Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's 2nd Quarter 2017 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation.
Please stand by. At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon and Chief Financial Officer, Mary Anne Lake. Ms. Lake, please go ahead.
Thank you, operator. Good morning, everyone. I'm going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on page 1, the firm reported record net income of $7,000,000,000 EPS of 1.82 dollars and a return on tangible common equity of 14% on revenue of $26,400,000,000 Included in the result is a legal benefit of approximately $400,000,000 after tax from a previously announced settlement involving the FDIC's Washington Mutual Receivership.
Other notable items, predominantly net reserve changes and legal expense, were a small net negative this quarter. So underlying adjusted performance was really strong. And highlights for the quarter include average core loan growth of 8% year on year, reflecting continued growth across products double digit consumer deposit growth strong card sales up 15% and merchant volume up 12% number 1 global IB fees up 10% and we delivered record net income in both Commercial Banking and in Asset and Wealth Management. Moving on to Page 2 and some more details about the quarter. Revenue of $26,400,000,000 was up $1,200,000,000 or 5 percent year on year, with the increase predominantly in net interest income, up approximately $900,000,000 reflecting continued loan growth and the impact of higher rates.
Fee revenue was up $300,000,000 year on year, but adjusting for one time items in both years was down modestly. With lower fixed income markets, mortgage and card revenue, all as guided, being offset by strong fee revenue growth across remaining businesses. Adjusted expense of $14,400,000,000 was up a little less than $400,000,000 year on year with auto leases being the biggest driver, but also including the impact of the FDIC surcharge and broader growth being offset by lower compensation. Credit costs of $1,200,000,000 were down $187,000,000 year on year on reserve build. As a net reserve build in consumer of a little over $250,000,000 driven by card was offset by a net release in wholesale of a little under $250,000,000 driven by energy.
Anticipating you may have questions given the recent stress in oil prices, I would emphasize that we guided to expect reserve releases given we started the year with $1,500,000,000 of energy related reserves. And with oil prices having found a lower but seemingly stable level, we feel appropriately reserved. Shifting to balance sheet and capital on Page 3. You can see in the red circle on the page here that we ended the quarter with binding fully phased in CET1 of 12.5% under the standardized approach, with the improvement being primarily driven by capital generation, offset by net loan growth. We've been hovering around the inflection point under the Collins floor for a while now and expect standardized to remain our binding constraint from here.
Given that, we've replicated this page under standardized rules in the appendix for you to read. Balance sheet, risk weighted assets and SLR all remained relatively flat from the prior quarter. And while not on the page, I would also note that we remain compliant with all liquidity requirements. We were pleased to announce gross repurchase capacity of up to $19,400,000,000 over the next 4 quarters and the Board announced its intention to increase common stock dividends 12% to $0.56 a share effective in the 3rd quarter. Addition, we recently submitted our 2017 resolution plan, which we believe fully addresses outstanding regulatory feedback.
Moving on to Page 4 and Consumer and Community Banking. CCB generated $2,200,000,000 of net income and an ROE of 16.5%. We continue to grow core loans, up 9% year on year, driven by strength in mortgage, up 12%. Card and Business Banking were each up 8%, and auto loans and leases were also up 8%, driven by strong lease performance from our manufacturing partners. Deposit growth continues to be strong, up 10% year on year with household retention remaining at historically high levels.
We saw improvement in our deposit margin, up 16 basis points. Sales growth in card was very strong again this quarter, up 15% as new accounts mature. And merchant processing volumes grew double digits, up 12%. Revenue of $11,400,000,000 was flat year on year, but recall that last year included a net benefit of about $200,000,000 principally driven by the Visa Europe gain. So excluding that, revenue was up modestly.
Consumer and Business Banking revenue was up 13% on both strong deposit growth and margin expansion. Mortgage revenue was down 26% as higher rates drove higher funding costs, which together with lower MSR risk management and lower production margins put pressure on mortgage revenue year on year. In addition, revenue included a reduction of approximately $75,000,000 to net interest income related to capitalized interest on modified loans. And card, commerce, solutions and auto revenue was down 3%, but if you exclude the non core items I mentioned was up 2%. With NII growth on higher loan balances and higher auto lease income predominantly offset by the continued impact of investments in card new account acquisitions.
Expense of $6,500,000,000 was up 8% year on year on higher auto lease depreciation, higher marketing expense and continued underlying business growth. Finally, on credit performance. Card services drove higher net charge offs year on year, but still within our guidance for the full year of less than 3%. Net reserve builds were around $250,000,000 building $350,000,000 in card, $50,000,000 in Business Banking and $25,000,000 in Auto, in part due to loan growth and in part higher loss rates in card. This was partially offset by a release of $175,000,000 in mortgage, reflecting continued improvement in home prices and lower delinquencies.
To touch on consumer delinquency trends, in particular in card, we are seeing some early signs of normalization, which are generally in line with our expectations and our credit risk appetite. And in auto, our trends are relatively flat. Now turning to Page 5 and the Corporate and Investment Bank. CIB reported net income of $2,700,000,000 on revenue of $8,900,000,000 and an ROE of 14.5%. In banking, IB revenue of $1,700,000,000 was up 14% year on year with strong performance across products but particular strength in DCM.
We ranked number 1 in Global IB Fees and number 1 in North America and EMEA. We were also number 1 in ECM and DCM globally, in each case gaining share for the first half of this year. Advisory fees were up 8%, benefiting from a large number of deals closing this quarter. Equity underwriting fees were up 29% better than the market, but relative to a weak prior year quarter. With a strong market backdrop and supportive valuations, we saw continued momentum in global issuance, especially ITOs.
And debt underwriting fees were up 5% from a strong quarter last year, driven by the high flow volume of repricing and refinancing activity, even with fewer large acquisition financings. In terms of the outlook, we expect IBCs in the second half of the year to be down year on year, given that we had the highest IBCs on record for Q3 last year. That said, overall sentiment remains positive. ECM issuance is expected to continue given the stable market backdrop and the M and A backlog is healthy with conditions remaining constructive for refinancing activity. Treasury Services revenue of $1,100,000,000 was up 18% driven by higher rates as well as operating deposit growth.
Lending revenue of $373,000,000 was up 35%, reflecting lower mark to market losses on hedges of accrual loans. Moving on to markets. Total revenue was $4,800,000,000 down 14% year on year. Fixed income revenue was down 19% with decent performance across products relative to a very strong Q2 last year, which was driven by higher levels of volatility and activity broadly, including as a result of Brexit. This quarter conversely can be characterized by a lack of idiosyncratic events, resulting in sustained low volatility, reduced flows and continued credit spread tightening, all of which impacted activity levels in rates, credit trading and commodities.
Emerging markets performance was relatively stronger on a weaker dollar and lower rate as well as some regional events. Equities revenue was down 1%. In derivatives on the structured side, we did quite well and outperformed. And on the flow end, we held our own in a quiet and therefore challenging environment. Prime was a bright spot as we are realizing the benefits of the investments we've been consistently making.
Before I move on, I would also like to remind you that the Q3 of 2016 markets revenue was also a record since 2010. In fact, it was about $1,000,000,000 more than the average of the previous 5 years. And so while that isn't guidance, it is context, as this quarter has felt quiet more like prior years. Security Services revenue of $982,000,000 was up 8%, driven by higher rates and higher asset based fees on higher market levels. And remember, the 2nd quarter benefits from dividend seasonality.
Finally, expense of $4,800,000,000 was down 5% year on year, driven by lower compensation expense and the comp to revenue ratio for the quarter was 28%. Moving on to Page 6 and Commercial Banking. Another quarter of excellent performance with record revenue and net income an ROE of 17%. Revenue grew 15%, driven by deposit NII as the rate environment continues to be favorable and on higher loan balances with spreads remaining steady. IB revenue was down due to the lack of large deal activity during the quarter, but underlying flow activity was solid across products as momentum continued and forward pipelines appear strong.
Expense of $790,000,000 was up 8%, and we expect this to grow mostly in the second half as we continue to execute on the investments in bankers and technology that we outlined at Investor Day. Loan balances were up 12% year on year and 3% quarter on quarter. C and I loans were up 4% sequentially ahead of the industry on broad based growth across markets and within specialized industries. CRE saw growth of 2% in line with the industry, up below last year's pace on reduced origination activity as we continue to be selective at this stage in the cycle. Finally, credit performance remains very strong with a net charge off rate of 2 basis points.
Leading the Commercial Bank and moving on to Asset and Wealth Management on Page 7. Asset and Wealth Management reported record net income of $624,000,000 with pre tax margin of 32% and an ROE of 27%. Revenue of $3,200,000,000 was up 9% year on year, driven primarily by higher market levels, but also strong banking results on higher deposit NII. Expense of $2,200,000,000 was up 4% year on year, driven by a combination of higher external fees and compensation on higher revenue. This quarter, we saw net long term inflows of $9,000,000,000 with positive flows across multi asset, fixed income and alternatives being partially offset by outflows in equity products.
We saw net liquidity outflows of $7,000,000,000 largely due to specific client deal related cash needs. Record AUM of $1,900,000,000,000 and overall client assets of $2,600,000,000,000 were both up 11% year on year on higher market levels. Deposits were flat year on year and down 5% sequentially, reflecting the beginning of balance migration into investment related assets as expected, and those balances remained with us. Finally, loan balances were up 9% year on year driven by mortgage up nearly 20%. Moving on to Page 8 and corporate.
Corporate reported net income of $570,000,000 which includes the legal benefit I mentioned earlier of $645,000,000 in revenue or $400,000,000 after tax. And a reminder, this is the same $645,000,000 that was publicly announced in August 2016 and represents partial reimbursement for costs that we've previously incurred and paid that remains the responsibility of the Whamoo receivership. Finally, turning to Page 9 and the outlook. Starting with the quarter, we guided 2nd quarter NII to be up about $400,000,000 from the Q1 given the rate the March hike rate hike. But you'll see that the NII for the quarter increased by only $150,000,000 While we did fully realize the expected benefit of higher rate and continued growth, Against that, we had the one time $75,000,000 mortgage adjustment as well as lower CIB market NII.
These effects together with modest downward pressure from lower tenure rates would all other things equal point to a full year number of closer to $4,000,000,000 up rather than the previous $4,500,000 but with the potential to be higher if we continue to benefit from tailwinds of lower deposit reprice. So you will see we have adjusted the guidance on the page, but it will be market dependent. And any near term forecast is sensitive to a number of factors, none of which changes our conviction that we will ultimately deliver $11,000,000,000 plus of incremental NII as rates normalize and we are well on our way. On expense, we continue to expect full year adjusted expense of $58,000,000,000 2nd quarter was in line with our expectation and our guidance at a little better than $14,500,000,000 which is also where we expect the Q3 to come in. Finally, we have revised our full year core loan growth down to 8% year over year, but a couple of comments.
First, we are seeing slightly lower growth than we expected coming into the year. It is only modestly lower. And more importantly, we remain encouraged by the consistency and breadth of client demand across products. Secondly, we noted that mortgage could be a big driver and with a smaller market and a more competitive environment, fewer loans have met our hurdle rate. And of course we remain appropriately focused on quality and not quantity of growth and as such, loan growth is an outcome loss target.
So to wrap up, we are very pleased with the firm's performance this quarter, with all of our businesses showing broad strength. We maintained or improved leadership positions and are delivering the benefits to both clients and shareholders of our operating model and our continued investments. We remain encouraged by the growth outlook for the global economy and expect continued solid growth here in the U. S, which positions us well going forward. With that operator, you can open up the line to queue
line of Glenn Schorr with Evercore ISI.
During the quarter, Jamie had made a comment on potential disruptions related to the unwinding of the U. S. Balance sheet. And I'm just curious, it's supposed to be slow and deliberate, but I'm curious how you think that impacts liquidity, the yield curve, trading, deposit betas and is there anything you can do to protect JPMorgan against those disruptions?
Yes. I would just stop for a second to just point out that what Jamie actually said was this is uncharted territory. It's not something that we've seen before. And so while it is the case that the Fed is communicating clearly and has every intention to make this gradual and predictable, things can change and we should just be prepared for that. Not to say that that would have a particularly significant impact necessarily on JPMorgan, but that that would just be a downside risk, not a probability.
So on the balance sheet, it's still the case that we expect to start seeing normalization in the balance sheet in September, if not in September by the end of this year. We're still actually calling for the next rate hike in December. The market is calling for March of next year. And as we said, the communication has been pretty consistent and pretty clear across the Fed space, which is to say that it's mostly priced into the market at this point as far as we can tell. And so you know based upon what we've understood, all things equal, we would see the balance sheet shrink about $1,500,000,000,000 over about the next 4 years.
So that would ultimately slow growth, not stock growth. And if we saw, you know, dollars 1,000,000,000,000 sorry, dollars 1,500,000,000,000 come out of the Fed's balance sheet, empirical evidence would suggest that we don't see dollar for dollar reduction in deposits. So if you just pick a point between $500,000,000,000,000 of deposit outflows at our 10% market share that would be about $75,000,000,000 over 4 years. So it was slow growth. It would not stop growth and it is what we've been expecting and what we've been talking about now for an extended period and gradual is good in that sense.
In respect of which deposits we would like to see, so that's the sort of growth scenario. In terms of liquidity, again, evidence would suggest and we've been communicating this quite clearly that we think the preponderance of that deposit outflow would be wholesale deposits and that would it would be non operating deposits. And those are deposits we ascribe little to no liquidity value to. So assuming that we're close to right, we would see those deposits ultimately leave the system, but it wouldn't affect materially, if at all, our liquidity position. So ultimately, the yield curve is priced, I think, all of this in.
What I think the Fed has been clear about is that they expect the balance sheet or hope the balance sheet to be in the background and to use short rates as their primary monetary policy tool. And so as a result, we would ultimately expect to see perhaps a flattening yield curve, but with the front end ultimately pulling the long end up. And you heard the Chair Yellen talk about being conscious of the shape of the curve as they go about normalization. I think you may have asked something else. Did I miss anything?
No, that was absolutely awesome. I do have one tiny follow-up. Those get a little more than you want today. Thank you. The one tiny follow-up, Marion, is I just want to make clear that the whole $1,000,000,000 versus $4,500,000 and you spelled out what happened in the quarter.
It sounded like most of that full year guidance happened in the second quarter. But I just want to clarify that in terms of the second half NII, do you think it's overly different from where we were a quarter ago?
No, that's correct. If you saw that compared to a $400,000,000 expectation, we were up $150,000,000 So it would be fair to say that most of it was in this quarter. We had also when we gave the last set of guidance of 4.5, we pointed out that the 10 year was low and that that was ultimately pressuring that 4.5%. So it really isn't that significant of a change. The only thing I would caution you to remember is that when we think about asset sensitivity and we think about NII, market NII, which we wouldn't consider to be in a traditional sense core, can exhibit volatility geographically with NIR.
If you think about a market making business where we can have assets that are throwing off NII hedged by derivatives that ultimately have an offset in NIR, we actually think about that in total revenue numbers. So there could be a little noise in there, but no, I'm not expecting there to be significant changes. But I think what this makes me realize acutely is that no good deed ever goes unpunished and chasing our tails, reforecasting the full year NII every 3 quarters isn't as important or every quarter isn't as important as keeping our eye on the long term, which is nothing has changed. We are absolutely realizing the benefits we expected in the banking book assets and liabilities. And that means that our long term projections will be good and the path is a little bit less important.
And your next question comes from Ken Usdin from Jefferies.
Hi, good morning, Mary Anne. So thanks for that clarity on the trading related NII. I wanted to follow-up on the loan yield side, which were not much moved. You mentioned the $75,000,000 in mortgage. Can you just help us walk through the loan portfolio and whether you're seeing the assets move, whether there's a lag or whether there's any spread compression underneath that?
Yes. So I understand why you're asking. If you look at the loan yields, they look relatively flat or even slightly down. If you adjust for the mortgage, it would be flat. If you decompose them into wholesale versus retail, we are absolutely seeing all of the yield improvement on the wholesale side, about 10 ish basis points.
And on the consumer side, with respect to this quarter, there was some mix impacts in the card business as we saw a higher level of transactors and so a few other things. So it's not to say that the loan yields aren't moving in line with our expectations, and they are, But mix will matter for any one quarter.
Okay. So would that naturally say that as we go forward, that should if they're moving the right way, mix adjusted, they should kind of move the right way from here?
Yes, that's right. And if you look back last quarter, they did too.
It's just
that we've got a couple of opposing things going on this quarter.
Understood. Okay. And then my second question is, it was nice to see the card revenues on the fee side and the revenue capture rate move towards the way you've been saying. It actually eclipsed the 10.5% you'd said for the year already. Can you just help us understand like have we turned the corner then on card income and your expectations for that going forward?
Thanks.
Yes. So, obviously, one of the biggest drivers over the last recent while in card revenues has been the extraordinary success we've had in capturing new Chase Sapphire reserve accounts. And so the end of the Q3, but importantly both the Q4 and the Q1 were extraordinary in terms of the number of accounts we acquired. And of course, we amortize or contra revenue out those expenses over 1 year. So at 10.5% revenue rate right now and with those having adjusted the premium with those originations stabilizing out into the Q2, we will see ultimately we'll lap that impact a year from now and we'll see our revenue rates start improving from here towards the 11.25% that we sort of guided to in the medium term and we expect to get to that point all other things equal kind of mid next year.
And of course, that's just one facet. We're also seeing significant momentum on the sales front, obviously, as a result of those accounts. We're growing our core loans, up 8%. So we're having higher NII on those balances. So there's a lot of dry powder.
We just need to get past these account acquisition costs, which we will. And I always feel compelled to point out that these are extraordinarily good customers. Their characteristics, their engagement, their spend, these are the customers that everybody wants to acquire. We now have them and we intend to deepen relationships with them.
Our next question comes from Betsy Graseck of Morgan Stanley.
Hi, good morning.
Hi, Betsy.
Hey, two questions. 1 on M and A strategy. There was some discussion that maybe you were interested in acquiring something. That's not really the question to comment on that specific rumor, but more in this regulatory environment and the changes that we've had already, do you feel like there's a little more flexibility for your strategic actions or outlook than maybe a year ago?
So I would characterize our strategy as unchanged. We've always been pretty consistent over an extended period that we would prioritize 1st and foremost strategic investments for growth in our businesses, be that organic or otherwise. And obviously, you've seen us be investing, whether it's in growing loans or introducing new products, hiring bankers, opening offices in our expansion markets and the like. But yes, it's been heavily skewed to being organic over the most recent while. We've also been pretty clear and active, I would say, in terms of partnering with, investing in, collaborating with partners that can accelerate our growth potential.
So we would always be interested, whether that's Fintech or otherwise, in getting capabilities that allow us to accelerate our growth potential. We don't have big gaps, but we would always be interested in that. Having said that, I'm not going to comment on the size of the regulation environment except to say you should expect for any of these events or transactions that we would have the appropriate regulators at the conversation with regulators at the appropriate time.
Second question is on a little bit of a ticky tacky, but on FASB. They're working on changing some of the hedge accounting rules. And I wondered how you're thinking about areas in your balance sheet you might be able to utilize that in a way that makes your business more efficient. I don't know if that's something that you're thinking about.
Yes. So obviously, we are supportive of the new hedge accounting rules, and it will allow us to consider taking advantage of hedge accounting for a wider set of products than we currently do. But we actually have reasonably limited hedge in effectiveness in our P and L right now. So from a practical perspective, it won't make a big difference to the business, but it is more flexibility in terms of the scope, and we're looking at that.
I would just add, as a policy matter, we make economic decisions, not accounting decisions. Accounting is a fiction. And Mary Anne spoke about the credit card. You expense the acquisition cost over 12 months. The benefit comes over 7 years.
So we make huge investments all the time based on economics. We will never make a decision based upon accounting. And then we'll describe it to our shareholders who understand why we're doing what we're doing.
Our
next question comes from John McDonald of Sanford Bernstein.
Hi, Mary Anne. I wanted to ask about credit cards. The outlook for charge offs remains the same at about below for the year. And you're about 3% now in the first half. So maybe you're expecting a little bit of improvement in the back half of the year.
Is that seasonal?
Yes, it's seasonality. So you've seen the first half at or around that guidance level. We would expect that to go down slightly just on seasonality in the second half for a full year, a bit below 3%.
And then at Investor Day, the outlook for the medium term was not much higher, dollars 3,000,000 to $325,000,000 Does that allow for the seasoning over the next year or 2 of all the growth that you've had and allow for some normalization too? Is that enough cushion to get all that in there?
So I would say, obviously, any time you reach an inflection point, you need to be cautious about understanding the pace of change. For at least for 2018, 3% to 3.25% feels right. I think when you get beyond that, we'll be updating you with our views as we experience a bit more in reality. It doesn't feel significantly different from that, But I think 2018 is a good number and 2019 we'll update you.
Okay. Thanks.
Our next question comes from Erika Najarian of Bank of America Merrill Lynch.
Yes, good morning. I just wanted to follow-up to the questions that Glenn and Ken had on margin. Marianne, could you give us a little bit of insight on how deposit betas trended wholesale versus retail during the quarter? And also just going back to your comments, if the Fed balance sheet reduction drives wholesale deposits out of the system, can we assume that that should not affect deposit betas negatively for JPMorgan?
Yes. Okay. So just talk about what we've seen so far. I think the industry has been really quite disciplined, which is what we would expected at this early stage of a normalization in terms of the rate cycle. It is a tale of 2 cities.
We said this last quarter that the wholesale space necessarily experiences higher reprice more quickly. And expectations. It matters, you need to get granular, the type of deposit, the client segmentation, it matters. So in the wholesale space, we're seeing it. We're on that journey.
In the retail space, we haven't seen that yet. So while there have been small changes in the industry in CDs, there's been nothing in checking or savings. But again, I'll just point out to you that that we wouldn't have expected that to be at this point yet in the cycle. And I would say with respect to deposit betas and the Fed's balance sheet, if we are right and we believe we'll be close to right and that we see the wholesale non operating deposits flowing out of the system assuming everybody else has reached that same conclusion, then it shouldn't really materially impact the liquidity position of financial institutions. And if you couple that with the expectation of a very gradual and measured pace, which gives people a lot of time and opportunity to plan accordingly.
We wouldn't expect there to be a significant impact on basis, if any.
Thank you. And my second question, you mentioned in the beginning of the call that standardized will ultimately be your CET1 binding constraints. And I'm wondering, if you were allowed to float off your current op risk floor and I think it's a 400,000,000,000 dollars Does that mean it standardizes your constraint that being able to float off the floor and model out your op risk may not be an incremental source of capital because Standardize is binding? Yes.
I would say first of all, I would say, focusing on anyone so we would be very supportive of changes to how operational risk capital is treated under REDCapitol rules. But I think focusing on one facet and not the whole thing, it's unlikely to be that only one thing changes. So we'd like to see changes made over time. But for the foreseeable future, as we're growing our loans quite strongly, and these are extraordinarily high quality loans where the differential between advanced and standardized is quite big, we still expect standardized to bind us.
And as you pointed out, this generalized, we're 100% in the United States. In Europe, we're talking about 75%. So there will be some changes over time in how all these capital ratios get calculated for international competitiveness reasons.
Yes. So and whether it's because the operational risk rule change or whether it's because the standardized rules become at least somewhat more risk sensitive, There should be changes over time. But I think for the foreseeable future, this is what we expect.
Our next question comes from Saul Martinez of UBS.
Hi, good morning. First question is on commercial banking. Can you just comment a bit on the sustainability of the growth and profitability you've had there? Your earnings are up 30% year on year, loan growth, C and I 9%, CRE up 15%. And we're not talking about small numbers anymore.
I think your loan book now is about $200,000,000,000 in commercial banking. And can you just talk about some of the initiatives that you've discussed that the middle market, the IB and how sustainable that is and whether you're comfortable with the risk profile of the books you have there because you are growing quickly. It is a big book now and you're certainly growing faster than the industry.
Yes. So I would start with, if you go back a couple of years ago, 2013, 2014, 2015, when we were doing our business simplification agenda and derisking and uplifting the control environment, the commercial bank was blocking and tackling and doing a lot of inwardly focused work. And we talked, I think, all the way back in 2016 that the outbound calls, opening offices, hiring bankers and that if you waited a minute, you see that come to our results. And this is the sort of fruits of that labor. So I do think it is sustainable.
There's nothing in these results that is particularly noisy outside of reserve releases, which I'll come back to. And I would also say the partnership between the Commercial Bank and the IB in terms of covering our clients, the introduction of 16 specialized industries, which is an advantage we can bring to our clients nationally and in fact globally that other competitors can't bring. All of those things set us up for continued solid growth. With respect to loan growth, I would say if you look at our C and I loans, this quarter as an example was pretty broad based. There wasn't a specific in the middle market.
There wasn't a specific industry or market segment that was strong. But over the last stronger, I should say, but over the last few years, a lot of our growth has been driven by the investments we've been making in the expansion markets. So we got into some new markets with the Wamu acquisition. We continued to build out those markets, add bankers, open offices, and that has been a source of growth for us that perhaps others haven't been able to enjoy. And also, as I said, specialized industries.
And then And I
would just add, we I think we're in all major 50 markets now, unlike retail, where one day we'll embark on an expansion in cities we're not in. And the product set is just fabulous. We're adding more and more online things. We're adding simpler and faster credit approvals. We're adding making it easy to do merchant processing when you sign up for middle market loans.
The online systems are great. So all that stuff, I think, is this is going to grow for a long period of time.
Right. And
then And thanks for pointing out how well it did. Right. And Doug Petter, if you're listening, congratulations.
Yes, no problem. The only thing I would say on commercial real estate, because I think it's really important is, commercial real estate, it depends what you do. And more than half of our commercial real estate exposure is commercial term lending. It's a very specific strategy. We don't deviate from that strategy.
And I would just point to you because it was interesting to me. If you look at the Fed's CCAR stress results, the commercial real estate across the industry and look at how our results compare to others, I think you can hopefully get somewhat more comfortable and we are very comfortable with what we have right now. Now that said, the performance this quarter did benefit from reserve releases and benign credit and at some point there will be a cycle. But the risk appetite we have and the way we've managed risk discipline, we're very happy with that.
And the IB, bringing JPMorgan Investment Banking to chase corporate clients, we still think has a long way to go.
That's great. If I can follow-up with a bigger picture question. And Jamie, you've been correct me if I'm wrong, you've been pretty vocal about believing that the underpinnings of our economy are healthy and strong and not buying into this whole secular stagnation argument. But at what point does political dysfunction and political paralysis really start to dent that confidence? And because you've also indicated that we do need structural reform to lift trend growth, whether it's infrastructure, tax reform, whatever it is.
And can you just comment on that? And I guess as an adjunct to that, what are your conversations with clients like? And is there a risk that is materializing that clients are also starting to become more frustrated with the lack of progress politically?
I would look at it the other way around. So we for since the Great Recession, okay, which is now 8 years old, we've been growing at 1.5% to 2% in spite of stupidity and political gridlock, because the American business sector is powerful and strong and is going to grow regardless when people wake up in the morning, they want to feed their kids, they want to buy a home, they want to do things the same with American businesses. My what I'm saying is that it would be much stronger growth have we made intelligent decisions and whether or not gridlocked. And thank you for pointing it out because I'm going to be a broken record until this gets done. We are unable to build bridges.
We're unable to build airports. Our inner city school kids are not graduating. I was just in France. I was recently in Argentina. I was in Israel.
I was in Ireland. We met with the Prime Minister of India and China. It's amazing to me that every single one of those countries understands that practical policies that promote business and growth is good for the average citizens of those countries for jobs and wages. And it's somehow this great American free enterprise system, we no longer get it. And so my view is that corporate taxation is critical to that by the way.
We've been driving capital and brings overseas, which is why there's $2,000,000,000,000 sitting overseas benefiting all these other countries and stuff like that. So if we don't get our act together, we can still grow. It's unfortunate, but it's hurting us. It's hurting the body politic. It's hurting the average American that we don't have these right policies.
And so no, in spite of gridlock, we'll grow it. We grow at 1.5% or 2%. I don't buy the argument that we're relegated to this forever, we're not. And if this administration can make breakthroughs in taxes and infrastructure regulatory reform, We have become the most one of the most bureaucratic, confusing, litigious societies on the planet. It's almost an embarrassment being an American citizen traveling around the world and listening to the stupid shit we have to deal with in this country.
And at one point, we all have to get our act together or we won't do what we're supposed to do for the average Americans. And unfortunately, people write about the thing like it's for corporations. It's not for corporations. Competitive taxes are important for business and business growth, which is important for jobs and wage growth. And honestly, we should be ringing that alarm bell every single one of you every time you talk to a client.
And then I would just say that in terms of how our clients are behaving and how the dialogue is going, whether you look at middle market, corporate client banking, M and A. It's not to say that the possibilities of reform and the impact that that could have isn't a part of the dialogue, but that fundamentally really just getting on with things. And so if there's a client that has a compelling strategic deal to be done or some spending or hiring or growth, then they're pretty much getting on with it, which is why we're seeing solid growth.
Our next question comes from the line of Matt O'Connor from Deutsche Bank.
Good morning. You guys obviously had a very big approval for share buybacks on the latest CCAR here. And I just wanted your thoughts in terms of using it all, given where your stock price is, given loan growth has slowed a tad and given a flatter yield curve makes buying securities a little less interesting, how do you put that all together?
Yes. So, look, obviously, you know the deal with CCAR approvals, which is capacity. It's not necessarily a commitment to utilize it. Although, we are, as we fairly clearly articulated at Investor Day. And as you see in the numbers here, we are at 12.5% in terms of our CET1.
And we believe we ought to be able to over time operate the company lower than that within the range of 11% to 12.5%, albeit that we would take time to do that. So we're in the market buying our stock every day. We're at 1.8 times a pound for book value you saw in Jamie's shareholder letter. We still think that there's significant value in the stock. We believe in the earnings power and the franchise that we have here.
And so not to say that we will utilize all the capacity because other things can come up. But we put in the request based upon our desire to want to ultimately move lower.
Yes. And there's a very important policy issue here too. So our preference is always to build organically, to not buy back stock, but to build branches and grow and lend more. But there's an argument that people are making that banks can't lend it and even if there's excess lending capability, they wouldn't have done it. And that is not true.
The counterfactual would have been, had banks been free to use their capital and there were clearly 5 years ago, there have been a lot more lending in the system. And we pointed out 2 areas where we would have taken place. 1 is mortgages, where regulations have held back lending to first time buyers, immigrants, self employed, prior defaults, etcetera. And the second is small business, where it's not existing small businesses, think of it as start up small businesses. And that they are having a hard time getting capital, maybe it's community bank level, etcetera.
The counterfactual would have been that $1,000,000,000,000 or $2,000,000,000,000 more would have been lent out and these rules have been changed 5 years ago. That's the counterfactual. It's not that, well, the banks wouldn't have lent the money. And so again, there's a false notion that all this stuff didn't hold back the economy. Yes, it did.
Okay. Thank you.
Thanks, Matt. Our next question comes from Gerard Cassidy of RBC.
Thank you. Good morning, Mary Anne.
Good morning. How are you?
Good. Can you give us some color? Federal Reserve Chairwoman Yellen indicated that she sees that there could be some relief on the horizon for the banks. And one of the areas that's been talked about is changing the calculation of the SLR. Have you guys modeled out what that could do to your SLR?
And then how that may change your view on capital going forward if there are changes where, for example, they take the cash that's sitting at the Central Banks out of the equation?
Yes. So obviously, they haven't been specific, although the Treasury report had some ideas, they haven't been specific about what the calibration would look like and whether there would be recalibration to the numerator and the denominator or one or the other. Clearly, we've been pretty clear that we think cash at Central Bank shouldn't necessarily be included and there are other things, different people have different opinions. So we've done the calculations. I would just point you back to the fact that we have some 20 potentially binding constraints right now, of which leverage in a variety of forms is part of that.
So to the degree that we get the opportunity to recalibrate that, it could have impact at the margin, but we take all of those things into consideration when we think about the direction of travel of the company. So we're being as thoughtful as we can. We're not specifically leverage constrained right now. That doesn't mean we're not supportive of making those changes. And we will obviously model it out, but we take the potential for those changes into consideration when we think about the direction we grow our businesses.
Very good. And then as a follow-up, coming back to credit cards, obviously, the Sapphire has been a huge success in growing your business there. Are the acquisition costs higher today than when you compare them to maybe 2 or 3 years ago? And then in that vein, when you guys look at the economics of putting on new cards, is the net present value or whatever measure you use to determine the economics, has that improved, stayed the same or weakened from maybe a year or 2 ago?
So I think, I want to point out something because I know that Sapphire Reserve gets a significant amount of attention for obvious and good reasons, but it is only one product in a platform of successful products, both proprietary and co brand. And so in reality, while we obviously do all the modeling and the math, it's not about what the cost of any one individual card acquired is or the NPV, that is how the portfolio is ultimately together perform over time. And it's still very early on Sapphire Reserve. I mean, it's not even a year old yet. And these are portfolios and products that develop and season over time.
And as I said, these are extraordinarily good customer relationships. So you know we've done a bunch of things in the card business over the last few years. We've renegotiated our co brands. That was ultimately with lower economics, but still very good economics. We've been out on the front foot issuing new products, not just Sapphire Reserve, but Freedom Unlimited, the Amazon Prime Card Inc.
And so we think about everything in the total portfolio and its collective performance over time, and it's still generating very good returns.
I just mentioned about the regulatory SLR. So look at it very broadly. If you look at it's not just capital liquidity, but mortgage rules, requirements, capital liquidity, collateral rules, what collateral can be used and not used. If these things were just calibrated differently, the cost of credit will go down, swap spreads will go down, mortgage will become more available, the cost of mortgage will come down. And those are kind of important in total if they're done right, without changing at all the risk to the system.
In fact, the system is healthier, the economy is healthier.
Our next question comes from Steven Chubak of Nomura Instinet.
Hi, good morning. So Mary Anne, I wanted to start off with a question on liquidity. You spoke of how the Fed balance sheet unwind should have little impact on your LCR. But just given the strength of your liquidity position and the significant excess reserves that you have at the Fed, how should we be thinking about the current capacity to deploy some of that excess into higher yielding MBS? And maybe what's your appetite to redeploy just given some of the tougher liquidity treatment for agency MBS in particular?
So when we think about the sort of liquidity position of this company, we're obviously managing not just to regulatory requirements, but also to what we want the ultimate sort of duration of equity and position of our balance sheet to be through the cycle. So we take into consideration not just the amount of liquidity we have and how that could be utilized, but also the mortgage portfolio we have, Agency MBS. So all of that goes into our determinations. And we will continue to add to duration opportunistically when it makes sense to do it and manage our balance sheet with discipline.
Okay, understood. And then just one more question for me, just on capital targets. I appreciate all the detail Mary Anne you provided indicating that over time there could be a path or trajectory towards getting to the lower end of that 11% to 12.5% range. And I'm just wondering given some the very favorable CCAR results we saw this year, coupled with some of the treasury reforms that have been outlined, is there the potential for you to actually manage to a target even below that 11, especially if gold plating of G SIB surcharges in fact goes away?
Yes. So I would start by saying that a lot can change between now and the next cycle of CCAR or the next two cycles of CCAR. And so we never did actually say that we necessarily wanted to get to the low end of the range, but just operate for the short to medium term within the range, while we let all of the potential changes to the sort of regulatory environment writ large play out. And so as to whether or not over time, there's a sort of recalibration of whether 11% is our minimum, that will play out over time. So for the next 1 or 2 cycles of CCAR, this cycle and the next one, I would just expect that we want to be on a measured pace to be within the range to allow us to better understand all of the changes that will take place over time and make appropriate decisions.
I wouldn't start imagining necessarily how low that goes. I think we would want to operate with a sufficiency of capital and liquidity.
Our next question comes from Andrew Lim of SocGen.
Hi there. Thanks for taking my questions. Just coming back to the treasury's proposals for the new calculation of the SLR. Can you give any color as to whether that's actually even possible within the global context as to how the Basel Committee would want harmonization across the whole world. Of course, if it did happen, then you would have massive advantage along with other U.
S. Banks versus other European investment banks.
So I would say, of course, it's possible. We've seen a number of situations where implementing global standards in the U. S. Have differed in meaningful ways from how they've been implemented elsewhere. You have rarely seen that be to the advantage of the U.
S. And the SLR is no exception. So while there may be recalibrations of either the numerator or denominator, know that to the European 3% standard, our current deposit institutions are held to a 6% standard. So there's plenty of room for there to be adjustments before it would create a non level playing field. And my suspicion is there will also be adjustments elsewhere.
And it's supposed to be, as I think, Chairwoman Yellen said, a backstop not binding in the way that perhaps it has become. So I think the answer is yes. So we'll see.
The key point Marion said is almost every single thing that's been done in America added to Basel requirements, the goal play in SLR, calculation of LCR, calculation of stress, GSIB, almost every single thing. And remember, America doesn't have to listen to Basel either. And you may have noticed that basically France, Germany, India, China are all time Basel, they better take a deep breath and stop doing more of what they're doing.
Great. Just a follow-up question also on the reduction in the op risk. I mean, you talked about advanced versus standardized front. I mean, looking at the CCAR, your SLR is a binding constraint there. So isn't that really a moot argument, a nonargument really as to whether that happens or not, I.
E, if you reduce your op risk, it doesn't really change your excess capital?
So sorry,
go ahead. So
look, there are a number of different people talking about the forward looking standard for operational risk. Basel under Basel 3.5 or 4 or whatever is talking about that there were some proposals in the Choice Act. So there's no question that there should be a revisitation of the mechanism to calculate operational risk. And then you're right, the way that all of these rules ultimately interplay with each other matters. And so from a pure stress head perspective at the margin, we had a little bit more binding constraint on leverage than CET1.
But if you look at just what we could run the company at, if C collar was our only constraint, it would be lower than where we are. So it's a complicated dynamic of trying to make sure that we're maximizing against all of these constraints and not just the mathematical ones, but also the operational and practical ones. So I mean, it's necessary to go back and rethink the calculation of operational risk just because it's the right thing to do. Ultimately, how that plays out into how we optimize against our constraints is less of what we're focused on.
Our next question comes from Betsy Graseck of Morgan Stanley.
Just two other quick things. 1, on the accounting with Hedge, just to get back on a little sec, the question also was, was there any opportunity for your clients too? Because if there is an opportunity for, say, institutions to hedge their books of business more that could feed into your revenues?
I wouldn't imagine it's not going to change our risk management strategy in a meaningful way. So I wouldn't imagine it would be
This affect corporations though? The new hedging rules affect other corporations or non banks?
Yes, in the sense that you can potentially hedge your commodity risk.
So wouldn't that be something?
We haven't looked at whether it creates more demand from the corporate side. So we'll look at that and see. Yes,
with telling us what your LCR is? I wasn't sure if that was coming up soon. Was that this quarter or next quarter? Has that just been put on hold?
No, it is still this quarter. There are requirements to make public disclosures in August. So depending on whether you make them in your Q and your Pillar 3 or not, we'll determine whether it's the beginning or middle or end of August. We, as you know, have as an industry been quite public about the fact that we think by the way, we provide an extraordinary amount of real time same day granular information on liquidity to our regulators in order for them to be able to properly supervise not just us, but the system. And so we believe the regulators do have and can have anything they need when they need it.
It's just a question about whether there is any added benefit of those informations being made public near real time. While it wouldn't matter today when everyone's running very significant liquidity surpluses, it could have unintended consequences if we were in an environment that was more stressful than we are today. So right now, the requirement is that we have to disclose. I suspect, although we've asked for a delay as an industry that we might have to disclose, we will continue to debate, I think, with regulators the merits of those public disclosures, over time.
I guess, I'm just thinking that there's the opportunity to show us the non operating deposits going away, which would help people understand the strength of deposit franchise.
Yes. And we I mean, I would suggest, although it's not something we show you every quarter that we've been pretty forthcoming about showing you the level of our deposits and the split at least in Investor Day now and then between operating and non operating deposits. And as we start to see the impacts of the Fed balance sheet unwind and the like, we will be very forthcoming. We try to be incredibly transparent, and we'll take that under advisement regardless of what the regulatory disclosures are about the quality of our deposit franchise. But we have, I think, periodically been more disclosive than most in terms of the quality of our deposits.
And knowing that, you could see that we have $500,000,000,000 of cash, dollars 300,000,000,000 securities, dollars 300,000,000,000 of repo. I mean, this is a pretty liquid company. It's liquid as any bank I've ever seen on this planet and
And we removed $200,000,000,000 of non operating deposits proactively. So we manage it very carefully.
Yes, there's nothing that would happen because of all this that would affect JP more that much. And the very important thing about LCR, it's not we it doesn't affect us, okay? We're fine disclosing whether they want to disclose. It's an issue of whether the monetary whether it's good for monetary policy and it will cause a problem, not for us, for the system when there's a crisis. Like do they want banks to use their liquidity or not?
Very simple. Because if the answer is you got to maintain over 100%, then you can't use your liquidity. That's what it means. And then so they and they've said publicly, some of the stuff probably that, well, if there's a crisis, we'll let you go below 100. And we're saying, well, what bank is going to be the first to go below 100.
And so it's kind of a policy issue. Whatever happens, we're completely fine at JPMorgan. If I was the regulators, I wouldn't want to put myself in that kind of position.
And we have no further questions.
Thank you.
Thank you very much.
This concludes today's conference call. You may now disconnect.