability of the momentum in terms of balance sheet growth, revenue growth? How much headway is there still to continue to grow in that business?
Decades. Decades. So you Mary had already mentioned that we are now in the top 50 MSAs. Are already adding products and services. We build technology and cash management side.
We are doing a better job serving U. S. Middle market companies for their international needs. It can go on for a long time. And we're competitive, we've got very good margins and we're constantly investing in the business.
People have done a great job. We've had especially finance lines. So just more of the same.
And think about the commercial banks, I see absolute nexus of everything we do. It's delivering the whole company to our clients in a way that very few other people can do. And so we've been investing 100 bankers a year for a period of time opening offices, adding capabilities, focusing on digital, improving the customer experience just like in the rest of our businesses. And so credit aside where ultimately there will be a cycle and it will be fine, that business is really poised to do very well.
And I'll just add to this. We shouldn't leave this call out talking about in the custody and fund services business, we've added great new technology. We've gained I think it looks like we've gained a little bit share in the emerging markets where we were probably a little bit weak. Service levels have gone way up and I'm embarrassed to say they weren't particularly good a couple of years ago. In treasury services, we're building new international payment systems.
The banking industry has built a real time, it hasn't been all rolled out, your real time payment business. What we've done with Aladdin, we feel exceptional about custody fund services. On the consumer side, we have a whole bunch of if you look at our digital offerings, it's gotten better and better and better. There's a whole bunch more coming. Zelle and Chase, QuickPay have gone we're not gaining share, but we're definitely gaining clients.
And so when we have really started to market that, that's where real time P2P has opened. I've got to be bank supported now like 30 or 40, but it's going to eventually
be In February, the bank's capital.
Everyone is going to be open up to Zelle. And then of course, this year, we have beta already. We spoke a little bit about online, Fin Mobile Banking. And these some of these things may all work with really great products and services, and we're pretty excited about it actually.
Our next question is from Brian Kleinhanzl of KBW.
Hi, good morning. I just have one quick question on security services. Within there, you saw good growth in your assets under custody, up over 3% quarter on quarter, unannualized, but the revenues were up less than 1%. Can you kind of were there some timing issues with when the AUC came on? And can you kind of highlight what was the difference between the AUC growth and revenue growth this quarter?
Yes. So in security services, we make money on NII, we make money on transactions, we make money on AUC. And depending upon whether that fixed income or equities or whether it's emerging markets or the U. S. Will drive the extent of that.
So it's not like you take the overall revenue of security services and link it to increases in assets on the custody and draw a direct I mean, there is obviously a direct relationship, but it's not going to necessarily move in line. So I can tell you that looking at that decomposition of what's higher market levels and higher flows by region and looking at the portion of our revenues that's related to assets under custody that they were in line.
And the full year effect doesn't happen in 12 months.
Yes, exactly.
But if you even go up, they're up like $2,000,000,000,000 twothree of assets going up, but it'll take a year before the full year effect of that felt. So you just see partial effects actually flowing into this quarter.
Okay. Thanks.
And we have no further questions at this time.
Thanks everyone.
Thank you. Thank you for joining us. Yes, happy New Year everybody.