Please stand by. We are about to begin. 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, Marianne Lake. Ms. Lake, please go ahead.
Thanks, 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 one, we're off to a good start this year, with net income of $6.4 billion, EPS of $1.65, and a return on tangible common equity of 13%, on revenue of $25.6 billion, 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%.
We achieved a number of records across our businesses, most notably net income and IB fees for a first quarter in the CIB, net income and revenue for the Commercial Bank, and assets under management and banking balances in Asset & 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 million, 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 million. The benefit relates to the difference in stock price between vesting date and grant date for our employee equity awards.
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, Asset & Wealth Management. Second is a write-down of our student loan portfolio of approximately $160 million after tax, as we move these loans to held for sale and explore alternatives for that portfolio. Last is firm-wide legal expense of around $140 million 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 two and some more detail about the first quarter. Revenue of $25.6 billion was up $1.5 billion 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, NIR reflected higher CIB revenues, partially offset by card acquisition costs and lower MSR risk management. Adjusted expense of $14.8 billion 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 million of the year-on-year expense change. Adjusted for the student lending write-down I just mentioned, credit costs of $1.1 billion would be down approximately $700 million 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. Switching to balance sheet and capital on page three.
We ended the quarter with both standardized and advanced fully phased in CET1 of 12.4%, in line with our expectations, overall driven by net capital generation. We continue to manage our balance sheet with discipline. Total assets returned to above $2.5 trillion, 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 year-end, the firm remains compliant with all liquidity requirements. We continue to grow tangible book value per share while returning $4.6 billion of net capital to shareholders in the first quarter, which included $2.8 billion of net repurchases and common dividends of $0.50 a share. This $4.6 billion compares to $3.8 billion returned last quarter.
As you know, we've recently submitted the 2017 CCAR capital plan to the Federal Reserve, as you would expect, we have no feedback to give you for now. Moving on to page four, the Consumer and Community Bank. CCB generated $2 billion 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 cards 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 billion 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. 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 $6.4 billion 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 million write-down of our student loan portfolio, against which we released $250 million of reserves.
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 & Investment Bank. CIB delivered a strong result with a reported ROE of 18% and net income of $3.2 billion. Remember, a significant portion of the tax benefit on the stock update is reflected in these results. Revenue of $9.5 billion was up 17% year-over-year, and IB fees of $1.8 billion were up 37%, partly due to a weak first quarter 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. Remember, the first quarter of 2016 was particularly strong in M&A and weak in DCM for us, and this quarter, share normalized.
Overall, we gained share and ranked number 1 in global IB fees 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 million was up 11% year-over-year, driven by higher rates and operating deposit growth. Lending revenue of $389 million was up 29% year-over-year on higher gains from securities received from restructuring. Moving on to Markets & Investor Services. Markets revenue of $5.8 billion 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 and volatility, but also clients responding more to market themes, including European elections and, to a lesser degree, a stronger US 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-over-year in somewhat quiet markets broadly, with corporate derivatives and prime being brighter spots. Security Services revenue was $916 million, in line with guidance. Finally, expense of $5.1 billion 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-over-year due to higher deposit NII and continued loan growth, as well as on strong IB revenues up 34%, making this the third consecutive quarter of IB revenues of over $600 million. Expense of $825 million was impacted by a $29 million impairment on leased assets. Excluding this, we saw expense increase slightly above 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 billion were up 12% over the prior year. Consistent with the industry broadly, we have seen a slowdown in C&I growth, with our loan balances remaining relatively flat sequentially, although up 8% year-over-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. 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. 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 two basis points, reflecting continued stability in both our C&I and CRE portfolios. Overall, a net release of loan loss reserves driven by energy. Leaving the commercial bank and moving on to Asset and Wealth Management on page seven. Asset and Wealth Management reported net income of $385 million, with pre-tax margin and ROE each of 16%. Revenue of $3.1 billion was up 4% year-over-year, driven primarily by higher market levels and strong banking results on higher deposit NII. Recall that last year's first quarter included a one-time, $150 million gain on the sale of an asset. Expense of $2.6 billion was up 24% year-over-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 billion, with strength in fixed income and multi-asset being partially offset by outflows in equity. Assets under management of $1.8 trillion and overall client assets of $2.5 trillion were both up 10% year-over-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 eight and Corporate. Corporate generated $35 million 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 nine 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 billion. Based on the implied, NII would be up by around $4.5 billion. Of course, the Fed dots would imply the possibility of three rate hikes this year, which is not fully priced in. Expect second quarter NII to be up sequentially approximately $400 million, 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&A. Operator?
Our first question comes from John McDonald with Bernstein.
Hi, good morning, Marianne. I just had 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 checking to savings and early signs of pressure on deposit pricing?
In the retail space, the answer is no, not really. 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 levels of rates that are still quite low. With IOER at 100 basis points, we're still in that realm of the atmosphere. We would expect that to start happening a couple 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. 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, Glenn.
Hi. Thank you very much. Hello. I wanted to maybe get out in front of what could be some brewing issues in retail land. The perspective that 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. Can you talk about both direct exposure in some of the problem retail areas and the related exposure in commercial real estate on the mall side?
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 the sort of $3 billion in the commercial real estate space. 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. I kind of liken the discussions a lot to discussions we have around our bricks and mortar banking businesses, which is the way consumers engage with retailers is changing. It doesn't mean they will stop engaging with retailers. 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.
Yeah.
We remain cautiously watching it, but also cautiously optimistic that it's a bit overblown.
You should assume that we've looked at not just direct retailer or retail-related real estate and all the vendors to any potentially troubled retailers.
Correct.
When you put it all together, it's a little bit like there'll be something there, but it's nothing that would be thematic for the company.
Yeah.
Is the main reason your position in the stack, meaning I notice you have a lot of collateral against your exposure, and 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 was dropping, and it turned out you barely came out with a few cuts and bruises. This seems to be more collateral here, but I want to put words in your mouth.
Are you talking about real estate related to retail, or are you talking about retailers?
I am talking both because you do have hundreds of billions of direct retail exposure plus the commercial real estate exposed to it.
No, you're way out of line. I mean, direct retail exposure, we're very careful. The retail business has always been violent and volatile. You can look back throughout history, and half of them are gone after 10 years. That is a normal course. We're usually senior. We're very careful, stuff like that. You go to real estate. Most of our real estate has nothing to do with retail. We do have some shopping centers and malls and buildings and stuff like that, but those are generally high on the stack, well-secured, not relying on single retailers, et cetera.
Okay. I was just looking to take your temperature.
It will be like oil and gas for us. It won't be a big deal.
Cool. Thanks.
Your next question comes from Gerard Cassidy with RBC.
Thank you. Good morning, Marianne. Can you give us some color on the credit card area in terms of, I know you upped your credit card losses earlier in the year in Investor Day in the fall of last year. What is 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?
Yeah. 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 low levels. 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.
Obviously the first quarter hasn't seen that.
Through the cycle stuff.
Yeah. Exactly. Obviously, first quarter has some seasonality. I would just start by saying that the charge-off rates we're seeing are completely in line with our expectations and guidance that we gave you at Investor Day, both in terms of 2017 being below 3% and over the medium term being between 3% and 3.25% for all the reasons that we articulated. A combination of targeted 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. It's not really about tolerating the charge-offs as long as we're getting paid properly for the risk, which is the case. Obviously, as we see those charge-off rates both normalize and reflect those newer vintages, they will go up modestly over time.
We expanded our credit in a targeted way, but it wasn't a significant expansion. We will respond in our credit and risk appetite to whatever we're seeing in the environment, but it won't necessarily be dictated by charge-off rates as long as we.
Very good.
Get paid for the risk.
Got you. As a follow-up, obviously you had very strong Investment Banking on the FICC trading side, very strong Capital Markets 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, et cetera?
I would say if you look back over 2016 and even 2015 and 2016, it's true and clear that we gained share, not just in Fixed Income, reasonable share, not just in Fixed Income, but also in Equities. Our business performed well last year. 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. It's a healthy, competitive market right now. I would say not really.
Thank you.
Your next question comes from Betsy Graseck with Morgan Stanley.
Hey, good morning.
Hi.
A couple questions, one on card. How large are you willing to be in card? I think on various metrics, you're between 15% and 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 ways to go before we're concerned
Just asking because in the last cycle you were really nimble, and do you still feel that you can be nimble at this market share?
For merchant processing, there's a lot of share you can gain.
Yes.
Okay? It's not even close because of products and services and the change in technology. I think we're way away in credit card from you 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.
I would also say that card continues to be a fiercely competitive space. We will continue to try and provide our customers with significant value and have deep engaged relationships. I don't think you're going to see material shifts in share in the short term.
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 clients.
When you're thinking about the credit box, I know a while back you mentioned, okay, we widened the box to 680. 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. I think we feel pretty well positioned at this point.
Loan growth should probably stay in line with where it is or slow down. Is that how we should be thinking about it?
Yeah, I would say loan growth should be in the mid to higher single digits.
Okay. Okay, thanks.
Your next question is from James Mitchell with Buckingham Research.
Hey, good morning. I'm going to follow up on the NII question. I think your implied guidance of $4.5 billion higher than 2016 is now about $500 million from where you were at the Investor Day. Is that the lower deposit beta experience? What's driving, I guess, the modest increase? Then just as a follow-up on that, in terms of if we do the implied curve, I think has 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?
Look, obviously, when we give you guidance, we give you sort of reasonably rounded numbers. Actually the impact of current implies is a bit more than $500 million more than it was in Investor Day. In the lore of big numbers, that's a pretty reasonable amount. 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 betas. With respect to if there was-- and you know that the implied curve has priced in one and a half more hikes. It's obviously marches earlier for longer. There's a little bit more rate benefit, but it's sort of in line with our expectations.
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. Anything in September would be sort of incremental.
You should be able to extrapolate those numbers on your own.
Yep. Okay. Thank you.
Your next question is from Ken Usdin with Jefferies.
Hi, good morning. Marianne, you noted the obvious slowdown we've seen in C&I. 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, then there's been some doubts on tax reform. Just wondering, can you help us understand just where you're seeing that slowdown in C&I and 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?
I mean, we do have 8% growth year-on-year in C&I. We're just saying sequentially things are a bit quieter and there's a whole bunch of reasons that could be driving that. 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. Putting aside those that have accessed capital markets for a variety of reasons in lieu of bank loans, it's completely understandable that optimism would lead action. As to what that lag will look like, we'll all wait and see. Fundamentally, a pro-growth series of policies will be constructive to the economy, to our clients, and ultimately will end up in them hiring, spending, and they already are.
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 affect it. You can go through the episodic part. If you look at CIB, I wouldn't look at loan growth at all because companies have a choice of doing loans and deals or bonds, something like that. Credit card looks okay. Mortgage is obviously affected by interest rates. Autos is obviously affected by auto sales. Middle market was okay. It was slow, but it was okay. I wouldn't overreact to that. The second thing is you all should expect as a given that when you have a new president and they get going, that the nine months after the 100 days is going to be a sausage making period. There will be ups and downs, wins and losses, stuff like that. Okay.
It is a pro-growth agenda, tax, infrastructure.
Thank you
regulatory reform. That is a good thing, all things being equal, and we think if that took place, it would help all Americans. To not to expect it to be smooth sailing, that would just be silly.
Yeah, fair points. Just one quick follow-up. Just on the deal-making side, M&A has 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? Is there anything different in terms of just strategics getting more aggressive in terms of acquiring and adding to their businesses?
It looks fine, and of course it's episodic.
Yeah. Okay, 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 or boards from considering strategic deals, 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. 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. That's part of the dialogue. Not to say it has no impact, but it's still quite healthy.
Understood. Thank you very much.
Your next question is from Marty Mosby with Vining Sparks.
Thanks for taking my question. I want to focus on deposit pricing in the 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's around 90 basis points and deposit costs are only 20. That 70 basis points on your $1 trillion of deposits basically gives you about $7 billion 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 break even on those costs versus revenues?
I tell you the answer to that. Marianne given you guys some very specific guidance on interest rates. When interest rates got to zero, remember that when it floored, no one expected the first 25 or 50 basis points would initially be paid out. This is a cost. Marianne also gave you at Investor Day, a very forward-looking view of that where it kind of normalizes. Okay? It's different for every different type of deposit. Wholesale deposits, commercial credit deposits, custody deposits, treasury deposits, they're all different. 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 no much as retail. I would say that that's like 3%.
Yeah, maybe a little less.
Maybe a little less.
I would also just say, I am glad that you brought up one point because it's a point that I 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. As margins improve, we will obviously enjoy the benefit of that, and to your point, we invested to be able to.
I will say that if we look at the performance of our branches every single week, month, individually put together by market, the very vast majority of them, meaning that only a handful do not, are profitable in their own right today at these spreads on a marginal basis. 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-
Yeah
Normalized returns to be in consumer, card, and all these businesses. Those numbers include normalized credit card charge-offs. Like in credit card, the number we now use is four and a quarter.
Yes.
Something like that. In retail, going back to normal spreads. That's what those numbers include. Of course, they all bounce around because we kind of look at business, we price for normalized results. We don't price for between overearning or underearning and too much credit or too little. 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 built that into every number we've given you.
That's right.
We've always told you that the beta has gamma.
Yeah. 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. 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. 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. You're right. Historically, 100 to 150 basis points, you start to see some movement. We'll see.
The last component of this is the balances continue to grow. 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 the 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, I'd be a little cautious there too. We feel great about the deposit growth and the account growth. You have new accounts who are growing and existing accounts are growing. Remember there, you also, 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, some of that potentially goes to the market. We're always conscious of the fact that those flows kind of ebb and flow, and history is only 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 in mortgage, like clarity in QM or the CFPB, or would changes in supervisory attitudes be enough for that to shift on the mortgage side?
I picked that category out precisely because it didn't take legislation, and it was very important. 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. Jozoff that really breaks it out. Because of the cost of servicing delinquent accounts, $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 False Claims Act, that the consumers both paying more and the credit box is wider than it otherwise be. That we actually believe that credit box is hurting first-time buyers, younger, self-employed, prior defaults.
Someone who went into default in the past who we always say deserves a second chance. That policy has restricted that. The shocking thing to me is the absolute size of that, which we think could be $300 billion-$500 billion a year. That one thing alone could have added, because of our secular stagnation, could have added 0.3% or 0.4% a year to growth. If you change it five 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 thing. Without taking a lot of extra credit risk. It was about America is why we wrote it. I could care less what the banks, the non-banks do it. My feeling about that was how it's hurting growth of America and hurting that class of citizen.
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. The follow-up to that is, a week ago or so, there was a lot of talk from Washington about the current administration potentially supporting Glass-Steagall. Of course, a lot of your investors called in concerned. Jamie and Marianne, two-part question. I'm wondering if that's a real worry for JPMorgan shareholders. Second, Marianne, maybe in an Investor Day two years ago, you mentioned that the capital and the cost that a breakup would save was not that much. I'm wondering if you could also, if you remember, refresh us on that analysis.
Okay. 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. 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. 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.
I would further say that it doesn't feel, for reasons that you've articulated in terms of a structural reform or a structural change in the model of banks, that would be consistent with a level playing field and pro-growth agenda in the U.S. 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. With respect to Investor Day a couple of years ago, lots of things have fundamentally changed since then. The ultimate conclusion hasn't, which is that we believe that there's significantly more value for 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.
Morning.
We've obviously seen quite a bit of flattening of the yield curve. It could reverse pretty quickly if there is progress made on the pro-growth agenda. Just talk about at what point does the flatter yield curve start to impact NIM? 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?
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. Ultimately, as long as the economy is growing, you'll see both of the front end, the long end of rates ultimately go up. Even though I know that it's lower and we've broken below a little bit of the lower bound, it's been in the kind of 230, 260 range for a while. We're still within, largely speaking, within the range. Our central case is that we're going to see the 10-year higher by the end of the year. If you look at our earnings at risk disclosures, we're much more sensitive as a pure NII NIM matter to the front end of rates.
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. 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? 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 out there to be purchased and sold?
Ultimately, any actions by central banks, 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. 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. If they are doing it because the American economy is getting stronger, that is more important than the direct effect of adding lending securities mature, et cetera.
Yeah, 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 markets businesses that maybe there's been a crowding out from all the QE. As they unwind it could actually boost activity levels.
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. I just wanted to get your perspective on the likelihood of that trajectory.
In terms of rates, obviously the loan balances are seasonally low in the first quarter and charge-off rates are higher in the first quarter. Overall, we're not expecting to see abnormal patterns in our charge-offs.
Got it. Thank you. 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 first quarter?
It happens every five or 10 years, so why would anyone be surprised? We've always been very conscious of this and very careful about how we do leases. We do them conservatively. We've got proper loss mitigation.
We only do them with our strategic manufacturing partners.
With going to the strategic manufacturers, and we properly account for it, and we have loss mitigation. That's pretty important. No, we're not surprised. It's going to happen every now and then.
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. Marianne, 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 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?
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 new products, particularly Sapphire Reserve in the fourth quarter and in the first quarter of this year. Fundamentally, if you go back, I think, to a conference that Kevin Watters 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 at 10 and a half for the full year of 2017." The first quarter lower and subsequent quarters continuing to now start rising back up towards the 11.25%, which was our ultimate run rate target.
That's still fundamentally what we're expecting to see, which is we're 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 second quarter. The overall year to be sort of finish the mid-10s and end the year 11-ish and then go back to 11.25 over the course of the next couple of years.
That's a very clear answer.
Okay, thank you. Jamie, maybe a question.
Jamie, you have a great new product.
Yeah. 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. I'm just curious in terms-
I'm not interested.
Pardon me?
I said I'm not interested. I'm kidding.
Well, somebody should fill those spots if it's not you. 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 clear. I think that Gary Cohn and Steve Mnuchin are doing the right thing. They want to find the right people for those jobs. I gather they're talking to lots of people. Even after they announce it, remember they need to be vetted and confirmed. That normally can take 90 days. The sooner the better, but I think getting the right people is equally important.
Okay. Thanks very much.
We have no other questions in queue at this time.
Okay. Glenn, I don't know if you're still on. I got a couple numbers for you in terms of retail exposure. Our direct retail exposure in the wholesale space is about $20 billion, more than 70% investment grade, and more than 60% secured. In terms of commercial real estate, about $11 billion, largely ABL, pick the right name, structural protection, all the things you talked about. 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. 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.
Thank you.
Thank you for your participation. This does conclude today's conference call. You may now disconnect.