Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's 2017 Investor Day. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation.
Please stand by. At this time, I would like to turn the call over to JPMorgan Chase's Head of Investor Relations, Jason Scott.
Good morning, everyone. I'm Jason Scott, Head of Investor Relations. Welcome to our 2017 Investor Day. As usual, you'll be hearing directly from senior management about our performance, our strategy, our priorities and our financial targets. However, new this year, we wanted to deliver something that you haven't seen before.
So we created an innovation showcase to highlight technology and innovation across the firm. We've been telling you about our technology investments for a while, so we thought we'd finally show you. It's right outside the conference center in the lobby. I'm sure you saw the displays on the way in. Frankly, it would have been very hard to miss.
The showcase includes 15 different exhibits covering technology for our customers, our employees and our global infrastructure. We're talking payments, next gen digital, big data, machine learning, cybersecurity, even cloud. Exhibits are manned by some of the most senior technologists and business leaders, including Matt Zanes and his team. So I encourage you to stop by, meet them, ask them lots of questions. They can give you background and show you demonstration to some of the most important investments we're making across the firm.
Now if you look at the back of your name badge, and I know you'll have them on, but look at the back of your name badge, you've been assigned 1 of our 2 30 minute breaks during the day to visit the showcase. Please stop by at this time, if at all possible, given space constraints. You have plenty of time to check email, grab a coffee and still go visit the showcase, trust me. Also, you should have been handed a one page map of the exhibits with your materials when you arrive. If not, we definitely have extras.
So finally, before we begin, just a few more items to cover quickly. Please turn off your cell phones or silence them. Also, don't forget to take a look at the forward looking statements in your materials. And last, when we do Q and A throughout the day, remember we have people listening in on the webcast, so please wait for the mic and make sure to introduce yourself, your name and your company. So right now, if you're not excited yet about Investor Day, we have a very brief video to show you that certainly should do the trick.
Thanks very much for coming. And with that, let's roll the video.
I think what makes us great is the
people around the company.
I'm most thankful for the people.
The people. The people. The people. The people. The people.
The people The people.
The people I get to work with. The people I get to work with. The people I get to work with. The people I get to work with. Pound for pound, person by person
in every country we're in, are people respected? No, this is unbelievable.
There's basically nothing we can't do.
Success is when this firm continues to be the go to employer for just the best people on the planet.
Call it a fee. I love being
partners with you guys.
Call it a premonition. Things are about to go mobile.
1.5 percent
cashback.
JPMorgan as a brand on social media has just expanded so much this year.
In 2016, we sponsored Cycle for Survival.
Welcome to our 10th Code for Good this year.
For my foundation. You guys are unbelievable.
My standout in 2016 would be our work with young people around the world.
The Chase Lounge is fantastic.
The new Sapphire Reserve card was a runaway success. The card business has been ranked number 1 in market share for both sales and
outstanding.
When you think about what we did at Brexit, I think at one point we did 1,000 foreign exchange transactions in a second on the night of Brexit.
I think in 2016, we were very successful in celebrating 100 years of doing business in Italy.
I'm incredibly proud to have been selected to lead the company's latest diversity strategy advancing black
labels. This is going to be the first of what we hope is an annual event that we will make special by the participation of each and every one of you. Start to collect evidence for your awesomeness. Women that I've gotten to know are so enthusiastic about what I'm trying
to create.
The key thing is not to
judge ourselves because we're not going to get it all right at once.
Companies who have women represented at the Board and in senior management positions provide greater shareholder value.
We're going to have a great week, everybody.
I'm proud of the work
that we achieved under the Trade initiative.
We need to throw the money. It was like, what can we do to really help accelerate?
Very few really successful companies really take chances. With Chase, we have a world class partner.
To celebrate the 10th anniversary of our holiday reading list, we decided to extend the list beyond books to include experiences and music.
I'm happier to be on the list.
Our
We are really damn proud
of you. Thanks every day. Thank you.
Hashtag what
That's a little bit tough to follow, and I'm going to do it though. So good morning, everyone. Thank you for coming. And in keeping with tradition, I'm going to kick off the day doing a year end review for the company as well as looking forward and giving you some guidance for our medium term outlook. So diving right in here on Page 1.
As you would expect, our strategy remains consistent. We are relentlessly focused on the customer and we are unwavering in our commitment to execute with excellence. Our strategy is working and we continue to gain share broadly across our businesses. It starts with exceptional client franchises and with fortress principles broadly defined, not just capital and liquidity, but also risk management, conservative accounting and our culture. And our focus is on the creation of long term shareholder value, consistently investing and innovating across our businesses for growth and profitability.
At the bottom of the page, you can see that our expectations for the company's performance over the medium term remain unchanged, most notably a 15% return on tangible common equity and a 55% overhead ratio. So before we look forward, let's do a review of 2016 on Page 2. 2016 was another full year of record net income, bringing us to 6 record years out of the last 7 and with a return on tangible common equity of 13%. Revenue of CAD 99,000,000,000 was up from the prior year. Strong core loan growth of 15% as well as higher rates drove NII up by nearly $3,000,000,000 and relatively flat non interest revenue reflects the diversification of our businesses with strong performance in markets offsetting lower fees in asset and wealth management as well as very significant investments that we made in the card business.
Adjusted expense for the year was $56,000,000,000 It was in line with expectations. But very importantly, we self funded nearly $1,000,000,000 of incremental investments and growth last year. And in addition, the legal expense last year was a modest positive. Finally, we distributed $15,000,000,000 net to shareholders, including dividends of $1.88 per share, up 0.9 dollars We continue to be a leader among peers across performance measures, which I'll show you on Page 3. So I've shown these charts in previous years and the message is still the same, that we are among the best in class across all of these measures, demonstrating broad strength and consistent performance.
Again, we delivered the highest revenue and highest net income as well as the highest net capital distribution, but importantly the lowest overhead ratio of our peers. EPS growth last year was 3%, 4% over 10 years. Our return on tangible common equity was among best in class and we cleared our cost of capital by about 300 basis points and we had strong tangible book value per share growth of 7%. So of course tangible book value as well as dividends are key building blocks of value creation. And on Page 4, we show you that we continue to grow consistently even as we provide solid payouts to our shareholders, returning nearly $60,000,000,000 net over the last decade.
You can see in the call out box on the page that including our strong dividend yield, we had double digit 5 year average all in returns before accounting for the expansion in our multiple over that period. Going forward, we would expect our tangible value per share growth to be more equally driven by share reduction, which I'll show you later, as by equity growth, but still providing significant value to shareholders. Moving on then to our operating model and moving on to Page 5. We have said it before, but it does bear repeating that our operating model is one that cannot be replicated. It has never been more compelling to be complete, global, diversified and at scale in all of our businesses.
And we spent decades building the capabilities that our clients want and need and it's working. How do we know? Because we are gaining share and we are maintaining strong customer satisfaction. The strength in our financial performance is not circumstantial. It's driven by our strategy and how we operate.
And it starts with 2 iconic brands and the brand promise that we make to our customers. We are focused on deep and engaged relationships. We're focused on the right products and the right services the right way. With our franchise capabilities, we're able to seamlessly serve our clients throughout their life cycle. The whole is greater than the sum of the parts.
So when we think about our businesses, we focus on the quality and performance of them at the granular level, and you can see that on Page 6. On this chart, you can see nearly 30 of our business units and nearly all of them cleared our cost of capital in their own right. And the size of the bubble on the chart represents the dollars of SBA. What you may not see from the chart is that many of these businesses relate to each other in a strategic sense in support of our clients' needs. Or said differently, the combination of them creates halo revenues that are extraordinarily powerful.
So continuing on the theme of diversification and of consistency as a key source of strength, moving on to Page 7. In the past, we've shown you that we have among the lowest revenue and non interest revenue volatility of our peers. And while that is still undoubtedly true, this year we have something a little different here. On the top half of the page, you can see that we are towards the top of the pack for both return on assets and return on risk weighted assets. Importantly improving each meaningfully in 2016 versus the 5 year average.
On the bottom on the left, it's not surprising that if you look at our CCAR market shock as a percentage of market risk RWA that we are in the middle of the pack. But on the right hand side, taking up to a firm wide level, the benefits of our diversified platform go a long way to mitigating that, resulting in a stressed capital drawdown that is among the lowest of our peers. So moving on then to the next section, starting on Page 9 and diving deeper into our exceptional client franchises. The table on this page shows the fruits of our labor. It shows the investments that we've been making over the last decade.
We think it's quite impressive. We have strong leadership positions across the board and we show the continuation of market share gains broadly. In CCB last year, we had industry leading double digit consumer deposit growth and we are the number one U. S. Credit card issuer with new products fueling record sales volume at the end of last year.
In the CIB, we maintained number one rankings for global IB fees, number 1 in North America and in EMEA, and we were the only bank among the top 5 that grew share last year. And in markets, we grew 170 basis points a share as the momentum we've gained in our businesses continued. In the commercial bank, we have unparalleled platform capabilities and we continue to have industry leading credit performance. Finally, in Asset and Wealth Management, our solid investment performance drove positive long term flows in a challenging year and should support flows going forward. So digging deeper then in some of those drivers versus our peers, on the next page, we're now on page 10.
We delivered industry leading core loan growth with a 5 year CAGR of 9% and 10% growth last year. And we continue to lead the pack in terms of retail deposit growth, double digits over the last 5 years as our investment in the customer experience in mobile and digital as well as the strength of our distribution are paying off. Similarly on the bottom left, in the CIB, there is a considerable distance between us and our competitors in terms of cumulative revenues. And as I said, we gained share in both markets and fees last year. Finally, on the bottom right, with our leading global Private Banking franchise and our continued strong investment performance, clients have entrusted us with over $400,000,000,000 of long term net flows over the last 5 years in Asset Wealth Management and Chase Wealth Management.
So going a little deeper into Consumer on Page 11. We are very proud of our customer satisfaction scores where we are an outperformer in retail banking, which is the culmination of our obsession with customer experience over the last 5 years and we are committed to not becoming complacent. On the top right, card sales is a tremendous success story for 2016. We went on the offensive. We launched 2 notable new products, putting significant value into the wallets of our customers and we were rewarded with record sales volume in the Q4.
And if you look at the table underneath the graph there, while our 5 year CAGR at 10% is already impressive, our sales growth is accelerating and that's even more impressive when starting from a base of nearly $500,000,000,000 On the bottom left, we continue to invest in our online and mobile capabilities. We have the highest rated mobile app as well as a significantly improved chase.com online experience. Our online and mobile customer base is the largest and we are growing both strongly, showing the importance of an omnichannel strategy. Finally, on this page on the bottom right, our merchant processing volumes are growing more than twice the industry and we surpassed $1,000,000,000,000 last year. So changing gears, moving on to operating with Fortress Principles on Page 13.
We continue to be disciplined in managing our balance sheet. We ended the year with $2,500,000,000,000 in line with our expectations. We added to our liquidity position in the year, we have nearly $700,000,000,000 of cash and securities. And we continue to grow core loans strongly across asset classes, up 15% last year with particular strength in mortgage and commercial real estate. Looking forward to this year in 2017, we continue to expect solid demand for credit broadly, but with growth rates moderating to more normal levels for an approximately 10% core loan growth this year over last.
And of course, the $64,000 question is, are we sacrificing credit discipline in order to achieve that growth? And the short answer is no, but let me show you on Pages 14 on. The credit environment remains relatively benign with charge off rates at or near historical lows. In 2017 and over the medium term, we expect charge off rates to remain relatively flat with the exception of card, which will be up modestly on the back of targeted credit expansion as we have previously discussed. And in 2017 circled, we expect total charge offs to be around $5,000,000,000 driven by loan growth.
On the bottom of the page, we've decomposed card net charge off rates into pre and post 2015 origination vintages. You can see the older vintage charge off rates remain relatively stable through time as they are already fully seasoned. And we've reached an inflection point where the loss rates on the new origination vintages have surpassed the loss rates on the mature portfolio. The newer vintages in green are underwritten to reach loss rates of about 4.5%, but with stronger risk adjusted margins. So the combination of the new vintages seasoning as well as them representing an increasing percentage of the overall portfolio will result in a portfolio average charge off rate continuing to rise, remaining below 3% this year in 2017 and between 3% and 3.25% over the next few years.
But these new vintages will be accretive to overall portfolio returns. So credit fundamentals remain strong and risk discipline is firmly in our DNA. Turning to Page 15, we'll talk about the outlook for reserves. Our reserves at the end of last year were about $15,000,000,000 firm wide. In consumer last year, we reached an inflection point where we started to build reserves.
And as we grow, expect net reserve builds of around $300,000,000 this year in consumer, predominantly driven by card, partially offset by continued releases in mortgage. In addition, we continue to watch the actual performance of our purchase credit impaired portfolio relative to modeled expectations. If trends continue to be favorable, there may be a further modest reserve release this year. In wholesale, outside of energy, similarly expect a modest build driven by growth. So you may recall that when I stood here this time last year, oil prices were struggling to find the bottom and we added very significantly to our reserve position at that time.
With energy making a recovery and if the stable forward outlook is realized, it is likely that we will be in a position to release a portion of the $1,500,000,000 of reserves that we hold. We do need to observe that stability. We want to look at supply and demand dynamics as we go into 2017. And as such, any reserve releases of any significance would be in the second half of this year or into future periods. Before we leave credit, given the industry focus on commercial real estate and on auto, I thought we'd spend a minute there on Page 16.
So we've been growing our commercial real estate business strongly more so than the industry at a 15% CAGO for 5 years, driven by success in our multifamily lending platform, but also more broadly. We ended the year with $140,000,000,000 of commercial real estate exposure for the company, which is not outsized relative to our overall exposures. Doug has more than 80% of this exposure in his portfolio, and he's going to deal with that in his presentation next. So the remaining $25,000,000,000 sits primarily in the CIB, about half is drawn and more than 60% is investment grade. The majority is tied to income producing properties and is diversified across sectors.
The secured portfolio average LTV is about 55% and the unsecured portfolio is predominantly investment grade and is structured against unencumbered assets. On the bottom of the page, auto, fundamentals remain good, supported by the highest ever age of vehicles on the road as well as strong consumer confidence. We are obviously watching the signs of stress or softening in the industry. However, for our portfolio specifically, our retail auto business is heavily prime and super prime and has better than industry credit characteristics. And a significant portion of our growth is driven by the strength of our manufacturing partnerships as well as dealer commercial services.
And in both cases, loss rates are lower than in the retail business. We only do leasing with our strategic manufacturing partners. We do good returns and with residual risk sharing arrangements. And our floor plan loans are fully collateralized at appropriate advance rates. So overall, we feel good about the quality of our commercial real estate and our auto exposure, but we do remain appropriately vigilant.
Moving on to the next section, capital and liquidity on Page 18. So the stats here demonstrate the continued strength of our capital and liquidity position. We ended 2016 with Common Equity Tier 1 above 12% and we continue to maintain discipline around the allocation of our scarce resources with flat risk weighted assets and a stable GSIB score within the 3.5% bucket. And we meaningfully increased capital returns to our shareholders with a net payout of 65%. As I said, we also added to our liquidity position in the year and we've reduced our GAAP to compliance with TLAC to less than $10,000,000,000 Despite the potential for changes to the regulatory environment under the new administration, at this point, it does seem likely that we will continue to operate under multiple potentially binding constraints.
So reflecting that, we made some changes to the allocation of capital to our businesses on page 19. As you know, historically, we allocated equity to the businesses based on advanced risk weighted assets as the best proxy for economic risk and as rules were in significant flux. Over the last couple of years, we've developed an optimization process to consider the optimal size and mix of our businesses or the direction of travel, contemplating 20 potentially binding constraints. And we've been using this to back test and validate business strategy and decisions. Today, we are approximately equally bound by multiple constraints, including advanced and standardized risk weighted assets, CCAR and our regulatory minimum requirements.
And as we discussed last year, our objective is to maximize the use of all of our scarce resources concurrently and not to allow any one of them to become singularly binding to effectively operate at the efficient capital frontier. So this year, we updated our equity allocation approach to explicitly include 5 and stress related constraints as we commit capital at a granular level. And the net effect was to increase capital for the CIB and for the Commercial Bank in 2017. Keep in mind that both businesses would have been higher this year even under the old methodology as we provided capital to them to support solid growth. You may recall that the CIB was on a glide path to higher capital.
So the CAD 70,000,000,000 that you see here is broadly in line what we expected for 2017. For the Commercial Bank, the increase is a little higher than we previously expected, partially from higher loan growth, but also due to the punitive standardized risk rating associated with the commercial bank's high quality loan book. As always, we'll continue to monitor all of our constraints and recalibrate them in the future if that's necessary. So I have 2 final points before we leave this page. The first is, as I said, the overall target return for the company remains unchanged.
However, the two businesses that I just mentioned have made changes to their return targets and they will both speak about them later. The CIB has increased to 14%, reflecting the expectation of cyclical and possibly secular tailwinds. Conversely, the Commercial Bank has reduced its target to 15% in response to higher allocated equity. Finally, on the page, you can see that we have $35,000,000,000 in corporate of capital retained outside of goodwill. And you can think of that in 3 pieces.
The first is the capital that is associated with corporate assets and activities. The second is operational risk capital that we hold against legacy private label mortgage backed securities, which we consider to be discontinued. And together, those account for about half of that $35,000,000,000 The remaining half represents the capital that we hold above the business hurdles and above our regulatory capital minimum of 11%. So next, let's take a look at our capital requirements on Page 20. So you saw at the beginning of the presentation that we continue to believe that the company should be able to operate with a CET1 ratio closer to 11% over time and the 4 pillars on the chart defend that thesis.
1st on the left, that's our internal capital policy minimum approved by the board at less than 11%, unchanged from last year. In the next column, looking back to the results of the Fed's 2016 2015 CCAR for us, we would have passed with capital of 11% or less. In the 3rd column, that's our current regulatory minimum requirement at 11%, including USGSIB and a management buffer. And finally, the last column on the right. This reflects recent commentary from the regulators giving us some insight into their current thinking about the evolution of CCAR.
And while there is uncertainty about how it will evolve, the new concept of a minimum baseline requirement, including a firm specific stress capital buffer would also seem to place us at 11% or slightly higher. So today, all roads lead to about 11% and that continues to solidify our conviction that the company can operate safely and soundly towards the lower end of our 11% to 12.5% capital corridor over time. Building on this and what it might imply then for payout trajectories in the future on Page 21. First, it reaffirms that as a minimum, we should not need to further accrete capital above 12.5%, which we are likely to reach this quarter or next. And we would go further to say that based upon what we know today, over time and I would emphasize over time, there is no good reason why we would not want to move down into the range.
It does feel like we have reached an inflection point for capital. Secondly, what could that mean for medium term capital plans? The green bars on the right is purely math. So it shows that purely mathematically, if you use analyst estimates for the next couple of years and if you solve simply for the top and bottom of our corridor 12.5% 11%, that would imply payouts of between 80% to 120%. And analyst expectations for this year on average 80%, which is the high end of our payout range.
However, other factors do matter, including meeting the regulators' expectations underlying the CCAR qualitative tests as well as the potential for volatility in the scenario or in the results. And these factors could require management to consider the potential need for and calibration of buffers. We do have to do CCAR for 2017. We've yet to do that. And as you know, for this cycle, we are still bound by the existing CCAR constructs and all that goes along with that.
So other than CCAR, the other most significant in flight capital regulation is Basel IV. And based upon what we know today, we do not believe that it will become binding for us as we currently understand it. But as you are aware, it has been delayed and things may change, so we wait. Moving on to liquidity on page 22. Last year, we added significantly to our liquidity position.
We've been compliant for an extended period with both external and internal liquidity requirements. So the most notable developments on this front in 2016 was our response to resolution feedback, which saw us preposition significant resources in material legal entities around the world and to consider these resources to be effectively trapped at the point of failure and as so less fungible. And as a result, we added about $50,000,000,000 of liquidity year over year, leaving us well above U. S. LCR requirements.
The cost of that liquidity is in our run rate. So stepping back to talk about resiliency more broadly on Page 23. On the left hand side, and we've included Fairferns and Wahmoves in JPMorgan's starting point. We've nearly doubled our pre price of tangible common equity levels. We've added very significantly to our cash position, while reducing reliance on short term liabilities even as our balance sheet has grown.
And on the right, the same is true for the whole industry, with more than twice the tangible common equity and nearly 3 times the amount of cash than before the crisis. So it is clear that a lot has been done to improve safety and soundness and confidence in financial markets and financial institutions, much of which was necessary. So to close this section with a few thoughts on the opportunity for the regulatory environment to evolve on Page 24. We don't want to debate the specifics of any single piece of legislation or any particular rule and we genuinely think less about JPMorgan than we do about the potential benefit to the economy as a whole. However, it is perfectly reasonable and rational and also normal after many years and many, many new rules and requirements to pause and step back and take a look at the entirety of them individually and together.
So focusing on principles, it would start with coherence and coordination across regulatory agencies, whereas today many agencies regulate the same issues either jointly or concurrently and in many cases with different interpretations and objectives. Secondly, but importantly, alignment of rules across jurisdictions around the world, notably eliminating U. S. Gold plating to level the playing field. It is also clear that the system would benefit from simplification and the reduction of compliance burdens.
Without a doubt, we do support a robust framework for adequate capital and liquidity and stress testing. However, I showed you that the industry has come an extremely long way and the time does feel right to provide more consistency and flexibility with respect to capital and liquidity. In any case, change should be informed by appropriate economic analysis of the cost and benefits and everything is not binary. It's not necessarily about less regulation, but important changes could be made in the way rules are implemented, achieving the right balance between safety and soundness first and economic growth. So moving on to the final chapter of my presentation, we're going to move on to the outlook section, starting with net interest income on Page 26.
So we've never really seen this movie before coming off of 0 bound rates in a world where liquidity requirements and technology advancements will increase the competition for good deposits and where customers are more rate aware. As such, we have modeled appropriately conservative reprice assumptions of more than 50% for the current cycle, and it's too early for us to change that expectation. Reprice is never linear. And as you can see from the graph, it isn't expected to be very significant for the first few rate hikes, especially with absolute rates of only 50 to 75 basis points. And if you look at the circles, the reprice experience of the 2,004 cycle and this cycle so far are very similar.
While to
date we have experienced lower reprice than our models, we are more focused on the end state reprice assumptions than the precise response to each individual hike in the early stage. So our assumption on reprice is included in our outlook for NII, which is on Page 27. As ever, we show on this page the short and medium term NII simulation of rates flat from December, of following the implied rate curve and of following the Fed dot plot. For context, the implied curve for this simulation is based on 2 hikes in 2017, 2 in 2018 and 1 in 2019. And the long end of rates reaches about 2 70 basis points end of this year, rising to about 300 basis points by the end of 2019.
So starting with rate flat, that would deliver approximately $6,500,000,000 of incremental NII in about 3 years with $3,000,000,000 this year. And you can see that our strong loan growth in blue on the chart accounts for a little more than half of the rate flat benefit. Based upon the implied rate curve, the run rate NII impact in 3 years is closer to $11,000,000,000 including the compounding effect of reinvesting our deposits at higher rates over time. And it may surprise you to see that we are showing a number as high as $11,000,000,000 here despite having realized some rate benefit last year and when compared to our $10,000,000,000 plus in prior presentations. The primary driver is stronger loan growth broadly as well as higher yields on that targeted credit expansion in cards.
So if rates rise more quickly than the implied, which is certainly possible, it would generate a short term reduction in capital through AOCI, but it would also accelerate and increase the NII benefits, which would pay back in 2 to 3 years and be in annuity income thereafter. Moving on then to non interest revenue on Page 28. So before I discuss forward looking guidance for non interest revenue, I thought it might be instructive to remind you that we have faced significant regulatory and business simplification headwinds since the crisis as well as made significant investments more recently in our card business that together put over $6,000,000,000 of downward pressure on our fee revenue over this time frame. Underlying that, from 2011 through 2016, we've seen 3% annual growth. And once these impacts are fully in our run rate, we expect that growth will start to push up the top line.
Clearly, full year non interest revenue is going to be very market dependent, so we do have some guidance. For the Q1, expect IB fees to be relatively flat to last quarter, although with higher than normal uncertainty around the timing of deals closing. And in markets, I have a couple of points. First, remember that in the Q1 of last year, we did outperform peers, which creates a relatively tougher year on year comparison. 2nd, March will matter a lot.
Last year in January, as you recall, the market collapsed, but by March it had recovered and March was really quite strong, whereas today, volatility and activity levels are more subdued. So as a result, we do expect total markets revenue year on year will be up, but up somewhat modestly. And for the full year, expect non interest revenue to be down about $700,000,000 in mortgage, driven by higher rates and a smaller market, tighter margins and a smaller servicing book. Also for the full year, expect card services non interest revenue to be down about $600,000,000 as we continue to amortize premiums on strong new product originations. But as I mentioned on the previous page, card NII continues to grow very strongly.
Moving on to expenses on Page 29. Recall that in 2014, we announced efficiency plans in the CCB and in the CIB of a total gross $5,500,000,000 We made excellent progress. And to date, we've achieved about 90% of that commitment. Our adjusted expense, as I said, for 2016 was $56,000,000,000 in line with our expectations and guidance. This year, we'll continue to execute on the remaining $600,000,000 of efficiencies and we will continue to invest in our businesses with an expectation for adjusted expense of about $58,000,000,000 in 20.17, but maintaining or improving operating leverage as revenue grows.
So we've created capacity of over $4,000,000,000 to invest and to grow. We've primarily utilized that in a cumulative $1,500,000,000 of auto lease growth with positive operating margins and good ROEs, a cumulative incremental $1,300,000,000 of marketing and technology spend and that's just in the expense line. If you total our marketing and technology investment spend across our businesses, it's over $9,000,000,000 And the remaining spend is largely funding revenue related expenses, about half of which is across the CCV with the remainder principally in Asset Wealth Management. So moving on to page 30 and the earnings simulation. Starting at the end with the same conclusion we've reached recently that this company has line of sight to delivering more than $30,000,000,000 of net income over the medium term on the back of rate normalization as well as solid underlying growth across our businesses.
I'm not assuming growth in markets coming off of a strong 2016 and while assuming that we absorb incremental expenses and credit costs as we grow. And depending upon where the final resting case for our capital is, this is consistent with 14% to 15% return and it's a pretty central case. So I think it's fair to say that with the wind expect to deliver a 15% return on tangible common equity over the medium term. The simulation clearly doesn't include any benefit associated with potential tax reform. We are supportive of corporate tax reform as good tax policy.
It's good for growth. It's good for our clients and it's good for the country. So we think more about the economy as a whole than we do about the potential impact to our bottom line. However, with respect to the potential impact on our financial performance, significant corporate tax rate reductions are typically accompanied by base broadening and other potential offsets and each of our businesses will be impacted in different ways. Overall, the direction appears positive, but it's too early to hypothesize on the impacts.
In conclusion, our strategy and our operating model drive our best in class financial performance. As I said, we are complete, global, diversified and at scale and these attributes have never mattered more. Each of our client businesses is a leader in its own right and is relentlessly focused on their customer. When we run the company, we run it as if we own 100 percent of it with long term strategic focus and a track record of successful execution and delivering on our commitments, all of which positions us to continue to outperform. So I have a few minutes for Q and A before I hand over to my partners.
Thanks, Marion, for that. So the first question is really around that interrelationship between your CET1 of 11% and your 15% ROTCE. You walked through, you've got some cushion now and what the sources of those of that cushion is. But could you give us a little bit of color under the current rule set and administration? Would you be comfortable bringing that down from 12.2 to 11?
Or is there something else that you're waiting for to raise that buyback level and drive that down?
So the first thing I would say is, as you know, this year 2017 CCAR cycle is as per prior CCAR cycles and everything that comes with that soft dividend caps and the like. I would say that based on everything we know and all of our work, which was on the page, that we would be happy ultimately moving into the range from where we will be likely in the middle of the year, which will be closer to 12.5%. But I do emphasize over time. So we do need to continue to meet the regulators' expectations writ large about our qualitative factors. And so we do have more work to do, acknowledging that, but over time, yes.
Could you get there organically? Or is that really going to be driven by buybacks to drive down that CET1 ratio? In other words, organically meaning loan growth? I mean, it takes a lot longer to do that, but just one
Yes. So I think if you look at the loan growth that we have, and ultimately a balance sheet growth equation of about 3 ish percent equates to the higher end of our payout and about 6 ish percent equates to the low end of our payout range for the 55% to 75% range. Clearly, what we're all sort of somewhat excited about is this higher level of optimism in the environment. If that does ultimately turn into a lot of conviction and and action and activity levels and there is an increase in demand, we could see our growth accelerate. But that's we can't really predict hypotheticals.
So we're basing it on our current pipelines, our current expectations, which is consistent with that 3% to 6% growth, 55% to 75% range, which means that if we had surplus capacity, it would be a combination of growth and share repurchases. But we would we've been very clear about our cattle stack, invest in our businesses for good strategic long term growth and profitability number 1 all day long. Mike?
Mike Mayo, free agent analyst. When you say deposit date of over 50%, are you sandbagging or do you really mean it? I mean, it seems like that's a little bit higher than the industry concentrations improved in the industry and we haven't seen it so far over the past year.
Right. Well, we wouldn't expect to see it in the 1st year. So I think the point we were trying to make is that when you're starting with rates close to 0 and for the first few hikes, you would always expect the reprice to be considerably smaller than when you get through the cycle. And so with the 2,004 cycle and this cycle so far looks very similar. So that's not telling us anything particularly new.
It is our belief that liquidity requirements will increase the competition for good deposits. And while we have been doing incredibly well and Gordon's team have been growing more than twice the industry average, we will continue to believe that will be competitive as well as technology advancements making it easier for people to move money around. So it's prudent for us to assume that it will be higher. Clearly, our assumptions drive the NII outcome, but not most materially. Most materially, it's our growth in the absolute level of rates.
Saul?
Hi, Mary Anne. Saul Martinez of UBS.
If I
can ask about your guidance for markets income, up modestly over what seemed like fairly easy comps a year ago. The 3 year guide is flattish markets revenue. How do you square that away with seemingly increasing optimism about cyclical secular dynamics in the business? And kind of what are you embedding in terms of market share in that?
Yes. So I'll start with the I think middle of your question, which is for full disclosure, the simulation is a simulation, it's not guidance. We think it's prudent not to have a strong conviction about the directional move in market over a short period of time and 1, 2, 3 years is relatively short. Obviously, and I think you'll hear from Daniel a lot more later that we do feel like we've reached a bit of an inflection where there may be more tailwinds than headwinds. So it's not guidance that we're expecting it flat.
It's just an assumption. You can make your own assumption and I hope you will. With respect to the quarter, I would just come back to while there's a lot of optimism and you've seen a lot of early activity, it is the case that 1 quarter is not a trend. And so we have to see that really translate into significant levels of activity. And right now, activity and volatility is exceptionally low.
Activity levels are somewhat quiet. March last year was a strong comp. Daniel will definitely if you want to add anything, Daniel? I will do it. Yes, later.
Okay.
Over here, Chris Matowski. Thank you. The graph on Page 27 for the rate sensitivity is very helpful. But can you talk about how that interacts with all the growth assumptions you laid out in the early part of the deck? You have everything going up to and to the right at upper single digit rate and presumably that would have an impact on net interest income as well.
So can you bring those 2 together?
So those 2 are embedded in that outlook for rates. So if you look at the blue section on the bottom, that is consistent with our expectation for loan growth and for the change in mix and the higher yields on the card portfolio, which is driving not an insignificant amount of that absolute level. And remember, that's not fully normalized rates. That's based on the implied rate curve. We don't have any more insights in the market about what could happen over the next 3 years.
So it will obviously be plus or minus that. But it does include our expectations 10% core growth this year and on into the future.
Okay, got it. Thank you. Gerard? Thank you. Hi, Miriam.
On the operational capital that you talked about under the corporate side, what's the probability of you guys getting relief over the next couple of years for the businesses that you're not in any longer that doesn't seem why you need it in the 1st place? And about how much is that in terms of total capital for those businesses that you're not in any longer?
So it's impossible to handicap the probability of those changes, I would say. And particularly at this moment in time, when I think there will be a lot of things being under review. I mean, we would obviously be supportive and hopeful of being able to take a more prospective rather than retrospective look at the businesses that we're in when we think about capitalizing for operational risks. But if we change, we will obviously continue to carry that capital. And it's somewhere plus or minus $10,000,000,000 for private label mortgage backed securities.
Right here in front. Sky?
Thank you. Guy Moskalsky with Autonomous Research. On Page 24, you talked about principles of regulation. And I was just wondering, is that JPMorgan's opinion? Is it or a message that you are sending to the administration and the regulators?
Or is it a reflection of what you have been hearing in Washington under the new regime?
So I mean, I think we've been as far as saying, I think we've been pretty consistent about the fact that a lot was needed to be done. It was an extremely hard job. The regulators did a good job and we're not supportive necessarily of throwing everything up in the air. So that's why we say it's not binary, it's not keep or appeal. It can be amended and changed.
And it's perfectly normal to do that after this many rules concurrently over this period of time. I would say that that is a combination, I think, of how we feel that we would like to look at Coherent, for example, across the plethora of liquidity rules that we have. We like to look at simplification, but I think also somewhat consistent with what we're hearing.
Thank you. Over here. Marty.
Marty Mosby of Vining Sparks. Wanted to ask you in the NII simulation, when you're talking about the long end going up, the OCI now comes out of your capital, wherein past times, we had rising interest rates that wasn't included in the regulatory capital ratios. Will that make you more proactive on taking those losses and reinvesting in higher yields? And does that incorporate it into that long end when you're looking at the positive you're picking up, just being more proactive in churning the portfolio?
Yes. So I'll start by saying that obviously for there to be incremental AOCI impact, we would have to see rate CVA from the implied curve that we have on here, which is certainly possible. We have a pretty disciplined risk management framework when we think about managing the assets and liabilities of the company, not just for interest rates but also liquidity, both are important. And obviously, we're targeting a target of duration of equity for the company at normal rates. We have a lot of negative complexity in our portfolio.
We've already realized a lot of that. It all plays a part. So I
I thought
it would be more accepted to take those and realize the losses, so you could generate more NII and kind of roll up the curve when interest rates go higher. Like take losses in the portfolio instead of just incurring them through the adjustment?
Yes. I don't mean to trivialize the question, but we're a little bit more strategic than that. We're not necessarily looking to just turn our portfolio. We're thinking much more about the path to normalization and where we want the company to be in totality, incorporating all of the risks including liquidity.
Yes. Just didn't know if
you put that positive into the NII or you just let it mature. That's what I was trying to look at.
Yes. The $11,000,000,000 is already a 20 year big range. So I think we're in reasonable shape.
Andrew?
Hi. It's Andrew Lim from SocGen. I was just looking at Slide 14 and what you've presented there on the risk adjusted returns. And presumably, that's in a benign economic environment. But how do you think about and how that pans out in a more, say, tough economic environment?
Presumably, there's more variability there in your risk adjusted returns as in charges your increase. So how do you think about that?
So I would say we we're at a point, I think, in the cycle where we feel like we've hit an inflection point. So to give like totally through the cycle forecast would be not necessarily as giving you what we think is realizable and able to be achieved over the course of the next several years. And over the next several years, it's not our central case expectation that we're going to have a credit led recession and that we're going to end up with more charge off rates than we have in our outlook. So obviously, our businesses in many cases are cyclical, but the diversification has through time defended our ability overall for the company to deliver towards that mid teens return. Obviously, the last couple of years, we've been in a cyclical low secular factors have applied, but 15% is still a central case almost regardless, I think, of the backdrop over time.
Okay. I am not going to take any more of your time. I will be here as we will all day. And I would like to hand over to Doug Pettenau with the Commercial Bank overview.
Morning, everybody. Welcome. Let me start by adding my thanks to all of you for joining us today. We're delighted you're here. We really appreciate you spending time with us this morning.
So to jump in for Commercial Banking, we continue to execute our disciplined proven strategy. 2016 was a terrific year for us, so we feel very good about the future of the business as we start 2017. And as is the case across this company, and this is something you're going to hear a lot of from my partners throughout the day, our business is built completely around our clients. We have fantastic teams delivering unmatched capabilities to our clients and while we have strong leadership positions, we continue to we've continuously invested in our platforms and we're definitely not standing still. We've expanded our footprint.
We're adding great bankers. We're investing in our TS and digital capabilities and we're bringing technology and innovation to improve our critical processes. And these investments are certainly paying off. We've been growing the business selectively while maintaining our focus on fortress principles and our strong financial performance has been driven by consistent, disciplined approach and the value that we're bringing every day to our clients. So, there's an awful lot to talk about in the commercial banks.
So, it's great to be here this morning with all of you. As I said, our focus every day is on our clients. We have a tremendous team of seasoned bankers. They average over 20 years of experience. We are local.
We are in 1600 markets over 122 locations nationally. Our bankers are visible and active in their communities and they can deliver the best broad based capabilities of a global bank at a very local level. Moreover, we have dedicated teams coming to work every day to help make the platform even better on behalf of our clients. So we're working very hard to be the easiest bank to do business with, to provide credit with speed and transparency and to offer products and services that are integrated, simple, digital and mobile. To best align ourselves with our clients, we have well defined segments across our 2 major businesses.
In C and I, we're targeting 18,000 clients and 31,000 prospective clients. Banking, we focus on small and midsized businesses. These are usually private companies and we're working very closely with Gordon's business banking teams to deliver a tremendous small business platform to the market. In Corporate Client Banking, we focus on our larger corporate clients. Many are public.
They oftentimes have extensive international operations and they usually have more complex capital structures and corporate finance requirements. And as such we are very well connected with Danielle's investment bankers. In commercial real estate, we are set up as 3 distinct but very well coordinated teams. We are covering 2,000 clients across real estate and community development banking and we are targeting 35,000 investor clients in our commercial term lending business. Our business is anchored around our client selection.
We are absolutely not all things to all people and it's that selectivity and focus that has allowed us to build a tremendous client franchise in the commercial bank. And being a part of JPMorgan Chase, we speak about this every year. It provides unmatched capabilities to serve our clients and we believe this is a distinct competitive advantage for us. Our clients have access to our extensive branch network. Over half the commercial banking clients use our branches, that's 18,000,000 branch transactions every year.
They have access to our international banking footprint, our leading merchant services and commercial card solutions, our industry leading digital and mobile capabilities and our clients have access to the number one investment banking platform. So last year alone, we executed 800 Capital Markets financings for commercial banking clients in the investment bank. And when things go well for our clients and they often do, it's very commonly the case that they end up as a great private banking client in Mary's business. So knit together and delivered locally, there is no other commercial bank that has our client franchise and the breadth and quality knit together and delivered locally, there is no other commercial bank that has our client franchise and the breadth and quality of our capabilities. And as our clients grow, their needs change.
So, we've built our business to support them along the way. So, every year in May, here at 270 Park, we host a terrific event. It's called our Founders Forum. We have over 200 owner founders that attend for a significant summit. And it's fascinating to see the span of clients that attend this event.
So, we have the founders of large multi $1,000,000,000 public companies all the way down to an owner founder of a brand new startup. And what we commonly hear from these folks is that they rapidly outgrow the capabilities of many of our competitors. And as their businesses succeed and as their growth explodes, they need not only need larger credit commitments, they need access to the public markets, they need outstanding industry content, they need international banking and they need integrated payments capabilities. So being able to grow with our clients provides them with real value and for us it creates long term deep relationships. If you look at our performance in 2016, you can see the absolute power of our franchise.
So in 2016, we delivered revenue of $7,500,000,000 up 8%. This was a record for us. Net income grew 21% and even with the pressures we felt in the energy sector, our credit performance remains stellar. So it's our 5th consecutive year with net charge offs of less than 10 basis points and we maintained a strong overhead ratio while we've continued to make significant investments in our platform and capabilities. We've also absorbed incrementally higher capital and the sustained investment in the business and generated a healthy return on equity of 16%.
But if you step back to me, what's not in the financials actually tells an even better story. We are totally on offense in this business. We launched the presence in 8 new markets in 2016. We hired over 100 new bankers. That's not an easy thing to do.
We are spending substantially more time with our clients, 20,000 more client calls in 2016 compared to 2015. So not a surprise, we added over 900 great clients in the business last year. And it's this calming activity and being out and visible in the market that's going to generate opportunities for us in the coming years. So across our business, we continue to see quality opportunities to generate great clients, prudently grow loans and extend our franchise. So as we think about growth in the business, we'll spend a moment on our loan growth.
I'm going to start with C and I. We had good C and I loan growth last year. Loans were up 9%, slightly outpacing the industry. It's our 7th consecutive year growth in loans in our middle market business. Expansion market footprint grew loans 18%.
Growth for us is broad based across many different targeted industries, across geographies and across the credit spectrum. Our asset based lending team had another record year of originations and we continue to see increased activity amongst our larger corporates and cash M and A as they complete more strategic transactions. Revolver utilization for us is remaining around flat where it's been in the low 30% range. It's been there for several years. And while I'm not sure I can call the bottom on credit spreads, it certainly feels like we're at the bottom.
Credit spreads have been stable in the last several quarters and have actually turned up in some of our markets. But we continue to be highly selective. We're staying true to our underwriting discipline. We're not competing on structure and we're actively avoiding the riskier financings that we see in the of financings that we see in the marketplace. To make that point, Mary Anne alluded to it, this time last year we stood up here with all eyes on the energy sector.
It was a 100 year flood. We're pleased to point out that since the downturn has happened in energy, the industry has suffered 240 bankruptcies. We have been a lender in less than 7% of those And we spent a lot of time last year talking about our reserve based lending portfolio and understandably so, it's a significant part of our energy exposure. We've only realized one net charge off amongst that entire portfolio. So given the stress in this part of the market, we're particularly proud of how we've performed and would encourage you to compare our performance to our major competitors.
It's obviously dynamic market and we're watching fundamentals very carefully, but our overall portfolio remains in excellent shape and there's really not much out there that gives us any material concerns. If you look at our CRE business, similar story, we had strong loan growth in 2016 and we continue to see quality opportunities to grow our portfolio. We continue to take share in select markets and commercial term lending right here in New York City is a great example of that. We're selectively growing exposure for our best real estate banking clients. Market conditions for us in CRE across our targeted asset classes and footprint actually remain quite healthy.
If you look at multifamily rents and vacancies are constructive across our major markets, driven by very strong supply demand fundamentals, Transactions remain transaction structures remain solid with low leverage. There are some parts of the broader CRE market that are worth watching. Some markets are seeing some supply and demand imbalances. Hospitality segment in some regions could feel some pressure. Luxury condominiums, Class B and C retail malls, especially in secondary and tertiary markets might feel pressure, but these are not our target assets and these are not our target geographies.
We are maintaining a strict underwriting discipline in our conservative approach. We have not modified our credit envelope to grow this business and we are staying focused on the types of loans in markets that we understand best. We've had no net charge offs in our real estate business in 2016 and 2017 feels like it could be a similar type performance for us. Let's go a little deeper into our commercial real estate portfolio. And when you think about our real estate business and compare us to others, you have to remember that commercial term lending for us is about 3 quarters of our overall portfolio.
And this is a business that we believe thrives through the cycle and certainly did through the financial crisis. It's focused on fully funded mortgages to B and C apartment buildings. These are apartments in large densely populated rent by necessity supply constrained markets. So think New York, San Francisco, Los Angeles. It's a very granular portfolio.
The average loan size is under $2,000,000 and we've tracked originations over the last 3 years. The average loan to values have been less than 60% and the average debt service coverage has been greater than 1.5x. So we feel very comfortable about the position of this business and our ability to safely grow this business. Real Estate Banking focuses only on high quality institutional investors with strong track records. And we're targeting the least volatile asset classes, so industrial, retail, office and multifamily.
We have very limited exposure, less than 1% of our portfolio is to homebuilding, hospitality and land and most of our exposure is in primary and secondary markets. So about 70% of our loans are in the top 20 MSAs in the United States. Construction lending is a much smaller part of our portfolio. It's only to well capitalized developers with proven track records. These are well structured low leverage transactions and oftentimes have significant recourse.
So we're obviously watching fundamentals very carefully, but we believe our credit discipline will serve us well and that this business will thrive through the cycle. As we think about growth in our business, we remain excited about the progress we're making in our expansion markets. So remember, when we started this effort, since we started this effort, we've opened up 45 new offices across the country. These are in great markets like LA, San Francisco, Boston, DC. Last year, we opened up 6 new offices in places like Palo Alto and Memphis.
We're now in 48 of the top 50 MSAs. We're going to be in all of the top 50 by the end of this year. I mentioned that we hired 100 bankers. Many of these bankers are landing in these great geographies for us. And as you can see, we've steadily grown clients and we've steadily grown revenues and we've essentially built organically by scratch a very nice sized bank, over 2,000 clients, over $12,000,000,000 in loans, over $8,000,000,000 in deposits, and we've done it all organically picking every client, picking every loan by scratch.
So we're executing with great discipline. We're investing for the long term and we're marching towards what we believe will be a $1,000,000,000 business for us over the medium and longer term. California for us is a great example of our success in building out in these expansion markets and it's an extremely exciting market for us and it's obviously a market with strong incumbent competition. But nevertheless, we continue to win full banking relationships, investment banking, treasury and lending. We've seen consistent growth in clients, loans and deposits and we're taking a long term view here.
We've had very exciting market for us. It's large global dynamic and international place to our strengths. There are also a lot of companies that are fitting into our industry coverage model. So we see a lot of clients in agriscience businesses, technology, life sciences and government sectors and that plays to our industry coverage format.
If you
look at industry coverage for us, it continues to be an important differentiator. In fact, across 16 of our targeted industries, 50% of our clients get the benefit of a specialized industry banker. They are able to deliver deep industry content and expertise. They're able to deliver industry specific products and solutions and they keep us well aligned with the industry teams in the IB and deliver strong industry content to our clients. Also an important part of this approach is defensive and that we have industry specific risk executives attached to each of these 16 industries.
The impact is very powerful and as you can see we've achieved outsized growth in clients, loans and deposits in our industry segments. Delivering the investment banking franchise to commercial banking clients continues to be an important growth driver for us. This is a tremendous partnership and it keeps getting better every year. Danielle's investment bankers are totally aligned with the commercial bank and the market leading capabilities that they can deliver on a regional basis sets us apart from every other commercial bank. We have grown investment banking revenues from commercial banking clients every year since the time of the BankOne merger in 2004 and that's through all market environments.
In 2016, we delivered another record year with $2,300,000,000 of investment banking revenue, up 5% we feel like we're well on our way to a $3,000,000,000 revenue target and think there's at least another $700,000,000,000 of a market opportunity there as we continue to cover these clients really well together. As we think about our franchise and our platform more broadly, the commercial banks are on a multiyear transformation of the business. So last year, we invested more than we ever had on technology, data and innovation. It's double what we spent 3 years ago and we're going to spend even more in 2017. And what we're doing is we're working hard to improve our capabilities across wholesale payments.
We're building best in class digital capabilities. We're driving efficiencies and improvements and performance across critical processes like credit delivery, KYC and onboarding and we're bringing data to bear to better serve our clients and to better manage So we're working across the company to leverage our capabilities, our scale and the firm's overall investments to make meaningful improvements in our business. As we make investments in our product capabilities, enhancing our wholesale payments products and services presents a tremendous opportunity to bring more value to clients. It's enormous white space, dollars 92,000,000,000,000 of North American wholesale payments last year and with all that activity, there's numerous pain points for our clients. The industry needs better solutions.
60% of wholesale payments still require some form of manual reconciliation or intervention. It's incredibly paper intense, so think paper checks. But we're making a number of investments to help our clients. We're streamlining transaction reconciliation process. We're digitizing payments and we are improving the client connectivity and enhanced systems integration.
But to be a leader in payments will acquire scale and product investment and capabilities and we believe we're doing that across the firm. Moreover, we think these critical capabilities will be the table stakes to acquiring and retaining core long term operating deposits over time. Also in this regard, working hand to hand with our partners in consumer, our digital strategies are focused on exactly the same priorities, speed, convenience, simplicity, transparency and mobile access. So this year, we're launching Chase Business Online. It dramatically improves our clients' user experience.
It's built with the advantage of the tremendous investments that Gordon has made on behalf of our consumer digital platform, but it's tailored to specifically meet the needs of our small and midsized clients. And you can get a sense for the power of this platform and the simple user experience in the innovation showcase. So, I'd encourage you to spend time with that platform. Another key area of focus for us is applying innovation in our credit delivery process. Credit and commercial bank is a core engine for us.
So, we're doing this across our lending platforms seeking to bring more speed, precision, transparency and efficiency to our lending models. And while our commercial term lending business is the number 1 multifamily lending business, we are absolutely not standing still. Over the last 2 years, we've made meaningful technology investments in our new credit delivery model called Creos. So, in addition to bringing real improvements in efficiency, it will the platform will enable complete transaction transparency for our clients and cut the time to close by over 50%. So, Al Brooks, who runs commercial real estate for me is here today.
When Al talks about his business, he talks about delighting his clients through his process. And I know he would love to spend time with you showing you the Kratos platform and the Innovation Showcase. So looking forward for the business, we are excited about the opportunities ahead and we believe we're very well against some of the major drivers that we see out in the market. I discussed the significant investments we've made to build out our footprint, adding locations and adding bankers. So, we're not sure what's going to happen in Washington, but we believe we're very well placed to participate in any kind of acceleration in economic activity.
The one thing that I will say is we see anecdotally as well as through the surveys that we conduct, small business confidence, middle market management confidence at levels we've not seen in 4 or 5 years. Small business confidence actually hit the highest point been since 2004. We've not yet seen that translate into significant loan growth, but it's been a missing critical ingredient we believe we're well placed to take advantage of any kind of acceleration in the economy when that happens. As we move to a more normal rate environment, we're very well positioned for rising rates. We have a strong and stable deposit base, a 100 basis point shift in the yield curve means about $300,000,000 for the commercial bank.
The world is certainly getting flatter and being one of the only commercial banks that can follow its clients into international geographies will continue to be a big differentiator for us. And we continue to see attractive opportunities to safely grow our real estate portfolio. There's $1,000,000,000,000 of maturities in the next 3 years. And amongst all of that, that volume of refinancing, there's some high quality clients and low leverage financings that we think we can participate and win. And lastly, I've discussed the rising consumer and wholesale expectations around our digital platforms and payments platforms.
The stakes are absolutely increasing there. And to compete, as I said, you need to scale an investment to do that. We believe we have the focus and investment to lead the industry in that regard. So we could not feel any better about how our position or how well our business is positioned moving forward. So to wrap up, what does that all mean for our outlook?
In terms of growth, we're making steady progress against our key initiatives. In middle market expansion, we continue our march towards our long term revenue target of $1,000,000,000 Investment Banking, we see meaningfully more room to grow that business and we're standing by our $3,000,000,000 long term revenue target there. International remains a key differentiator for us. We think over time this will be a $500,000,000 business for us. We're standing by our overhead ratio target of 35%.
It's the right cost structure for the business long term, even while we continue to make smart investments on behalf of our franchise and our clients. It will take some degree of rate increases to help us get there over time, but we believe it's the right cost structure for the business. On credit, we see a relatively benign environment moving into 2017 and would expect net charge offs in the medium term to be continue to be less than 15 basis points. And for the business overall, Mary Anne spoke about the higher capital in the business. We believe we can continue to maintain strong investment in our franchise, absorb this higher capital and achieve a 15% return on equity.
So for Commercial Banking, hopefully it's clear that we're focused every day on building our platform to serve our clients. We're taking a long term disciplined view. We're making substantial investments in our business and we're working hard to extend our franchise and our leadership positions. And with that, I'd be delighted to take any questions that you might have.
Betsy? Thanks, Doug. Question just on the rate environment and what that means for your spreads, because we've seen in prior cycles when rates rise that the C and I and the CRE book is what gets some spread compression as you try to share that with your clients. The question is, we've already seen a lot of spread compression. So are we done?
Or do you think this is going to repeat as prior rate hike?
As I said, I think we've bottomed on credit spreads. I think it's come down dramatically through the financial crisis, but I think we have upside in some markets. We've started to see spreads start to widen across our business. It can always go lower. We can certainly compete if it goes lower, but it's not what we're seeing out in the market.
Matt Brunel with Wells Fargo. Doug, thanks very much for the information on the spread revenue improvement in 100 basis points higher environment. How do you think about in a higher GDP growth environment, say 50 to 100 basis points if we are to get that, how does that help fee revenue in your business? Is there an acceleration in that side of the
Yes, absolutely. If there's a meaningful step change improvement in the economy, you're going to see greater capital markets activity. I mean, our middle market clients have been pretty sanguine through the financial crisis since the financial crisis. Confidence has been lagging, the consumer confidence that we've witnessed. The investment banking activity has been inconsistent and there's a lot of pent up cash.
So I think in terms of just investment banking alone, there's going to be a tremendous amount of dry powder ready to be deployed if people get some sort of clarity on what the regulatory outlook is or whatever pick your catalyst if it happens and causes a spark in the economy.
Hi. Just a broader question on the credit cycle. The H8 data has been pretty weak, especially in 1Q and especially in C and I. And it feels like the C and I cycle is a little bit long in the tooth yet at the same time, as you mentioned, business confidence is resurging, utilization rates have room to go up. There's a lot greater optimism about broad economic growth.
How do you square away those crosscurrents and when would you start to think that we see an inflection point in terms of growth?
Well, first of all, I think there's a lot of noise in the Fed data. We've seen a deceleration in loan growth in C and I going back to 2014. So what we've seen recently is just a continuation of that same trend. You've also seen a deleveraging in some of the deep cyclical commodities markets. And you've seen many, many clients rush to the capital markets, the more permanent debt markets to lock in rates, which takes away from the C and I quantum of loans.
So, there's a lot of ins and outs going on there. I think it all ties back to management confidence and organic growth and that picked a manufacturing company that's got fully depreciated equipment that's been waiting to invest in its business because it needs greater fiscal clarity, it needs greater tax clarity. Once we have that, I think there's a tremendous amount of capital that get put to work and you can see that in greater revolver usage and greater loan growth across the business. That's our bet. I mean, we've been investing.
It's one of the reasons why we've been investing in our footprint and adding bankers as we want to we believe we're bullish on long term on the U. S. Economy, especially in the middle market part of commerce. So it's we'll see what happens.
Adam Compton with GMP Capital. If you look at your data on Page 6, you guys have done a great job growing lending. And I tend to think about small to mid sized businesses as being self funding. It's usually very deposit rich. You guys have done a good job historically, but if you look at the average deposits at least that you have on that page, they're kind of running flat over the last couple of years.
I realize that's average versus period end. So probably some of the math there gets mixed. But do you guys feel like you're getting the deposits you need as you bring in these new accounts? And what are you doing to make sure?
Yes, we usually do. I mean, I think you have to remember only half our clients borrow. So that's definitely half of our clients just purely a deposit and operating type relationship. There's other noise in our numbers and the trend in our deposit profile. As you recall, we've stepped away from some non operating core FIG deposits.
That was a meaningful part of our business. That was a headwind for us. But I guess we would expect as rates rise, there will be some normal amount of reinvestment and the economy improves, there will be some normal amount of deposit migration into other securities and investments and just the money is going to get put back to work. That'll be a net positive for us in the long term. But certainly, I mentioned acquiring 900 new clients last year.
In most of those cases, we're getting the full banking relationship and we're getting the core operating deposits and the core treasury business as well.
Right up here in front, Ken.
Thanks, Doug. Can you talk a little bit about both that banker expansion and the new markets? 7% a year, you're growing bankers a lot. Can you just talk about the marketplace for still adding new bankers and the pace at which you continue to invest? And also, can you just flush out a little bit on the newer market expansion?
What's been going well? What may be not up to snuff like where you're seeing better activity out of?
So as I mentioned, we'll be in 50 of the top 50 MSAs by the end of this year. We added 45 new markets. It's not easy to hire good bankers. There's just there's not a banker tree you can go over and pick off 3 or 4 bankers. They're hard the good ones are entrenched in the banks, hard to pry out and they're not as many out there as you think.
So, we're sort of limited by their ability to the time it takes to grow our own in those markets or to get be able to acquire bankers in other markets. We may have started a little slow. I think we probably could have accelerated this coming out of the financial crisis a little faster, but we've been building very steadily. You can certainly see it across all measures in terms of new clients, revenues, loans and deposits. Every market has a slightly different story, depending on whether you're in Nashville, D.
C, Boston or on the West Coast as I pointed out, but we've been making steady progress. I think the message from Jamie at the beginning of this was build a 100 year business, hire the best people, draw a circle around the best clients and over time we will have substantial scale. Don't measure your success in near term loan growth, that will be a disaster. So, we've been taking that measured disciplined approach, making sure we're hiring great people and matriculating them into our organization, exporting chase risk people into those markets. And maybe it's taken us a little while longer, but you can see we've sort of steadily been growing that business.
These are 100 year investments for us. We've been a middle market banker in New York City for 220 years. We expect to be the same in San Fran and Tampa and Nashville and so we want to do it right and build the foundation for the long term.
Mike?
60% manual intervention for wholesale payments seems ridiculous. Why is that so high? Why hasn't that been lowered more? And where do you think that will go?
I mean, it's think lock boxes, think paper checks, there's still tremendous amount of dependency on companies conducting payments with the paper check, cost $8 for a client to send a check. The industry is moving against it away from it. We're slowly migrating our clients to digital platforms, but there's you have to have willing clients. So think U. S.
Municipalities, they need the budgets to upgrade their systems and technology, so they can integrate with the banking systems. So a lot of
that that needs to happen.
It'll happen over time. The long term trends are certainly moving paperless into digitized payments, but it's a tremendous white space right now. I have no idea. Yes, I couldn't tell you. I mean, theoretically, it goes away.
I mean, there's no reason why you need a lockbox to receive paper checks long term, where you can digitize every payment. Our corporate QuickPay product and our corporate QuickCollect products have been so we're starting to see rapid adoption, which essentially like Gordon's quick pay payment capability, it could completely eliminate the need for a check. Just you need clients to adopt it and you need clients to have the systems capability to use these products.
Everybody
Okay.
So let's get started. So good morning. Thank you for being here. So during the next 45 minutes, we will discuss the Corporate and Investment Bank. I will focus on 3 things.
First, about trends in performance and the progress we have made on the expense side. 2nd one, I'll give you an update on the different lines of business that following your feedback last year, we'll have a lot of focus on the Marquez business. And last, we'll talk a bit about the medium financial targets. So turning to Page 1, we have discussed a series of priorities in the past and this is a bit of a mark to market of that. So $10,900,000,000 record earnings last year, 16% return on equity and $19,000,000,000 of expenses.
We have made minimal progress in the multi year transformation of our transaction services platform. We have maintained our number one position in banking, continue a very good momentum in M and A and we continue adding senior talent to our banking ranks. We have maintained our number one position in fixed income with an increase in market share and we have made a lot of progress in our equity business. So the change in the structure of the market is playing through the system. We are really focused in building great platforms, maintain and grow our leadership positions in e trading and to deliver through all that a great client experience.
Lastly, we have discussed with you our strategy of being a global scalable player with a complete set of products for our clients. At the same time, we've been simplifying portions of the business that were not core to the franchise and we've been optimizing to multiple constraints in terms of capital liquidity and other resources. So moving to Page 2, we have delivered the Corporate Investment Bank very good returns over the years in an increasing amount of capital. If you look at the normalized revenue line, which is a gray color line at the top of the graph, it shows that it's been stable over the years. We have delivered growth mainly by a good performance in fixed income in 2016.
That is 16% return on equity on $64,000,000,000 of capital, $35,000,000,000 of top line and almost $19,000,000,000 of net income for a costincome ratio of 53%, which is in line with the $19,000,000,000 of expenses. So talking to expenses, about expenses in Page 3, on the left side of the page, this is what has happened over the last 5 years, bottom to the top of the graph. Blue is front office compensation expenses. They have gone down by 13%. The green part is all operational expenses plus non front office compensation has gone down by 9%.
The cost control has increased from the last from 2012 by 22%, but it has stabilized in 2015 and margin and it has gone down in 2016. The yellow part is regulatory assessment that has been relatively stable over the years and the orange part is mainly the improvement in simplification costs. So a lot of progress there. In 2015, Investor Day of 2015, we have discussed with you a multiyear expense program. We said then that we were going to move expenses from $21,800,000,000 to approximate 19 by 2017.
And we also said that if we found areas where we need to improve investment and accelerate investment or make new investments, we will make them and we'll discuss with you. So now on the right hand side top of the page, on the left, there are 2 boxes, the box on the left is what was included in the program and what we have done. So clearly, we have delivered on the simplification. We have found efficiencies in our front office expenses. We have made a lot of progress in delivering efficiencies in technology and operations.
And we have then a bunch of investments that we have made. Also, we decided that the business require further investments and we have made those. And those are related to acceleration of the global delivering the global payment platform. It is about the custody and fund services infrastructure transformation is more money in investments in our trading platform and continue hiring senior talent to boost our banking business. We have made all that.
Also in 2016, as you know, we have very strong performance and we want to maintain our culture, though prudent, we want to pay for performance and we pay for that excess performance. Also, we have the benefit that it will play has played in 2016 because the way that we hedge our cost, it has been a tailwind in 2016 and it will continue to be and a small tailwind in 2017, which is a revaluation of the dollars. So for 2016, we are still forecasting for expense for 2017, sorry, we're still forecasting expenses to be around $19,000,000,000 with including an acceleration, further acceleration of investments, the FX tailwinds and the normalization of some of the some expense items that were particularly low in 2016. So overall, really a good performance on the expense side. Moving to Page 4, all that has give us a good return.
So in 2015, our return on equity, once you normalize for legal, it was 14%. The business growth in revenues has added 200 basis points of return on equity and we lost 40 basis points because our run of portfolio is becoming smaller and smaller and the contribution from 2015 to 2016 is lower. We have one hike that contributed 20 basis points. The net of all the operation the expense program has added 70 basis points and we have increased capital as you remember from 62 to 64 in 2015 to 2016 that took 50 basis points, but an overall performance of 16%. So now going to the an update on the individual businesses.
So we spent a lot of time last year talking about the transaction banks. Let me give you a bit of an update on both of them, treasury service and custody and fund services. A lot of the focus is on improving our client experience. We've been working hard in the digitalization of onboarding and can opening documentation exchange. We are making our product implementation more digital and more customizable.
And we are working and Doctor. Endo mentioned this better than ever across the Corporate and Investment Bank, the Commercial Bank and the Retail Bank with what relates to business banking in really delivering a wholesale payment solution for our clients taking into account the size of them, the sector they operate and the needs that they may have. Technology transformation really at the core of what the payment business and treasury service is about and we are delivering on that with a lot of focus working with Matt Sainz on cyber security and fraud detection for us and for our clients. And we are delivering all that by reducing operating expenses of this business from 14% to what is forecast on 17% of 13%, an increase in an acceleration in technology of 12% for an overall reduction of cost of 8%. You remember that many years ago, we talked about the importance of developing and growing our global corporate bank.
These products and the quality of these products is core to it. This business has gone from being a bit offensive to being very offensive. The quality of the services, the quality of the product is improving and the clients are rewarding us with more and more mandates. When you look at on the right hand side of the bottom, at the bottom of the page, our operating deposits, though we've been reducing non operating deposits substantially in the last few years has grown by about 15% and the bulk of that growth is with multinationals outside the United States. Turning to Page 6, custody and fund services.
Similar as you remember from last year, similar story. We've been very focused in the client experience, the stability of the platform, delivering our digital agenda, analytics, data solution, workflows, solutions and also completing the set of products that we are delivering to our clients. We are building and about to be done our ETF platforms and we are really working in creating a scalable middle office solution for our clients. We are working in optimizing our platforms and making more and more scalable. And also in this case, we are managing to achieve all that also by focusing on reducing operational inefficiencies that have gone down by 12% in terms of operating expenses and accelerating the investment in technology for about 30% from 14% to what is going to be this year for an overall reduction in expenses of 5%.
At the bottom of the page, the clients are recognizing the strategy that we are following and they like it. They are recognizing the improvement that we had made. And really, we are winning Mondays here too around the world, Particularly, the most noticeable one is the BlackRock $1,000,000,000,000 custody contract that we signed a few years a few weeks ago. So overall, a lot of improvement here too. And I think that the combination of all this will create substantial growth in the years to come.
In Banking, Page 7, we always have a very, very good and solid debt capital markets business in the bottom left of the graph, number 1 many years ago, number 1 now. We've been working hard in improving our Equity Capital Markets platform and we've been number 1 for the last couple of years and really improving our market share. We've been, as I mentioned, adding a lot of senior bankers in order to improve and enhance the strategic dialogue with our clients at the CEO and Board level. And that is being clearly reflected in the improvement that we have made in our M and A platform, 6.4% market share in 2012 moving to 8.6% market share with constant growth every year. Also as part of these investments in bankers, we've been very focused in different regions and different sectors, putting up on the bottom right of the page in a very good position across sectors around the world.
Now moving to market Page 8. Strategy really hasn't changed. It's the same as it was many years ago. We want to make a scalable place that deliver a complete set of products to our clients around the world. And that strategy did work.
But once you have that is how you operate your operating principles about how you run the business to make it profitable is very important. Clearly, it's a client centric franchise, but we are very focused in operational efficiencies. We've been very focused in managing our expenses properly. We are very focused in optimizing to multiple constraints in capital, liquidity and other resources. And we have a very solid risk management process around.
The combination of the scale and these operational principles have give us very strong return on equity over the years and particularly in 2017 2016, 17% return on equity. Going forward, it will be all about continue developing innovation in our platforms and we deliver a great client experience when they use our products. This is the piece that we can control. This is all us. When you look at the wallet and the industry, we do believe and we'll talk a bit more about in a second that it will be headwinds and tailwinds.
But overall, we have delivered very strong performance in the past and we feel positive that in the medium to long term, the market business has growth. Moving to Page 9, this is what has happened. Fixed income and equities, these are full wallet collision numbers. We used to talk about top 10, these are full wallet. And we start this graph.
We started this graph in 2010 for one simple reason. 2,008, we had the crisis. 2,009, it was a very peculiar year. We have a massive sell off in the Q1 and a massive rally for the rest of the year. So 10% is when the market has started settling and being more normal.
In fixed income, the wallet has substantially shrunk over the year with some small growth last year, but most important, our market share has gone up from 8.6% in 2010 to 12%. In equities, a little bit less impacted for the nature of the business. The wallet has been relatively stable to slightly down, but our market share has gone up from 6.9% to a bit over 10% last year. So really a lot of improvement in our markets organization. Also moving to Page 10, you may remember that I show in the past a graph where we show in the sub segments across the corporate and investment bank, but in particularly in markets, we split in 9 segments and we're pretty much top 10, top 3, always top 10, top 3 in almost all of them with the exception of cash equities.
That was in 2012. We also told you then that behind those top three positions, there were plenty of places, region and products, where we were not. And this is a bit of a mark to market of that over the last 5 years. In 2012, in 39% of the products, when you split those known 9 businesses into sub segments that represent 31 sub lines of business, 39% of those were non top 3. And those 3 those businesses represent a smaller part of the wallet, but important then of 21%.
5 year forward, we are not top 3 in only 23% of them with a 17% representation of the wallet. So we have made progress there. The bulk of this improvement is in Asia. Almost 90% of this improvement is in Asia. And really how we choose where to invest or not, it was about all about completing the platform for our clients.
So in one of the areas where we did have challenge and we still do, but we made a lot of progress on Page 11 is equities. But we have made progress across all the segments in equities. Top left is prime. We said in the past that this was an area where we're And we have done that. The And we have done that.
The overall wallet, our overall revenues have gone up by 22% with a wallet that has only gone up by 4%. Percent and in cash synthetic, the in synthetic prime, the green part of the graph, we have gone up by 48%. Cash equity is another area. We were late to the low tide agenda and we've been catching up, investing a lot of money in that and making progress. From 2014 to 2016, our revenues have gone up by 31%.
Clearly, the cash wallet overall is shrinking. It has ranked 34%. And our all revenues has gone down only 4%. So an increase in market share there too. We always did very strong in cash sorry, in derivatives, but we have some challenges if what it connects with flow derivatives.
And we're very focused on that, particularly in the United States. So our revenues have gone up by 26% in the last couple of years with our wallet that has gone down by 5%. So and we overall according to coalition last year we were number 2 in equities. So I'm quite happy about it. Now getting into more of the details of markets overall, we always talk about markets in terms of Exinca and Equities, my spreads and macro and equities, this is looking at markets through a different lens.
And it's look at flow, it's looking at financing and it's looking at solutions. So our flow business is the biggest part of what we do, has gone up from $10,000,000 to $12,000,000 from 15% to 16%, 21%. And this is all the market making that we do on liquidity provisioning cash and derivatives for our clients. On the center of the page, you have the financing business, dollars 5,500,000,000 to $7,000,000,000 over this period. And also the return on the balance sheet that we deploy has gone up from 1.6% to 2.1%.
And the amount of balance sheet deployed is being more or less stable, if anything, it's slightly lower in 2016 than it was in 2014. The improvement in return on the balance sheet is mainly connected to 2 things. 1 is optimization. So we are deploying obviously keeping the client in mind, we are deploying our balance sheet in the places where it produce the best returns. But also, there is some this is an area where there is tangible repricing in the industry and mainly what relates to the financing of high quality assets, government bonds, high grade bonds and all that and obviously connected to SLR and leverage.
So progress there too. Our smaller part of the business is solution. Obviously, it's important to the clients and it's important to our strategy in delivering a complete set of products. It has gone up by 8% from 1.5% to 1.7%. At the bottom of the page is when you these are daily average daily revenues, they've been very stable with a bit of growth in 2015%.
But I want to make a comment here about our risk management approach. We are very careful and we are working hard with the market managers and myself in defining how much risk do we need to take. And the reason we take is 1, as much as we can, to be what is necessary to provide liquidity to our clients. The client franchise is in a stage where it's profitable. So we don't need to take risk in order to enhance our profitability.
We need to take the amount of risk that is necessary to provide liquidity to the clients in any kind of market conditions. And if we try to be smarter than that, if we try to really punt our way to accept profitability, we can put ourselves in a very bad position, which is losing money in those positions and also not being able to monetize the client franchise. So a lot of the effort goes in defining how much is necessary, how much is the right amount of raise that is necessary. The next page, Page 13, is a phase about discipline throughout operating principles. Our revenues have gone up from 17.5 percent to 21 $17,500,000,000 to $21,000,000,000 while market expenses have been flat from $14,000,000 to 16, though we continue paying for performance and our net income has gone up by 43%.
We've also been optimizing the utilization of capital and liquidity, in this particular case, it's capital to multiple constraints. We have reduced the consumption of G SIF points in the market organization by 14%. We have reduced the consumption of standardized RWA by 17%. And ideally, in a multiple constrained environment, you want to have all the constraints being equally binding. So essentially, we have a bit of room to grow advanced RWA.
Samsung is about growth and something is about the different allocation. But all that discipline has generated a 17% return on equity that we saw in you saw in 20 17 and in the past. Going to Page 14, this is exactly the same page that we showed you last year. And it shows the components of the fixed income business and its return on a fully loaded basis. Last year in 2015 was 15% return on equity and all the lines of business were crossing comfortably the cost of capital with exception of commodities that we're still dealing with the tail end of the simplification process.
But most important, on the right hand side of the page, you have the marginal return on equity that is very positive across everything, including commodities. That tells you that the expense base of this business is a lot more sticky than one would have thought, number 1. Number 2, that it is really difficult to shrink your work to profitability. And for us, the most important piece is that these platforms has a very positive operating leverage. And that's exactly what has happened in 2016, where the fixed income business increased performance going to Page 15.
And you see the allocation of capital is totally consistent, but it's slightly higher capital in 2016 than in 2015. It shows that increase in the top line in fixed income produced an extra 300 basis points return in the overall fixed income business. Increase of returns in the rates business has moved the commodity business from being not crossing the cost of capital to comfortably crossing the cost of capital and substantial improvement in the spread businesses all across. So clearly, operating leverage and the size of the business and considering the scalability of these platforms is a very important component here. Going to Page 16.
This is how we think is our roadmap to be complete and our roadmap for the client experience. What you have around this circle is all the services that we provide to our clients from the onboarding and how do we make that experience better or how do we deliver our research products, how do we deliver our analytics. And then one is that how do we execute transactions on a principal basis and on an agency basis for the structure products, for flow products and all the post trade services that we provide from settlements and financing and custody and fund services and corporate finance services. What we are working on is to be able to complete this set of products and also to deliver those products to all the channels that the clients would want to consume them. So we are very focused on that.
David Hudson and the markets organization, the sales organizations, I'm very focused because I think that to get this right will guarantee the future of the markets organization and the rest of the business. So we said that those are the things that we control and we talk about headwinds and tailwinds in markets. So let's talk a bit about headwinds. As the market structure continue shaping, the way that we are thinking about is through the lens of electrification. On the left hand side of the page, we have the graph of the flow business.
Remember, 10 1,000,000,000 in 2014, dollars 12,000,000,000 in 2015, 10% of that of those revenues were done through electronic means in 2014%, 12% in 2016. Then on the center of the page, you have the revenues for market in 2016 and the waterfall. So solutions and financing unlikely to be to go electronic. There are portions of the business that they are not going to be electronic or very low likelihood because of the liquidity and the requirement of capital. So and then there is an addressable part of the flow business, where it's a more liquid part.
Some of that has already gone. And there are $5,500,000,000 that you could consider is a fertile ground for further electrification. On the right hand side of the page, we have different scenarios where we assume how much margin compression may or may not be and what percentage of those $5,500,000,000 may become electronic. Let me pause here and give you a few comments here. Today, taking fixed income as an example, 94% of the business we do or the tickets we print are done electronic.
39% of the notional that we trade is on electronic and 11% of the revenues. So that is a gross fixed income mainly driven by foreign exchange and government bonds. So that's that. The second thing is there is no legal impediment or regulatory impediment for the whole $5,500,000,000 or any other part to go electronic in the past of today. And the reason why it hasn't gone or part of the reason is the fact that in this $500,000,000 there is plenty of it that requires capital in facilitating the intermediation process.
So the combination that some of the staff that is more liquid at very high margin has already gone electronic and the need of capital make us believe that effect of electrification is more towards the top left of the right graph more than the bottom right. But this is our assessment, you may have a different idea there. So moving to Page 18, talking about the future or the potential for growth in markets in the medium to long term. So we discussed that the wallet has run substantially from 10% to 15%. And I would have thought that and Jamie mentioned this before that there are three reasons, some secular, some cyclical.
So there are products that have been eliminated, don't exist anymore. There is some margin compression due to mainly the process of electrification and market transparency. And we have a long period of low volatility, low interest rates that is some way reversing. And some of that may have reversed last year with a growth in fixed income of 6%. When we look forward around the world, political issues all over Europe, French election, Italian situation, German election, SAC elections, Brexit, new policies in the United States, geopolitical issues pretty much everywhere.
So it's very hard to believe even though this quarter happens to be that volatility is very, very low, the volatility will remain low in the years to come. So I think that higher volatility will help market business. The normalization of interest rate is positive for the market business in particular for the rates business. The European Capital Markets will continue to develop. There is no doubt that that will happen over a long period of time.
And emerging markets on the bottom right that represent only 12% of our revenue represent 40% of the GDP on the world and 70% of the growth of the GDP in the world. They've been challenging for strong dollar, low commodity prices, all kind of political issues all over the world, but at some point it will come back. So the combination of all this makes me believe that even though considering some headwinds for electrification and it will be modestly positive over the years to come. So now going to Page 19 and look about and talk a bit about financial targets. So 16% return on equity in 2016.
Let's go to the revenue page. When we were with you on 2015, I will give you our million ton forecast. So we increase in these numbers already 100 basis points of higher revenues. But this 20 basis points negative is a bit of for the next couple of years, a bit of being cautious on market for two reasons. 1st, because the wallet grew last year and hopefully that situation is sustained over a longer period of time.
But most important, because we have a very, very substantial increase in wallet share last year. So we're a bit cautious with markets, though we are planning for growth and for increasing revenues in all the other lines of business. We think that the couple of 2 or 3 rate hikes that we see in the forward curves is going to give us an extra 80 basis points. The end of our expense program, including the acceleration of investment is a positive 30 basis points that is compensated by some items in expenses that were a bit too low in the past year. When you look at and then there is 60 basis points negative in normalization of credit and tax rates.
At the bottom of the page where you have the box, let me remind you the forecast that we have in 2015, dollars 34,000,000,000 of revenues, approximate $19,000,000,000 of expenses, our cost income ratio, it was from 55% to 60%, at 12.5% capitalization on our glide path of advanced RWA for a capital amount of $70,000,000,000 and a 13% return on equity. Going forward, we think that the revenue is going to move to $36,000,000,000 that based on that and our expense program, the cost income ratio will be more towards the bottom of the page and gravitate in the neighborhood of 55%. We are going, as Marianne mentioned, to have $70,000,000,000 of capital that has been allocated in a different way in 2017. And depending where the company settles its capitalization and how much more optimization we can do, that number may go up modestly in 2018 or not. We don't know yet.
And for us and the consequence of all that is an increase in our target return on equity of 14% to 14%. So now to wrap up. So there is no doubt that the size and quality of the franchise is amazing and we continue working in deepening the relationship with our clients. We are in a very privileged position with leadership in pretty much all the lines of business that we run. But and we have worked very, very hard to get here.
But from where we are, it will require working even harder than every any time before in order to maintain our growth, our franchise portfolio. So for me, for the management team to avoid complacency and be aggressive going forward is very, very important. We talk about the change in the structure of the market. We will continue to embrace those change and investing in and being disruptive in our business model and not being defensive to really continue the success of the past being equal or better than the one in the future. Deliver a great client experience across all lines of business as we are building and developing our platform is very important.
Our culture, our expectations for conduct of our employees will be maintained to the high risk standards regardless what change or not occurs in regulation. We have learned from the mistakes that we make in the past and those lessons will be fresh in our mind when we look at the future. And finally, this is a business of people. The quality of the service that we provide is related to the quality of talent. So attracting and retaining the best possible talent in the industry is a top priority for us.
So I will stop here and we have probably a few minutes for questions. Glenn?
Thank you. Glenn Schorr, Evercore ISI. I appreciate the breaking out rates separately on that ROE walk. But when you look at the revenues and on the chart, it had basically flat revenue projection over the medium term ex rates. Can you talk through a little bit of the puts and takes in your mind because it seems like the share you've taken, if fee pools grow a little bit, you should be a big beneficiary of that.
So maybe it makes sense to talk about it by these business could do a little bit better, these business could do a little bit worse from an industry level?
I'll tell you how we think about it. We there is no doubt that we always did and we are a bit cautious in the way that we plan for market business. And when you look at every year, you can you have some core number of revenues and then you have an increase of activity around certain events. So those events may or may not repeat, it will make the different ones. So we don't plan to have 100% of events that took place in 2017 repeated going forward.
We have increased our market share, as I mentioned, substantially in 2016. So that is a bit of a maybe a bit of a headwind going forward. In the long run, I have no doubt that this business will grow. To plan the next couple of years, we will work as hard and we make as always do as much money as it's possible to make. But I think that I'd rather be a bit more cautious in the way we plan and we deliver and we manage our expenses and all the other resources in line with that.
And if there is an outperformance, these platforms are very scalable, so the less deposit leverage will produce better returns. Mike,
Slide 10 shows your movement into the top 3 in different product areas. How do you balance not being all things to all customers in all regions when you deliver the platform, which you said helped you gain share in Asia, staying the course versus pulling the plug when you see a certain area not working out for you.
And I think that we have shown over the years discipline. So simplification was an example of that. We were in plenty of things that represent almost $1,500,000,000 of expenses that were not core to the franchise. So essentially, we are very disciplined and we have been and will continue to be investing in what is core and important to the franchise. We don't want to be complete for the sake of it.
We don't want to get market share for the sake of it. We want to really create a platform that delivers the best possible outcome to our clients and the best possible return to our shareholders. So that's why we've been very surgical about when you look at from these 39% of areas where we're not top 10 to now 23 It's not that we're going to throw money everywhere and say, let's go to top 3 everywhere. We pick the ones, in particular, Asia and equities, where we were not where we wanted to be. The feedback of our clients they want bigger and better JPMorgan and that's where we invest in.
So it's like everything else. It's disciplined about risk. It's disciplined about investment. It's disciplined about invest those in a way that deliver the best service to the clients and the best profitability for the shareholders. Okay.
Betsy?
Hi. Daniel, two quick questions. One is on Page 15. You talk about the various ROEs and the products. And then at the very bottom, you've got this small ROE for the runoff portfolio.
Is that basically given that the ROE in the business was 16%, is that fair to say that the runoff is pretty much done or? Yes. Okay. And then just on your comment around slow derivatives in U. S, what's the plan to fix that?
Well, we've been investing heavily. If you look at coalition, we were number we were around number 7 in 2012. We are now 3 or 4. So we have made a lot of progress and we'll continue to focus on that.
Okay.
So we Because your comments
were like, we have some things we have
to do to get that up, but
No, no. Like for example, we are not offering cash. We're number 5. We're number 8 or 10, but we're number 5. There is more growth there.
We are rolling we have rolled our prime platform in Asia, our DCS platform in Asia. We are gathering more market share. When I compare Asia with Europe and the U. S, we are not where we should be. So that's another area.
Flow derivatives was one more example of EBITDA derivatives for the United States where it still some more growth to come. Okay. That's all I have time for. Okay. Thank you, guys.
All right, everybody. I stand between us and lunch. And this is going to be a topic that is near and dear to everyone's heart given that this is a roomful of some of the world's best stock pickers. I'm Mary Erdos. I'm CEO of the Asset and Wealth Management Businesses here at JPMorgan.
And I'm looking forward to going through the story with you. As a reminder, just on the first page, what is the asset and wealth management business here at JPMorgan Chase? This is the business that manages the assets of clients all the way from the retail investor who's buying their first stock and bond to the most sophisticated sovereign wealth funds around the world. We've been doing this for 2 centuries. And over that 200 years, we have amassed what I think is the single best client franchise in the world.
We have direct relationships with each and every one of those clients and it gives us great insight into the kind of things that they need and that they want and they partner with us to tell us what they need in the future. And that's what keeps us constantly innovating and adapting this business. Sometimes people say, you're in a really big firm and it's a really old firm. Can you really be dynamic and fast and quick to thinking about new things? It may surprise you that inside Asset and Wealth Management, 45%
of the
people that work for us are millennials. We hire 300 people straight out of university each and every year to help us to think about creating all of these new great products and services. And we never stop investing in these people. Just like Daniel said, it's the single most important asset we have. The most important statistic on this page is the 95% retention of top talent.
If we don't do that, if we don't make this a great place to work, people will not have their long term careers here. And they do because we keep investing in them. We keep giving them the tools and the technology to be able to do their job better and better in spite of whatever comes at them from industry headwinds. And we do that because we constantly use both sides of our brain, investing in new things, new people, new technology and constantly waste cutting, so we can put that money back into the areas that we need for the future. And that's why we continue to build this diversified business that has such depth and breadth that you find that the numbers that we go through each and every year are just more consistent than others because of that.
They are just like the portfolios we manage for clients. You diversify them so that you can have lower volatility. And that's what we have. So how have we done? Let's go to the numbers page.
We continue to grow our assets and revenues at a 5% annual compounded growth rate over the past 5 years despite the upper right hand, which are many challenges on alpha, on fees, on flows. We do an intense amount of work on this waste cutting I referred to and that's why we continue to deliver such strong pre tax income numbers. As a matter of fact, we hit a record last year, up 7% compounded annual growth over the last 5 years. And a very solid 29% margin and a 24% ROE. And we do that without changing our priorities drastically every year because this is a long term business.
This is a business where you focus on investment performance, where you focus on client experience, where you constantly innovate and grow and you squeeze out those operational efficiencies. So let's start with investment performance. I do not need to tell this room that the last few years have been very tough for stock and bond pickers. Quantitative easing has distorted a lot of what happened. We've had incredibly low volatility and high correlation in almost all that we do and that's presented these challenges.
I also don't need to tell the room that those 5 10 year numbers are some of the industry's best. And you know that they're even better because those 1 year numbers are included in those 5 10 year numbers. But I want to tell you, this is not going to last forever. As a matter of fact, you've seen a lot of change in the last 3 months. And you too should not doubt yourself in the jobs that you do and your clients shouldn't doubt your stock picking abilities.
And as a matter of fact, if I just take equities, that was a 1 year rolling number. Fast forward just to the end of January, where you drop last January and you pick up this January, that number goes to 75%. The world is changing and you cannot doubt the ability for human beings to pick good stocks over bad stocks. And the reason that we focus on these 5 10 year long term numbers is because they generally lead to the long term flows that grow this business. So I want you to look up on the screen for this page.
This is a page that has lots of colors on it. And we've shown you this left hand side of the page for a couple of years to explain to you not the individual boxes, but the diversification of this business. So that different asset classes across the top can be challenged from time to time. You can have people not as interested in fixed income in 1 year and not as interested in equities in another. But if you have a diversified business, clients need you for other things in every year.
You can have regions or client types that have troubled areas in their region and they don't have as much new money to put to work. And so all of that continues to add to flows into this business where clients entrust us with their assets. Last year $23,000,000,000 a little bit better than the year before, but not as high as we had become accustomed to. I haven't shown you the full story in years past. So this year, we decided to give you a little bit more transparency into the other things that are long term drivers of the flows of this business.
And that is the other side of the balance sheet. The Chase Wealth Management and JPMorgan Wealth Management clients that come to us and ask us for help across their entire balance sheet, whether it's brokerage, custody, deposits or credit. Last year adding an additional $62,000,000,000 into JPMorgan for a total of $85,000,000,000 into the asset and wealth management business. And these that over the last 3 years is totaled more than a $250,000,000,000 inflows into our business. And it's this diversified business model that helps us to hold up quite well against our peers.
Like to like comparisons with publicly reported peers only, very importantly Vanguard would be on the top of this chart if it were a publicly reported peer. Consistency is the key here to this page. Number 2, cumulative flows across active and passive managers for $408,000,000,000 over the 5 years or roughly $82,000,000,000 a year. But that's not our goal. Just so you know what I say every Monday morning when we get together as a global team, we don't strive to be the biggest in this business.
That is not our goal. Our goal is to be the best. If assets flow as a byproduct of being the best, that's great. But our goal is to be the best. And that's why the investment performance is so important.
But it's also why the financial results are so important. So when you look at this next page across all of our publicly reported peers on a like to like basis, We aren't the largest in assets, we're number 3. We aren't the largest in revenues, we're number 5. But for you, we need to deliver the best bottom line performance for you, our shareholders. And that pre tax income number is one that we are incredibly proud of, leading our peers.
So what are we going to do about this business going forward? Let's take a look at some of the challenges. Look up here on the screen for a second. Here's the industry headlines that you all know about. Active versus passive, hard times come to hedge funds, fee compression, brokers will experiment with new fee plans, competitors versus humans, cyber brains are taking over.
Guess what? None of that is new. 1970, 1975, 1980, these are the same headlines year in year out. So what do we do about it? JPMorgan constantly adapts.
We don't believe the debate is active versus passive. It's active and passive. We need those as building blocks for strong portfolios over the future. And clients don't just come to us for products. They come to us for solutions for their entire wealth.
Fee compression. Fees should always, always reflect your expectations of the value you can add to clients over the long term. And if not, you need to change. We need to constantly think about the portfolio of things that we offer to clients. And if it's not what they need and if it's not working, you change.
And if you aren't innovative and you aren't launching new things, you need to change. Over the last 5 years, we have closed or merged 191 funds and launched 267. We need to see the opportunities for the future for our clients. And on the computer versus the human, it is definitely not or, it's definitely and. Clients choose how they want to interact with us, when they want to interact with us, from where they would like to stare at a computer screen and interact with us.
We need to be there for them. And technology helps our own people to be better at what they do, to be more efficient, to not have to do the rope work, but to be able to give the higher value added services to our clients. It not only increases their productivity, but it greatly reduces the risk of error. And when you have complexity that gets entered into clients' lives, you need a human being. Human beings need human beings to explain the world to them And that's our job.
There's no better example of that than this wealth management business that we have across Gordon's Retail Bank and the asset management business. This is a new page that I want to just walk you through. This is both Chase and JPMorgan across the wealth management spectrum. Chase Banks half the households in the United States of America, half across 5,200 branches. Less than 10% of them invest with us.
JPMorgan banks 50% of the world's wealthiest. We do that across 109 different countries around the world, but less than 30% of them in the U. S. Actually use us as their main bank. When you pull this together, there is no better way to help clients through their life cycle.
I was thinking to myself as I was trying to bring this to life for you, an example of a real life client who goes through this journey with us. And there's a client that most of us on the management team actually know quite well. He just came to us only few years, several years ago, but within the last decade. And he started when Barry Summers was running the Chase Bank and Barry put him into the Chase Wealth Management business because he saw this entrepreneur who he knew would be successful in the future. And they did their first mortgage for a small apartment in New York City.
He then was expanding his company and he came to us and we decided that we needed to go to Doug Pettenau's group to get more of an important loan from a business banking perspective. And then Doug said, we should probably think of an equity investment here and we should show it to Larry Unrein, who runs our private equity business. And we invested on behalf of our clients into his company. He then started to get some real sizable money and assets that needed to be managed. And so we introduced him to Kelly Coffey in the private bank.
And then he wanted to have a bigger mortgage and a very complicated water slide in his backyard, which caused all sorts of problems from a jumbo mortgage perspective. And Vince LaPadula was able to do that. And then we introduced him to Daniel. And I'm proud to say that just recently we were awarded lead left on the IPO. And now, Brian Carlin and his team are working on putting all the stock into a pre IPO grant so that we can help him.
And then when he's done, you never know, but we might be able to help him buy a sports franchise or something depending on how well Daniel does with this process. But I will tell you not to leave anyone out at this table. It is a full client service organization and this client did just have dinner with Judy and Jamie Dimon 2 weeks ago. So he's taking care of them from top to bottom. So that is really how it works in this place.
That is a real life client and that is how we help them through the life cycle of this. But at the beginning, it starts with banking. And so I just want to remind you that at
the heart of all of this,
the clients who entrust us with their deposits are at the beginning of a relationship with JPMorgan Chase. It's the beginning of a dialogue, 19% compounded annual growth across. People feel safe and good and need great advice from JPMorgan Chase and that's where they start. And it gets all the better when we begin the relationship on the bottom half of this page, which is on the lending side. When you learn and explore what a client needs on the other side of their balance sheet, you have a much more intimate understanding of their needs and desires as they go through life.
It's a way that you begin a relationship where clients understand lending actually is not a commodity when you're an individual. You need that bank in good times and in bad and we are there for them. And that's why the most important thing we do is on the bottom right. It's not just underwriting as many loans as we can. It's knowing how much is too much for a client.
We don't want to be there on the other side of that. We are going to be there in good times and bad and we want to make sure that they get through those tough times. So we use all of the great risk analytics that we have across the JPMorgan franchise and the years of experience that we've had in lending to have a very risk controlled portfolio of loans. And that's why we're at industry low charge off rates here. So risk controlled portfolio of loans and that's why we're at industry low charge off rates here.
So when you take the banking and the lending combined with the investment management that we do at JPMorgan Wealth Management, that's where you get these recurring revenues. And I just want to tell you as you think about how you apply multiples to different parts of this business, the single most important number on this page is at the very bottom left. 85% of what we do across the wealth management franchise are recurring revenues. That is different than most of our wealth management competitors. Most of our wealth management competitors have to wake up every morning and think about how to create what they did the day before and the year before.
We manage our business focused on very long term client relationships, helping them through. And those are the kind of clients that come to JPMorgan. And that's why you see in the numbers those compounded annual growth rates that are peer leading over time. So when you think about that diversification of the business and how we manage the wealth management, it's no different than the way that we manage the asset management. Chris Wilcox and team manage across the asset management spectrum and I want to start with the core equities franchise.
The thing we talked about as being a great target of focus in the press. When you look at the top right, those 5 year numbers, 86% U. S, 79% Global, 98% Europe, 79% emerging markets. Those are incredibly strong active management results. And we get and maintain that active edge through being all the way around the world, trying to get those local insights.
5,000 client meetings every year that our analysts around the world are doing to make sure that they know the good ones from the less good ones, along with the analytics and the tools we give them, the visualization, all the things that you will see outside
on the
break. Our client our investment professionals are highly trained to understand. We want them in this to run a marathon, not a sprint. We want them running long term investment portfolios for them. If you look at the charts on the bottom, this goes to some of the challenged numbers over the past 1 year.
You think about growth, okay? The bars are outperformance or underperformance to the benchmark. You see that in the past several months in a row, they had a very challenged time. You cannot doubt your portfolio managers when they are managing this way. You must ask, did the markets change or did they change?
And if they haven't changed, you need to give them all the support and confidence to keep doing exactly what they're best at every day. And that's what we do. And that's why despite these good times and bad times, they are a 5th percentile manager, 5th percentile, 7th percentile for the 1st couple of days of this year. It's really outstanding performance. And the same is true in European dynamics.
It's hard enough managing across the European markets. And when you have the benchmark that moves because of this quantitative easing and very high correlations of asset classes. You have to stay true to your portfolio managers. And when you look at those numbers, I strongly believe that if somebody has entrusted you to be a steward of their wealth, you have a fiduciary obligation to look at the outperformance of these managers and consider whether you're going to leave an extra 10%, 20% or 30% of wealth on the table and not have it in their retirement account when they're done. It will change the lives of their families and the way they retire if you consider managers like this.
It's no different in fixed income. Bob Michael runs a fabulous team. It's incredibly important that he has the ability to continue to invest in this business and prepare for what might be the end of a 35 year bull market in bonds. He does that across the globe from the broad markets that are headquartered in Columbus, Ohio, all the way to the high yield and emerging market teams, which are in very high demand right now. The growth on the left of this area has been 50% faster than the competitors.
It's because of the diversification, not just of the solutions we provide to the clients, but the talent that we have around the world to be able to help them. And if you look on the bottom left, we are the number 2 in flows over the last 5 years of our publicly reported peers except for Vanguard. And so it's very important that there are products and services that you provide like on the lower right, where they are go anywhere strategies, where they are duration agnostic and where you have a long term track record that you can help clients to feel comfortable in trusting us with their assets, 100 percent outperformance over the rolling time period, 9th percentile manager. And as you continue to go through and diversify the portfolios, alternatives is an equally important part of the conversation. Clients turn to JPMorgan in this area because of the complexity and the long term nature of some of these asset classes.
We're the 2nd largest alternatives platform in the industry. Everything from our liquid flagship strategic opportunities fund $20,000,000,000 run by Bill Egan all the way through to our global real assets platform. And then there's things like alternative beta. We've been in it for many years. We're fortunate enough to have a very strong 5 year usage track record.
We see lots of flows into factor based approach in getting hedge fund like returns, but having daily liquidity. And I think this will continue to be a growing importance in clients' portfolios. But maybe the most important area is solutions where it pulls it all together. It's not about a single product. Clients don't come to JPMorgan Asset Management just for that.
They come for solutions, whether it's on the institutional side on the top right, where they have to solve for a liability stream or whether it's the retail side on the bottom right, where they're looking for a goal, how to retire in a way that makes them comfortable. And I want you to just look here up on the screen. The JPMorgan Smart Retirement has been an explosive platform growing at 45% compounded annual growth rate. Where are you when you think about when you're going to retire in decades from now, what firm do you know is going to be there in decades from now? JPMorgan, which is why they continue to entrust.
But I would tell you just to tie back the question of humans versus computers, I thought it was interesting I just put up, if you just missed the last 3 days in the index, the best 3 days, sorry, not the last 3 days, the best 3 days over that decade, you have 25% less of your assets, which is why humans need humans. Siri is not going to hold your hand and help you to think about getting through these tough markets. And so that's why we never stop investing in our people. And the upper right hand quadrant, left hand side of this page, we continue to invest our dollars 1st and foremost in the people. They need to deliver these innovative solutions to our clients.
The second most important spend though is technology. Mike Urzioli runs what I think is the leading technology platform in the asset management industry. And we do it again with 2 sides of the brain. The bottom half, constantly making things more efficient, reducing the cost of our legacy footprint, increasing the usage of the cloud. Those two things are very important.
And then reengineering, we all know the process of KYC, new rules, new regulations through things for a loop. How do you think about doing that straight through processing, risk controlled, making sure we're doing the right things for our firm and also for the client experience. We now have that even more efficient than when the whole journey began. And if you do all of that together, this bottom right hand, we have reduced errors dramatically while clients continue to entrust more and more assets with us. We do that so that we can invest in the top half.
The top half is all about digital, what Gordon and I are doing to make sure that how client comes into us is seamless and they can work whenever they want, wherever they want. But very importantly, you can't do that unless you have agile technology development. Those displays out there, they're not fake. We didn't buy them from another company. We spend $9,000,000,000 on being one of the leading technology firms ourselves.
We have agile technology where we can do it just as fast as all of the small FinTech companies and that you can go over to Hudson Yards, you can go to our Palo Alto office and you can see exactly what they do and they love working for this company. We have codeathons where they solve a client's problem and within just a matter of days, we've created it and we import it and we plug and play into what we do here at JP Morgan. So when that all comes together, this is the business of asset management, which is poised for continued growth. The first comment on this page is client focus. It is all we do is client focus.
We do it because we constantly innovate and we do it on a global platform. Others are retreating from the global stage and we continue to grow. But we do that always with risk management on the forefront of our mind. Risk management is not a separate thing at JPMorgan. You just heard Daniel talk about it.
Risk management is in the fabric and the culture of everything we do. It is how we do business. And we do that while leveraging the entire brand of JPMorgan. When you think of the work that Kristen Lemkow does on our iconic brand, when you think of the work that Dana Deasy does to protect our assets from cyber and other threats, when you think about using the full spectrum of JPMorgan, it's really hard to replicate. It is really hard to replicate a 10 year investment performance track record.
It's really hard to replicate a 50 year relationship with a pension fund. It's even harder to replicate a 100 year relationship with a family. It's really hard to be a number one investment bank overnight. It's really hard to have the highest client satisfaction statistics in a retail bank across 5,200 branches. And it's really hard to be the best commercial bank out there.
It's even harder to have all of those things in one firm and we do. And that's really, really hard to replicate. And that's why we're going to continue to grow long term assets. We are going to continue to deliver revenue growth. We will continue to gain efficiencies in this business with pretax of 10% and a solid pretax margin of 30% and an ROE of 25%.
And I have a minute or 2 for questions.
Okay.
We're right up front here. Andrew Lim.
Thank you. Regarding your Wealth Management proposition, Wealth Management in the U. S. Has been quite agent led versus Europe, I would say. But it doesn't seem to be part of your proposition.
You seem to be differentiating yourself in terms of performance, mismanagement and so on. Is that really
I didn't catch the first few words. So you said U. S. Continues to be what led?
Agent led. Agent led.
Agent led.
Yes. So they tend to get a great proportion of the, say, the value of what management brings. So is that like a differentiating matter between yourself and competitors of the U. S. That you're much more focused on performance on product and innovation and so forth?
I wouldn't say that
well, I certainly think it's a great differentiator for us. I wouldn't say we're focused on product. I would say that we're quite blessed with the client base that we have and they drive us to the things that they need. Our job is to create the best solutions for them for their entire portfolio, not just a piece of it and to be able to help them through that entire lifecycle. And that's why you see that more and more clients every day as the world is in turmoil continue to choose JPMorgan as a place that they want to turn and they can work with us in a variety of different ways across that wealth management spectrum.
Okay. We have time for probably one more if there's one in the room.
We're going to go through some logistics about lunch and a break. Thank you very much for giving me your time.
Okay. That's great. Thanks, Mary, Daniel. So just a couple of things very, very quickly before we break. Please check your emails.
You should have either just received 1 or you're about to receive 1 with your table seating and the room number for today's lunch, which starts at 12:15, so at least half an hour for our 2nd break. If you didn't get a chance to go out and see our innovation showcase earlier, please do stop by. If you don't make it now, we will have one more chance at the end of the day after all the presentations are done. So if you want to do that, stay around for a little while, grab a real drink and stop by on your way out. Enjoy lunch, be back here in 90 minutes.
The afternoon session starts promptly with CCV at 1:15. Thanks a lot.
All right, guys. Can you turn up my mic? Thank you, everyone. If you could grab a seat at the back, if the people on the doors, would you guys mind bringing the doors shut? Well, that was fortunate.
We nearly locked 1 person out. Sorry about that, Jamie.
Not done purposely.
All right. Good afternoon, everyone. Gordon Smith, CCB, there's just myself, the CCB team who I've introduced in a second between us and Jamie and his closing remarks and questions. I apologize for having a slightly raspy, croaky voice. I work so closely with my teammates on the operating committee that Doug Pettenau has given me his cold, for which I'm very grateful.
Doug, thank you for that. I'm going to be joined today on the stage by Cassandra Duckett. T, could you give everyone just a wave? She's running retail banking for us. Jennifer Peepsack, Jen is running business banking for us and is in the process of moving to credit card and Mike Weinbach running the mortgage company.
This is Mike around over the course too. All right. So I am going to cover an overview of CCB, kind of how we're doing overall. And then the team will come up and do banking and do mortgage, not in that order. And then I will come back and do questions before, as I said, I hand over to Jamie.
So I'm going to my Page 1, which just lays out the strategic priorities that we've used over the last many years here actually, that focus around deepening the relationships with our customers, has tremendous economic value for us to continue to lead and to drive the payment innovation work. And I think we see some really good momentum in 2016 in that regard. To continue to drive digital engagement across our customer base, you had a couple of comments from my teammates over the course of the morning about the power of the digital app and it really does have an impact on our economics as well. Working with Matt Zanes and his team on cybersecurity and making sure that we keep our systems as safe and secure as they can possibly be. And Matt and his team have done a terrific job working through that with us.
To continue to really focus on the control environment, we've come a very long way over the course of the last 4 years or so. And that will continue to be a focus for us going forward. But I'm actually very pleased with the momentum that we've gained there. And the investments that we've made in the control environment have made us a better company and has made it better for our customers too. A number of you have mentioned to me the progress on expenses and I will touch on that, but some excellent momentum there.
And I particularly wanted you to meet some of our team members presenting today other than I'm sure an hour and a quarter of me would be somewhat dull. Some of you will be thinking 15 minutes is somewhat dull. But we have a really strong talented group across the consumer businesses. Turning to Page 2, we look at the medium term guidance as Mary Anne has defined over the course of the next 3 years. And you can see that business banking charge off rates largely consistent with where they are in 2016 as we look out into the future.
Ditto of mortgage, Marianne talked a little bit about the increase in credit card, very consistent with our expectations, very consistent with where we priced the business. Net revenue rate also up a little bit there as we assimilate the new co brand deals and the investments that we've made in marketing. And the return on equity performance at the group level at 20%, that's likely to move closer to 20% plus over the course of time. This I think is an incredibly important page. So you've heard each of my fellow presenters and you've heard Jamie and Marianne talk in the earnings calls, that we continue to invest in the business.
We continue to invest for the long term health of the company, if not the long term health of the presenters here. And this is where you see it all begin to come together. So look at the active mobile customers up 16%. You'll hear more from T on deposits, but up 11%. And I'll show you a chart a little bit later on that that's been a consistent performance over the last number of years.
Business Banking, average deposits up 9%. Foreclosure units in the mortgage business down 36%, excellent momentum there. Mike is going to talk more about mortgage shortly. Credit cards, the number of accounts up 20% and particularly think about up 20% given our scale and the share gains that we've had over the last number of years. Sales volume ended the year at 10% and accelerated as we came through the 4th quarter and continues to be very, very strong in the 1st 8 weeks or so of the year.
Merchant processing volume up 12% and average loans in the auto finance business up 16%. Interestingly on merchant services, just before I go on to this slide, is when we split merchant services from the partnership with First Data back in 2,007, We owned 51%, they owned 49% of the partnership. And the total partnership had $719,000,000,000 back in 2,007. So we split the 2, we took out slightly over half and now our slightly over half is actually almost at a run rate of $1,000,000,000,000 and just really sorry, fabulous men.
Could you
just go back one slide for me, please? Just one. There we go. Perfect. Thank you.
So I said I would give
you a little bit of
sense of what happened to consumer banking deposits over time. And just look at the steady consistent growth since 2012, 9% compound annual growth rate. And if you cast your eye across to the right, you look at the period 2012 to 2016 on the far right of the chart, you'll see the total loan growth was 3%, but core was up 13%. And so now what we're starting to see is those non core loans typically across each of the business lines came with Washington Mutual acquisition, running off, running through the system and very strong core loan growth across our key products. Let me also now turn to revenue growth.
Clearly, we're seeing some good momentum as a result of the investments, but offset really by kind of 2 large areas, the new card originations and as we talked a little bit about that, we have to amortize the expense or expense over the 1st year of acquisition from those new customers. And also the co brand renewals. And we sat a couple of years ago at a point where we had substantial numbers of our co brand partnerships who were up for renewal. We put a dedicated team run by Matt Cain, who is actually here and is now the CEO of the Merchant Services business. And at this point, we've got more than 80% from a volume basis of our co brand deals renewed for the long term.
So some challenges that we've had, but I think net net, if I look at those challenges, they're all driven by some real positive really positive business outcomes. Turning to Page 6. And we look at some of the areas that we've put money to work on. And look at on the left hand side of the top chart, branch banking operating model, you'll hear more from T on that, digital, Chase Pay and the control infrastructure. Give you a sense of the control infrastructure over the course of the last 4 years or so just in CCV, just in CCV, not across the company, just from a technology perspective, that doesn't include all the other people across business units and support functions.
We spent approximately $1,200,000,000 approximately $1,200,000,000 And as I said, I think we have made material improvements across the company as a result of that. Drop your eyes to the bottom half of the page and you'll see about $1,700,000,000 of incremental spending. Kristin Lemkow, our Chief Marketing Officer, I think is over to my left, where she's a distant left over there. Her and her team have done a phenomenal job at really energizing the Chase brand, the JPMorgan brand and the JPMorgan Chase and Company brands. And you see on the right hand side, the type of outcome that we've had in terms of the metrics driven from these incremental expenses.
We go through every single one of these investment types every month. Sarah Youngwood, who was previously Investor Relations, so you all know her well, is now Chief Financial Officer for CCB. And so we look very carefully each investment, how is it performing relative to our early expectations. Turning to Page 7, and looking a little bit at digitally engaged customers. And so we just did that percent of households who are digitally engaged from the Q4 of 2012 to the Q4 of 2016, up about 18 percentage points.
So continuing to grow quickly. And then as we look at kind of all other households against digitally engaged households, and I'd be the first to say there's a little bit of a cause and effect here. So obviously, our best customers tend to migrate anyway towards digital. But just look at the credit and debit card spending is dramatically higher when a customer is digitally engaged. Attrition is lower.
And if we just look to the right and say, what's the cost of a digital transaction in terms of depositing a check, dramatic reductions. And my overall sense is as we continue on this journey towards digital that we'll continue to see great operating leverage as a result. Some of which you'll see on the next page, I particularly like this page, actually, it takes the period from 2013 through 2016 and gives you the compound annual growth rates of some of our key metrics. So think about these as the business drivers, the things that should drive back office type activities for the company and then drop down and say, okay, well, I'm looking at a set of business drivers that are up high single, low double digits. And then I look at, okay, so how many phone calls do we have coming into the organization, up very, very low single digits.
And then the unit cost of handling each of those calls down about 3%. So for those of you who don't spend your time deeply engrossed in the operations of these companies, that's actually a particularly meaningful accomplishment because as we pull out transactions and automate them or they get handled digitally, they're typically the easier transactions to deal with, leaving the more complex, more expensive for people. And so to be able to have a situation where we're getting the costs to come down and volumes to be substantially less than the business drivers is again a good example of operating leverage. Turn to Page 9, and Daniel covered as well as Marianne the impact of expenses. We have taken about $2,400,000,000 out of CCB, overhead ratio down about 2 25 basis points.
And over that window, about 7,000 people. Since Jamie asked us to put all of the consumer businesses together, he decided put all the consumer businesses together so we could focus around the customer. Since 2012, the number of people who are in CCV is down by just short of 40,000 people. So just short of 40,000 people. Substantial component of that, of course, came from the ramp up that we had in mortgage.
Turning to the next page, we'll just give you a little bit of a sense of where some of those returns came from across mortgage, branch banking, broader set of digital initiatives and technology automation. But this just gives you a high level sense of very specifically, where the investments came from, where the returns came from. And then on Page 11, I think something that I really want to stress and I think each of my colleagues have stressed is the focus on expenses is continuous. So we want to be constantly driving out waste. We want to be constantly looking for areas that we can upgrade our mobile and digital capabilities.
And by the way, the focus there is to make it a better experience for left hand side of the page that we'll be really focusing on. And Mike particularly will cover a little bit of the digital mortgage pilot in a few pages. So overhead ratio, our expectation is that over the course of the medium term, same with Marianne's definition of it, that will bring the overhead ratio down in the CCB to about 50%. So it's an aspiration that we've had internally for some time and one we feel quite confident at this point that we will achieve. And I think that will be fairly meaningful progress from the high 60s that we were just a few short years ago.
So expect us over the next couple of to 3 years to be right around 50%. Okay. So now I'm going to turn to the payment section and just highlight a couple of things. I mentioned earlier credit card loans and sales volume. And just to give you a sense of a couple of numbers that are not on the chart here, but if you look at credit card sales volume year over year up 10%, the 1st 8 or so weeks of the year, we're tracking up 14% over the same period last year, about 14% and loan growth up about 8%.
And I covered the other two metrics a little earlier on. Turn to Page 14 and you'll see over a 12 month window, both again in terms of sales market share and in terms of outstandings market share in terms of loans outstanding, we gained share, which makes us the number one in both sales volume and the number one in terms of loans outstanding. And again, just to reiterate, we exited 2,006 at 15.9% market share on a sales basis and now at 22%. So, if there was ever a measure that you might turn to say investing continuously and investing through all economic cycles, I think this is a great measure to look at in terms of what has truly paid off for us. So we tried to lay out a very clear payment strategy around consumer to business, around person to person.
I'll show you a few more metrics on these in just a moment. And also importantly, in the work that we're doing through Chase Pay is to make sure that we're also offering value for merchants, that the merchant is an absolutely key component in the payment transaction. And it's an area of real focus for us.
Give you a little bit
of a sense of the impact that some of the investments that we've been making over time. And these are obviously, the vintages here I'm going to describe are of differing sizes. But the point of this chart is simply that we've invested heavily in order to drive those larger vintages. So if we look at the 2012 year as an acquisition vintage for credit card, and we look at the 2016 year as a vintage, it's 2x the volume, same for outstandings. So just shows the ramping up that we've been seeing and the impact that those investments have been having.
And then when we look across to the right to the portfolio as a whole, you'll see the average sales are up 7 percentage points per account. And then sales active the number of sales active customers up also 7 percentage points. A number of people have asked me about Sapphire Reserve, and we had just some tremendous PR and excitement around the product. So I'd like to give
you a little bit of
a sense of the type of customer that was taking the product. And these are incredibly difficult customers to attract. They tend to have it taking the product. And these are incredibly difficult customers to attract. They tend to have made their purchase decision at some point and tend to stick with it.
But the average income greater than $180,000 a year, the average deposit and investment wallet at greater than $800,000 a year, average FICO score greater than 785 and a lift on spending with Chase up greater than 50%. So we're very pleased with the outcome of the work that we're doing. We have the expense impact as we deal with the cost of acquisition over the next most of 2017 actually as that cycles through the P and L. But these are customers that we are very, very happy to have active in the franchise. And let's turn a little bit on Page 18.
On the left hand side of the page to look at our position in terms of FICO score of less than 660. And as much as we've talked about marginally expanding our credit box, you can see that we've actually been very, very consistent, perhaps boringly so, in terms of our share in the less than $660,000,000 segment. And if you look across to the right hand side, you'll see that the kind of mid prime section $640,000,000 to $720,000,000 We had the lowest share in these players in the industry and these players carry the vast majority of the volume in the industry. So we tend to be playing much more in the prime and in the super prime space. Something I think when I first joined the company in 2007, really didn't think would be possible, which is the left hand side of Page 19.
And if you go back, those of you who can remember 2,007, when direct mail was slowly, slowly dying and people wonder, well, what will be next? How will we fill the gap in a post direct mail world? And you can see now that fully 77%, almost 80% of our acquisitions now come through digital channels at a fraction of the cost, at a fraction of the cost associated with the direct mail piece. And interestingly, and this is a technical challenge that some of you may or may not think about, but the size of the screen on a phone offers some unique challenges. And so our technology team, our marketers under Kristen and the general managers work.
So now how do you manage to fit an application on a screen that somebody can actually understand and follow. And so they just look at a 28 percentage point improvement in terms of the number of digital applications actually that came through on the mobile device. Turning to Page 20 and our focus on person to person payments. Again, active mobile users for CCV, 15,000,000 in any 90 day window active. Drop down and I talked about the momentum we had at this meeting last year.
Well, since then our P2P volume under Chase QuickPay is up 38%, 38% since last year. Cut your eyes to the right hand side, Chase QuickPay use a household $4,000,000 in any 90 day window and annual P2P transactions at $94,000,000 dollars So this is an important point to make. And we clearly don't make money on P2P transactions because we don't charge the customer. And we don't charge the recipient whether they're a Chase customer or whether they're not. But what it does do is keep the customer engaged with the Chase application so that they're interacting with us.
When they're interacting with us, it gives us the opportunity to talk to them, it gives the opportunity to see our mobile capabilities and to extend the relationships. I'm really pleased with the progress we have there. Chase Pay. Chase Pay is moving along very well. I'm actually pleased with the progress we've made over the course of 2016.
Important to note actually that if we take Chase volume and only Chase volume and we look at the various phone wallets and so on that exist, it's still about 1% of our business. So this is a technology in its absolute infancy. And it's very easy for some very reasonable people to turn around and say, well, why invest here? Will it be the future? Who knows?
But I think it's the right place for us to be investing. And I think we're large enough and have the right scale to be able to define a little how the industry will look. I think when we add the right level of functionality and you can see here some of the examples, customers will find it easier to track their purchases. You'll get to pay securely with a tokenized transaction. We've done a very interesting venture on an order to pay capability, which particularly when you're buying fast food, for example, those of you who are having fast food for lunch, you can order in advance on your phone, pay with Chase Pay, the mobile device, the fast food restaurant knows where the mobile device is, hopefully the mobile device is on your person.
And then as you get to the right distance away for them to be able to prepare the food, so it's hot for when you arrive and you just pick up the food and go. So all these things are going to be technology in their infancy. But I think, over time, they will grow to be the way that people pay with
their credit and debit cards. And you
can see some of the terrific partners that we signed on the bottom part of the page with the large focus being on customers using a merchant with a great deal of frequency so that they become comfortable using the product. If any of you step upstairs to the cafeteria or is it on this level? Yes, upstairs to the cafeteria, you can pay for whatever it is you want to buy using Chase Pay. I do that every morning. On Page 22, I talked a little bit about merchant services and the tremendous growth that they've enjoyed.
On the right hand side of the page, you see a little bit of the power of the company as working with Daniel's team, working with Doug Petchno's team, and actually working with the retail bank too, the amount of volume that we source from internal clients. And then on the lower half of the page that when we are dealing with internal clients, somebody already has a relationship with us, the probability of them closing on a deal to be a merchant processing customer with us is greatly improved. So, I think in payments, really a year of fantastic momentum. Many years of consistent focused strategy, many years of consistent focused investing. And you can see on the left hand side of the page, as I said, number 1, in both sales and outstandings, a $1,000,000,000,000 through merchant services, successfully launched new partners and branded products.
So you see us working with our co brand partners and continuing to build our proprietary business. I talked about the co brand renewals and early momentum that we are seeing on Chase Pay with some really terrific merchant partners. So with that, I'm going to hand over to Mike Weinbach and Mike is going to talk a little bit about the mortgage company and some great progress that the team have been making there. Mike, over to you. I'm going to take my tea with me.
Thank you, Gordon. Good afternoon, everybody. As Gordon mentioned, I'm going to give you an update on mortgage banking. Talk about where we've been, where we are and where we're going. For the last several years, we've been talking to you about our strategy of building a higher quality and less volatile mortgage business.
And that's exactly what we've done. Customer satisfaction has improved year after year. We've increased our share of jumbo originations with very high quality and attractive returns. And our servicing book has gotten cleaner and cleaner with delinquencies now approaching decade lows. And I'm going to talk more about each of these areas.
But first a look at some of our key drivers and how we performed over the last year. Our originations overall were down slightly, but within these results, there's really 2 very different stories. In our consumer originations, which are loans that we do through our retail and direct channels primarily to Chase customers, we were up 23%, outpacing the industry. In our correspondent originations, we were down 16%. There were a few reasons for that.
We took a conservative approach to the implementation of new CFCB rules in the early part of the year. We sold our USDA business in the middle of the year and we saw increased competition for agency loans in the cash window throughout the year. Our home equity originations, which are also through our retail and direct channels primarily to Chase customers were up a very healthy 40%. In servicing, as Gordon talked about, we've been focused on quality. And so our 3rd party servicing loans were down 12%, but you see a much steeper decline in our foreclosure inventory and in delinquencies, which I'll show you in a little bit, which overall leads to a healthier, less risky servicing business.
And last but not least, our loan balances grew 14% with net charge offs of only 10 basis points. In terms of our results with customers, we look at both internal and external measures. And you can see on the left our net promoter score, that's an internal measure where we ask customers if they're willing to refer friends and family to Chase for a mortgage. And you can see steady improvement year after year after year in those results. On the right, you see J.
D. Power results, that's an external measure. Where if you go back to 2010, we were ranked in double digits in both originations and servicing, and I might add with fewer participants than we have today. And you can see significant progress since that time and even year over year where we're now among the top in the industry in both categories. Moving on to Slide 27.
Much has been made of the shift in mortgage originations over the last several years from large banks to smaller banks and independent mortgage companies. And that's exactly what's happened. You can see in the chart on the left that in 2011, the top 5 banks accounted for the majority of all new mortgages. And last year that was only 25%. Within those results, however, there's truly a tale of 2 cities.
Our share and other large banks share of government lending declined, in our case, from 9% to 2%, as we factor in the risks, think False Claims Act type litigation of originating government loans and the increased cost and complexity of servicing government loans when they go delinquent. Our jumbo originations on the other hand have grown significantly. Our share increased from 3% to 12%. And when you look at the delinquencies profile of these 2 different product types, you see our delinquencies in jumbo are close to 1% and it's more than 10 times that level in our government lending book. All that being said, we do believe there's an opportunity for government and industry to work together to make these programs safer to participate in and thereby expand access to credit.
Largely on the strength of our growth in jumbo share, where we primarily keep and almost exclusively keep jumbo loans on our balance sheet, we've seen significant loan growth. Our core loans have been growing for the last several years and for the last 2 years, our core loan growth has more than exceeded the runoff in our non performing loans, resulting in double digit overall loan growth. And while it will be hard to maintain that level of growth at our current size and facing a smaller origination market, we expect to continue to grow our loan balances, albeit more slowly. Not only have our balances grown, but the credit performance has improved dramatically. You can see in the chart on the left that at the end of 2012, nearly 5% of the loans in our portfolio were delinquent and at the end of last year that was close to 1%.
And our net charge off rates of 10 basis points are a decline of more than 2 25 basis points from where we were in 2012. It's not only our portfolio, but also our servicing book that's seen this improvement in quality. On the top half of the chart on the left, you can see over the last 2 years, we added just over 1,000,000 loans to our servicing portfolio through a combination of new originations and servicing acquisitions. The delinquency of these loans is close to 0. Some of that's due to seasoning, but it's primarily due to the outstanding credit profile of the loans that are entering our servicing book.
In the bottom half of that chart, you can see just north of 2,000,000 loans exited our portfolio through a combination of runoff and loan transfers and those loans have double digit delinquencies. So on the right, you can see the significant improvement in the overall delinquency profile of our servicing business. This is very important because the cost of servicing a non performing loan is 25x to 30x greater than the cost of servicing a performing loan on a per unit basis. So with that decline in delinquencies and the significant decline in our foreclosure inventory, which you can see in the chart on the bottom left, it's helped drive a reduction in expenses of over $3,000,000,000 a year from 2012 to 2016. Moving on to Slide 32, the last area of our portfolio I'm going to talk about is home equity.
You've been asking us for the last several years what we can expect from home equity lines of credit that were originated pre crisis as they reach their end of draw period. And you can see in the chart on the left, over $13,000,000,000 of our home equity lines of credit have reached their end of draw in a recast. And we've taken a proactive approach, early outreach to our customers, looking to refinance customers where it makes sense and where customers are experiencing payment shock and difficulty to pay aggressive modification programs. And I'm happy to say the results are much better than we may have initially feared and credit losses are very much in line with expectations. And as we look to the future, we still have $15,000,000,000 that's yet to recast, But the vast majority of these loans were originated post crisis.
And you can see in the charts on the right have a significantly stronger credit profile. So we'll continue with our proactive approach, but we believe this is a concern that's largely behind us. As we look to 2017 in an environment where interest rates are significantly higher than they were a year ago, We expect the credit market to be about flat, maybe to grow modestly, but the refinance market to be significantly smaller, resulting in an overall origination market about 25% smaller in 2017 than what we saw in 2016. And this is going to put pressure on margins as the industry puts excess capacity to use. You can see in the chart on the right at the bottom that we expect the primary secondary spread for 2017 will fall below 1%, a level we haven't seen since 2014, the last time we saw a significant decline in the size of mortgage originations.
All that being said, one of the benefits of being a part of JPMorgan Chase is we're built to be there for our customers through the cycle. So while the near term environment may provide some headwinds, we're going to continue to invest and expect to be well positioned to compete for the long run. One of those investments is digital mortgage. We announced a couple of weeks ago a partnership with Roostify, a fintech firm in Silicon Valley to bring a digital mortgage offering to our customers. And perhaps you had a chance to see it at the Innovation Showcase.
And if you haven't, I encourage you to check it out after the presentations are over. This is something that we think will be table stakes for mortgage originations in the years to come. It provides our customers the ability to access their mortgage anytime, anywhere from any device through the application process. The opportunity to e sign all documents prior to closing and we believe one day in the closing itself and the ability to upload or take pictures of documents to securely get them to Chase. This makes the process much simpler and more transparent for our customers and adds significant efficiencies for Chase.
We're pilot with a small number of customers and look forward to rolling this out to more and more of our customers throughout 2017 It's an area where you can and should expect to see us continue to invest in the years to come. Our biggest opportunity, however, is with our own customers. As Gordon shared with you, we have relationships with 60,000,000 households across CCB and roughly half of them, about 30,000,000 own homes and have mortgages. But only 5,000,000 of those customers have their mortgage with Chase and a number of those were acquired through our correspondent channel. So of those 30,000,000 less than 1 in 10 got their mortgage with Chase.
Or if you think about it in market share terms, our retail and direct market share is less than 2.5%, which when compared to our retail deposit share of over 8% and our share of credit card sales of over 20% represents an enormous opportunity. Where we've already started going after that opportunity with our Chase private client customers, we see results that are more than 4 times greater than what we see with our checking customers that are not yet a part of Chase Private Client. So we think it's an opportunity that's significant and we're going to go after it by leveraging the strengths that we already have, broad relationships with 60,000,000 households, fortress balance sheet, strong brand consideration, especially among millennials, which are the next wave of homebuyers in multiple distribution channels, including our branches. And we plan to augment that by leveraging what we already know about our customers, think deposit balances, investment balances, looking at direct deposit in the checking account to be able to qualify our customers for income in the underwriting process. We plan to leverage our balance sheet to offer products to chase customers that are difficult, if not impossible, for competitors to replicate.
And we plan to leverage digital, branch and phone based channels to provide our customers access and advice in whatever manner they choose. So in closing, we've accomplished a lot over the last several years. We've improved the customer experience. We've enhanced the quality of our servicing portfolio and take a significant risk out of the business. We've substantially reduced expenses and grown our balance sheet with high quality originations.
And all of that is foundational for us as we go after the next big opportunity. As a bank whose mission is to build lifelong relationships with its customers, we want to be there for the most important financial moments and there's no purchase, which is bigger, more meaningful, more emotional for our customers than their home. So we're going to be continuing to invest and working hard to earn the right to be the 1st choice for Chase customers when they purchase or refinance their home. And we think the opportunity in doing so is tremendous. So with that, I thank you.
And I'll hand it over to my partner, Ti, who's going to give you an update on consumer banking.
Thank you. All right. Thank you, Mike, and good afternoon, everyone. I'm Tashanda Duckett and I'm happy to be here to provide an update on our consumer business. I also look forward to getting to know many of you better in the upcoming months.
For those of you on the phone, I'm on Slide 37. For the last several years, we've been talking about our strategic priorities to acquire and deepen relationships, to increase digital adoption and to drive down expenses. Well, we're happy to report that we've made great progress against these priorities. For example, in Consumer and Business Banking, we grew deposits and investments by about $250,000,000,000 since 2012. We've more than doubled our households that bank with us using their mobile phones.
And we've reduced our structural expense base by about $600,000,000 while reinvesting a meaningful portion of these savings in digital and marketing to critical components of our success this past year. So the underlying performance of our business continues to remain strong. I'd like to call your attention to a few drivers. We improved our overhead ratio by 3 percentage points year over year, even while our deposit margin decreased by 9 basis points. Across the combined franchise, we grew average deposit balances by 11% year on year.
We also grew client investment assets by 7% over the past year, with 40% of those total assets in managed accounts. Focusing on our consumer deposits, we grew more than twice the industry average since 2012. I'd also like to point out that we achieved this record growth while remaining disciplined on interest rate paid on deposits. So there are 3 primary drivers that I'd like to call your attention to. 1, our leading physical presence 2, our top quality digital capabilities and 3, our leading brands in marketing.
They are all interdependent in driving customers' banking decisions. And I want to walk you through each one of them. Let's start with our physical presence. As you can see on Slide 40, our branches are located in the fastest growing markets in the country. We're also outpacing our competitors in each of the markets where we compete.
Across our top 10 markets by deposit balances, we rank number 1 in nearly every market in deposit growth over the last 4 years. So branches continue to remain a critical part of our growth. In fact, about 75% of our deposit growth comes from customers who use our branches. Roughly 2 thirds of our customer base visits a branch on average 4 times per quarter. So maintaining our leading physical presence is critical to our success and an important competitive advantage in winning market share.
The second factor of our growth is offering our customers great digital and mobile ways to bank with us, particularly for those everyday transactions to help them simplify their lives. As I said earlier, we continue to invest in our digital capabilities and it's clearly working. Household adoption is up double digits across our digital offerings and engagement continues to remain very high. For example, we're seeing our customers who use our mobile app log in more than 5 times per week. Think about that.
Five times per week, they are looking at the Chase octagon. Households using QuickDeposit deposited nearly 75,000,000 checks on their mobile device in 2016. And as Gordon already said, customers sent almost $28,000,000,000 in payments over Chase QuickPay, our person to person payment solution. That represents $10,000,000,000 more than our nearest FinTech competitor. So the bottom line is that our digital capabilities are the invisible ties that bind.
By having a prominent place on our customers' mobile phones and making their everyday lives a little easier, we're more connected to them in a deep and personal way. And here's why that's so important to our business. As Gordon already mentioned, when our customers are digitally engaged, they're stickier. These households have grown significantly at an 11% annual rate since 2012. They've also contributed to our drop in attrition, hitting a record low down about 4 percentage points since 2012.
These customers also have roughly a 20% higher net promoter score. And as Mike said, when our customers have more satisfaction with Chase, they're more likely to recommend us to a friend. And on brands and marketing, we've continued to invest to support our strong brand. And as a result, we're now ranked number 1 in the country in consideration for new checking and savings accounts. So our strong brand is a factor that can't be ignored when looking at how we continue to grow deposits.
So when we put this all together, our leading positions and physical presence, our digital tools, as well as our brand and marketing, that is what has driven our outperformance versus the industry since 2012. Having these leading positions across the three drivers allows us to serve our customers and reduce attrition, while at the same time delivering cost reductions and shareholder value. So on the topic of structural expenses, you can see on Slide 44. You can see how we have achieved these reductions. Our ongoing branch transformation efforts make up about half of these savings.
And as you've heard us discuss in the past, we began our journey in 2014 to evolve our customer experience and serve their everyday simpler transactions through self-service channels. Since then, we reduced our teller transactions by $130,000,000 while increasing the number of self-service transactions by $180,000,000 Today, 4 out of every 5 monetary transactions are completed through our self-service channels. But we still see meaningful opportunities for improvement. Last year, we had over 400,000,000 transactions being completed through our tellers, 70% of which could have been done through our self-service channel. So in the year ahead, you're going to continue to see us focus on migrating more of these transactions to digital.
So as transactions and branch servicing volume comes down, we continue to look at opportunities to optimize our branch network. It's important to note that we make our branch decisions at the micro market level with a surgical approach that has helped us increase deposit share By opening branches in higher growth areas and consolidating branches with lower servicing volume, we reduced our net branch count by 150 last year. And what's really powerful about this slide is that even in markets where we consolidated, we still grew share. So our relentless focus on local market execution will help us continue to grow in the future as well. Our share in our footprint states is 12%.
So we expect to grow organically and expand in new geographies within these states. And it's also important to note that we have deliberately structured our real estate portfolio with a high degree of flexibility, should consumer behavior evolve more rapidly. We have the opportunity and the optionality to adapt tactically in the short term and strategically for the long term. In fact, we could exit 75% of our branches within 5 years, but we also have the option to extend control for more than 10 years with over 80% of these branches. So to wrap up, our strategy is led by our customers' needs and it's working.
We're the primary bank for more than 70% of our consumer households. We lead our peers in brand perception in both trust and advice. We have a leading position in our physical presence and in high engagement with our digital offerings. And we're well positioned with millennials. And as Mike said, this is an important group because this is a generation whose wealth is expected to grow at the fastest rate over the next 15 years.
And importantly, we've grown revenue even without meaningful rate increases. So the fusion of the factors I discussed, our physical presence, our digital capabilities and our trusted brand and marketing have created industry leading deposit growth. And we can continue to strategically and tactically adjust as necessary to maintain and grow our position. And ultimately, our strategy remains the same. It's about developing lifelong relationships with our customers by providing advice and financial products they need.
That's our competitive advantage. And myself and my peers and my colleagues are personally committed to ensuring that continues to happen. Thank you. And at this point, I'd like to turn it over to my colleague, Jin, to talk about Business Banking.
Thanks, Tee, and good afternoon, everyone. So I'm going to spend a few minutes talking about growth opportunities in Business Banking. But first, I just want to make a few comments on our small business franchise here on Slide 47. You can see we have market leadership positions in both customer convenience and distribution as well as a very strong product offering across deposits, lending and merchant services. And our focus on the customer has been recognized by J.
D. Power in that we rank in the top 3 in every region and have so for the past 2 years. In addition, we are able to deliver the full value of the JPMorgan Chase franchise to our small business customers. 75% of our customers also have a consumer relationship, 30% use card, 15% of our relationship managed customers and that's the larger end of the small business segment use Commerce Solutions products and more than 200 of our customers grew to be commercial banking clients in 2016 alone. Our customers also use multiple treasury services products.
And so this unique value proposition not only offers the full suite of financial services products, but the scale that says you can never outgrow us. On Slide 49, just a note on distribution and everyone has talked about increasing digital engagement. Well, that's true for the small business segment as well. But even though we see that changing behavior and we see the increasing digital engagement, We know the optimal distribution for us remains omnichannel. You can see in the bottom left hand part of the slide here, 70% of our business customers still visit a branch at least once a quarter.
And on the bottom right, and this is industry data, 55% of the time, small business owners still prefer a branch for more complex transactions like account opening. We've had very strong performance since 2014, in particular as a result of our investments in the expansion markets. You can see here deposits 10% CAGR, loans 6%. But importantly, those numbers in our expansion markets are 18% 21%. But we're not going to stop there.
We see incremental growth opportunity in this segment, so we continue to invest. And now I'm on Slide 51, and this is perhaps the most important slide. Where is that opportunity going to come from? Well, first, context on the market. There are 28,000,000 small businesses in the U.
S. And they contribute about $120,000,000,000 to financial services revenue. On the left hand side of the slide, you can see this is a relatively fragmented market. Chase, Wells, BofA, we all have about 9%, 10% share and then it trails off significantly from there. So there's a real opportunity simply to take share in this important segment.
On the right hand side of the slide, you can see it's a market with good product depth. So if you take a small business owner who has a deposit relationship, well more than 80% use card, almost 50% use merchant services and 43% use all three of deposits, card and merchant services. And yet we know in our portfolio, when you look at our relationship managed customers, only 10% use all three with us. So there's a meaningful growth opportunity in our own portfolio simply with deepening relationships. And when we do deepen relationships, we see a really powerful story here on Slide 52.
If you take a business banking only customer and you add the card relationship,
we see
21% higher deposit balances in business banking.
And when you add
the merchant services relationship, that number is 43%, 43% higher deposits of deposit balances because we've earned the primary operating account. And on the bottom of the slide, you can see how that translates into higher customer revenue, 2.3 times and much lower attrition. In terms of investments to capture this opportunity, we have several key initiatives, all with the theme of making the parts of Chase work better together to enhance the value proposition of consolidating your financial services relationship with us. So first, we're introducing a new digital platform. Importantly, Chase Business Online will integrate that digital experience for our customers across deposits, payments and lending.
Customer onboarding will have a single application and a single credit decision across all of the lines of business that serve small business owners. In business card, we've expanded the product set. We introduced the new ink business preferred card and we've improved credit decision times. In merchant services for our business banking customers, we've introduced next day funding and we've simplified the product set and the pricing.
And lastly on this slide, as many of you
may be familiar, earlier in 2016, we introduced a new small business online lending product, Chase Business Quick Capital, in collaboration with OnDeck. So just a note on Quick Capital on Slide 54. First, why was this product innovation so important to us? Well, I talked about the value of deepening relationships with the larger part of the small business segment, but capturing the opportunity with the smaller end of this segment is equally as important given the scale. And digital engagement is critical to getting that right.
You can see on the left hand side of the page, small business lending was about $1,600,000,000 in 2012 and we would estimate it was almost $10,000,000,000 by 2016. So this is a rapidly changing marketplace. On the right hand side, this is a screenshot of the Quick Capital experience. It's a little bit difficult to see. So hopefully, you've had a chance to see it in the demo outside.
But this is the screenshot where customers are able to customize their loan terms. But importantly, this screenshot is one of only 6 screenshots to complete the process. So this can literally be completed in minutes with funding the same day. And just a note on why we chose partner rather than build ourselves with any critical innovation like this, we are always going to consider buy, build versus partner. In this case, there are a few things that were important to us.
1, speed to market. So I talked about the rapidly changing marketplace. So speed to market was super important for us. 2, the customer we wanted to completely own the customer experience. So we wanted it to be a white label product.
We wanted it to be our balance sheet. We wanted it to be our pricing. And so in this case, we were able to achieve all of that through partnership. Still early days on volume, but an important step for us on innovation nonetheless. On Slide 55, lastly on Business Banking, this slide is really about momentum.
So we've made a lot of progress with our customers. You can see our net promoter score going from 29 to 40. We're certainly not satisfied at 40, so more work to do, but great momentum nonetheless. And I'm incredibly proud that in a space as critical as a small business segment, we have been taking share when our competitors have been flat or declining in share, going from just over 6% to 8.5%. So we believe this momentum positions us incredibly well to capture this opportunity.
I'll close on Consumer and Community Banking before we go to Q and A. You can see here we have tremendous leadership positions across our franchise. We have a proven strategy with consistent investment, relentless focus on the customer and very strong results through time. But behind all these rankings, as you've heard, we have meaningful growth opportunities and we are truly committed to delivering as a team.
So with that, I'll turn
it back to Gordon for Q and A.
So guys, please join give me another give them another round of applause. That's the first time any of them have ever done this with all of you. It's not easy. They make it look easy. It takes a lot of preparation, a lot of thought and it's just an outstanding group of leaders.
So great job guys. Thank you. All right. We have as much time as you want for questions before we hand up well, not really, 15 minutes before we hand over to Jamie and then you have as much time as you want for the call.
We've got one over here to the left.
Chris?
Thank you. I'm looking at your Slide 21 on Chase pay. And I'm wondering if you can talk a little bit about the business model underlying it. Presumably, most of the interchange fees are subject to Durbin and that's not really a big profit driver. So is the way that you get paid that it drives balance deposit to remain to remain competitive in the deposit business in the 21st century?
So, I think one of the things I hope comes through really clearly in all the presentations today is the power that we're seeing across these businesses as a result of the investments that we've made in the mobile and digital experience. Now, so if we now take ourselves away from the chip or the and the magnetic stripe on a plastic card and you begin to look at and I'm not going to go into too many details because we have a product roadmap, which I'd rather release when we're ready to do that. But if you think about the type of capabilities that we can begin to add for customers when they're paying through a mobile device is materially different than what we can do with a Magstripe or a chip, firstly. Secondly, it's our experience from testing that when a customer sees our brand at the point of sale, whether the point of sale is on the mobile device or in a physical point of sale, we tend to capture more share. So I would think about this as largely a share play and how we can continue to capture more of our customers spending on credit and debit and then capture more of their overall financial
channels.
Well, no, I think there is a direct drive revenue channel because every time we drive more share, we get more revenue. So there's absolutely a direct drive revenue channel. Every time we drive down attrition or improve retention, there's a direct impact on revenue. Yes. James just said it's debit and credit.
Okay. We have Ken right here in the middle.
Thanks. Hey, Gordon, on Slide 12, you had kind of what looks like an offsetting between the next stage of spend versus save. It looks like the investments part includes growth, so which you imply that the saves are still more than the spend. Can you just kind of give us some thoughts on the 2? You had that good slide about the next stage of cost cuts, but then how is that going to flow between the 2?
Yes. Listen, I think what you should take away from this is that we're going to work relentlessly to self fund as many of the investments as we humanly can to drive these businesses. And I hope you've seen from the team that the opportunities are enormous. People will ask me occasionally, and I've never asked Jamie this, I see, they may have a different point of view, but they turn around and
say, well, Goldman, when are you
going to move into international? And honestly, I look at it and say, do I want to wake up one morning and look for tea and fun cheese in Singapore or in London, where we would end up having a subscale business without a major acquisition? Or do I want to sit and look and say, now we just got such enormous growth potential here in the United States with huge leverage, which we have in every one of these 6 business lines. So you should look at the numbers in such a way that says, we will the first thing we'll do is to generate as many savings as we can humanly can to drive the investment and what it is and the opportunities that we see. And it's the first question I get from my boss down here when we go through the budget reviews with them.
Is there anything else that you should be spending for the long term health of the company? If we don't have those ideas, which would be very disappointing and likely lead to some other type of change, then we're going to have to drop to the bottom line.
Gordon, two questions. 1 on Chase Sapphire Reserve. So you gave us some interesting input on the profile of the customer. Could you just help us understand the economics of the program? Because I think a lot of us expect that these are cards that are paid for with revolvers and NII.
And it looks to me at least like that's not the profile of a revolver. And is there really enough spend to make it work?
The answer is yes. I don't want to go through every line of our assumptions because then someone else is listening on the call, we'll just do what we do. Think about it this way. We've looked at it very carefully, laid out some very clear assumptions. And we can look at where we are at 90 days, 180 days and at year 3 in terms of where we expect to be in the early stages is exactly where we want to be, most important thing.
Second thing I would say is we're not just a credit card company. So what do I mean by that? We have the ability, once we have a relationship with a customer, might you better sell them a mortgage. You show we have terrible penetration, terrible penetration of our selling mortgages into our Chase customers. I think that's a fabulous opportunity.
So I'm not worried about it in the slightest, a fabulous opportunity. I can then take those customers and sell them into retail banking if that's what the wants. We're going to introduce wealth management capabilities for them.
So if you think about
that, I'm just going to use round industry numbers. What if it costs us $500 to acquire a credit card customer or $500 $500 to hire to acquire a customer for retail banking, if you're doing it through just pure external prospect acquisition. Once you have the customer and once they're interacting with you on a frequent basis through your digital channels, the ability to attract that customer into another product, if it's what's right for the customer is infinitesimally lower and fundamentally changes the economics too. And that's something by the way that we have not built into the Sapphire Reserve math.
Okay. That would be plus alpha. All right. And then the second question is just on the closed loop that you've got makes you unique versus many of your other bank peers. And the question is, do you have what you need to really go after the private label business a little bit more aggressively?
Is that something that you're interested in doing?
We do. We do have what we need, and we'll think hard about in the historically, and this is largely me more than anyone else. I try to avoid the private label space because it was kind of fraught with at a point in time. Lots of back end fees, things which would be punitive on customers and it's definitely changed. There were been multiple opportunities to buy those businesses.
I think what I would rather do is look very carefully at where we're doing a partnership with a retailer, for example, on Chase Pay. There may not be an opportunity to do something more broadly with them. But we will only do we'll only move into that space if we think there's a really good value proposition that we can build for the retailer and for the end customer.
Are you doing international with your Amazon relationship?
International in terms of merchant service is not international in terms of card issuing. Sorry, that's not my job, is it? Sorry, Jason.
Oh, you
can do your job. Yes.
So I
made this into show and tell. That's okay. It's Mike Mayo. Mike. I did some research.
I went to your bank branches and I have all this paper. I have a deposit slip and I have a payment slip and I have a withdrawal slip and there's all this paper still in your branches. You invested $1,000,000,000 extra in technology. You're talking about self funding initiatives. So when can I walk into a Chase branch and not see these slips of paper?
Unfortunately, you're not quite a millennial there, Mike. I mean, we've got so serious problem, serious questions.
How much can you save by reducing paper?
Yes. Okay. So which we send out 100 of 1,000,000, with the discount that we get on postage, think about the cost of a statement is between 0.50 dollars and $0.55 roughly. So we would spend across CCB and it's not a number that we disclose publicly, but think of it as around $400,000,000 in the machine generating statements. So right there is a huge opportunity with $400,000,000 in just statement production for us to be able to erode over time.
Now what do you have to do? You have to make sure that the customer experience is just much better than receiving a piece of paper. So customers have to vote for these things and say that's what they want. And we're seeing some very good momentum in digital adoption for statements. And by the way, as the improvements that we're starting to see in those adoption rates are largely driven by the fact we're making a much better experience than excuse me, just receiving the paper statement, which you if you're going to try to find something, you've got to scan through, you can't edit for it, you can't search it and so on.
Right. That's the first part. 2nd part of your question is, it will take time for us to drive paper fully out the branch. When you look at the chart that T had 130 odd 1000000 teletransactions already out the system, It's a big opportunity and we're honestly just at the beginning of it. A lot more work to do.
Can I have those so I can put them back in the branch? And we like to hunt our waste knife.
Okay. Ready over the left, Jimmy.
Hey, Gordon, it's Jimmy Hanna. A few quarters ago, we learned that JPMorgan was seeing good risk adjusted returns in the credit card business if you expanded the credit profile a bit. If I move over to the auto business, that's a business where a lot of other banks are pulling back. I don't think JPMorgan is necessarily pulling back. But is that an opportunity now if JPMorgan is staying in that business to expand the credit profile?
And what are your thoughts around that?
Well, firstly and most importantly, I think we are actually amongst the very first to pull back. So in the Q1 of 2012 sorry, Q1 of 2013, Tee and I looked at particularly the type of performance and what was happening with roll rates in the subprime auto space And we dramatically reduced our underwriting in that space. Sometime last year, I think, we looked at and again, there was no real data that showed deterioration in this, but we looked at the 82 months 82 months, 84 month, sorry, yes, 84 month plus segments. So long duration loans, which run into the danger of them when a customer then comes to trade the vehicle that they're now underwater at the point that they do the trade. And again, the credit performance look very strong, but instinctively we just felt with the risk team, with Ashley Bacon's team, that we didn't like it.
So we literally within, I think, a couple of weeks or 3 weeks, we dropped our share of that space by more than half, substantially by more than half. So we have made some of those trimmings and the auto space is just one we'll continue to watch. And we never focus on a share goal in a cycle. If it's deteriorating, we'll back off, we'll tell Jamie we're going to let some share go and he'll say good. And in environments where we think that there's real opportunity as we've seen in card, we'll continue to be aggressive.
Gordon, correct me if I'm wrong, but I think you said Chase pay is roughly 1% of the volumes right now?
No. No, I said if I took all, I'll call them digital wallets, just talk about them as a segment.
Okay. Well, I guess the question is how much what's the sort of upside of Chase Pay? How should we think about that? And how much of it is credit versus debit?
Listen, I think at some point, we end up seeing a and it's probably a number of years away, by the way. I don't think this happens in 2017 or 2018. But I think we end up seeing a dramatic shift in customers use of the mobile wallets. I don't know when, but I think so.
We have one more right over here Gerard.
Got 1 minute and 53 seconds before the call.
Okay. Gerard Cassidy, RBC.
Gordon, can you share with us how you guys expect to integrate Zelle, the P2P offering that's coming out this year with your current digital products for your customers?
So, Zelle effectively will give us the ability to link up many more banks. So almost immediately when we launch this summer, we'll have about 65% roughly of all U. S. Domestic checking accounts. Certainly for an extended initial period, we'll use our own brand powered by, but effectively a customer will just better go on where they see that brand and move money from person to person totally seamlessly.
It's a really, really nice customer experience. So think about it as moving from Chase to a much bigger consortium of customers that will give you the ability to move money to. So again, yet another good reason to go on and use the Chase Banking app. I think that's it. Jamie, are you ready for me to hand over to you?
Thank you guys very much for your time today. Really appreciate it.
That was exhausting. So welcome everybody. No, not your presentation. All I know, when I watch these presentations, all I can think is what a company. Honestly, it is just an unbelievable company.
And I'm going to just highlight 4 quick issues and then open it up to Q and A and then you can ask any questions on your mind. So first one, I hope you got from all these presentations that you always look at a business from the point of view of the customer. It's about the customer, what they need, what they want, getting it to them better, faster, quicker. It's not about what we want. But a lot of the services you hear, we consider Zelle as table stakes.
Fair after payments is table stakes, where the quick pay is 1%, 5%, 50%. It doesn't matter to us. Customers are going to want it. They're going to use it. We got to learn by it.
That customer goes everything we do. The reason you gain share in business is because you're doing a better job, your clients are always going to vote with their feet. And the other thing is this basic strategy about being a fortress company. That means fortress balance sheet, fortress liquidity, fortress capital, fortress that we're able to bear any stress that there is, fortress controls. And the point of all that is there will be good times and bad times, that's a given.
I don't forget about what the bad time is going to be. We don't change our plans a lot. To me, the point of having a fortress company is you can do the right thing for the client whatever the environment was. And the last crisis we have is a good example, JPMorgan Chase. It didn't change a lot.
We were scared. We met a lot more. We were a little more careful, but we can also operate in the client's best interest. And so now I'm going to make 2 statements about that or also fortress risk controls. You measure all the time the risk you can take, and we have no problem staying up in front of here and showing that auto loans are down 20%.
And then we're not going there. No, we're not going to do subprime now. I think it would be dead exactly the wrong time. In private label, we don't own the client. And to me, it's that you can do that business, but it's a processing business with risk associated with it.
But we want to be able to step away at any point in time. Warren Buffett often says, in the insurance business, there's a point in time to take the salespeople and don't let them sell, have them go play golf, okay? And that happens in credit exposures too. The exception is how we treat real clients of the company. So again, the last great recession was an example.
We did a lot of things that had made no profit, took tremendous risk because we're the lender of last resort to our clients and that's why we're there. It's not a time when you say, I mean, we can maximize profit or charge them 12%. That's the time you say, we'll do everything you can to help you get through this, knowing that we bear the risk. And we do have that fortress company. And that fortress company also means you can invest relentlessly throughout the cycle.
I do not think it makes sense to be a company like JPMorgan Chase. And if you hit a downturn for whatever reason to pull everything back, you can't hire sales people, you can't invest in systems, you can't invest in technology, you got to go run scared, you got to get mad at people and lay off people. It's just terrible way to run a business. So that strategy, building in good times and bad times having the fortress company isn't going to go away. A lot of you saw a great technology stuff here.
I hope you just spent a little time out there. I want to point out technology by technology effort of everybody, not the technologists. So like the liquidity thing, they had to go with that and then the late that technology, but all the technology as the sales, systems, traders, finance, they're all getting involved in designing that stuff. So you have to have a company that's quite used to work in the technology. And there's a lot more coming.
Next year, we're going to be able to put 10 or 20 other things up there, some may work and some may not. There will be faster payments and wholesale payments. You've seen a lot of examples where these things are coming across parts of the company. So Chase Commerce Solutions works with commercial banks, small business, works with large bank clients, wholesale payments, automated receivables, payables, they're going to cross the whole company, treasury services, which reports directly to Daniel, but it services his biggest client is Doug, and they're inventing these online access programs which will serve all these companies. Mary kind of mentioned, kind of got there.
On the investing side, I hate the word robo, but we're going to have something like robo in beta. I've got one where
we have
that. And also where you can also have self managed accounts, stocks, bonds, munities and stuff like that, so that when you walk into our company or you go online or you're mobile, you can invest, deposit, move money, get the full range of products and services out there, hope in a very attractive way. And I think I heard you kind of mentioned the full digital account, so that you can open it, you can fund it, do everything online, which allows us to go, obviously, into a lot of different places. But the more important part is it gives these that those who never want to go to bank, never want statements, never want, then you can serve them too. And so one quick thing, it wasn't exactly a technology, but it kind of is into it.
Gordon and his folks signed a deal and you heard us talking in the past about data. And this data is a big deal. Banks have a lot of data. People screen scrape, people buy data, people sell data. A lot of people you push that I agree button, I beg to tell you that you have no idea what you agree to.
We do because we studied all those contracts, all of them, is how that data gets controlled. So we went to we didn't want to control it, we didn't want to say that the customer can't use the best interest, but with Intuit, the deal is very simple, That the client will get a kind of menu of what they're going to they want to give Intuit or Mint or whoever. So the client knows exactly what's going and can change it by the way. So they can say, I don't want X, I want Y, then that data is pushed into it, means you don't have to give your bank passcode. Now you may know that to give your bank passcode to someone, that money is stolen because there was a mistake there, they are probably liable.
Now a lot of you probably don't know that. So if you wake up tomorrow and your $1,000,000 bank accounts are gone because you gave your bank passcode to somebody else, that's not our problem. It's our problem, okay? So this way the client is served, the system is safer, the banking system is safer and sounder and actually Intuit served. You know there's been a liability shift, we both feel like we're trying to do the right thing for the clients out here.
So there's tons of things underlying technology, you don't really see in what we're doing here. And finally, the most important thing is the people. I mean, this company has unbelievable capabilities in over 100 countries around the world. But the people, the people, the people, the people, the people. I hope you saw some fabulous people up here.
They're diligent, they're smart, devoted. They always want to do the right thing. They partner very well with each other. In addition to people you saw up here, there were 53 other people. Think, that are seeing with you at these tables, we want to get to you know a little bit, 16 years average tenure here.
I think that's important. I think constant turnover is a terrible thing. Most have had 5 different roles here. That's important because if you see these what we're doing across the company and you look at the company, how you serve a client, people being in different roles, respecting different roles, going from staff to non staff, etcetera, going from investment bank. Doug Pettenau ran Energy Investment Banking.
And so we it gives people a chance, they sit down, they know the other person's problems and issues and roles and responsibilities, and they've been in 2 LOBs. So for all the 53, I want to thank you. I think you've all done a great job. And with that, I'll stop and take any questions or comments you have. Thank you.
Jamie, thanks. I'll kick off with a question that you addressed on the most recent conference call, but I just want a little more color about how you're thinking about it. It's in regard to potential for changes in the tax rate and how you think about what you keep for competitors with customers, sorry, not competitors, but customers. And in particular, on the corporate side, because corporates obviously know how much wallet they're giving to you. I made
a mistake in saying that because now we've been asked not to talk about this. I was talking about capitalism. Forget banks, forget JP Morgan, forget intent to pass things on. I was simply saying in a rational capitalist world, when rates get cut, eventually those benefits get passed on to customers. They don't get passed on to their company.
That's not the same for every company. If you're in a different position, you might be able to keep a little bit of that, whereas one company can't and another company can't. So I wasn't referring to JPMorgan or any intent to pass it on or anything like that. So I think what you'll find out in general, again, not for JPMorgan Bank, that some will fall to the bottom line, but it's not rational in a capital society everyone's ROE goes from 12% to 18% and stays there. In fact, most you know what studies show this is a good thing, that cutting corporate tax rates, you know what helps the most?
Wages, which I think could be a good thing for America too by the way.
Just a follow-up is, in dealing with the new administration, maybe you could give us some color as to how it is in as a sounding board, is some of the feedback you're getting from them as well as what your wish list is when they come to you and ask what would you like to see us do to be more efficient?
Yes. Us, the country.
Us, the banking industry. Okay.
So the I could tell you like what I know about tax that you have already seen all this, okay. So one fundamental issue is whether Obamacare comes first. That will clearly delay tax and maybe make it hard to get something done. So the timetable is very important. At the best case of Obamacare comes first, it's going to take 12 months to do tax, okay?
The Republican House has a bill, a specific bill. We haven't seen all the detail, but you've worried about it. I'm not going to spend much time on it for adjustability, capital expensing, net interest, lack deductibility, etcetera. That is Senate, which is all important. Some centers have not supported that.
They have not come with their own plan and the administration has a plan. So I'm just going to let them worry about making the saucers there. It's not JPMorgan, it's not the banks, it's not even the corporate world. The President's team met with an awful lot of people. I've been fairly consistent.
I think there are a lot of really top professional people there who are working in this. At the end of the day, you can get really great corporate reform or just modest. I hope it's great. I don't know the odds any better than you do, okay. America however, I will say, as America needs corporate tax reform, we have been driving brains, capital, businesses, research overseas now for 10 or 15 years.
It's not hurting JPMorgan Chase. It's hurting the average American. That's why it should be done. So I'm we're big supporters of getting tax reform done and making it one of the list. The other ones that are high on the administration's list, I also agree with infrastructure.
Do you know that this country hasn't built a airport for 40 years? We haven't put a tunnel or bridge in New York City for I think maybe longer than that, okay. We haven't people you hear the horror stories how long it takes to build a highway, a road, a grid, a tunnel, an airport. It took 75 years to build one additional landing gear landing O'Hare, because I was there when they were doing that. And then like Mary's chart, they put up a chart about when they first started finding that, it was like soon after World War II, okay.
And so this is not good. America, if you rate us on the ability to open businesses and infrastructure, we're like 15, 20, 25. Net business formation has gone negative for the first time ever in a recovery, small business formation ever in a recovery. And so these things, getting these kind of reforms is a would be a very good thing to do. And it's going to take a lot of work, maybe some legislation, but then some could be done with depend.
But and around I think around bank regulation, I think, Mary and Price are the key principles. It is high time you look at it. No one in their rational mind can say what we do is completely consistent, rational, perfect. That didn't hurt America, didn't cut back lending. We're not fanatics about it.
There was a we know there was a crisis. So capital, liquidity, transparency, controls, of course, they should be enhanced. But at one point, you have to calibrate where you want to be in the system. I pointed out to you all that, so these are things like we look at gold plating, even the regulators would agree that the system is set up itself has huge structural flaws. So there are 7 people involved in mortgage regulation.
Because of that, we don't have safe harbors at FHA. We don't have securitization laws in place, which 7 years later. We don't have safe harbors, which is why banks are putting overlays on top of GSE. So that alone, if we had just done just that, there probably would have been another $500,000,000,000,000 of mortgages done. That's the counterfactual.
I can't prove that, but that and that's one example. Same with certain capital rules, liquidity rules, so keep the system safe and look at it and then come with some coherent and consistent that makes it better for everybody. Again, the point, you're not going to see JPMorgan talking about which is good for us, okay. We need to compete competitively. We were I believe in stress testing, like we do 120 stress tests a week, right, or something like that, a week.
I mean, we are far more worried about risk than believe me, they are down to Fed, okay. The CCAR, which is an unbelievably complex was 1 year, okay. And so we want to protect ourselves from that kind of risk, but CCAR itself has these uncertainties around to make it a little bit harder to manage your capital. So to me, I'd like to get back to much more collaborative regime where we talk to people, we analyze these things, we talk them out and we come with something, execute it and make it better for all. And also remember you got Basel 2 and Basel also, so Basel 4.
Basel 1, 2, 2.5, 3, we have like 6 types of capital now. I mean, it's the complexity is dangerous, by the way. Some of it's going to be in 10 years, someone's going to wake up, the complexity will have killed a company.
Mike Mayo, it's kind of a trick question. What does your brand represent? And the reason I asked that, I think you're one of the only, if not the only, large U. S. Financial firm with 2 brands in the top 100 of the global brands, JPMorgan and Chase, would you ever consider just having one brand for the overall firm?
And what does it cost to have the 2 brands?
No. So let me just, first of all, you're a brand too, Mike Mayo. You don't need you didn't need CLSA. I want to tell you quick Mike Mayo story, because we've been going for a long time. When I first went out to Bank 1, I got out there and like one of the first analyst calls, they said, Mike Mayo is not allowed on the call.
And they stop you from being on the analyst calls, which I said, that's absurd. And they said, well, he was terribly insulting about it because he had written literally a tomb and was called even Hercules can't fix it. And it went through the bad systems, the bad credit, the inefficiencies and stuff like that. I told the management team, I hate to tell you, read his too because he's right about every single thing in there. And that's how you become better, not by sticking your fingers in the eyes.
So you helped us become a better company. When we did the JPMorgan Chase Bank 1 deal, we were quite clear that there were 2 brands here, okay? So JPMorgan Investment Banking, Asset Management, Private Banking, Global, think of kind of a Tiffany type brand and there was the Chase, U. S. Only.
So it's U. S. Only, but it's more on the feet ground. So middle market, small business, consumer, etcetera. And at the JPMorgan Chase, you only ever really see us use that for foundational type when we give them the foundation, kind of management meetings, stuff like this, but we don't market that.
All the marketing is done in really one of the 2. And we still think it's a very rational way to do it. And when we did the merger with JPMorgan Chase Bank 1, we didn't pound our chest and saw who's got the best brand. Remember, the Chase people didn't like the JPMorgan people or the Bank 1 people. And I was like, which would ever make sense for the company and clients.
Forget all the other stuff. And obviously, Jake Moore and Chase were 2 wonderful brands. Bank 1 was a little tarnished.
Andrew?
Hi. Your technology showcase and everything you've talked about with technology is really impressive. And I think one thing that comes across is that you don't do it you don't invest in technology in a reactive way, but very proactively. So to an extent, you're a technology disruptor, perhaps investing in projects that might not necessarily pay off. And I'm just thinking to myself, how do you engrain this as part of your DNA?
How do you incentivize this and make this a differentiated of your bank?
I think it's what you do in any I think any company who doesn't do that is making a mistake. So I'd go back my whole career we've been doing that. You have technology people at the table, you look at new things, you compete, partner with FinTech people. But like I said, it's we always ask the question, we don't know, are we investing all the things you should be doing, all the things. And it's not about the payoffs.
So certain things we do, I said, don't involve with the NPV. You're wasting your time. This is about straight through processing, it's about reducing error rates, it's about giving client it's kind of table stakes. And so but other times, obviously, we have much more detailed NPV. But you have to have in the room when we have business reviews and a lot takes place without me, constantly sales, marketing, systems, ops, front office and the technologists could be programmers or infrastructure people because some of the stuff you saw out there, the heavy lifting is done by folks in infrastructure.
People work in the data centers and networks and stuff like that and they were there at the table. So every year, what are we doing, what should we be doing, no one should ever say, Mary may remember meeting years ago, when someone said, well, we didn't do that because we didn't have money in the movement of the budget last year. I said, no, but I've been telling you for 10 years, you can't say that to me. If it's the right thing to do, we're going to do it, budget be damned. And I still feel that way, okay.
And so I made everyone in her team sign a piece of paper saying, we've requested everything in this year's budget we could possibly think of requesting and we will not say that we couldn't afford something we needed to do. I tell them it's like if you need to maintain the airplane, it's kind of a smart thing to do. Defer and maintenance is a dumb thing to do. So we're just trying to make it part of the DNA. Of course, the folks always try to make it more effective and more efficient and as new people get involved, Daniel is spending more and more time on it, he keeps on talking about how you know about the program efficiency.
I said, Daniel, good luck. But he'll make it better than it was before. How do you get those things? The agile program, Jeff Bezos talked about the 2 pizza teams. We try to use all these things to do a better job.
But if all the people got up here and the other 45 people in this room, they all of them, whatever area they're in, go through their technology, their budgets, their risk management. So I know Kristen is here and Ashley is here. We use huge big data machine learning for underwriting and marketing, just those two things. And if they don't do that, they'll be behind April within 6 months or a year. And we always ask questions.
Like I ask, if you got paid on a Friday and we know you went to a casino, are you a better credit or a worse credit? Because we do know.
John?
Jamie, Marion made the case that you might have some opportunity in the next couple of years to accelerate the distributions in that kind of 80 to 120. What's your thoughts on the mix of how you think about when you accelerate distributions, dividends, buybacks, some people talk about special dividends and there's a debate inside the company. I think they
end up with too much capital. And I've always been worried about this, the banking system, been forced to hold capital to capital. When you saw, I want to point out the $1,500,000,000 RWA, that includes $400,000,000,000 of risk weighted assets for operational risk, which to me is a false number. It didn't exist in those segments. So when I see some people say, how much capital we have $500,000,000 of capital, 500,000,000 dollars We compare the CCAR loss to all major banks in United States, America, and Control and Credit Suisse, UBS, Barclays and Deutsche Bank.
That's how much capital we have. So these people have a rational calibration. I think it will end up being too high, but Marion said, the most important thing we do, but are none is investing on businesses. And the opportunities are everywhere to do better services, better products, trade through processing, more efficient. After that, you want to have a steady dividend.
You can make it higher, lower as a payout based upon how much excess cap you think you have in the future. The third is stock buyback. And obviously, years ago, we gave you a number of stock buyback at tangible book value is kind of a no brainer because if you buy a block of stock, 5 years later, your earnings are going to be 5% or 6% or 7% higher and your tangible book value is 10% higher or something like that, I mean, it's kind of a no brainer. If you believe your tangible book value earnings, which we do totally here and that's those numbers they kind of even at 2x tangible book value, they're kind of true. You have higher earnings per share, but that book value will pay back over 5, 6 or 7 years or something like that.
And if after all of that, you have this extra capital, I always remind people that's not that's you haven't lost it forever. It's kind of earnings in store. You can use it to buy back stock, you can but I don't know we do it. If we end up with that, we're going to come with a very
rational way that's the best thing
for shareholders. And so we'll deal with it when we get there. There are other ways to do it. I do think counterfactual would have been the banks would have expanded more too. Banks now have $2,000,000,000,000 of excess reserves, okay.
That's never happened before with 20% of deposits with excess reserves ever. It's not because of monetary policy, more because of regulatory policy. But if that was usable, I think banks would have been over a year, have been a little more active in going places. Doug showed a number and this is instructive, but you can't prove the counterfactual. I think $1,000,000,000,000 more may have been lent out.
But he went to all the different markets and I think it shows like almost 13,000,000,000 that we were not there. We sent in our experts, our professionals 13,000,000,000
and of course some of
that would have been taken from other people, but some wasn't. He brought an expertise that they didn't have in parts of Silicon Valley or elsewhere in Florida or something like that. So I think you would have had it without people taking extra credit risk and expanding your credit in the banking system. And hopefully, banks will one day acquire or invest in things like this, which I think are just absolutely critical to the future of banking.
Matt, yes. Hi. So the expectation of revenue growth is good and I get the need to invest for kind of future growth and reinvest, but the $58,000,000,000 expense number kind of surprised me. And just back of the envelope math, it suggests just a little bit of positive operating leverage. So especially with net interest income, which should be a pretty high incremental operating or pre tax margin revenue source, why not target a little more positive operating leverage in the near term?
It's all really all those decisions are made separately, okay. I mean, it would be very easy when you say, okay, make it 57,000,000,000 dollars But then what are they going to do? We're not going to build this new Chase, Chase pay thing, we're not going to do this other thing. Remember, dollars 1,000,000,000 of that is auto leases going up. That is a positive.
I mean, that's just bad accounting. It shows up as an expense, but if you did it, if you count for it differently like a loan, you wouldn't have the expense. So there's a $1,000,000,000 basically goes from $56,000,000 to $58,000,000 or $700,000,000 And so we make independent decisions. We don't tell people to cut it back so we can show an extra point of operating leverage and we do expect that $55,000,000 is already going to be best in class. So again, this is not a statement about JPMorgan, it's just a statement about capitalism, okay.
It is not a rational thought and I remember some of our competitors going way back saying we're always be increasing operating leverage, Well, you can't because you have competitors. Remember, Jeff Bezos says your margin is my opportunity. And that's true. You've got to be really careful about how you go about that, if you think you could just increase your margins, if you feel like it. So when we see valid investments to make, we're going to make them.
If Gordon and his folks come back, Jen now comes back and says, Sapphire is going gangbusters, it could cost another $400,000,000 next quarter. I said, it's still going to return, go for it, just like Warren Buffett would, go for it. That's a $400,000,000 investment that have payback for the house, it will show up as an expense over here, but it's positive NPV for the shareholder, I would do it. I'm not going to be run by accounting. Accounting is an artifice.
Always keep that in mind. We study it, we want the economics right, we look at the risk of it, but it's an artifice. As you know, they change all the time too.
And up here, Guy? So back in the fall and this is just in
the context of fixed income, you made a comment that was half of the revenue that was lost over the last decade or so post crisis isn't going to come back. But half of it is cyclically, QE goes away and everything. Given what we're hearing more recently about regulation, about how the composition of the Fed Board of Governors might change, Do you feel differently about that half that you thought
was permanently gone? Daniel, so
the number is like $150,000,000,000 wallet down, not quite to 100, that 50,000,000,000 drop. And we're just trying to do a rough estimate and what went away forever. It's almost impossible to do, okay. So certain exotics went away forever, God bless them. Certain subprime went away forever, God bless it.
There are a whole bunch of stuff, it's not going to come back. There are a whole bunch of things that's kind of disappeared, but have to show up elsewhere. So if you were a senior if you were a buyer of credit through senior structure CDOs, you're probably still a buyer of credit. You're just buying in a different venue than you were buying it before. So that was our rough estimate about 30% of that drop, more than 50% of the drop was probably something lost forever.
From there, we don't it's very hard to tell. But I don't expect that stuff to come back.
And just as a follow-up, I think, that was really just the way we stand. We did have
a little bit of subprime mortgage come back. I mean, I think that we've hurt America by not having a slightly bigger credit box for subprime, not subprime, near prime. So I do think there'll be some recovery of some of those maybe, but we'll see.
And more broadly, in the months since the election, really over the last couple of months, has your mindset begun to change about some of the things that might happen in the regulatory environment even without significant legislative change?
Yes. So there's legislation, which is a big thing to open up, though you could see a small piece of legislation changing how Volcker defines prop trading, which I would like to see by the way. They define prop trading, includes everything and prove to us it's not. But it should have said that prop trading is if I hire you to trade a room, you don't deal with customers at all, you just use the firm money and your own ideas and stuff like that. And so that causes huge consternation.
The regulators, you're going to see a change in regulators. So personnel's policy in some cases and they can't do whatever they want because they have to go through MPRs and there are other people to Fed and other people to OCC and the FDIC. But I think you'll see some of those changes happen over time. We don't want you here to be sitting here saying, well, expect the change this year. I hope we get changes that make sense for the United States economy and all the people who are paid by the economy.
That's honestly what I really care about. It's why I'm doing the BRT roundtable. It's why I'm doing the thing for the President of Strategic Policy Group, because I think the United States could be doing a lot better with proper policy. So for banks, you had this kind of all of a sudden, this political, legal, regulatory went from being still continued tough to maybe plus. And I think you've seen that and obviously a little bit of stock price and stuff like that.
So I guess I want collaboration. You can imagine the team, they go through everything in an extremely detailed level, which is not going to share with you. We do have feelings about what is the right thing to do for a bunch of this stuff. Again, we always ask the question, what's the right thing to do for the system, the country, the economy, the people, the banking system. It's not in our interest to see big banks fail.
So I don't want to go back to and I think I mentioned, we've already given $10,000,000,000 to the FDIC over the last 6 years to pay for the failure of banks. I would like to see a safer system. I also like to look at even though some of those banks are planning to pay for it, make it a little bit easier for the smaller banks. I think some of these things are much tougher than they have been in us.
Back here, back right. Marty?
When we were sitting here last year, the feeling was a lot different outside of this room as well as inside this room. Now that things have improved, where do you see the 2 areas? It's still
that bad in this room last year, you guys did.
But where do you see the couple of opportunities to be able to see faster growth or stronger economic activity given the swing that we've seen
in the last 12 months?
Yes. Again, I don't I could guess anything going forward in the next 6 months, 12 months, 18 months, since I don't get paid to do that, I don't do it. That's your job. It's too hard for me to do. I can't predict the weather, the New York Stock Exchange volume, prices, the exact pace of tax reform any better than you can.
And so we build the company permanently for the future. I do think that the future is very bright, okay? And so, talk about fixed income trade, make believe the second stuff is gone. The amount of dollars that people have to buy and sell of investable securities both equity and debt over the next 15 years is going to double. That's a pretty good number.
The amount of billionaires around the world, 12, 15 years is going to double. The amount of corporations that are in our bailiwick for CIB, I think, let's think $1,000,000,000 revenue companies is going to go from $8,000 to $15,000 in the next 15 years. And so these are the things that drive the future of JPMorgan. That's what we built for. We trim our sales every now and then.
We're very conscious of the risk we're taking. And but if you have tax reform, regulatory reform, infrastructure reform, okay, I believe you can see the United States going much faster. I do not believe that the United States is going slow because of this permanent state of affairs of secular stagflation, a new normal. I don't buy any of that. I think the reason we're growing so slow is ourselves, our policies.
And we've had wars and shutdowns and how are we going to default in government debt? We did things by sequestration, which is like the worst way to do something in my opinion. We've had a very tough regulatory environment, very tough legal environment. Those things hold back growth. I haven't seen and yet I haven't seen one even monetary policy has sucked up a lot of bank lending capability.
That affects growth. So I look at these things and I just want our positive to be very rational and do these things. Growth is what is going to help America, all Americans. And like I said, there are several major studies about what lower tax rates do, corporate tax rates, they help wages for lower paid Americans. That's what the study show.
I know it's counterintuitive, but it's the flip side, the other unintended consequences. And so that's what I'd like to see is do things that are great for America. And that's what I was trying to
get at, financial implications of the other things, but business wise, where are some pockets of growth that could be released like what you were just talking about?
Look, I think you'll see I'm going
to talk about banks in general, not JPMorgan Chase. I think you'll see banks open to more countries overseas. Maybe people, not just us, will want to open you're doing 2 more, but you could do more than that over time. You hire more bankers in private banking in Asia, which drives our investment banking business too. So I think you'll see a lot of incremental things like that.
People going into cities, they're not with retail branches,
which I think will all
be good for the growth of America, again for all of America. When I talk to community banks, it's much more about local real estate lending or where they feel
they weren't allowed to lend
to certain types of small businesses if they're afraid about AML and BSA type of risk. So I think that we have kind of safe harbors there, it can reduce their people's costs and they might lend to more small businesses. And small business, like I said, formation is negative for the first time ever in recovery. I can't tell I don't think it's credit, because that's not what they complain about. If you look at charts and Mike Sembliss did a chart, I don't know if you're in the room, that showed the massive regulations, but that's their number one complaint now, the regulations.
Someone told me it takes a year to become a barber in New York City and you need 3 licenses, okay, you have to go to 3 completely separate places. And I call it sinecure by the way. That's corruption. That's not logical regulation. So I think it's time for Americans to actually analyze the stuff and do the right thing and we will have a much better economy.
I suspect there are 5,000,000 people who go back in the job market when wages go up enough. And remember, the economy is not a zero sum game. People go back in the job market, create new stuff, spend that money and it feeds itself, It's not a zero sum game.
Glenn?
You might have at least partially just answered this, but I'm just thinking out loud that the last, I don't know, 5, 6 years, you've had actually decent industry loan growth, a mix of backdrop that we had like 2% GDP growth. Now we have optimism that some policy change will bring us to 3% plus yet every bank is talking down expectations for loan growth. It seems a little backwards. Is that did we just pull stuff forward with low rate environment? No.
I think, again, you got to look at the buckets, okay. So the CIB loan growth is that's not driven by us. Some of it is episodic from M and A deals, bridge loans, etcetera, but put that aside. And that can dwarf some of those other numbers here. Mortgages, jumbo growth, we say is going to be a little slower than last year.
That's doing credit right. That's what it is. It can grow. I think you've seen all banks do that. Home equity loan growth is going to go up a little bit, not down a little bit.
Auto, we think, is going to slow down, both because people are little stressed on credit and because auto sales are slowing down. Small business, I think we said we expect to grow. I think you spoke to a lot of small other banks, they expect the same thing and they expect some in the middle market. So if you put it all together, it might be 3%, but you got to look at each piece. Some are not drivers of the economy, other ones are drivers of the economy.
Back left over there, Steve.
Thanks. Steve Trebek, good morning, Cinet. Jamie, I was hoping you could give us some context as to how we should think about the excess liquidity that you have available for deployment. It sounds like you're well above the LCR, the NSFR requirements, but resolution planning actually appears to be the binding constraint for you guys. So how should we think about that capacity?
In the round of everything to 100 and 1,000,000,000, okay. So it's not completely accurate. Resolution planning, it was another not quite another $150,000,000,000 and that was just putting more liquidity. I think it's all excess. I think it was completely unnecessary and I'm in totally favor proper planning for to help regulators manage the failure of a bank.
And then the other one is we have a cushion and the reason we have a cushion over the 100% is because people afraid about falling below the 100%. I don't think it's perfectly rational either. That's probably $25,000,000,000 or $30,000,000,000 Other than that, my issue would be, and again, we want probably liquidity, how you can use liquidity. I think we have a very rigid system with liquidity. Cash at the central bank counts, treasuries count, mortgages count up to an extent up to 85%.
And so therefore, it provides no liquidity given to anything else you hold. So the municipal people want municipal liquidity, but you the Federal Reserve itself, if you go to the Fed window, puts like $0.50 against equities and $0.80 as corporate bonds and 90 percent against 10 year treasuries, whatever it is. I do think your liquidity would have been used differently and not when a cliff type of way. I'm not worried about that. I think it reduces bank earnings a little bit.
I worry about that in a crisis, because in a crisis, a bank like JPMorgan provide a lot of liquidity against other types of assets. And we won't be you can't do that with these current rules. Every time you sell, every time you finance something, you have to raise more liquidity to do it, which means you have to sell something, which obviously obviates the effect of what you're trying to do. But anyway, that will one of the things that we looked at and nor should it be gold plated. I mean, I do think this thing we don't have to be exactly the same as the rest of the world, but it should be roughly equivalent.
So over the long run, the people at JPMorgan Chase can compete.
Chris?
I guess I'd love to hear you talk a little bit about the key risk factors out there. It's a very bullish presentation here, very bullish outlook. And I agree with you, it doesn't seem to me like credit is an issue for the next couple of years, but something always comes and gets us. Where are you thinking about the key like unknown risks for JPMorgan? Is it interest rates?
Is it Europe? Is it China running out of money? Or is it something else?
So, I guess, the first is, I always look at the underlying stuff in the economy. And if you look at the consumer, they're in good shape, jobs are going up, household formation is going up, wages are going up. There's no pothole like in mortgages, we had a $1,000,000,000,000 hole basically. So student lending is a small negative, but the total is $1,300,000,000,000 and a couple of 100,000,000,000 has gone bad and the government is going to pay for it anyway. Auto lending, I forgot $300,000,000,000 or $400,000,000,000 of the $1,000,000,000,000 plus is subprime.
I think you're going to see some issues there, but it's not systemic. But look at credit folks, it's never been better. I mean, literally, look at the note, it's never been better, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever. It's not going to get better, but it's not it's just going to return to norm. I mean, it's just returned to a norm.
And so but if you look at the credit that was underwritten since the crisis, most of credit card was prime, all of mortgage was prime. People were very careful with small business, very careful. So I think the credit book that was built is actually pretty damn good. It will have a cycle. It will go through a cycle and there's a recession.
I'm not saying there will never be a recession, but I think it's pretty good. Corporations in good shape, middle market is in good shape, small business in good shape, large corporations in great shape, there's tons of liquidity in the system. I don't see the pothole. Now you can make a list of all these things going overseas and it's always true geopolitics, I'm not going to make the list. That list would be just like Mary's list up there.
Mike Sembliss did a report that showed of all these major geopolitical crises, a list of 40 since World War II, only one affected the immediately affected the global economy, and that was the 'seventy three Middle East crisis. Not the other 5 Middle East crises, not the 2 Iraq wars, not the Iraq Iran war, not the 2 Afghanistan wars, not the Chinese Russian battles, not the Chinese Vietnam battles, not Vietnam, not Korea, I mean, I can go on and on. They didn't affect it. So I'm not saying they won't. I always look at this, the friction costs of geopolitics is higher or lower than they norm.
And can you be surprised? North Korea, that could be pretty bad. And you can imagine where we want to take that through our grant or stuff like that. So, but I again, we run the company serving our clients. We'll be fine with a crisis like that.
The only interest rates, no, okay, not for JPMorgan. Someone's going to get hurt. I do think that the 10 year bond is subject to a bouts of volatility that will surprise people when the time comes, okay? And I think we were here last year, it was at 1.5 that and you and that and you'll see the volatility when people are scared, not when people are feeling great. When they get scared, they realize there may be an inflationary environment, they're not going to go brush into 10 year anymore.
So I just I look at those a little bit. Will someone get hurt? Yes. Will it be systemic? No.
Someone's going to get hurt. That's a given, that someone's going to be on the wrong side of something, not thought through some of the interest rate exposures. So it's not credit, it's not really markets, it's not risk. I think the one when you look at since the new administration, political, legal, regulatory kind of went from flashing red to flashing green, still got to get done, hasn't been done. It just looks more positive than before.
But the trade is one that I think has the possibility of disrupting things. And I think Mexico has been a great neighbor, but I don't think NAFTA is going to be the issue and I think NAFTA will be renegotiated. It's going to be about China, China and United States, that relationship, that trade relationship. And could we be surprised there? It's possible.
And I'm sure there are others. We run through I don't know how many different fear of things we run through to make sure we can handle them.
Thanks. Jamie, what about acquisitions? Maybe not necessarily bank acquisitions domestically, but a little bit more broadly in this most recent regulatory environment, you have to ask for everything you want to acquire and if that stayed somewhat?
I think other banks need to merge. America still has too many banks. So I think part of the solution for smaller banks is that they get allowed to merge again, as you know, been very few because so hard to get them done. For us, first of all, I love the fact, I said this continuously, we have been growing organically and can grow organically for 20 years, okay. So I don't like relying and doing acquisition to fix the problem, which is kind of what Aldis has been doing for years, to get share, to get size, to get scope, to get brand.
Emerges are tough. So being able to say that we can grow every business organically is a great thing to do. But at one point, we and other banks will the regulators won't look askance on growth and acquisitions, stuff like that. And it might be fintech payments. It could be something overseas.
We don't sit around and say we're missing a huge something. And if we did, we might do that. We've got to change our minds a little bit because we haven't been thinking that way for so long. It's like we've been let out of jail. So we'll see.
Yes, just to follow-up on the question before about orderly liquidation. There's been some rumblings that it's politically expedient or desirable among some people in Washington to change Title II of Dodd Frank, which obviously would make it much more difficult for the treasury to provide backstops to banks. Consequences of that in your view, what your backup plans would be if in fact it looked like there were going to be a significant Title II change?
Yes. So this gets becomes very complicated. So I think the regulators have the right to say that can you recover yourself and stuff like that, whether we did a lot of work, but I don't think it's worthwhile, but to say can you recover. Title II, I think the American public has the right to say, we want a bank that can fail that and that is not too big to fail. So what does that mean to me?
I try to define this because it's very important. To me, it means that a big bank can fail and you don't have to pay the taxpayer, okay. And you didn't, by the way, this last go around, we did, just so you know. And that is by capital, liquidity, requirements, all those various things that protect you. And the second one is that the bank can fail, but you have an orderly unwind.
So it doesn't take down the American economy. So last time around, some of these financial failures were part of the reason, not the only reason, but you had the American economy look like it was going into the tank. And that is a reasonable thing. You have this, how do you manage that? So how do you manage it?
Now, the biggest part of that was done with TLAC is the contracts. So Lehman, if you look at just Lehman, even before the living wells, before no one had the right to take over Lehman by law. They had no, it's called, when the FDIC takes you over like a bridge banker, They had no receivership for it, okay. And even they did it, didn't have people who had to manage it. Now they do, okay.
And the second one, the ISDA contracts all got terminated in bankruptcy, causing this huge rush to capital, everyone having to run-in the market to re hedge their positions and those two things have gone. So already you would have had Lehman would have been far more orderly than it would have been before. Instead of selling the affiliate good investment bank in the middle of the night to 0, you would have much more orderly unwind. And you know who financed Lehman after bankruptcy? On the order of I think it was almost $100,000,000,000 we did.
It wasn't the Fed and we have the capability to do that with we had security and stuff like that and it was kind of scary. So I think they've already got some of those pieces in place and the last piece is that they want more detail about how it would take place. This thing about the lender last resort. So they also have this Bankruptcy 14, which we kind of support Bankruptcy 14, which is, I call it bankruptcy for the big dumb banks. I do think for the American public, I hate the word resolution because it sounds like you're billing them out.
It should be bankruptcy for big dumb banks. The American public should know if that happens. They'll claw back every piece of comp they can, the fire manager, the fire the Board and the name has to be put on the wall of shame forever, never to be used again. So there's no question that Old Testament justice apply, because that's a little bit of what got the American public upset, but you do have to have some kind of backstop. And they have the window, that's what the window is for against good collateral.
So that technical detail remains to be worked out exactly how it's done. Tim Geithner just wrote a thing in foreign affairs about that there will be a crisis again. It will be a crisis unknown, But if you take away the authority of the Fed to do certain things it needs to do, you've made it hard to recover, not easier. And you've hurt the public not help them. And so I do think this issue about standing in ceremony and how that should work.
So you kind of recast it as like you said bankruptcy for big dumb banks with debtor in possession financing.
Yes. Remember the government gave debtor in possession financing to GM. Okay, I'd go on and on. It wasn't and JPMorgan needed any help. It was others who needed help during the crisis.
So but you do need something that can handle something extreme. And again, it may not be a bank at all. It may be something that was got built up over maybe a non bank that people weren't looking closely at. I don't think it's an issue today, but it might be an issue down the road. Thanks.
Hey, Jamie. Steve Lukas from Matrix Asset. Just getting to technology, you have this revolution in technology last 5 10 years. A lot of people still think it's in the 1st inning. When you look at banking, it's very people and paper intensive process.
Then when I look at your returns, it's very good 15%, But what gets it higher? And when you look at technology, I mean, do you put a strategy in place where you can get to 17% returns or 20% returns by driving these new technologies harder the next 5 years?
I think again, I think if you think like that, you're going to have a problem. You have to go through piece by piece and say why are you doing this technology? 1st, you have to do infrastructure all the time. So the folks doing the main infrastructure, the main data centers, the cloud, the agile, that is constantly driving down costs and making things more efficient. And you can do a payback on that NPV, but you should be doing it anyway.
That's kind of like your upgrade you generated every 5 or 10 years or something like that in your house or however you run it. But every other thing, every other major project, you should know why you're doing it. So like I said, a lot of these things, there's no payback at all. We're going to do real time P2P. We think it's table stakes.
I forgot how much it cost us. We are going to do certain things because it's table stakes. We're doing that to defend the 15%, not to get it to 17%.
I think
there are other things that very well may drive it up. We think if you have a neat new product, a neat new service, it's very different, you have a competitive thing. So it's possible that Chase pay over time does that. It's possible some of the areas because they're areas where the E is very little. You can add the product, but there is no equity, Okay.
And so therefore, it should drive your return up and there's no reason the markets drive it back down, because you're competing in that product, you're just adding your incremental volume. And then you could have that in some of Dana's areas. He may get incremental volume from certain things he thinks through that doesn't change anything and drive the return up. Some of it may be technological driven, generally just be driven by very smart marketing deals. Think of getting more FX flow, It doesn't have to come from your traditional resources.
Folks, thank you very much for spending so much time with us. We hope you got a lot out of it. Appreciate it. Thank you.