Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's First 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.
Thanks, operator, and 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, we're off to a good start this year with net income of $6,400,000,000 EPS of $1.65 and a return on tangible common equity of 13%, on revenue of $25,600,000,000 with the continuing momentum from last year driving strong performance across all of our businesses. Highlights for the quarter include average core loan growth of 9% year on year reflecting broad strength across products continued double digit consumer deposit growth, strong card sales up 15% and merchant volume up 11%.
In addition, we achieved a number of records across our businesses, most notably net income and IBCs for our Q1 in the CIB, net income and revenue for the Commercial Bank and assets under management and banking balances in Asset and Wealth Management. Overall, the credit environment remains benign. In Consumer, there were no reserve actions taken across our core portfolios, While in wholesale, we had a net reserve release of about $90,000,000 driven by energy, resulting in net releases in both the CIB and the Commercial Bank. You see no significant items here on the page, but there are a few notable items in our results that I'll highlight here for you. The first is a tax benefit of a bit less than $400,000,000 and the benefit relates to the difference in stock price between vesting date and grant date for our employee equity awards.
And while such an adjustment is business as usual, the recent appreciation in our stock price has caused the benefit to be outsized this quarter. With the largest impact accruing to the CIB and to a lesser extent assets and wealth management. 2nd is a write down of our student loan portfolio of approximately $160,000,000 after tax as we move these loans to held for sale and explore alternatives to that portfolio. And last is firm wide legal expense of around $140,000,000 after tax relating to a number of matters across businesses, some positive, some negative and with the most significant impact being in the AWM business. Moving on to Page 2 and some more detail about the Q1.
Revenue of 25.6 $1,000,000,000 was up $1,500,000,000 or 6% year on year with the increase evenly split between net interest income and non interest revenue. NII reflected the impact of higher rates and continued growth and NIR reflected higher CIB revenues, partially offset by card acquisition costs and lower MSR risk management. Adjusted expense of $14,800,000,000 was up 7% year on year, mainly driven by higher compensation on increased revenue and higher auto lease depreciation. In addition, the combination of the impact of the FDIC surcharge as well as our foundation contribution this quarter accounted for nearly $200,000,000 of the year on year expense change. Adjusted for the student lending write down I just mentioned, credit costs of $1,100,000,000 would be down approximately $700,000,000 year on year as higher charge offs in card were offset by a wholesale net reserve release this quarter versus a sizable build in the prior year.
Shifting to balance sheet and capital on Page 3. We ended the quarter with both standardized and advanced fully phased in CET1 of 12.4%, in line with our expectations and overall driven by net capital generation. Continue to manage our balance sheet with discipline. Total assets returned to above $2,500,000,000,000 reflecting the continuation of strong deposit growth as well as our trading balances normalizing from very low levels at the end of the year. From a liquidity perspective, HQLA was flat to year end and the firm remains compliant with all liquidity requirements.
We continue to grow tangible value per share while returning $4,600,000,000 of net capital to shareholders in the Q1, which included $2,800,000,000 of net repurchases and common dividends of $0.50 a share. And this $4,600,000,000 compared to $3,800,000,000 returned last quarter. As you know, we recently submitted the 2017 CCAR capital plan to the Federal Reserve. And as you would expect, we have no feedback to give you for now. Moving on to page 4 and the Consumer and Community Bank.
PCB generated $2,000,000,000 of net income and an ROE of 15%. Core loans were up 11% with strength across products. Mortgage was up 15%, card up 9%, business banking up 9%, and auto loans and leases up 12%. Deposit growth continued to outperform the industry, up 11%, with about half of deposit growth from existing customers as we continue to deepen relationships. We continue to see very strong growth metrics in card for the quarter with sales up 15% and new account originations up 9%.
Merchant processing volumes were up 11% year on year and active mobile customers up 14%. Revenue of $11,000,000,000 was down modestly. Consumer and Business Banking revenue was up 8% on strong deposit growth and we are starting to see the long awaited improvement in deposit margins. Mortgage revenue was down 18%, driven by lower net servicing revenue, reflecting lower MSR risk management as well as portfolio runoff. And card, commerce solutions and auto revenue was down 3%, driven by continued investment in card new account acquisitions that will provide long term value, which was predominantly offset by net interest income on higher loan balances as well as higher auto lease income.
Expense of $6,400,000,000 was up 5% year on year on auto lease depreciation and continued business growth. Finally, the credit trends in our core portfolio remain favorable. Net charge offs increased year on year, primarily driven by a $470,000,000 write down of our student loan portfolio, against which we released $250,000,000 of reserves. And card charge offs were up, in line with expectations and in line with guidance. Moving to mortgage and auto credit, our portfolios continue to perform very well.
Now turning to Page 5 and the Corporate and Investment Bank. CIB delivered a strong result with a reported ROE of 18% and net income of $3,200,000,000 But remember, a significant portion of the tax benefit on the stock update is reflected in these results. Revenue of $9,500,000,000 was up 17% year on year and IBCs of $1,800,000,000 were up 37%, partly due to a weak Q1 last year, but also given strong absolute performance this year. In Banking, IB revenue was up 34%, driven by higher overall issuance, especially in ECM, including a strong IPO market. And remember, the Q1 of 'sixteen was particularly strong in M and A and weak in DCM for us, and this quarter share normalized.
Overall, we gained share and ranked number 1 in global IBCs and number 1 in North America and EMEA. Looking forward, sentiment is positive, the market remains broadly constructive and across products, we expect decent deal flow and the pipelines are healthy. Treasury Services revenue of $981,000,000 was up 11% year on year, driven by higher rates and operating deposit growth. Lending revenue of $389,000,000 was up 29% year on year on higher gains from securities received from restructuring. Moving on to Markets and Investor Services.
Markets revenue of $5,800,000,000 was up 13%. At Investor Day, the market was characterized by low volatility and subdued client activity, leading us to be somewhat cautious. March ended up being stronger than expected, reflecting some recovery in volatility, but also clients responding more to market themes, including European elections and to a lesser degree, a stronger U. S. Rates outlook.
Fixed income revenue was up 17% with credit and securitized products as key drivers on stronger client activity and significant spread tightening broadly. Rates was also solidly up as the market reacted to central bank actions and we saw a pickup of flows in EMEA. We had a decent quarter in equities with revenue up 2% year on year in somewhat quiet markets broadly with corporate derivatives and prime being brighter spots. Security Services revenue was $916,000,000 in line with guidance. And finally, expense of $5,100,000,000 was up 7% driven by higher performance based compensation and the comp to revenue ratio for the quarter was 29%.
Moving on to Page 6 and Commercial Banking. Another excellent quarter in Commercial Banking with a 15% ROE. Revenue grew 12% year on year due to higher deposit NII and continued loan growth, as well as on strong IB revenues, up 34%, making this the 3rd consecutive quarter of IB revenues of over $600,000,000 Expense of $825,000,000 was impacted by a $29,000,000 impairment on leased assets. Excluding this, we saw expense increase slightly of our guidance as we made great progress on the pace of investments, which will continue to drive strong top line growth. Looking forward, we expect our underlying expense trends to be relatively flat.
Loan balances of $191,000,000,000 were up 12% over the prior year. Consistent with the industry broadly, we had seen a slowdown in C and I growth with our loan balances remaining relatively flat sequentially, although up 8% year on year. There are a number of factors likely contributing, including potential noise in the data from large acquisitions in prior periods and a resurgence in capital markets activity, particularly in DCM including high yield. So not to dismiss the importance of the trend, we do need to weigh all the facts. And against that other macro indicators remain supportive of the economy broadly, including CapEx data and surveys as well as very high levels of business optimism, all of which should be supportive of solid demand for credit over time.
In Commercial Real Estate, we saw sequential growth of 3%, slightly ahead of the industry but below the pace of prior quarters, impacted both by higher rates as well as a prudent approach to new originations given where we are in the cycle and maintaining discipline on risk adjusted returns. Credit performance remains strong with a net recovery of 2 basis points, reflecting continued stability in both our C and I and CRE portfolios, and overall, a net release of loan loss reserves driven by energy. Moving the Commercial Bank and moving on to Asset and Wealth Management on Page 7. Asset and Wealth Management reported net income of $385,000,000 with pretax margin and ROE each of 16%. Revenue of $3,100,000,000 was up 4% year on year, driven primarily by higher market levels and strong banking results on higher deposit NII.
Recall that last year's Q1 included a one time $150,000,000 gain on the sale of an asset. Expense of $2,600,000,000 was up 24% year on year, predominantly driven by higher legal expense. I want to emphasize that the underlying core business results remain very strong, in fact, in line with the strongest performance of the business ever. This quarter, we saw net long term inflows of $8,000,000,000 with strength in fixed income and multi assets being partially offset by outflows in equity. Assets under management of $1,800,000,000,000 and overall client assets of $2,500,000,000,000 were both up 10% year on year, reflecting higher market levels and net inflows into both liquidity and long term products.
Finally, banking balances continue to be strong with loan and deposits up 7% and 5% respectively. Moving on to Page 8 and corporate. Corporate generated $35,000,000 of net income for the quarter. Treasury and CIO's results improved, in part reflecting the benefit of higher rates, and other corporate benefited from the release of certain legal reserves. Finally, turning to Page 9 and the outlook.
With the addition of the March rate hike, we've updated our NII scenarios as follows: Rates flat from here, for the full year NII would be up around $4,000,000,000 Based on the implied, NII would be up by around $4,500,000,000 And of course, the Fed Dots would imply the possibility of 3 rate hikes this year, which is not fully priced in. So expect Q2 NII to be up sequentially, approximately $400,000,000 consistent with what we saw this quarter. To wrap up, these results reflect strength broadly across our businesses. We remain well positioned to benefit from client flows and a healthy economy as we serve our clients and communities, and we look forward to continuing to grow our business. With that, operator, you can open up the line to Q and A.
Our first question comes from John McDonald with Bernstein.
Hi, good morning, Mary Anne. So a question about any early signs of deposit beta and elasticity. I guess on the consumer side in your retail banking area, are you seeing customers increasingly ask for higher rates in their deposit accounts or any activity where they're moving from kind of checking to savings and kind of early signs of pressure on deposit pricing?
So in the retail space, the answer is no, not really. And to be completely honest, we've been pretty consistent that we would not really have expected there to be much in terms of deposit reprice at absolute level of rates that are still quite low. And so with IOER at 100 points, we're still in that sort of realm of the atmosphere. And so we would expect that to start happening a couple of rate hikes from here maybe. We'll have to wait and see.
We've obviously never really been through exactly this before. On the other side of the equation in the wholesale space, we are in the process of seeing reprice happen.
Got it. Okay. And in terms of customers, they're not really asking yet or behaving in a way that they're looking price sensitive. You're not seeing any early signs of it yet? No.
Okay. Thank you.
Your next question comes from Glenn Schorr with Evercore ISI.
Hi. Thanks very much. Hello. I wanted to maybe get out in front of what could be some brewing issues in retail And the perspective I'm looking for is you have plenty of gross exposure to retail and retail related. However, there seems to be plenty of collateral, and you're typically at the top of the capital structure too.
So can you talk about both direct exposure in some of the problem retail areas and the related exposure in like commercial real estate on the mall side?
Yes. So I don't have all those numbers directly in front of me. I know that in the commercial bank, our exposure to malls is really pretty modest. It's around about sort of $3,000,000,000 in the commercial real estate space. And I will tell you that while there obviously is a lot of discussion around retail and with some merit, it's very case by case, location by location specific.
And I kind of liken the discussions a lot to discussions we have around our bricks and mortar banking businesses, which is consumer the way consumers engage with retailers is changing. It doesn't mean they will stop engaging with retailers. And so it will be very specific with respect to location and tenants. And it doesn't necessarily mean that retail is going to be in as much potential trouble as I think people are talking about. So we remain cautiously watching it, but also cautiously optimistic that it's not it's a bit overblown.
And you should assume that we've looked at not just direct retailer, retail related real estate and all the vendors to any potentially colored retailers. When you put it all together, it's a little bit like there'll be something there, but it's nothing that would be dramatic
for this company.
Is the main reason your position in the stack, meaning I noticed you have a lot of collateral against your exposure. Like I said, you tend to be at the top of the stack. Is that the main issue? I remember doing this with you guys 2 years ago in oil, while oil is dropping and it turns out you barely came out with a few cuts and bruises. There seems to be more collateral here, but I don't know if
the word to Are you talking about real estate related to retail or are
you talking about retailers? I'm talking both because you do have 100 of 1,000,000,000 of direct retail exposure plus the commercial real estate exposed to it? I'm just thinking
No, no, you're way out of line. I mean, retail exposure, we're very careful. The retail business has always been violent and volatile. You can look back to our history and half of them are gone after 10 years, that's a normal course. So we're usually senior, we're very careful with stuff like that.
And then you go to real estate, okay, most of our real estate has nothing to do with retail. So we do have some shopping centers, malls and buildings and stuff like that, but those are generally high on the stack, well secured, not relying on single retailers, etcetera.
Okay. I was just going to take your time.
It will be like oil and gas for us. It won't be a big deal.
Your next question comes from Gerard Cassidy with RBC.
Thank you. Good morning, Mary Anne. Can you give us some color on the credit card area in terms of I know you upped your credit card losses early in the year in Investor Day and in the fall of last year. What's your guys' outlook for the credit losses in the credit card portfolio? Where would you tolerate it to?
And at what point do you really change the underwriting standards if you need to?
Yes. So, look, I know that so one of the things that we want to remind everybody before we talk about the trend is that the credit card losses are still at absolutely very, very low levels. And notwithstanding whatever we would have done or have done or continue to do with our credit box, we would ultimately have expected them to normalize to higher rates regardless.
Agreed.
So and then obviously, the Q1 hasn't seen that.
The prices through the cycle stuff.
Yes, exactly. And obviously, Q3 has some seasonality. So I would just start by saying that the charge off rates you're seeing are completely in line with our expectations and guidance that we gave you at Investor Day, both in terms of 20 percent percent 3.25 percent for all the reasons that we articulated. A combination of positive credit expansion that took place over the last couple of years. And the performance of those newer vintages is in line with our expectations and with high risk adjusted margins.
So it's not really about tolerating the charge offs as long as we're getting paid properly for the risk, which is the case. And obviously, as we see those charge off rates both normalize and reflect those new advantages, they will go up modestly over time. And we expanded our credit in a targeted way, but it wasn't a significant expansion. And we will respond in our credit and risk appetite to whatever we're seeing in the environment, but it won't necessarily be predicated by charter rates as long as we can
go through it.
Got you. And as a follow-up, obviously, you had very strong investment banking on the FICC trading side, very strong capital market numbers. Are you guys seeing further evidence of taking more market share from your competitors in any of the product lines, whether it's investment banking or FICC trading or Equity Trading, etcetera?
So I would say if you look back over 2016 and even 2015 2016, it's true and clear that we gained share not just in fixed income reasonable share, not just in fixed tax income, but also in equities. And our business performed well last year. And I would suggest to you that we will defend that share, but the competition is back and healthy. And you can't expect us to continue to gain share at those kinds of levels. We want to defend it, but it's a healthy competitive market right now.
Well, I would say not really.
Thank you.
Your next question comes from Betsy Graseck with Morgan Stanley. Hey, good morning.
Hi.
Couple of questions, one on card. How large are you willing to be in card? I think on various metrics, you're between 15% 22% depending on if you're looking at things like merchant acquiring or the balances in card in general as a percentage of total outstandings in the country?
We have a way to go before we're concerned. But I
think I'm
asking because in the last cycle, you were really nimble. And do you still feel that you can be nimble at this market share?
I mean, for merchant processing, there's a lot of share you can gain. Yes. And that is not even close because either products and services and the change in technology. And I think we're way away in credit card when you'd say, well, that's too big for JPMorgan Chase. There is a point where it's going to be a good question, but it's not even remotely close to this one.
And I would also say that card continues to be a 50 competitive space. So we will continue to try and provide our customers with significant value and have deep engaged relationships. But I don't think you're going to see material shifts in share in the short term.
And we also look strategically at credit card, debit card, online bill pay, P2P is all one big thing to do a great job for the client.
And then when you're thinking about the credit box, I know a while back you mentioned, okay, we widened the box to $680,000,000 Is there any interest in widening it further?
Not specifically at this point. I think we're very happy with the performance of the portfolio with the growth rates we're getting. You saw that our core card loans were up 9% year on year. We're getting a lot of NII benefit from that. So I think we're still pretty well positioned at this point.
So loan growth should probably stay in line with where it is or slow down. Is that how we should be thinking about it?
Yes, I would say loan growth should be in the mid to higher single digits.
Okay. Okay, thanks.
Your next question is from Jim Mitchell with Buckingham Research.
Hey, good morning. I'm going to follow-up on the NII question. I think your implied guidance of $4,500,000,000 higher than 2016 is now about $500,000,000 from where you were at the Investor Day. Is that the lower deposit beta experience? What's driving, I guess, the modest increase?
And then just as a follow-up on that in terms of, if we do the implied curve, I think there's about one more rate hike in June. If we were to get another one, realize the dot plot to get another one in September, would that be a material increase in that expectation or just incremental? Or just how do we think about that?
So look, I would obviously, when we give you guidance, we give you reasonably rounded numbers. So actually, the impact of current implied is a bit more than $500,000,000 more than it was in Investor Day. But in the law of big numbers, that's a pretty reasonable amount. Yes, there is an element, of course, as we talked about in the wholesale space, where we are seeing reprice happen and it does reflect our estimates of what we expect to see over the course of the year in cumulative deposit basis. And with respect to if there was and you know that the implied curve has priced in 1.5 more hikes.
So it's obviously March is earlier, so longer there's a little bit more rate benefit, but it's sort of in line with our expectations. And if we had another rate hike, it would likely be later in the year and ultimately have a relatively modest impact on this year, but obviously be important going forward.
Okay. So anything in September would be sort of incremental?
You should be able to extrapolate those numbers in your own.
Yes. Okay. Thank you.
Your next question is from Ken Usdin with Jefferies.
Hi, good morning. Marion, you noted the obvious slowdown we've seen in C and I and Jamie in the press release you talk about consumers and businesses being healthy and the pro growth initiatives. Since the Analyst Day, we obviously had Obamacare not go through and then there's been some doubts on tax reform. So just wondering, can you help us understand just where you're seeing that slowdown in C and I and how it where are we in terms of that confidence turning into real results? And how much is just the wait and see versus where the economy actually is?
So and I think it's important to put that into context. I mean, we did have 8% growth year on year in C and I. We're just saying sequentially things are a bit quieter and there's a whole bunch of reasons that could be driving that. And importantly, you mentioned it, when we're in dialogue with our clients, they are optimistic and they are thinking about growing their businesses and hiring and all of those things are true. And so putting aside those that have access to capital markets for a variety of reasons in lieu of bank loans, it's completely understandable that optimism would lead action.
And so as to what that lag will look like, we'll wait and see. But fundamentally, a pro growth series of policies will be constructed to the economy, to our clients, and ultimately will end up in them hiring, spending and they already are. And we'll see that translate into loan growth, whether that's in the second half of this year, we'll see.
I would just add that I wouldn't overreact to the short term thing about loan growth because there's so many things that affected. And you can go through the episodic part. If you look at CIB, I don't look at loan growth at all, because companies have a choice between loans and deals and or bonds, something like that. Look, your credit card looks okay. Mortgage is obviously affected by interest rates.
Auto is obviously affected by auto sales and middle market was okay. It was like slow, but it was okay. So I wouldn't overreact to that. And the second thing is, you should perfect you all should expect as a given that when you have a new President and they get going that the 9 months after the 100 days is going to be a sausage making period. There will be ups and downs, wins and loss, stuff like that, okay.
But it is a pro growth agenda, tax, infrastructure, regulatory reform and that is a good thing all things being equal and we think that if that took place it would be helpful to all Americans. But to not to expect it to be smooth sailing that would just be silly.
Yes, fair points. Fair points. And just one quick follow-up just on the deal making side. M and A slowed a little bit, but I'm assuming it's the same point, Jamie, just in terms of just pipelines and expectations that corporates have about transacting. Is that fit into that same vein?
Or is there anything different in terms of just companies getting strategics getting more aggressive in terms of acquiring and adding to their businesses?
It looks fine and of course it's episodic.
Okay. And I would also say that while of course people's dialogues include a degree of discussion around regulatory reform and tax reform and the like. It isn't stopping the strategic dialogue and it isn't stopping people from or boards from considering strategic deals, partly in partly because of what you said, partly because there is a recognition that these things will take some time to ultimately get finalized and that they don't want to put their strategic agenda on hold. So in some ways, you get both sides of the equation. People aren't going to wait indefinitely to get certainty on issues when there are good strategic deals that can be done and that's part of the dialogue.
We're not saying it has no impact, but it's still quite healthy.
Understood. Thank you very much.
Your next question is from Marty Mosby with Finance Sparks.
Thanks for taking my question. I wanted to focus on deposit pricing in a sense that before the Fed started moving up, deposit rates and the Fed funds rate were right on top of each other around 15 basis points. Now the effective Fed funds rate is around 90 basis points and deposit costs are only 20. So that's 70 basis points on your $1,000,000,000,000 of deposits basically gives you about $7,000,000,000 worth of incremental revenue that's needed to cover the cost of branches and other things for those deposit franchise. At what point do you hit a targeted kind of spread and where is that where you begin to at least breakeven on those costs versus revenues?
Can I just answer that? Marion has given you guys some very specific guidance on interest rates. When interest rates got to 0, remember that when it floored, those no one expected for 25 basis points or 50 basis points initially to be paid out as the cost. Marion also gave you at Investor Day a very forward looking view of that where it kind of normalizes, Okay. And it's different for every different type of deposit.
The wholesale deposits, commercial credit deposits, company deposits, treasury deposits, they're all different. So it's hard to summarize it all. But at one point, you're going to go back to kind of a normalized spread and it's very much as retail, I would say that's like 3%.
Maybe a little less.
Maybe a little less.
And I would also just say, I am glad that you brought one point because it's something that I like a point that I'd like to make, which is when people think about the benefit we get from NII and rising rates, there's an element of people making it sound very passive. Yes, you're correct. We did build those branches. We acquired those customers. We built the products.
We invested in the customer service to be able to enjoy the industry leading deposit growth that we're having. But I would also make and so as margins improve, then we will enjoy the benefit of that. And to your point, we invested to be able to. But I will say that if you we look at the performance of our branches every single week, month individually put together by market and the very, very, very, very, very vast majority of them, meaning that only a handful do not, are profitable in their own rights today at these spreads on a marginal basis. So the branches are doing very well.
There's another number we give you all you should look at. We give you what we expect normalized margins and normalized returns to be in consumer, car and all these businesses. Those numbers include normalized credit card charge offs like the credit card, remember we now use this for a quarter, something like that. And in retail, going back to normal spreads. That's what those numbers include.
And of course, it all bounced around, but we kind of look at business, we priced for normalized results. We don't price for over earning or under earning and have too much credit, too little and that's kind of how we run the business.
The follow-up to that is really what I'm getting at is last year everybody was assuming through the cycle kind of betas and we were saying that they were going to be much lower early on. We do think once you get to a certain target usually about 100 basis points of spread, you start to see a little bit more pricing pressure starting to kick in, just like you were saying, Jamie, in the sense of different products.
We've built that into every number we've given you. We've always told you that the beta has gamma.
I can point you to a presentation in May of 2014 where we showed exactly what we expected the convexity of deposit reprice to look like based upon historical moves. And so what we have actually seen to date looks incredibly similar in terms of realized reprices. You're absolutely right. I will tell you though that history may not be a precise predictor of the future because we've never really been in this exact position before. And other things play into the equation, including the fact that the industry, but us specifically, have significantly invested in other customer service products, items like digital and the like, which will change the dynamic one way or another on reprice.
So you're right, historically, one 100 basis points, 150 basis points you start to see some movement, we'll see.
And the last component of this is the balances continue to grow. So as long as we're seeing double digit kind of sequential annualized and year over year growth in deposits, that provides a little bit of cover in a sense of what you're talking about as well. We may see a little bit more lag just because we're still continuing to get deposit growth.
Yes, but I feel cautious there too. I mean, we feel great about the deposit growth and the account growth. So you have new accounts who are growing and existing accounts are growing. Remember, there you also in the history, you got to be very careful because if rates were higher, people do different things with their money like CDs. And then how they view the stock market, that money and some of that protection goes to market.
So we're always conscious of the fact that those flows kind of ebb and flow and we can't history is only a somewhat of a guide to that.
Thanks.
Your next question comes from Erika Najarian with Bank of America.
Hi, good morning. I had a few questions on deregulation. Jamie, in your shareholder letter, you dedicated a lot of time on mortgage and opening that up for banks to originate more of the percentage of mortgage in the United States. As we look forward, do we need legislative change for the banks to gain more market share from non banks and mortgage like clarity in QM or the CSPB or would changes in supervisory attitudes be enough for that to shift on the mortgage side?
So I picked that category out precisely because it didn't take legislation and it was very important. And my point isn't about banks versus non banks. My point is about the United States of America and what these things did to the availability of credit to certain class of people. I was very specific. We actually published a research report in mortgage land, which you can go get by Mr.
Joseph that really breaks it out. But because of the cost of servicing delinquent accounts, dollars 2,000 a year, because of the additional cost of origination, because of the potential litigation, because of the lack of clarity around the QM, because of the fraud claims that the consumers both paying more and the credit box is wider than it otherwise be. And that we actually believe that credit box is hurting first time buyers, younger, self employed, prior defaults. Someone who went defaulted past or deserved, but we always say deserves a second chance. So that policy has restricted that.
And the shocking thing to me is the absolute size of that, which we think could be $300,000,000,000 to $500,000,000,000 a year. That one thing alone could have added, in particular of a secular stagnation, could have added 0.3% or 0.4% a year to growth. So if you change it 5 years ago, you're talking about a lot of growth, a lot of jobs, a lot of new homes, a lot of young families into homes and a very positive care. That's taking a lot of credit risk. It's not it was about America, where I could care less what the banks and the non banks do it.
That my point about that was how it's hurting growth of America and hurting that class of citizen. And I really think some of you should be writing about that more because that's how important that is. That was one example.
That's clear. Thank you. And the follow-up to that is, a couple a week ago or so, there was a lot of talk from Washington about the current administration potentially supporting Glass Steagall. And of course, a lot of your investors called in concerned. And Jamie and Mary Anne, 2 part question, wondering if that's a real worry for JPMorgan shareholders?
And second, Mary Anne, maybe in an Investor Day 2 years ago, you mentioned that the capital and the cost that a breakup would save was not that much. And I'm wondering if you could also, if you remember, refresh us on that analysis.
Okay. So I would just start by saying we've been consistent that our operating model, including the diversification of our businesses, has been and was a source of strength, not just for us, but also for the financial markets during the crisis. And there is strength in the way the company operates that can't be discounted. I would also say that the commentary feels unnecessary given where the industry stands on capital liquidity and regulatory reform broadly. And I would just point, as I'm sure you've all read, to most recently Governor Tarullo making comments about this.
But historically, other thought leaders in the financial stability space talking about it. And I would further say that it doesn't feel, for reasons that you just articulated in terms of structural reform or structural change in the model of banks, so that would be consistent with a level playing field and pro growth agenda in the U. S. So that's kind of how we feel about it. I can't give you specific reasons to not continue to monitor the situation, but it doesn't feel consistent with the rest of the objectives of the administration.
And with respect to Investo A couple of years ago, lots of things have fundamentally changed since then, but the ultimate conclusion hasn't, which is that we believe that there is significantly more value for our shareholders. And as I said before, for the economy with this company the way it is today than in some other form. Thank you.
Your next question comes from Matt O'Connor with Deutsche Bank.
Good morning.
Good
morning. We've obviously seen quite a
bit of flattening of the yield curve and it could reverse pretty quickly if there is progress made on the pro growth agenda. But just talk about at what point does the flatter yield curve start to impact NIM? And I guess I'm thinking specifically if we get a couple more hikes on the short end, but the long end either doesn't move or the long end comes down more. How do we think about the break point in terms of NIM benefit of the short end being offset by the flatter yield curve?
Look, I was just first of all, we don't overthink the shape of the curve or the path of normalization in any one period. We think about the reason for the actions. And ultimately, as long as the economy is growing, you'll see both of the spot and the long end of rates ultimately go up. And even though I know that it's lower when we've broken down broken below a little bit at the lower bound, it's been in the kind of 230, 260 range for a while. So we're still within largely speaking within the range.
And our central case is that we're going to see the 10 year higher by the end of the year. And if you look at our earnings and risk disclosures, we're much more sensitive to as a pure NII NIM matter to the front end of rates. And so not to say it would not have an impact, but it would take a while for that to have an impact that would meaningfully offset any of the benefit of higher short end rates.
Okay. And then separately, as we think about central banks winding down some of the QE and the Fed actually shrinking their holdings, How do you think about that impacting your businesses? And obviously, there might be a rate impact. I think you talked about your rate expectations quite a bit, but just how do you think it might impact, say, the markets business with potentially more assets kind of out there to be purchased and sold?
Well, I mean, ultimately, sort of any actions by Central Bank, any change in the shape of the yield curve, anything that is presenting an opportunity for clients to transact and trade is an opportunity for our businesses. So as long as it happens in a reasonably rational fashion and there are no significant events, it should create an opportunity for clients and an opportunity therefore for us.
Always keep in mind, the why they do something probably is more important than the what they do. So if they are doing it because the American economy is getting stronger, that is more important than the direct effect of adding letting securities mature, etcetera.
Yes. I guess there's two thoughts on there's the impact of QE on the economy and then the impact of QE on some of the market's businesses that maybe there's been a crowding out from all the QE. So as they unwind it, it could actually boost activity levels?
It could, it could. I just wouldn't put that in your models.
Okay. Thanks for taking my questions.
Thanks.
Your next question is from Eric Wasserstrom with Guggenheim.
Thank you for taking my question. Just a couple of questions on consumer. We've talked a lot about card losses, but one thing that seems to be a little bit unusual is that a lot of the commentary across many of the card issuers is for the expectations of losses to be higher in the first half than the second half. And I just want to get your perspective on the likelihood of that trajectory.
So well, I mean so in terms of rates, obviously, the loan balances are seasonally low in the Q1 and charge off rates are higher in the Q1. But overall, we're not expecting to see abnormal patterns in our charge offs.
Got it. Thank you. And then just to follow-up on auto. Your release alluded a little bit to the impact of declining residual values, which has been, of course, a focus for the past couple of years. Was there anything unusual in your view about the pace of decline in resid values in this Q1?
Because it happens every 5 or 10 years. So why would anyone be surprised? And we've always been very conscious of this and very careful that how we do leases, we do them conservatively. We've got property But we only do
this after the strategic manufacturing.
And which is going to the strategic manufacturers and we properly account for it and we have loss mitigation that's pretty important. So no, we're not surprised it's going to happen every now and then.
And but in terms of the pace of residual values from here, similar or different in your view?
I have no idea. Okay.
All right. Thanks very much.
Thank you.
Your next question comes from Matthew Burnell with Wells Fargo Securities.
Hi, Matt.
Good morning. Thanks for taking my question. Mary Anne, let me start with a question on the net revenue rate in the card services business. That's been relatively steady, a little over 10% for the last couple of quarters. I presume given your outlook that that would stay pretty close to the 10.1% level that you've reported for the last couple of quarters or are you thinking about a change there as you slightly change your marketing strategy?
So it's actually got somewhat less to do with our marketing strategy than it has to do with the fantastic success we've had with the new products, particularly Sapphire Reserve in the Q4 and in the Q1 of this year. So but fundamentally, if you go back, I think, to a conference that Kevin Waters spoke at last year sometime in, I think, September, he said, look, we're going to see the revenue rate be lower about 10 and some for the couple of quarters while we acquire all of these accounts. Once we've hit a pace, we should see it middle out in 10.5% for the full year of 2017. So the Q1 lower and subsequent quarters continuing to now start rising back up towards the 11.25%, which was our ultimate run rate target. And that's still fundamentally what we're expecting to see, which is we're at a assuming that our expectations for what we're going to see in account growth over the future period continues to hold, we would expect to see an increase from here in the Q2.
The overall year to be sort of in ish, the mid 10s and the year 11 ish and then go back to 11.25 over the course of the next couple of
years. Okay.
Thank you. Jamie, maybe a
question We have a
great new product. Yes.
Fair enough. Jamie, a question for you, just another one on the regulatory landscape. There are a number of open positions inside the beltway at a number of the primary bank regulators. And I'm just curious in terms pardon me?
I said I'm not interested. I'm kidding.
Well, somebody should fill those spots if it's not you. And I'm just curious what your thinking is of the timing of those appointments and how quickly those could get filled and what benefit that might provide to the banking industry?
Look, I've been I think that Gary Cohn and Steven Mnuchin are doing the right thing. They want to find the right people's jobs. They're talking I've gathered, they're talking to lots of people. But even after they announce it, remember they need to be vetted and confirmed that Scott that normally can take 90 days. So, the sooner the better, but I think getting the right people is equally important.
Okay. Thanks very much.
And we have no other questions in queue at this time.
Okay. So just Glenn, I don't know if you're still on. I got a couple of numbers for you in terms of retail exposure. Our direct retail exposure in the wholesale space is about $20,000,000,000 70 more than 70 percent investment grade and more than 60% secured. And in terms of commercial real estate, about $11,000,000,000 largely ABL, pick the right name, structural protection, all the things you talked about.
So not that it's nothing, but it's in the context of our overall wholesale lending portfolio. It's not as concentrated, I think, as perhaps you were implying. So if you want to call Investor Relations and let us know what you were looking at, we can try and reconcile those numbers for you. Okay. Thank you, everyone.