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.
I didn't know I was going to get intro music. Good morning, everyone. I'm Jason Scott. I'm 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. New this year, we wanted to deliver something that you haven't seen before. 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've 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, cyber security, even cloud. Exhibits are manned by some of the most senior technologists and business leaders, including Matt Zames and his team. I encourage you to stop by, meet them, ask them lots of questions. They can give you background and show you demonstrations of some of the most important investments we're making across the firm. If you look at the back of your name badge, I know you all have them on, but look at the back of your name badge. You've been assigned one of our two 30-minute breaks during the day to visit the showcase. Please stop by at this time, if at all possible, given space constraints. You'll have plenty of time to check email, grab a coffee, and still go visit the showcase. Trust me.
You should've been handed a one-page map of the exhibits with your materials when you arrived. If not, we definitely have extras. Finally, before we begin, just a few more items to cover quickly. Please turn off your cell phones or silence them. Don't forget to take a look at the forward-looking statements in your materials. Last, when we do Q&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. 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.
We're most thankful for the people.
For the people.
The people.
The people.
Thankful for are the people who 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. This is unbelievable.
There's basically nothing we can't do. Woo-hoo.
Success is when this firm continues to be the go-to employer for just the best people on the planet.
I love being partners with you guys.
Call it a premonition. Things are about to go my way.
1.5% cashback.
You don't have to see it.
We're hot.
Just believe. Something's about to change.
In the ATM.
I said, I see $20 in the street.
JPMorgan as a brand on social media has just expanded so much this year.
Runner, stop.
I say things are looking up. I say they're looking up. Take all my trouble because I've had enough. I say they're looking up and I feel so fine. I say they're looking up.
In 2016, we sponsored Cycle for Survival.
Welcome to our 10th Code for Good this year.
I'm feeling so fine.
Down. Four. Down. Two.
Giving 20 push-ups to support those who keep our country safe.
One. All right.
I just want to say thank you to Chase for everything that you do for my foundation. You guys are unbelievable.
My standout in 2016 would be our work with young people around the world.
I say things are looking up. I say they're looking up.
The Chase lounge is fantastic.
The new Sapphire Reserve card was a runaway success. The card business has been ranked number one in market share for both sales and outstanding.
You say I'm going down, but I'm feeling so fine.
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.
You don't know what's coming next. I've got this feeling.
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 Leaders.
I say things are looking up. I say they're looking up.
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 others 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.
I say things are looking up.
We're going to have a great week, everybody.
I'm proud of the work that we achieved on the Detroit Initiative.
We didn't just throw the money. It's like, what can we do to really help accelerate this?
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 happy to be on the list.
I say things are looking up.
Legendary.
Our most successful initiative in 2016 is definitely the launch of Chase Pay. We are now in market with consumers.
Chase Pay.
Take on the world with open hands. That's what you say.
Oh.
We are really damn proud of you. Thanks every day. Thank you.
#WhatAYear.
#Invigorating.
#Community.
#Fulfilling.
#Team.
#Culture. #Freedom.
#Legendary.
#MakingItHappen.
#BuildingBadassBrands.
Dynamic.
Transformative.
Collaborative.
Community.
Exceptional.
Amazing.
What a year.
What a year.
Wow.
That's a little bit tough to follow, and I'm going to do it, though. Good morning, everyone. Thank you for coming. In keeping with tradition, I'm going to kick off the day doing a year in review for the company, as well as looking forward and giving you some guidance for our medium-term outlook. Diving right in here on page one. 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. It's broadly defined not just capital and liquidity, but also risk management, conservative accounting, and our culture.
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 financial performance over the medium term remain unchanged, most notably a 15% return on tangible common equity and a 55% overhead ratio. Before we look forward, let's do a review of 2016 on page two. 2016 was another full year of record net income, bringing us to six record years out of the last seven, and with a return on tangible common equity of 13%. Revenue of $99 billion was up from the prior year. Strong core loan growth of 15%, as well as higher rates, drove NII up by nearly $3 billion.
Relatively flat non-interest revenue reflects the diversification of our businesses, with strong performance in markets offsetting lower fees in Asset & Wealth Management, as well as very significant investments that we made in the card business. Adjusted expense for the year was $56 billion. It was in line with expectations. Very importantly, we self-funded nearly $1 billion of incremental investments and growth last year. In addition, the legal expense last year was a modest positive. Finally, we distributed $15 billion net to shareholders, including dividends of $1.88 a share, up $0.09. We continue to be a leader among peers across performance measures, which I'll show you on page three. 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 to share growth of 7%. Of course, tangible book value, as well as dividends, are key building blocks of value creation. On page four, we show you that we continue to grow consistently, even as we provide solid payouts to our shareholders, returning nearly $60 billion net over the last decade.
You can see in the callout box on the page that including our strong dividend yield, we had double-digit, five-year average all-in returns before accounting for the expansion in our multiple over that period. Going forward, we would expect our tangible value for 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 to our operating model and moving on to page five. 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. We spent decades building the capabilities that our clients want and need, and it's working. How do we know?
We are gaining share, and we are maintaining strong customer satisfaction. The strength in our financial performance is not circumstantial. It is driven by our strategy and how we operate. It starts with two 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. When we think about our businesses, we focus on the quality and performance of them at a granular level, and you can see that on page six. 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.
The size of the bubble on the chart represents the dollars of FCA. 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. Said differently, the combination of them creates halo revenues that are extraordinarily powerful. 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. 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 five-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. 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 stress capital drawdown that is among the lowest of our peers. Moving on 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 one in North America and in EMEA, and we are the only bank among the top 5 that grew share last year. In markets, we grew 170 basis points a share as the momentum we 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. Digging deeper 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 five-year CAGR of 9% and 10% growth last year. 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. 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 billion of long-term net flows over the last 5 years in asset wealth management and Chase Wealth Management. 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 five years. 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 two notable new products, putting significant value into the wallets of our customers. We were rewarded with record sales volume in the fourth quarter. If you look at the table underneath the graph there, while our five-year CAGR at 10% is already impressive, our sales growth is accelerating. That's even more impressive when starting from a base of nearly $500 billion. 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. We are growing both strongly, showing the importance of an omni-channel strategy. Finally on this page, on the bottom right, our merchant processing volumes are growing more than twice the industry. We surpassed $1 trillion last year. Changing gears, moving on to operating with fortress principles on page 13. We continue to be disciplined in managing our balance sheets. We ended the year with $2.5 trillion, in line with our expectations. We added to our liquidity position in the year. We have nearly $700 billion of cash and securities. 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. With growth rates moderating to more normal levels for an approximately 10% core loan growth this year over last. Of course, the $64,000 question is, are we sacrificing credit discipline in order to achieve that growth? The short answer is no. 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. In 2017, circled, we expect total charge-offs to be around $5 billion, driven by loan growth.
On the bottom of the page, we decompose 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. 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. 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 rates continuing to rise, remaining below 3% this year in 2017, and between 3% and 3.25% over the next few years. These new vintages will be accretive to overall portfolio returns.
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 billion firmwide. In consumer last year, we reached an inflection point where we started to build reserves. As we grow, expect net reserve builds of around $300 million 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.
You may recall that when I stood here this time last year, oil prices were struggling to find a 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 billion and a half dollars 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. 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.
We've been growing our commercial real estate business strongly, more so than the industry, at a 15% CAGR over five years, driven by success in our multi-family lending platform, but also more broadly. We ended the year with $140 billion 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. The remaining $25 billion 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 secure 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 for 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. A significant portion of our growth is driven by the strength of our manufacturing partnerships as well as dealer commercial services. In both cases, loss rates are lower than in the retail business. We only do leasing with our strategic manufacturing partners. We do it at good returns and with residual risk-sharing arrangements. Our floor plan loans are fully collateralized at appropriate advance rates. 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. 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. 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 reduced our gap to compliance with TLAC to less than $10 billion. 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.
Reflecting that, we made some changes to the allocation of capital to our businesses on page 19. As you know, historically, we allocated equities 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. 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.
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. This year, we updated our equity allocation approach to explicitly include size and stress related constraints as we commit capital at a granular level. 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 $70 billion that you see here is broadly in line with 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 weighting 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. I have two 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.
On the page, you can see that we have $35 billion in corporate of capital retained outside of goodwill, and you can think of that in three 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. Together, those account for about half of that $35 billion. The remaining half represents the capital that we hold above the business hurdles and above our regulatory capital minimum of 11%. Next, let's take a look at our capital requirements on page 20. 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 four pillars on the chart defend that thesis.
First 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 and 2015 CCAR for us, we would have passed with capital of 11% or less. In the third column, that's our current regulatory minimum requirement at 11%, including U.S. GSIB and a management buffer. 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. 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.
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%-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. 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.
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% and 11%, that would imply payouts of between 80%-120%. 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. 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. As you know, for this cycle, we are still bound by the existing CCAR constructs and all that goes along with that.
Other than CCAR, the other most significant in-flight capital regulation is Basel IV. Based upon what we know today, we do not believe that it will become binding for us as we currently understand it. As you are aware, it has been delayed and things may change, 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. The most notable development on this front in 2016 was our response to resolution feedback, which saw us pre-position 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.
As a result, we added about $50 billion of liquidity year-over-year, leaving us well above U.S. LCR requirements. The cost of that liquidity is in our run rate. Stepping back to talk about resiliency more broadly on page 23. On the left-hand side, we've included Bear Stearns and WaMu in J.P. Morgan'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. On the right, the same is true for the whole industry, with more than twice the tangible common equity and nearly three times the amount of cash than before the crisis.
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. 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 J.P. Morgan 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 new rules and requirements, to pause and step back and take a look at the entirety of them individually and together.
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, 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. 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. We've never really seen this movie before, coming off of zero 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, 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 50-75 basis points. If you look at the circles, the reprice experience of the 2004 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. 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 rate 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 two hikes in 2017, two in 2018, and one in 2019. The long end of rates reaches about 270 basis points end of this year, rising to about 300 basis points by the end of 2019. Starting with rate flat, that would deliver approximately $6.5 billion of incremental NII in about three years, with $3 billion this year. 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 three years is closer to $11 billion, including the compounding effect of reinvesting our deposits at higher rates over time.
It may surprise you to see that we are showing a number as high as $11 billion here, despite having realized some rate benefit last year, and when compared to our $10-plus billion in prior presentations. The primary driver is stronger loan growth broadly, as well as higher yields on that targeted credit expansion in card. 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 two to three years and be an annuity income thereafter. Moving on to non-interest revenue on page 28.
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 billion of downward pressure on our fee revenue over this time frame. Underlying that, from 2011 through 2016, we've seen 3% annual growth. Once these impacts are fully in our run rate, we expect that growth will start to push up the top line. Full year non-interest revenue is going to be very market dependent, we do have some guidance. For the first quarter, expect IB fees to be relatively flat to last quarter, although with higher than normal uncertainty around the timing of deals closing. In markets, I have a couple of points.
First, remember that in the first quarter of last year, we did outperform peers, which creates a relatively tougher year-over-year comparison. Second, March will matter a lot. Last year in January, as you recall, the market collapsed, by March it had recovered, and March was really quite strong. Whereas today, volatility and activity levels are more subdued. As a result, we do expect total markets revenue year-over-year will be up, but up somewhat modestly. For the full year, expect non-interest revenue to be down about $700 million 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 million as we continue to amortize premiums on strong new product originations.
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 $5.5 billion. 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 billion, in line with our expectations and guidance. This year, we'll continue to execute on the remaining $600 million of efficiencies, and we will continue to invest in our businesses with an expectation for adjusted expense of about $58 billion 2017. Maintaining or improving operating leverage as revenue grows. We've created capacity of over $4 billion to invest and to grow. We've primarily utilized that in a cumulative $1.5 billion of auto lease growth, with positive operating margins and good ROEs.
A cumulative incremental billion three of marketing and technology spend, that's just in the expense line. If you total our marketing and technology investment spend across our businesses, it's over $9 billion. Remaining spend is largely funding revenue related expenses, about half of which is across the CCB, with the remainder principally in Asset & Wealth Management. 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 billion of net income over the medium term on the back of rate normalization, as well as solid underlying growth across our businesses. Not assuming growth in markets coming off of a strong 2016, while assuming that we absorb incremental expenses and credit costs as we grow.
Depending upon where the final resting place for our capital is, this is consistent with 14%-15% return, and it's a pretty central case. I think it's fair to say that with the wind at our backs, we 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 is good for growth, it's good for our clients, and it's good for the country. 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. 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% 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.
I have a few minutes for Q&A before I hand over to my partners. Betsy, hi.
Use the mic. Thanks, Marianne, for that. The first question is really around that interrelationship between your CET1 of 11% and your 15% ROTE. You walk through, you've got some cushion now and what the sources of that cushion is. 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? Is there something else that you're waiting for to raise that buyback level and drive that down?
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, so 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%. I do emphasize over time. We do need to continue to meet the regulators' expectations writ large about our qualitative factors. 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,
Yeah
meaning loan growth. I mean, it takes a lot longer to do that, but just wondering.
Yeah. I think if you look at the loan growth that we have, and ultimately a balance sheet growth equation of about three-ish% equates to the higher end of our payout, and about six-ish% equates to the lower end of our payout range, so the 55%-75% range. Clearly, what we're all somewhat excited about is this higher level of optimism in the environment. If that does ultimately turn into a lot of conviction and action and activity levels, and there is an increase in demand, we could see our growth accelerate. We can't really predict hypotheticals, so we're basing it on our current pipelines, our current expectations, which is consistent with that 3%-6% growth, 55%-75% range, which means that if we had surplus capacity, it would be a combination of growth and share repurchases.
We've been very clear about our capital stack, invest in our businesses for good strategic long-term growth and profitability, number one, all day long. Mike.
Mike Mayo, free agent analyst. When you say deposit beta of over 50%, are you sandbagging, or do you really mean it? It seems like that's a little bit higher than the industry. Concentration's 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 first year. I think the point we were trying to make is that when you're starting with rates close to zero and for the first few hikes, you would always expect the reprice to be considerably smaller than when you get through the cycle. With the 2004 cycle and this cycle so far look very similar. That's not telling us anything particularly new. It is our belief that liquidity requirements will increase the competition for good deposits. 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. It's prudent for us to assume that it will be higher.
Clearly, our assumptions drive the NII outcome, not most materially. Most materially, it's our growth and the absolute level of rates.
Saul?
Hi, Marianne. Saul Martinez of UBS.
Hi.
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 what are you embedding in terms of market share in that?
I would 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 one, two, three 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. 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 one quarter is not a trend.
We have to see that really translate into significant levels of activity. Right now, activity and volatility is exceptionally low. Activity levels are somewhat quiet. March last year was a strong comp. Daniel will definitely give Do you want to add anything, Daniel, or?
We will do it later.
Yeah. Later? Okay.
Over here, Chris Kotowski.
Thank you. The graph on page 27 for the rate sensitivity is very helpful. 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 an upper single-digit rate, and presumably that would have an impact on net interest income as well. Can you bring those two together?
Those two are embedded in that outlook for rates. 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. Remember, that's not fully normalized rates. That's based on the implied rate curve. We don't have any more insight than the market about what could happen over the next three years. 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.
Okay. Right here. Gerard?
Thank you. Hi, Marianne. 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 first place? About how much is that in terms of total capital for those businesses that you're not in any longer?
It's impossible to handicap the probability of those changes, I would say, and in particularly at this moment in time when I think there will be a lot of things being under review. 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. In change, we will obviously continue to carry that capital, and it's somewhere ±$10 billion for private label mortgage-backed securities.
Right here in front. Guy.
Thank you. Guy Moszkowski with Autonomous Research. On page 24, you talked about principles of regulation. 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?
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. That's why we say it's not binary, it's not keep or repeal. 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 coherence, for example, across the plethora of liquidity rules that we have. We'd like to look at simplification, I think also somewhat consistent with what we're hearing.
Thank you.
Okay, over here. Marty.
Marianne, Marty Mosby, Vining Sparks. Wanted to ask you, in the NII simulation, where you're talking about the long end going up, the OCI now comes out of your capital, wherein past times when we had rising interest rates, it wasn't included in the regulatory capital ratios.
Will that make you more proactive on taking those losses and reinvesting in higher yields? Is that incorporated into that long end when you're looking at the positive you're picking up, just being more proactive in churning the portfolio?
Yeah. I start by saying that obviously for there to be incremental AOCI impact, we would have to see rates deviate 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. Obviously, we're targeting a target of duration of equity for the company at normal rates. We have a lot of negative convexity in our portfolio. We've already realized a lot of that. It all plays a part.
If you'd be more accepting 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.
Yeah. 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.
Yeah. 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.
No. $11 billion is already a plenty big range. I think we're in reasonable shape.
Andrew?
Hi, it's Andrew Lim from Société Générale. I was just looking at slide 14 and what you've presented there on the risk-adjusted returns. Presumably that's in a benign economic environment. How do you think about how that pans out in a more, say, tough economic environment? Presumably, there's more variability there in your risk-adjusted returns. Presumably, net charges will increase.
Right.
How do you think about that?
I would say we're at a point in the cycle where we feel like we've hit an inflection point. To give totally through the cycle forecast would be not necessarily as instructive as giving you what we think is realizable and able to be achieved over the course of the next several years. 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. 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 Petno 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. To jump in for Commercial Banking, we continue to execute our discipline proven strategy. 2016 was a terrific year for us, so we feel very good about the future of the business as we start 2017. 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. While we have strong leadership positions, 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. These investments are certainly paying off. We've been growing the business selectively while maintaining our focus on fortress principles. Our strong financial performance has been driven by this consistent, disciplined approach and the value that we're bringing every day to our clients. There's an awful lot to talk about in the Commercial Bank. 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're in 1,600 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. 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 two major businesses. In C&I, we're targeting 18,000 clients and 31,000 prospective clients. In Middle Market Banking, we focus on small and mid-sized 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 financial requirements.
As such, we're very well connected with Daniel's investment bankers. In commercial real estate, we're set up as three distinct but very well-coordinated teams. We're covering 2,000 clients across real estate and community development banking, and we're 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. 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 million 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. Last year alone, we executed 800 capital markets financings for commercial banking clients in the investment bank. 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. 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. As our clients grow, their needs change. We've built our business to support them along the way.
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. It's fascinating to see the span of clients that attend this event. We have the founders of large multi-billion-dollar public companies all the way down to an owner founder of a brand-new startup. What we commonly hear from these folks is that they rapidly outgrow the capabilities of many of our competitors. As their businesses succeed and as their growth explodes, they 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. 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. In 2016, we delivered revenue of $7.5 billion, up 8%. This was a record for us. Net income grew 21%. Even with the pressures we felt in the energy sector, our credit performance remains stellar. It's our fifth consecutive year with net charge-offs of less than 10 basis points. 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%. 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 a presence in eight new markets in 2016.
We hired over 100 new bankers. That's not an easy thing to do. We're spending substantially more time with our clients, 20,000 more client calls in 2016 compared to 2015. Not a surprise, we added over 900 great clients in the business last year. It's this calling activity and being out and visible in the market that's going to generate opportunities for us in the coming years. Across our business, we continue to see quality opportunities to generate great clients, prudently grow loans, and extend our franchise. As we think about growth in the business, let's spend a moment on our loan growth. I'm going to start with C&I. We had good C&I loan growth last year. Loans were up 9%, slightly outpacing the industry. It's our seventh consecutive year of 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. We continue to see increased activity amongst our larger corporates in cash M&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. 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 the last several quarters and have actually turned up in some of our markets. 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 marketplace.
To make that point, Marianne 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've been a lender in less than 7% of those. 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. Given the stress in this part of the market, we're particularly proud of how we've performed, and we'd encourage you to compare our performance to our major competitors.
It's obviously a 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 in 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. 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. 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're 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.
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 three-quarters of our overall portfolio. This is a business that we believe thrives through the cycle. It 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. Think New York, San Francisco, Los Angeles. It's a very granular portfolio. The average loan size is under $2 million. We've tracked originations over the last three years. The average loan to values have been less than 60%, and the average debt service coverage has been greater than one and a half times. 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. We're targeting the least volatile asset classes, industrial, retail, office, and multifamily. We have very limited exposure. Less than 1% of our portfolio is to home building, hospitality, and land, and most of our exposure is in primary and secondary markets. About 70% of our loans are in the top 20 MSAs in the U.S. 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 that oftentimes have significant recourse. 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 you think about growth in our business, we remain excited about the progress we're making in our expansion markets.
Remember, since we started this effort, we've opened up 45 new offices across the country. These are in great markets like L.A., San Francisco, Boston, D.C. Last year, we opened up six 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. As you can see, we've steadily grown clients, and we've steadily grown revenues. We've essentially built organically by scratch, a very nice-sized bank. Over 2,000 clients, over $12 billion in loans, over $8 billion in deposits. We've done it all organically, picking every client, picking every loan by scratch. We're executing with great discipline.
We're investing for the long term, we're marching towards what we believe will be a billion-dollar 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. It's an extremely exciting market for us, it's obviously a market with strong incumbent competition. Nevertheless, we continue to win full banking relationships, investment banking, treasury, and lending. We've seen consistent growth in clients, loans, and deposits. We're taking a long-term view here. We've had essentially no net charge-offs since beginning our operations in California. It's a very exciting market for us. It's large, global, dynamic, and international. It plays to our strengths. There are also a lot of companies that fit into our industry coverage model.
We see a lot of clients in agroscience businesses, technology, life sciences, and government sectors, 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're able to deliver deep industry content and expertise. They're able to deliver industry-specific products and solutions, 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 in that we have industry-specific risk executives attached to each of these 16 industries. The impact is very powerful. 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, it keeps getting better every year. Daniel's investment bankers are totally aligned with the commercial bank. 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 for commercial banking clients every year since the time of the Bank One merger in 2004, that's through all market environments. In 2016, we delivered another record year with $2.3 billion of investment banking revenue, up 5%. We feel like we're well on our way to a $3 billion revenue target and think there's at least another $700 billion 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 bank's on a multi-year transformation of the business. Last year, we invested more than we ever had on technology, data, and innovation. It's double what we spent three years ago, we're going to spend even more in 2017. 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 in performance across critical processes like credit delivery, KYC, and onboarding. We're bringing data to bear to better serve our clients and to better manage risk. 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, $92 trillion of North American wholesale payments last year. 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. We're making a number of investments to help our clients. We're streamlining transaction reconciliation process, we're digitizing payments, and we're improving the client connectivity and enhanced systems integration. To be a leader in payments will require 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-in-hand with our partners in consumer, our digital strategies are focused on exactly the same priorities: speed, convenience, simplicity, transparency, and mobile access. 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's made on behalf of our consumer digital platform, but it's tailored to specifically meet the needs of our small and mid-sized clients. You can get a sense for the power of this platform and the simple user experience, in the innovation showcase. 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.
We're doing this across our lending platform, seeking to bring more speed, precision, transparency, and efficiency to our lending models. While our commercial term lending business is the number one multifamily lending business, we are absolutely not standing still. Over the last two years, we've made meaningful technology investments in our new credit delivery model called CRIOS. In addition to bringing real improvements in efficiency, the platform will enable complete transaction transparency for our clients and cut the time to close by over 50%. 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. I know he would love to spend time with you showing you the CRIOS platform in the innovation showcase.
Looking forward for the business, we are excited about the opportunities ahead, and we believe we're very well positioned 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. 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 four or five years. Small business confidence actually hit the highest point it's 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 million for the commercial bank. The world is certainly getting flatter. Being one of the only commercial banks that can follow its clients into international geographies will continue to be a big differentiator for us. We continue to see attractive opportunities to safely grow our real estate portfolio. There's a trillion dollars of maturities in the next three years.
Amongst all of that volume of refinancing, there's some high-quality clients and low leverage financings that we think we can participate and win. Lastly, I've discussed the rising consumer wholesale expectations around our digital platforms and payments platforms. The stakes are absolutely increasing there. 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. We could not feel any better about how well our business is positioned moving forward. 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 billion.
Investment banking, we see meaningfully more room to grow that business. We're standing by our $3 billion long-term revenue target there. International remains a key differentiator for us. We think over time, this will be a $500 million 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. We believe it's the right cost structure for the business. On credit, we see a relatively benign environment moving into 2017. Would expect that charge-offs in the medium term to continue to be less than 15 basis points. For the business overall, Marianne 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. 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. We're working hard to extend our franchise and our leadership positions. 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&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. Are we done or do you think this is going to repeat as prior rate hikes?
As I said, I think we've bottomed on credit spreads. I think they've come down dramatically through the financial crisis, but I think we have upside in some markets. We're starting to see spreads start to widen across our business. It could always go lower. We can certainly compete if it goes lower, but it's not what we're seeing out in the market. Matt?
Matthew Burnell with Wells Fargo. Doug, thanks very much for the information on the spread revenue improvement in 100 basis points in a 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-
Yeah, absolutely. If there's a meaningful step change improvement in the economy, you're going to see greater capital markets activity. Our middle market clients have been pretty sanguine since the financial crisis. Confidence has been lagging. The consumer confidence that we've witnessed, the investment banking activity has been inconsistent. There's a lot of pent-up cash. 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.
Okay. Over here, Saul.
Hi. Just a broader question on the credit cycle. The H8 data has been pretty weak, especially in 1Q and especially in C&I. It feels like the C&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 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&I going back to 2014. What we've seen recently is just a continuation of that same trend. You've also seen a de-leveraging in some of the deep cyclical commodities markets. You've seen many clients rush to the capital markets, the more permanent debt markets to lock in rates, which takes away from the C&I quantum of loans. There's a lot of ins and outs going on there. I think it all ties back to management confidence and organic growth and pick the 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 could get put to work, and you can see that in greater revolver usage and greater loan growth across the business. That's our bet. It's one of the reasons why we've been investing in our footprint and adding bankers is we're bullish on long-term on the U.S. economy, especially in the middle market part of commerce. We'll see what happens.
Adam?
Hi, Adam Compton with GMT Capital. If you look at your data on page six, you guys have done a great job growing lending. I tend to think about small to mid-size 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. Do you guys feel like you're getting the deposits you need as you bring in these new accounts? What are you doing to make sure-
Yeah, we usually do. I think you have to remember, only half our clients borrow. That definitionally half of our clients is just purely a deposit, an operating type relationship. There's other noise in our numbers and the trend in our deposit profile. As you'll recall, we stepped away from some non-operating core FIG deposits. That was a meaningful part of our business. That was a headwind for us. I guess we would expect as rates rise, there'd be some normal amount of reinvestment, and the economy improves. There'll be some normal amount of deposit migration into other securities and investments, and just the money's going to get put back to work. That'll be a net positive for us in the long term. 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? It's your time.
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? Also, can you just flesh out a little bit on the newer market expansion, what's been going well, what maybe is not up to snuff? Where are you seeing better activity out of?
As I mentioned, we'll be in the top 50 MSA by the end of this year. We added 45 new markets. It's not easy to hire good bankers. There's not a banker tree you can go over and pick off three or four bankers. They're hard. The good ones are entrenched in the banks, hard to pry out, and there are not as many out there as you think. We're sort of limited by their ability, the time it takes to grow our own in those markets or to 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. 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. 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 year-term loan growth. That'll be a disaster. 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. 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.
Expect to be the same in San Fran and Tampa and Nashville. We want to do it right and build the foundation for the long term.
Mike.
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?
Think lockboxes, think paper checks. There's still a tremendous amount of dependency on companies conducting payments with the paper check. It costs $8 for a client to send a check. The industry's moving against it, away from it. We're slowly migrating our clients to digital platforms. You have to have willing clients. Think U.S. municipalities. They need the budgets to upgrade their systems and technology so they can integrate with the banking systems. There's a lot of that that needs to happen. It'll happen over time. The long-term trends are certainly moving paperless into digitized payments. It's a tremendous white space right now.
Do you have a number where 60% goes to?
I have no idea. Yeah, I couldn't tell you. Theoretically, it goes away. There's no reason why you need a lockbox to receive paper checks long term when you can digitize every payment. Our corporate QuickPay product and our corporate QuickCollect products, we're starting to see rapid adoption, which essentially, like Gordon's QuickPay payment capability, it could completely eliminate the need for a check. It's just you need clients to adopt it, and you need clients to have the systems capability to use these products. Good?
Yeah. All right. Thanks, everybody. I think we have our first 30-minute break. All right. Thanks, everybody.
[Break]
Okay. Let's get started. Good morning. Thank you for being here. During the next 45 minutes, we will discuss the Corporate & Investment Bank. I will focus on three things. First, about trends in performance and the progress we have made on the expense side. Second one, I'll give you an update on the different lines of business that, following your feedback last year, will have a lot of focus on the markets business. Last, we'll talk a bit about the medium-term financial targets. Turning to page one, we have discussed a series of priorities in the past, and this is a bit of a mark to market of that. $10.9 billion, record earnings last year, 16% return on equity, and $19 billion 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&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. 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.
Moving to page two, 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, and we have delivered growth mainly by a good performance in fixed income in 2016. That is 16% return on equity on $64 billion of capital, $35 billion of top line, and almost $19 billion of net income for a cost income ratio of 53%, which is in line with the $19 billion of expenses. Talking to expenses, about expenses in page three. On the left side of the page, this is what has happened over the last five 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 2012 by 22%, but it has stabilized in 2015, and marginally 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 cost. A lot of progress there. In 2015, Investor Day of 2015, we have discussed with you a multi-year expense program. We said then that we were going to move expenses from $21.8 billion to approximate 19 by 2017. 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 will discuss with you.
Now on the right-hand side, top of the page, on the left, there are two boxes. The box on the left is what's included in the program and what we have done. 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 done a bunch of investments that we have made. Also, we decided that the business require further investments, and we have made those. Those are related to acceleration of the global delivery and the global payment platform. It is about the custody and fund services infrastructure transformation. It's more money in investments in our trading platform, and continue hiring senior talent to boost our banking business. We have made all that.
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. We have the benefit that it 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 our evaluation of the dollars. For 2016, we are still forecasting for 2017, sorry, we're still forecasting expenses to be around $19 billion, with including a further acceleration of investments, the tax tailwind, and the normalization of some expense items that were particularly low in 2016. Overall, really a good performance on the expense side. Moving to page four. All that has give us a good return.
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-off portfolios 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 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 for an overall performance of 16%. Now going to an update on the individual businesses. 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, account opening, documentation exchange. We are making our pros implementation more digital and more customizable. We are working, and Doug Petno mentioned this better than ever, across the Corporate & 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. We are delivering on that with a lot of focus, working with Matt Zames on cybersecurity and fraud detection for us and for our clients.
We are delivering all that by reducing operating expenses of this business from 2014 to what is forecast on 2017 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 talk about the importance of developing and growing our Global Corporate Bank. This product and the quality of this product 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 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 U.S. Turning to page six, 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. 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.
Also in this case, we are managing to achieve all that also by focusing in reducing operational inefficiencies. That's all gone down by 12% in terms of operating expenses and accelerating the investment in technology for about 30% from 2014 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. They like it. They are recognizing the improvement that we have made. Really, we are winning mandates here, too, around the world. Particularly, the most noticeable one is the BlackRock $1 trillion custody contract that we signed a few weeks ago. Overall, a lot of improvement here, too. I think that the combination of all this will create substantial growth in the years to come.
In banking, page seven, we always have a very good and solid debt capital markets business. In the bottom left of the graph, number one many years ago, number one now. We've been working hard in improving our equity capital markets platform. We've been number one 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. That is being clearly reflected in the improvement that we have made in our M&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're very focused in different regions and different sectors, putting us on the bottom right of the page in a very good position across sectors around the world. Now moving to markets, page eight. Strategy really hasn't changed. It's the same as it was many years ago. We want to be an scalable player that will deliver a complete set of products to our clients around the world. That strategy did work. Once you have that, it's 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. 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.
We have a very solid risk management process around. The combination of the scale and these operational principles have given us very strong return on equity over the years, particularly in 2017 and 2016, 17% return on equity. Going forward, it will be all about continue developing innovation in our platforms and 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. Overall, we have delivered very strong performance in the past, and we feel positive that in the medium to long term, the markets business has growth. Moving to page nine. This is what has happened. Fixed income and equities.
These are full wallet Coalition numbers. We used to talk about the 10. This is full wallet. We started this graph in 2010 for one simple reason. 2008, we have the crisis. 2009 was a very peculiar year. We have a massive sell-off in the first quarter and a massive rally for the rest of the year. 2010 is when the market started settling and being more normal. In fixed income, the wallet has substantially shrunk over the years with some small growth last year. Most important, our market share has gone up from 8.6% in 2010 to 12%. In equities, a 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. 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 & Investment Bank but particularly in markets. We split in 9 segments and we're pretty much top 10. Top 3. We're 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 3 positions, there were plenty of places, region and products where we were not. This is a bit of a mark to market of that over the last five years. In 2012, in 39% of the products, when you split those 9 businesses into sub-segments that represent 31 sub-lines of business, 39% of those were not top 3. Those businesses represent the smaller part of the wallet but important then of 21%.
Five year forward we are not top 3 in only 23% of them with a 17% representation of the wallet. We have made progress there. The bulk of this improvement is in Asia. Almost 90% of this improvement is in Asia. Really how we choose where to invest or not it was all about completing the platform for our clients. In one of the areas where a challenge, and we still do but we made a lot of progress on page 11 in equities. 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 investing. We said that also we made progress in cash prime and we were looking at making more progress in balancing cash and synthetics. We have done that.
The overall revenues have gone up by 22% with a wallet that has only gone up by four, and in synthetic prime, the green part of the graph, we have gone up by 48%. Cash equities, another area. We were late to the low- touch agenda, and we've been catching up, investing a lot of money in that and making progress. From 2014 to 2016, our revenues has gone up by 31%. Clearly, the cash wallet overall is shrinking. It has shrunk 34%, and our overall revenues has gone down only 4%, so an increase in market share there, too. We always is very strong in derivatives, but we have some challenges in what it connects with flow derivatives, and we're very focused on that, particularly in the U.S.
Our revenues has gone up by 26% the last couple of years with a wallet that has gone down by 5%. We overall, according to Coalition last year, we were number 2 in equities, so quite happy about it. Now getting into more of the details of markets overall. We always talk about markets in terms of fixed income and equities, 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. Our flow business is the biggest part of what we do, has gone up from $10 billion-$12 billion and from 10%-16.1%, and this is all the market making that we do on liquidity provision in cash and derivatives for our clients.
On the center of the page, you have the financing business, $5.5 billion-$7 billion over this period. Also, the return on the balance sheet that we deploy has gone up from 1.6%-2.1%. The amount of balance sheet deployed is being more or less stable, if anything, slightly lower in 2016 than it was in 2014. The improvement in return on the balance sheet is mainly connected to two things. One is optimization. We are obviously keeping the client in mind. We are deploying our balance sheet in the places where it produce the best returns. Also, 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. 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%-1.7%. At the bottom of the page is these are our average daily revenues. They've been very stable with a bit of growth in 2015. I want to make a comment here about our risk management approach. We are very careful, and we're working hard with the market managers and myself in defining how much risk do we need to take. The risk that we take is, one, 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 risks 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. If we try to be smarter than that, if we try to really punt our way to excess 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. A lot of the effort goes in defining how much is necessary, how much is the right amount of risk that is necessary. The next page 13, is a page about discipline through our operating principles. Our revenues have gone up from $17.5 billion to $21 billion, while market expenses have been flat from 2014 to 2016, 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-SIB points in the markets organization by 14%. We have reduced the consumption of standardized RWA by 17%. Ideally, in a multiple-constraint environment, you want to have all the constraints being equally binding. Essentially, we have a bit of room to grow advanced RWA. Something is about growth and some is about the different allocation. All that discipline has generated a 17% return on equity that you saw in 2017 and in the past. Going to page 14, this is exactly the same page that we showed you last year, 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, all the lines of business were crossing comfortably the cost of capital, with the exception of commodities that we're still dealing with the tail end of the simplification process. 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've thought, number one. Number two, that it is really difficult to shrink your way to profitability. For us, the most important piece is that these platforms has a very positive operating leverage. That's exactly what has happened in 2016, where the fixed income business increased performance.
Going to page 15, you see the allocation of capital is totally consistent, it's slightly higher capital in 2016 than in 2015. It shows that increase in the top line in fixed income produce 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. 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 once it's that, how do we execute transactions on a principal basis, on an agency basis, for structured products, for flow products, and all the post-trade services that we provide from settlements and financing and custody and front 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. We are very focused on that.
David Hudson and the markets organization, the sales organizations, are very focused because I think that to get this right will guarantee the future of the markets organization and the rest of the business. We said that those are the things that we control, and we talk about headwinds and tailwinds in markets. 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 electronification. On the left-hand side of the page, we have the graph of the flow business. Remember, $10 billion in 2014, $12 billion in 2015. 10% of those revenues were done through electronic means in 2014, 12% in 2016. On the center of the page, you have the revenues for markets in 2016 and the waterfalls. Solutions and financing are likely to go electronic.
There are portions of the business that they are not going to be electronic or very low likelihood because of liquidity and the requirement of capital. There is an addressable part of the flow business, what is the more liquid part. Some of that has already gone, and there are $5.5 billion that you could consider is a fertile ground for further electronification. 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 $5.5 billion may become electronic. Let me pause here and give you few comments here. Today, taking fixed income as an example, 94% of the business we do, of the tickets we print, are done electronic. 39% of the notional that we trade is on electronic and 11% of the revenues.
That is across fixed income, mainly driven by foreign exchange and government bonds. That's that. The second thing is there is no legal impediment or regulatory impediment for the whole $5.5 billion for any other part to go electronic in the past or today. The reason why it hasn't gone, or part of the reason, is the fact that in this $5.5 billion, Plenty of it that requires capital in facilitating the intermediation process. The combination that some of the stuff that is more liquid at very tight margin has already gone electronic, and the need of capital make us believe that the effect of electronification is more towards the top left of the right graph, more than the bottom right. This is our assessment. You may have a different idea there.
Moving to page 18, talking about the future or the potential for growth in markets in the medium to long term. We discussed that the wallet has shrunk substantially from 10 to 15. I would have thought that, Jamie mentioned this before, that there are three reasons, some secular, some cyclical. There are products that have been eliminated, don't exist anymore. There is some margin compression due to mainly the process of electronification and market transparency. We have a long period of low volatility, low interest rates that is some way reversing. 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 elections, Dutch elections, Brexit, new policies in the U.S., geopolitical issues pretty much everywhere.
It's very hard to believe, even though this quarter happens to be that volatility is very low, that volatility will remain low in the years to come. I think that higher volatility will help markets business. The normalization of interest rates 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. Emerging markets on the bottom right that represent only 12% of our revenue, represent 40% of the GDP in 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.
The combination of all this makes me believe that even though considering some headwinds for electronification, it will be modestly positive over the years to come. Now going to page 19 and talk a bit about financial targets. 16% return on equity in 2016. Let's go to the revenue page. Where we view on 2015, I will give you our medium-term forecast. We increase in these numbers already 100 basis points of higher revenues. This 20 basis points negative is, for the next couple of years, a bit of being cautious on markets for two reasons. First, because the wallet grew last year and hopefully that situation is sustained over a longer period of time. Most important, because we have a very substantial increase in wallet share last year.
We're a bit cautious with markets, though we are planning for growth and for increase in revenues in all the other lines of business. We think that the three 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. 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. $34 billion of revenues, approximately $19 billion of expenses.
Our cost-income ratio was from 55% to 60%, at 12.5% capitalization on our glide path of advanced RWA for a capital amount of $70 billion and a 13% return on equity. Going forward, we think that the revenue is going to move to $36 billion. 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 billion of capital that is being allocated in a different way in 2017. 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. For that, and the consequence on all that, is an increase in our target return on equity to 14%. Now to wrap up.
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. We have worked very, very hard to get here. From where we are, it will require working even harder than any time before in order to maintain our growth, our franchise for here. 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 highest standards, regardless what change or not occurs in regulation. We have learned from the mistakes that we made in the past, and those lessons will be fresh in our minds when we look at the future. Finally, this is a business of people. The quality of the service that we provide is related to the quality of talent.
Attracting and retaining the best possible talent in the industry is a top priority for us. I will stop here, and we have probably few minutes for questions.
Glenn? Thomas.
Thank you. Glenn Schorr, Evercore ISI. I appreciate the breaking out rates separately on that ROE walk. When you look at the revenues and on the chart it had basically flat revenue projection over the medium term, X rates. Can you talk through a little bit of the puts and takes in your mind? It seems like the share you've taken, if fee pools grow a little bit, you should be a big beneficiary of that. 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 a industry level.
I tell you how we think about it. There is no doubt that we always say that we are a bit cautious in the way that we plan for market business. When you look at every year, you have some core number of revenues, and then you have an increase of activity around certain events. Those events may or may not repeat. It will make the different ones. 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. That is 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 is possible to make.
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. If there is an outperformance, these platforms are very scalable, so the positive leverage will produce better returns.
Mike, right here.
Slide 10 shows your movement into the top three 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.
Yeah
not working out for you?
I think that we have shown over the years discipline. Simplification was an example of that. We were in plenty of things that represent almost a billion and a half of expenses that were not core to the franchise. 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 deliver the best possible outcome to our clients and the best possible return to our shareholders.
That's why we've been very surgical about when you look at from this 39% of areas where we're not top 10 to now 23, it's not that we're wanting 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. It's like everything else. It's discipline about risk, it's discipline about investment, it's discipline 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 obviously 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-
Yeah.
Okay. Just on your comment around flow derivatives in the U.S., what's the plan to fix that?
We've invested heavily. If you look at Coalition, we were around number 7 in 2012. We are now three or four. We have made a lot of progress, and we'll continue to focus on that.
Okay.
So we-
Because your comments were like, "Oh, we have some things we have to do to get that up.
No. There is plenty. For example, we are not the three in cash. We're number 5 now. We were number 8 or 10, but we're number 5. There is more growth there. 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. That's another area. Flow derivatives was one more example, every derivative for the United States where it feels there are more growth to come.
Okay. That's all the time for.
Okay. Thank you, guys.
All right, everybody. I stand between us and lunch, this is going to be a topic that is near and dear to everyone's heart, given that this is a room full of some of the world's best stock pickers. I'm Mary Erdoes. I'm CEO of the Asset and Wealth Management businesses here at JPMorgan. 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 two centuries, 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, it gives us great insight into the kind of things that they need and that they want. They partner with us to tell us what they need in the future. That's what keeps us constantly innovating and adapting this business. Sometimes people say, "You're in a really big firm, 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. 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. They do because we keep investing in them. We keep giving them the tools and the technology to be able to do their jobs better and better in spite of whatever comes at them from industry headwinds. 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.
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. How have we done? Let's go to the numbers page. We've continued to grow our assets and revenues at a 5% annual compounded growth rate over the past five 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 five years. A very solid 29% margin and a 24% ROE. 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. 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. That's presented these challenges. I also don't need to tell the room that those five and 10-year numbers are some of the industry's best.
You know that they're even better because those one-year numbers are included in those five and 10-year numbers. I want to tell you, this is not going to last forever. As a matter of fact, you've seen a lot change in the last three months. You too should not doubt yourself in the jobs that you do, and your clients shouldn't doubt your stock-picking abilities. As a matter of fact, if I just take equities, that was a one-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, you cannot doubt the ability for human beings to pick good stocks over bad stocks.
The reason that we focus on these five and 10-year long-term numbers is because they generally lead to the long-term flows that grow this business. I want you to look up on the screen for this page. This is a page that has lots of colors on it. 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. Different asset classes across the top can be challenged from time to time. You can have people not as interested in fixed income in one 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. All of that continues to add to flows into this business where clients entrust us with their assets. Last year, $23 billion. 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. 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. That is the other side of the balance sheet. The Chase Wealth Management and J.P. Morgan 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 billion into J.P. Morgan for a total of $85 billion into the asset and wealth management business. That, over the last three years, has totaled more than a quarter of a trillion dollars in flows into our business. 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 billion over the five years, or roughly $82 billion a year. But that's not our goal. Just 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. It's also why the financial results are so important. 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. 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 and year out. What do we do about it? J.P. Morgan 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. Clients don't just come to us for products. They come to us for solutions for their entire wealth. Fee compression. Fees should always reflect your expectations of the value you can add to clients over the long term. If not, you need to change.
We need to constantly think about the portfolio of things that we offer to clients. If it's not what they need, and if it's not working, you change. If you aren't innovative and you aren't launching new things, you need to change. Over the last five years, we have closed or merged 191 funds and launched 267. We need to see the opportunities for the future for our clients. 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.
Technology helps our own people to be better at what they do, to be more efficient, to not have to do the rote 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. 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. 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. There's a client that most of us on the management team actually know quite well. He just came to us only a few years, several years ago, but within the last decade.
He started when Barry Sommers was running the Chase Bank, Barry put him into the Chase Wealth Management business because he saw this entrepreneur who he knew would be successful in the future. They did their first mortgage for a small apartment in New York City. He was expanding his company, he came to us, we decided that we needed to go to Doug Petno's group to get more of an important loan from a business banking perspective. Doug said, "We should probably think of an equity investment here, we should show it to Larry Unrein," who runs our private equity business. We invested on behalf of our clients into his company. He started to get some real sizable money and assets that needed to be managed, we introduced him to Kelly Coffey in the Private Bank.
He wanted to have a bigger mortgage, a very complicated water slide in his backyard, which caused all sorts of problems from a jumbo mortgage perspective. Vince LaPadula was able to do that. We introduced him to Daniel, I'm proud to say that just recently, we were awarded lead left on the IPO. Now Brian Carlin and his team are working on putting all the stock into a pre-IPO grant so that we can help him. When he's done, you never know, we might be able to help him buy a sports franchise or something, depending on how well Daniel does with this process. I will tell you not to leave anyone out at this table. It is a full client service organization, this client did just have dinner with Judy and Jamie Dimon two weeks ago.
He's taking care of them from top to bottom. That is really how it works in this place. That is a real-life client, that is how we help them through the life cycle of this. At the beginning, it starts with banking. 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, that's where they start. 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, we are there for them. 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, we want to make sure that they get through those tough times.
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. Risk-controlled portfolio of loans, and that's why we're at industry-low charge-off rates here. When you take the banking and the lending combined with the investment management that we do at J.P. Morgan Wealth Management. That's where you get these recurring revenues. 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. Those are the kind of clients that come to J.P. Morgan. That's why you see in the numbers those compounded annual growth rates that are peer leading over time. 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 Willcox and team manage across the asset management spectrum. 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. 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 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 one 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? 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. That's what we do. That's why, despite these good times and bad times, they are a fifth percentile manager. Fifth percentile. Seventh percentile for the first couple of days of this year. It's really outstanding performance. The same is true in European dynamics. It's hard enough managing across the European markets.
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. 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 Michele 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 markets 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 client, but the talent that we have around the world to be able to help them. If you look on the bottom left, we are the number 2 in flows over the last five years of our publicly reported peers, except for Vanguard.
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% outperformance over the rolling time period, ninth percentile manager. As you continue to go through and diversify the portfolios, alternatives is an equally important part of the conversation. Clients turn to J.P. Morgan in this area because of the complexity and the long-term nature of some of these asset classes. We're the second largest alternatives platform in the industry. Everything from our liquid flagship strategic opportunities fund, $20 billion run by Bill Eigen, all the way through to our global real assets platform. Then there's things like alternative beta.
We've been in it for many years. We're fortunate enough to have a very strong five-year usage track record. We see lots of flows into factor-based approach in getting hedge fund-like returns, but having daily liquidity. I think this will continue to be a growing importance in clients' portfolios. 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. I want you to just look here up on the screen. The J.P.
JPMorgan SmartRetirement has been an explosive platform, growing at 45% compounded annual growth rate. 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? J.P. Morgan, which is why they continue to entrust. 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 best three days, sorry, not the last three days, the best three 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. That's why we never stop investing in our people.
In the upper left-hand side of this page, we continue to invest our dollars first and foremost in the people. They need to deliver these innovative solutions to our clients. The second most important spend, though, is technology. Mike Urciuoli runs what I think is the leading technology platform in the asset management industry. We do it, again, with two sides of a 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. Then re-engineering. 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. 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 a client comes into us is seamless, and they can work whenever they want, wherever they want. 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 billion 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. 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 code-athons where they solve a client's problem, within just a matter of days, we've created it, we import it, and we plug and play into what we do here at J.P. Morgan. 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. We do it on a global platform. Others are retreating from the global stage, we continue to grow.
We do that always with risk management on the forefront of our mind. Risk management is not a separate thing at J.P. Morgan. 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. We do that while leveraging the entire brand of J.P. Morgan. When you think of the work that Kristin Lemkau 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 J.P. Morgan, 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. 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. We do. That's really, really hard to replicate. 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 pre-tax of 10% and a solid pre-tax margin of 30% and an ROE of 25%. I have a minute or two 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. It doesn't seem to be part of your proposition. You seem to be differentiating yourself in terms of performance, risk management, and so on. Is that-
I didn't catch the first few words. You said U.S. continues to be what led?
Agent led.
Oh, agent led. Yes.
They tend to get a greater proportion of the value of what management brings. Is that a differentiating factor 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.
Won't say outrageous.
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 life cycle. 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. 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. Okay.
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. Just a couple of things very, very quickly before we break. Please check your emails. You should have either just received one or you're about to receive one, with your table seating and the room number for today's lunch, which starts at 12:15 P.M. That leaves half an hour for our second 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. 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 CCB at 1:15 P.M. Thanks a lot.
Let me place on a music hold.
Waiting on a sunny day. Gonna chase the clouds away. Yeah, I'm waiting on a sunny day. Without you, I'm working when I ain't on down. I'm at a party in a one dog town. I need you to chase the blues away.
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? Oh, that was fortunate. We nearly locked one person out. Sorry about that, Jamie. Not done purposely. Good afternoon, everyone. Gordon Smith, CCB. There's just myself, the CCB team, who I'll introduce in a second between us, and Jamie and his closing remarks and questions. I apologize for having a slightly raspy, croaky voice. I worked so closely with my teammates on the operating committee that Doug Petno's 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 Thasunda Duckett. T, could you give everyone just a wave? She's running retail banking for us. Jennifer Piepszak.
Jen is running business banking for us and is in the process of moving to credit card. Mike Weinbach, running the mortgage company. Is Mike around? Applause too. I am going to cover an overview of CCB, kind of how we're doing overall. The team will come up and do banking, and do mortgage, not in that order. I will come back and do questions before, as I said, I hand over to Jamie. I'm going to my page one, 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, which has tremendous economic value for us. To continue to lead and to drive the payment innovation work, I think we see some really good momentum in 2016 in that regard.
To continue to drive digital engagement across our customer base. You heard 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 Zames and his team on cybersecurity and making sure that we keep our systems as safe and secure as they can possibly be. 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 four years or so, and that will continue to be a focus for us going forward. I'm actually very pleased with the momentum that we've gained there.
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. Some excellent momentum there. 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. We have a really strong, talented group across the consumer businesses. Turning to page two, we look at the medium-term guidance, as Marianne has defined over the course of the next three years. 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've priced the business. 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. 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. This is where you see it all begin to come together.
Look at the active mobile customers up 16%. You'll hear more from Thasunda 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's 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 fourth quarter and continues to be very strong in the first eight 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 onto this slide, is when we split merchant services from the partnership with First Data back in 2007, we own 51%, they own 49% of the partnership. The total partnership had $719 billion back in 2007. We split the two, we took our slightly over half, and now our slightly over half is actually almost at a run rate of a trillion and one. Fabulous. Could you just go back one slide for me, please? Just one. There we go. Perfect. Thank you. I said I would give you a little bit of sense of what happened to consumer banking deposits over time. Look at the steady, consistent growth since 2012, 9% compound annual growth rate.
As you cast your eye across to the right, you look at the period 2012-2016 on the far right of the chart, you'll see that total loan growth was 3%, but core was up 13%. Now what we're starting to see is those non-core loans, typically across each of the business lines, came with the Washington Mutual acquisition, 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 two 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 first year of acquisition from those new customers. Also the co-brand renewals.
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 Kane, who's actually here and is now the CEO of the merchant services business. At this point, we've got more than 80% from a volume basis of our co-brand deals renewed for the long term. Some challenges that we've had, but I think net, if I look at those challenges, they're all driven by some really positive business outcomes. Turning to page six, we look at some of the areas that we've put money to work on. 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 four years or so, just in CCB, not across the company, just from a technology perspective, so that doesn't include all the other people across business units and support functions. We spent approximately $1.2 billion. 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 $1.7 billion of incremental spending. Kristin Lemkau, our Chief Marketing Officer, I think is over to my left, though, 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 & Co. brands. 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. We look very carefully each investment, how is it performing relative to our early expectations. Turning to page seven, looking a little bit at digitally engaged customers. If we just do the % of households who are digitally engaged from the fourth quarter of 2012 to the fourth quarter of 2016, up about 18 percentage points. Continuing to grow quickly. As we look at kind of all other households against digitally engaged households, I'd be the first to say there's a little bit of a cause and effect here. Obviously, our best customers tend to migrate anyway towards digital.
Just look at the credit and debit card spending is dramatically higher when a customer is digitally engaged. Attrition is lower. 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. 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. Think about these as the business drivers.
The things that should drive back-office type activities for the company, drop down and say, I'm looking at a set of business drivers that are up high single, low double digits. I look at how many phone calls do we have coming into the organization? Up very low single digits. The unit cost of handling each of those calls down about 3%. 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.
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 nine. Daniel covered, as well as Marianne, the impact of expenses. We've taken about $2.4 billion out of CCB, overhead ratio down about 225 basis points. Over that window, about 7,000 people. Since Jamie asked us to put all of the consumer businesses together, or he decided to put all the consumer businesses together so we could focus around the customer. Since 2012, the number of people who are in CCB is down by just short of 40,000 people. 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, a broader set of digital initiatives, and technology automation. This just gives you a high-level sense of very specifically, where the investments came from or where the returns came from. 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. 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. By the way, the focus there is to make it a better experience for the customer at the same time that we are driving the cost structure down.
You see four areas on the left-hand side of the page that we'll be really focusing on. Mike particularly will cover a little bit of the digital mortgage pilot in a few pages. Overhead ratio. Our expectation is that over the course of the medium term, staying with Marianne's definition of it, that we'll bring the overhead ratio down in CCB to about 50%. 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. I think that will be fairly meaningful progress from the high 60s that we were just a few short years ago. Expect us over the next couple to three years to be right around 50%. 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. 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 first eight or so weeks of the year, we're tracking up 14% over the same period last year. About 14%. Loan growth up about 8%. I covered the other two metrics a little earlier on. Turn to page 14, 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 gain share, which makes us the number one in both sales volume and the number one in terms of loans outstanding.
Again, just to reiterate, we exited 2006 at 15.9% market share on a sales basis and now at 22%. 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. 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. 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. These are obviously the vintages here I'm going to describe are of differing sizes. The point of this chart is simply that we've invested heavily in order to drive those larger vintages. If we look at the 2012 year as an acquisition vintage for credit card, we look at the 2016 year as a vintage, it's 2x the volume. Same for outstandings. It just shows the ramping up that we've been seeing and the impact that those investments have been having. Then when we look across to the right to the portfolio as a whole, you'll see the average sales are up seven percentage points per account. Then the number of sales active customers up also seven percentage points.
A number of people have asked me about Sapphire Reserve. We had just some tremendous PR and excitement around the product. I thought I'd give you a little bit of a sense of the type of customer that was taking the product. These are incredibly difficult customers to attract. They tend to have made their purchase decision at some point and tend to stick with it. 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%. 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&L.
These are customers that we are very happy to have active in the franchise. 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. As much as we've talked about marginally expanding our credit box, you can see that we've actually been very consistent, perhaps boringly so, in terms of our share in the less than 660 segment. If you look across to the right-hand side, you'll see that the mid-prime section, 640-720, we have the lowest share in these players in the industry, and these players carry the vast majority of the volume in the industry. 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. If you go back, those of you who can remember 2007, when direct mail was slowly dying, and people wondered, well, what will be next? How will we fill the gap in a post-direct mail world? You can see now that fully 77%, almost 80% of our acquisitions now come through digital channels at a fraction of the cost associated with the direct mail piece. Interestingly, this is a technical challenge that some of you may or may not think about, the size of the screen on a phone offers some unique challenges.
Our technology team, our marketers under Kristin, and the general managers were saying, now how do you manage to fit an application on a screen that somebody can actually understand and follow? 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 CCB, 15 million in any 90-day window are active. Drop down, I talked about the momentum we had at this meeting last year. Since then, our P2P volume under Chase QuickPay is up 38%. 38% since last year. Categorized to the right-hand side, Chase QuickPay user households, 4 million in any 90-day window, and annual P2P transactions at 94 million. This is an important point to make.
We clearly don't make money on P2P transactions because we don't charge the customer. We don't charge the recipient whether they're a Chase customer or whether they're not. 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 relationship. 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.
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? 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. 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 be able 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 fast food restaurant knows where the mobile device is. Hopefully, the mobile device is on your person. 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. 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. You can see some of the terrific partners that we've 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?
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 Petno's team, and actually working with the retail bank, too, the amount of volume that we source from internal clients. On the lower half of the page that when we are dealing with internal clients, somebody who 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. I think in payments, really a year of fantastic momentum.
Many years of consistent focused strategy, many years of consistent focused investing. You can see on the left-hand side of the page, as I said, number one in both sales and outstandings, $1 trillion through merchant services. Successfully launched new partners and branded products. You see us working with our co-brand partners and continuing to build our proprietary business. I talked about the co-brand renewals, and the early momentum that we are seeing on Chase Pay with some really terrific merchant partners. With that, I'm going to hand over to Mike Weinbach, and Mike's 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.
Good job. 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, 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. Our servicing book has gotten cleaner and cleaner with delinquencies now approaching decade lows. 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 two 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%, and there were a few reasons for that. We took a conservative approach to the implementation of new CFPB rules in the early part of the year. We sold our USDA business in the middle of the year, 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.
So our third-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. 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. 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. 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 fewer participants than we have today. 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. That's exactly what's happened. You can see in the chart on the left that in 2011, the top five banks accounted for the majority of all new mortgages. Last year, that was only 25%. Within those results, however, there's truly a tale of two cities.
Our share and other large bank 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 costs 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%. When you look at the delinquency profile of these two 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 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 two years, our core loan growth has more than exceeded the runoff in our non-performing loans, resulting in double-digit overall loan growth. While it'll be hard to maintain that level of growth at our current size in 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%.
Our net charge-off rates of 10 basis points are a decline of more than 225 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 two years, we added just over 1 million loans to our servicing portfolio through a combination of new originations and servicing acquisitions. The delinquency of these loans is close to zero. 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 million loans exited our portfolio through a combination of runoff and loan transfers, and those loans have double-digit delinquencies.
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 25 to 30 times greater than the cost of servicing a performing loan on a per-unit basis. 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 billion 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 if they reach their end of draw period.
You can see in the chart on the left, over $13 billion of our home equity lines of credit have reached their end of draw and have recast. 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. 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. As we look to the future, we still have $15 billion 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. 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. 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.
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. Perhaps you had a chance to see it at the Innovation Showcase. 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, and 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 million households across CCB and roughly half of them, about 30 million own homes and have mortgages, but only 5 million of those customers have their mortgage with Chase, and a number of those were acquired through our correspondent channel. Of those 30 million, less than one in 10 got their mortgage with Chase. 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 four times greater than what we see with our checking customers that are not yet a part of Chase Private Client. 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 million households, a fortress balance sheet, strong brand consideration, especially among millennials, which are the next wave of home buyers in multiple distribution channels, including our branches. We plan to augment that by leveraging what we already know about our customers. Think deposit balances, investment balances, looking at direct deposit in a 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. We plan to leverage digital branch and phone-based channels to provide our customers access and advice in whatever manner they choose. 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 taken significant risk out of the business. We've substantially reduced expenses and grown our balance sheet with high-quality originations. 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.
We're going to be continuing to invest and working hard to earn the right to be the first choice for Chase customers when they purchase or refinance their home. We think the opportunity in doing so is tremendous. With that, I thank you, and I'll hand it over to my partner, T, who's going to give you an update on consumer banking.
Thank you. All right. Thank you, Mike, and good afternoon, everyone. I'm Thasunda 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. 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 billion since 2012. We've more than doubled our households that bank with us using their mobile phones.
We reduced our structural expense base by about $600 million while reinvesting a meaningful portion of these savings in digital and marketing, 2 critical components of our success this past year. 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-over-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.
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. 3, our leading brand 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 one in nearly every market in deposit growth over the last 4 years. 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 two-thirds of our customer base visits a branch on average 4 times per quarter. 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. 5 times per week, they are looking at the Chase octagon. Households using QuickDeposit deposited nearly 75 million checks on their mobile device in 2016.
As Gordon already said, customers sent almost $28 billion in payments over Chase QuickPay, our person-to-person payment solution. That represents $10 billion more than our nearest fintech competitor. 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. 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 four percentage points since 2012. These customers also have roughly a 20% higher net promoter score.
As Mike said, when our customers have more satisfaction with Chase, they're more likely to recommend us to a friend. On brands and marketing, we've continued to invest to support our strong brand. As a result, we're now ranked number one in the country in consideration for new checking and savings accounts. Our strong brand is a factor that can't be ignored when looking at how we continue to grow deposits. 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.
On the topic of structural expenses, you can see on slide 44. You can see how we've achieved these reductions. Our ongoing branch transformation efforts make up about half of these savings. 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 million while increasing the number of self-service transactions by 180 million. Today, four out of every five monetary transactions are completed through our self-service channels. We still see meaningful opportunities for improvement. Last year, we had over 400 million transactions being completed through our tellers, 70% of which could have been done through our self-service channel. In the year ahead, you're going to continue to see us focus on migrating more of these transactions to digital.
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. What's really powerful about this slide is that even in markets where we consolidated, we still grew share. 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%. We expect to grow organically and expand in new geographies within these states.
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 five years. We also have the option to extend control for more than 10 years with over 80% of these branches. 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.
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. Importantly, we've grown revenue even without meaningful rate increases. 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. 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. Myself and my peers and my colleagues are personally committed to ensuring that continues to happen. Thank you. At this point, I'd like to turn it over to my colleague, Jen, to talk about business banking.
Thanks, T. Good afternoon, everyone. I'm going to spend a few minutes talking about growth opportunities in business banking. 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. 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 two 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. 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. Everyone has talked about increasing digital engagement. Well, that's true for the small business segment as well. Even though we see that changing behavior and we see the increasing digital engagement, we know the optimal distribution for us remains omni-channel. 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.
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%. Importantly, those numbers in our expansion markets are 18% and 21%. We're not going to stop there. We see incremental growth opportunity in this segment, so we continue to invest. 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 million small businesses in the U.S., and they contribute about $120 billion to financial services revenue.
On the left-hand side of the slide, you can see this is a relatively fragmented market. Chase, Wells, B of A, we all have about 9%-10% share, and then it trails off significantly from there. 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. 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. Yet we know in our portfolio, when you look at our relationship managed customers, only 10% use all three with us. There's a meaningful growth opportunity in our own portfolio simply with deepening relationships.
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. When you add the merchant services relationship, that number is 43% higher of deposit balances because we've earned the primary operating account. 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. 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, we've improved credit decision times. In merchant services for our business banking customers, we've introduced next-day funding, we've simplified the product set and the pricing. 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. 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. Digital engagement is critical to getting that right. You can see on the left-hand side of the page, small business lending was about $1.6 billion in 2012, and we would estimate it was almost $10 billion by 2016. 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. Importantly, this screenshot is one of only six screenshots to complete the process.
This can literally be completed in minutes with funding the same day. Just a note on why we chose to 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. One, speed to market. I talked about the rapidly changing marketplace, so speed to market was super important for us. Two, 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. 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. 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. I'm incredibly proud that in a space as critical as the 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%. We believe this momentum positions us incredibly well to capture this opportunity. I'll close on Consumer & Community Banking before we go to Q&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.
Behind all these rankings, as you've heard, we have meaningful growth opportunities, and we are truly committed to delivering as a team. With that, I'll turn it back to Gordon for Q&A.
Please give them another round of applause. Come, ladies. 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. Great job, guys. Thank you. All right. We have as much time as you want for questions. Well, not really. 15 minutes before we hand over to Jamie, and then you have as much time as you want for questions.
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. Is the way that you get paid, that it drives deposit balances or loan balances, or is it the fee, or is it the agreement with the merchants, or is this just simply what you have to do to remain competitive in the deposit business in the 21st century?
No, listen, 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. If we now take ourselves away from the chip 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. 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 mag stripe or a chip, firstly.
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. 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 relationship because they're integrated with us through the mobile channels. No, I think there is a direct drive revenue channel because every time we drive more share, we get more revenue. There's absolutely a direct drive revenue channel. Every time we drive down attrition or improve retention, there's a direct impact on revenue.
Debit and credit.
Yeah. Jen just said it's debit and credit.
Okay. We got Ken right here in the middle. Right behind you, Ken.
Thanks. Hey, Gordon.
Hey.
On slide 12, you had what looks like an offsetting between the next stage of spend versus save. It looks like the investments part includes growth, which would imply that the saves are still more than the spend. Can you just give us some thoughts on the two? You had that good slide about the next stage of cost cuts, how does that flow between the two?
Yeah. 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. I hope you're seeing from the team that the opportunities are enormous. People will ask me occasionally, I've never asked Jamie this, actually. They may have a different point of view. They turn around and say, "Well, Gordon, when are you going to move into international?" Honestly, I look at it and say, do I want to wake up one morning and look for T and find she's 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, man, we just got such enormous growth potential here in the U.S. with huge leverage, which we have in every one of these six business lines. You should look at the numbers in such a way that says, the first thing we'll do is to generate as many savings as we humanly can to drive the investment in the opportunities that we see. It's the first question I get from my boss down here when we go through the budget reviews with him. 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, we're allowed to drop to the bottom line.
All right. Ready?
I know you had-
Right. If you go to the left, Betsy.
Hey, Gordon. Two questions. One on Chase Sapphire Reserve. You gave us some interesting input on the profile of the customer. Could you just help us understand the economics of the program? 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. Is there really enough spend-
Yeah
to make it work?
The answer is yes. Betsy, I don't want to go through every line of our assumptions because then someone else who's listening in on the call will 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 three 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. 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 selling mortgages into our Chase customers.
I think that's a fabulous opportunity. 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 customer wants. We're going to introduce wealth management capabilities for them. If you think about, and I'm just going to use round industry numbers. If it costs us $500 to acquire a credit card customer and $500 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. That's something, by the way, that we have not built into the Sapphire Reserve math.
Okay. That would be plus alpha. All right. Then the second question is just on the closed loop that you've got makes you unique versus many of your other bank peers. 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. We'll think hard about it. 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. It's definitely changed. There have 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 or not be an opportunity to do something more broadly with them. 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 services, not international in terms of card issuing. Oh, sorry. That's not my job, is it? Sorry, Jason.
Oh, it can be your job.
Yeah. Sorry.
I made this into show and tell, if that's okay. It's Mike Mayo.
Mike.
I did some research. I went to your bank branches. I have all this paper. I have a deposit slip. I have a payment slip. I have a withdrawal slip. There's all this paper still in your branches. You invested $1 billion extra in technology. You're talking about self-funding initiatives. When can I walk into a Chase branch and not see these slips of paper?
Right. Unfortunately, you're not quite a millennial there, Mike. I mean, there's serious problems, serious question. Serious question.
How much can you save-
Yeah
by reducing paper?
Okay. Let's answer your question first at its simplest level and then more broadly. If you think about just statements, consumer statements, of which we send out hundreds of millions. With the discount that we get on postage, think about the cost of a statement is between $0.50 and $0.55, roughly. We would spend across CCB, and it's not a number that we disclose publicly, but think of it as around $400 million in the machine-generated statements. Right there is a huge opportunity with $400 million in just statement production for us to be able to erode over time. 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.
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. 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 it a much better experience than, excuse me, than in just receiving the paper statement, which 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. Second part of your question is it will take time for us to drive paper fully out the branch. You look at the chart that T had, 130 odd million teller transactions 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? We like to hunt out waste, Mike. Okay. Right here on the left, Jimmy Hanna.
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. 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. In the first quarter of 2012-- sorry, first quarter of 2013, T 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 84 month. The 84-month-plus segment, so long-duration loans, which run into the danger of then when a customer then comes to trade the vehicle, that they're now underwater at the point that they do the trade.
Again, credit performance looked very strong, but instinctively, we just felt with the risk team, with Ashley Bacon's team, that we didn't like it. We literally within, I think, a couple of weeks or three weeks, we dropped our share of that space by more than half. Substantially by more than half. We have made some of those trimmings, and the auto space is just one we'll continue to watch. 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." In environments where we think that there's real opportunity, as we've seen in card, we'll continue to be aggressive.
Gordon, at over here to the right. Where are we? Right over here to the right.
Hi. Gordon, correct me if I'm wrong, but I think you said Chase Pay is roughly 1% of the volumes right now?
No.
One-
No, I said if I took all, I'll call them digital wallets. I just talk about them as a kind of as a segment.
Okay. Well, I guess the question is what's the sort of upside of Chase Pay? How should we think about that, and how much of it is credit versus debit?
Oh, listen, I think at some point we end up seeing. It's probably a number of years away, by the way. I don't think this happens in 2017 or 2018. I think we end up seeing a dramatic shift in customers' use of the mobile wallets. Don't know when, but I think so.
I think we have one more right over here, Gerard.
Got one minute and 53 seconds before the boss comes back.
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?
Zelle effectively will give us the ability to link up many more banks. 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. Effectively, a customer will just be able to go on where they see that brand, and move money from person to person totally seamlessly. It's a really, really nice customer experience. Think about it as moving from Chase to a much bigger consortium of customers that will give you the ability to move money to. 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.
Oh, that was exhausting. 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. I'm going to just highlight four quick issues and then open it up to Q&A, you can ask any questions on your mind. 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. A lot of the services you hear, we consider Zelle as table stakes. Faster payments is table stakes. Whether QuickPay 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 cuts across everything we do. The reason you gain share in business is because you're doing a better job than your clients. They're always going to vote with their feet. The other thing is this basic strategy about being a fortress company. That means fortress balance sheet, fortress liquidity, fortress capital, fortress strength, that we're able to bear any stress that there is, fortress controls. The point of all that is there will be good times and bad times. That's a given. I don't guess about what the bad times are 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. The last crisis we had was a good example at JPMorgan Chase.
It didn't change a lot. We were scared. We met a lot more. We were a little more careful. We could also operate in the client's best interests. Now I'm going to make two statements about that. Also, fortress risk controls. That you measure all the time the risk you can take. We have no problem standing up in front of here and showing that auto loans are down 20%. We're not going there. No, we're not going to do subprime now. I think it'd be dead, exactly the wrong time. In private label, you don't own the client. To me, it's that you can do that business, but it's a processing business with risk associated with it. 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 you take the salespeople and don't let them sell and have them go play golf. Okay? That happens in credit exposures, too. The exception is how we treat real clients of the company. Again, the last great recession was an example. We did a lot of things that made no profit, took tremendous risk because we're the lender of last resort to our clients, and that's why we're there. That's not a time when you say, "Oh, maybe we can maximize profit. Let's charge them 12%." That's a time you say, "We'll do everything we can to help you get through this," knowing that we bear the risk. We do have that fortress company. 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, have to pull everything back. You can't hire salespeople, you can't invest in systems, you can't invest in technology. You got to go around scared. You got to get mad at people and lay off people. It's just a terrible way to run a business. That strategy, building in good times and bad times, having a fortress company isn't going to go away. You saw great technology stuff here. I hope you just spent a little time out there. I want to point out technology is the effort of everybody. It's not the technologists. Like the liquidity thing, they had a good net, and underneath that is technology. All the technology, the sales system, traders, finance, they're all getting involved in designing that stuff.
You have to have a company that's quite used to working with technology. 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'll be faster payments and wholesale payments. You've seen a lot of examples where these things are cutting across parts of the company. 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, its biggest client is Doug, 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, we're going to have something like robo in beta.
At some point, we're going to have that. Also, where you can also have self-managed accounts, stocks, bonds, munis, 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, hopefully in a very attractive way. I think I heard you kind of mention 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. The more important part is that those who never want to go to a bank, never want statements, then you can serve them too. One quick thing, it wasn't exactly a technology, but it kind of is Intuit. Gordon and his folks signed a deal.
You heard us talking in the past about data, and this data's 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, and 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. It's how that data gets controlled. We didn't want to control it. We didn't want to say that the customer can't use their best interest. With Intuit, the deal is very simple, that the client will get a kind of a menu of what they want to give Intuit or Mint or whoever. The client knows exactly what's going and can change it, by the way. They can say, "I don't want X.
I want Y." That data is pushed to Intuit. It means you don't have to give your bank passcode. You may know that if you give your bank passcode to someone and that money's stolen because there's a mistake there, they're probably liable. A lot of you probably don't know that. If you wake up tomorrow and your million-dollar bank accounts are gone because you gave your bank passcode to somebody else, that's not our problem. If it was through us, it's our problem. Okay? This way, the client is served, the system is safer, the banking system is safer and sounder, and actually, Intuit's served. You know there's been a liability shift. We both feel like we're trying to do the right thing for the client set here. There's tons of things underlying technology you don't really see in what we're doing here.
Finally, the most important thing is the people. This company has unbelievable capabilities in over 100 countries around the world. 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 the people you saw up here, there were 53 other people, I think, that are sitting with you at these tables. We want to get to know you a little bit. 16 years average tenure here. I think that's important. I think constant turnover is a terrible thing. Most have had five different roles here.
That's important because if you see what we're doing across the company and you look in the company, how you serve a client, people being in different roles, respecting different roles, going from staff to non-staff, et cetera, going from investment bank. Doug Petno ran energy investment banking. It gives people a chance. They sit down, and they know the other person's problems and issues and roles and responsibilities, and they've been in two LOBs. For all the 53, I want to thank you. I think you've all done a great job. 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 yourself versus share with customers. 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 nonstop about this. I was talking about capitalism. Forget banks, forget JPMorgan, 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 the 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. I wasn't referring to JPMorgan or any intent to pass it on or anything like that. I think what you'll find out in general, again, not for JPMorgan banks, that some will fall to the bottom line, but it's not rational in a capitalist society that everyone's ROE goes from 12%-18% and stays there.
In fact, most studies show, and this is a good thing, that cutting corporate tax rates, you know what helps the most? Wages, which I think would 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 as a sounding board, 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?
Yeah. Us, the country?
Us, the banking industry.
Okay. I could tell you what I know about tax. You have already seen all this, okay? One fundamental issue is whether Obamacare comes first. That will clearly delay tax and maybe make it hard to get something done. The timetable is very important. At the best case, if 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. Border adjustability, cap expensing, net interest, lack of deductibility, et cetera. The Senate, which is all important. Some senators have not supported that. They have not come up with their own plan. The Administration has a plan. I'm just going to let them worry about making the sausages there. That'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 on 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. I will say this, 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. I'm a big supporter of getting tax reform done and making it one on the list. The other ones which are high on the administration's list, I also agree with. Infrastructure.
Do you know that this country hasn't built an airport for 40 years? We haven't put a tunnel or a bridge in New York City for, I think, maybe even longer than that. Okay. You hear the horror stories of 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 at O'Hare because I was there when they were doing that. Like Mary's chart, they put up a chart about when they first started flying. That was soon after World War II. Okay. This is not good. America, if you rate us on the ability to open businesses, on infrastructure, we're 15, 20, 25. Net business formation has gone negative for the first time ever in a recovery. Small business formation, ever in a recovery.
These things, getting these kind of reforms would be a very good thing to do. It's going to take a lot of work, maybe some legislation, but then some could be done with the Pen. I think around bank regulation, I think Marianne Lake have 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. It didn't cut back lending. We're not fanatics about it. We know there was a crisis. Capital, liquidity, transparency, controls, of course, they should be enhanced. At one point, you have to calibrate where you want to be in the system. I pointed out to you all that if you do things like we look at gold plating.
Even the regulators would agree that the system is set up itself has huge structural flaws. There's seven 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. That alone, if we had just done just that, there probably would've been another half a billion trillion dollars in mortgages done. That's the counterfactual. I can't prove that, and that's one example. Same with certain capital rules, liquidity rules. Keep the system safe and look at it, and then come with something coherent, consistent that makes it better for everybody. Again, the point, you're not going to see JPMorgan talking about what's just good for us. Okay. We need to compete competitively.
I believe in stress testing. We do 120 stress tests a week, or something like that. A week. We are far more worried about risk than, believe me, they are down at the Fed. Okay. The CCAR, which is unbelievably complex, was one a year. Okay. We want to protect ourselves from that kind of risk, but CCAR itself has these uncertainties around it that make it a little bit harder to manage your capital. To me, I'd like to get back to a much more collaborative regime where we talk to people, we analyze these things, we talk to that, and we come up with something, execute it, and make it better for all. Also, remember, you got Basel II. Basel also, Basel IV. Remember Basel I, Basel II, 2.5, 3. We have 6 types of capital now.
The complexity is dangerous, by the way. In 10 years, someone's going to wake up and the complexity will have killed our company. Yeah.
Mike Mayo, it's kind of a trick question. What does your brand represent? The reason I ask 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? What does it cost to have the two brands?
No. All right. Let me just, first of all, you're a brand, too. Mike Mayo. You didn't need CLSA. I want to tell you a quick Mike Mayo story because we've known each other a long time. When I first went out to Bank One, I got out there and one of the first analyst calls, they said, "Mike Mayo's not allowed on the call." They'd stop you from being on the analyst calls, which I said, "That's absurd." They said, "Well, he was terribly insulting about it because he'd written literally a tome," and it was called "Even Hercules Can't Fix It." 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 tomb because he's right about every single thing in there." That's how you become better, not by sticking your fingers in the eyes. You helped us become a better company. When we did the JPMorgan Chase Bank One deal, we were quite clear that there were two brands here. Okay? The J.P. Morgan investment banking, asset management, private banking, global. Think of kind of a Tiffany type brand. There was the Chase, U.S. only. It's U.S. only, but it's more the on the feet brand on ground. Middle market, small business, consumer, et cetera. The JPMorgan Chase, you only ever really see us use that for foundational type, when we give them the foundation kind of management meeting and stuff like this, but we don't market that.
All the marketing is done in really one of the two. We still think it's the very rational way to do it. When we did the merger with JPMorgan Chase Bank One, we didn't pound our chests and say, "Well, who's got the best brand?" Remember, the Chase people didn't like the J.P. Morgan people or the Bank One people, I was like, "Which would ever make sense for the company and the clients. Forget all the other stuff." Obviously, JPMorgan and Chase were two wonderful brands. Bank One was a little tarnished.
Andrew?
Hi. Your technology showcase and everything you've talked about with technology is really impressive. I think one thing that comes across is that you don't invest in technology in a reactive way, but very proactively. To an extent you are a technology disruptor, perhaps investing in projects that might not necessarily pay off. I'm just thinking to myself, how do you ingrain this as part of your DNA? How do you incentivize this, and make this a differentiating part of your bank?
I think any company who doesn't do that is making a mistake. I go back my whole career, we've been doing that. You have technology people at the table, you looking at new things. You compete, partner with fintech people. Like I said, we always ask the question, are we investing in all the things you should be doing? All the things. It's not about the payoffs. There are certain things we do. I said, "Don't even bother with the NPV. You're wasting your time." This is about straight-through processing, it's about reducing error rates, it's about giving a client. It's kind of table stakes. Other times, obviously, we're much more detailed NPV.
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 there, the heavy lifting is done by folks in infrastructure. People working the data centers and networks and stuff like that. They're there at the table. Every year, what are we doing? What should we be doing? No one should ever say Marianne may remember a meeting years ago when someone said, "We didn't do that because we didn't have money in the budget last year." I said, "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." I still feel that way.
I made everyone on our 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 people, it's like if you need to maintain an airplane, it's kind of a smart thing to do. Deferring maintenance is a dumb thing to do. We just try and make it part of the DNA. Of course, the folks are always trying to make it more effective and more efficient, and as new people get involved. Daniel's spending more and more time on it. He keeps on talking about how about their programmer efficiency. I said, "Daniel, good luck." He'll make it better than it was before. How do you get those things? The Agile program.
Jeff Bezos talks about the two-pizza teams. We try to use all these things to do a better job. All the people who got up here and the other 45 people in this room, all of them, whatever area they're in, go through their technology, their budgets, their risk management. I know Kristin's here and Ashley's here. We use huge big data machine learning for underwriting and marketing. Just those two things. If they don't do that, they'll be behind the eight-ball within six months or a year. We always ask questions. 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, Marianne made the case that you might have some opportunity in the next couple of years to accelerate the distributions in that kind of 80-120. What's your thoughts on the mix of how you think about when you accelerate distributions, dividends, buybacks. Some people talk about special dividends, is there a debate inside the company and what are the differences?
I think we're going to end up with too much capital. I've always been worried about this. The banking system has been forced to hold capital. It's a capital-covered. When you saw, I want to point out, the $1.5 billion RWA, that includes $400 billion of risk-weighted assets for operational risk, which to me is a false number. That didn't exist in 2007. When I see some people say, "How much cap?" We have $500 million of capital. $500 million. We could bear the CCAR loss of all major banks in the United States of America. You could throw in Credit Suisse, UBS, Barclays, and Deutsche Bank. That's how much capital we have. People just have a rational calibration. I think it'll end up being too high. Marianne said the most important thing we do, bar none, is invest in your own businesses.
The opportunities are everywhere to do better services, better products, straight-through processing, more efficient. After that, you want to have a steady dividend. You can make it higher or lower as a payout based upon how much excess capital you think you have in the future. The third is stock buyback. Obviously, years ago, we gave you a number. The stock buyback at tangible book value is kind of a no-brainer because if you buy a block of stock, five years later, your earnings are going to be 5% or 6% or 7% higher and your tangible book value 10% higher or something like that. It's kind of a no-brainer if you believe your tangible book value earnings, which we do totally here. Those numbers, even at 2 times tangible book value, they're kind of true.
You'll have higher earnings per share, but the book value will kind of pay back over five, six, or seven years or something like that. If after all of that you have this extra capital, I always remind people, you haven't lost it forever. It's kind of earnings in store. You can use it to buy back stock. I don't know what we'd do with it. If we end up with that, we're going to come with a very rational way that's the best thing for shareholders. We'll deal with it when we get there. There are other ways to do it. I do think a counterfactual would have been the banks would have expanded more, too. Banks now have $2 trillion of excess reserves. Okay? That's never happened before, where 20% of deposits were excess reserves, ever.
It's not because of monetary policy, more because of regulatory policy. 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, this is instructive Because you can't prove the counterfactual. I think $1 trillion more may have been lent out. He went to all the different markets, I think it showed almost $13 billion that we were not there. We sent in our experts, our professionals, $13 billion. Of course, some of that would've been taken from other people, but some wasn't. He brought an expertise that they didn't have in parts of the Silicon Valley or elsewhere in Florida, something like that. I think he would've had it without people taking extra credit risk and expansion of credit in the banking system.
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 Zames.
Hi. The expectation of revenue growth is good. I get the need to invest for kind of future growth and reinvest, the $58 billion expense number kind of surprised me. Just back of the envelope math, it suggests just a little bit of positive operating leverage. Especially with net interest income, which should be a pretty high incremental operating lever or a pre-tax margin revenue source, why not target a little more positive operating leverage in the near term?
Really all those decisions are made separately. Okay? It'd be very easy for me to say, "Okay, make it $57 billion." What are they going to do? We're not going to build this new Chase Pay thing, or we're not going to do this other thing. Remember, a billion dollars of that is auto leases going up. That is a positive. That's just bad accounting. It shows up as an expense, but if you accounted for it differently like a loan, you wouldn't have the expense. There's a billion basically goes from $56 to $58 or et cetera in there. We make independent decisions. We don't tell people to cut it back so we can show an extra point of operating leverage. We do expect the 50. 55 is already going to be best in class.
Again, this is not a statement about JPMorgan Chase. It is just a statement about capitalism. Okay. It is not a rational thought. I remember some of our competitors going way back saying, "We're going to always be increasing operating leverage." You can't because you have competitors. Remember, Jeff Bezos says, "Your margin is my opportunity." That's true. You've got to be really careful about how you go about that. You think you can just increase your margins because you feel like it. 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's going gangbusters. Going to cost me another $400 million next quarter." I say, "It's still going to return. Go for it." Just like Warren Buffett would. Go for it.
That's a $400 million investment I have to pay back for the house. It'll 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.
Right over here, Guy.
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. 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?
No. I think Daniel showed a number. It was like $150 billion wallets down, not quite to $100 billion. That's a $50 billion drop. We're just trying to do a rough estimate on what went away forever. It's almost impossible to do. Okay? Certain exotic derivatives 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. 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. That was our rough estimate. About 30% of that drop. More than 50% of the drop was probably something lost forever.
From there, it's very hard to tell. I don't expect that stuff to come back.
Just as a follow-up, I think maybe that was really just the way-
I do think you have a little bit of subprime mortgage come back. I think that we've hurt America by not having a slightly bigger credit box for subprime. Not subprime, near prime. I do think there'll be some recovery of some of those maybe, but we'll see.
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?
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. It should have said that prop trading is if I hire you to trade in a room, you don't deal with customers at all. You just use the firm money and your own ideas and stuff like that. Because that causes huge consternation. The regulators, you're going to see a change of regulators. Personnel is policy in some cases, and they can't do whatever they want because they have to go through MPRs, and there are other people at the Fed, and there are other people at the OCC and the FDIC.
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 big changes this year." I hope we get changes that make sense for the U.S. economy and all the people who are paid by the economy because 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's strategic policy group because I think the U.S. could be doing a lot better with proper policy. For banks, you had this All of a sudden, this political, legal, regulatory went from being still continued tough to maybe plus. I think you've seen that in, obviously, a little bit of stock price and stuff like that. I want collaboration. You can imagine the team.
They go through everything in 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. I don't want to go back to it. I think I mentioned, we've already given $10 billion to the FDIC over the last six years to pay for the failure of banks. I would like to see a safer system. I'd also like to, even though some of those banks are failing, we pay for it, make it a little bit easier for the smaller banks.
I think some of these things are much tougher on them than they have been on 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 two areas?
It wasn't that bad inside this room last year. You guys did.
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?
Again, I could guess anything going forward 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. We build the company permanently for the future. I do think that the future is very bright. Okay? Talk about fixed income trading. Make-believe the SEC 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, think of billion-dollar revenue companies, is going to go from 8,000 to 15,000 in the next 15 years. These are the things that drive the future of JPMorgan. That's what we built for. We trim our sails every now and then. We're very conscious about the risk we're taking. If you have tax reform, regulatory reform, infrastructure reform, okay, I believe you could see the United States growing much faster. I do not believe that the United States is growing slow because we have this permanent state of affairs of secular stagnation, a new normal. I don't buy any of that. I think the reason we're growing so slow is ourselves, our policies. We've had wars and shutdowns and hell, we're going to default on government debt.
We did things by sequestration, which is 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. Even regulatory policy has sucked up a lot of bank lending capability. That affects growth. I look at these things, and I just want our policymakers to be very rational and do these things. Growth is what is going to help America, all Americans. 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 studies show. I know it's counterintuitive, but it's the flip side of the other unintended consequences. That's what I'd like to see, is just do things that are great for America.
That is what I was trying to get at.
And-
Not the 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 will see, I am going to talk about banks in general, not JPMorgan Chase. I think you will see banks open in more countries overseas. Maybe people, not just us, will want to open, doing two more, but you could do more than that over time. You hire more bankers in private bank in Asia, which drives our investment banking business, too. I think you will see a lot of incremental things like that, people going into cities they are 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 is much more about local real estate lending, or where they feel they were not allowed to lend to certain types of small businesses because they are afraid about AML and BSA type of risk.
I think if we have kind of safe harbors there, it could reduce people's costs, and they might lend to more small businesses. Small business, like I said, formation is negative for the first time ever in a recovery. Okay? I do not think it is credit, because that is not what they complain about. If you look at charts, and Michael Cembalest did a chart, I do not know if he is in the room, that showed the massive regulations, but that is 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 three licenses. Okay? You have to go to three completely separate places. I call that sinecure, by the way. That is corruption. That is not logical regulation.
I think it's time for Americans to actually analyze this stuff and do the right thing, and we will have a much better economy. I suspect there are 5 million people who will go back in the job market when wages go up enough. Remember, the economy's not a zero-sum game. People go back in the job market, create new stuff, spend that money, and it feeds itself. Not a zero-sum game.
Okay. Glenn.
You might have just at least partially just answered this, I'm just thinking out loud. The last, I don't know, five, six years, you've had actually decent industry loan growth amidst the backdrop that we had like 2% GDP growth. Now we have optimism that some policy change will bring us to three-plus %, yet every bank is talking down expectations for loan growth. It seems a little backwards. Did we just pull stuff forward with low rate environment?
No. I think you got to look at the buckets, okay? The CIB loan growth, that's not driven by us. Some of it's episodic from M&A deals, bridge loans, et cetera. Put that aside. That can dwarf some of these other numbers here. Mortgages, jumbo growth, we said is going to be a little bit slower than last year. That's doing credit right. That's what it is. It's going to grow. I think you've seen old 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 a little stressed on credit and because auto sales are slowing down. Small business, I think we said we expect it to grow.
I think it's for the last. Other banks, they expect the same thing, and they expect some in the middle market. 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 Chubak with Nomura Instinet , 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. How should we think about that capacity?
Yeah. I'm going to round up everything to hundreds and billions, okay? It's not completely accurate. Resolution planning, it was another, not quite another $100 billion, $50 billion. That was just putting more liquidity. I think it's all excess. I think it was completely unnecessary. I'm in totally in favor of proper planning to help regulators manage the failure of a bank. Then the other one is we have a cushion, and the reason you have a cushion over the 100% is because people are afraid about falling below the 100%. I don't think that's perfectly rational either. That's probably another $25 billion or $30 billion, no, it's another $50 billion. Other than that, my issue would be, and again, we want public liquidity, how you can use liquidity. I think we have a very rigid system with liquidity.
Cash at a central bank counts, treasuries count, mortgages count up to an extent, up to 85%. Therefore, it provides no liquidity is given to anything else at all. The municipal people want municipality as liquidity. The Federal Reserve itself, if you go to the Fed window, it puts like $0.50 against equities and $0.80 against corporate bonds and 90% against 10-year treasuries or whatever it is. I think their liquidity would have been used differently and not in 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. 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. Anyway, that'll be one of those things that'll be looked at, and nor should it be gold-plated. 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. Over the long run, the people at JPMorgan Chase can compete.
All right. 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. 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 unknown risks for JPMorgan? Is it interest rates? Is it Europe? Is it China running out of money? Is it something else?
I guess the first thing is, I always look at the underlying stuff in the economy. 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 trillion-dollar hole, basically. Student lending is a small negative, but the total is $1.3 trillion and a couple hundred billion has gone bad and the government's going to pay for it anyway. Auto lending, I forgot, $300 or $400 billion of the trillion-plus is subprime. I think you're going to see some issues there, but it's not systemic. Look at the credit, folks. It's never been better. Literally, look at the numbers. It's never been better. Ever, ever. It's not going to get better, but it's just going to return to norm.
It'll just return to a norm. 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. I think the credit book that was built is actually pretty damn good. It'll have a cycle. It'll go through a cycle, and there's a recession. I'm not saying there'll never be a recession, but I think it's pretty good. Corporations are in good shape. Middle market's in good shape. Small business in good shape. Large corporations, great shape. There's tons of liquidity in the system. I don't see the pothole. 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 Cembalest did a report that showed of all these major geopolitical crises, he had a list of 40 since World War II, only one immediately affected the global economy, and that was the 1973 Middle East crisis. Not the other five Middle East crises. Not the two Iraq wars. Not the Iraq-Iran War. Not the two Afghanistan wars. Not the Chinese-Russian battles. Not the Chinese-Vietnam battles. Not Vietnam, not Korea. I can go on and on. They didn't affect it. I'm not saying they won't. I always look at the friction cost of geopolitics is it higher or lower than a norm? Can you be surprised? Yeah. North Korea, that could be pretty bad. You can imagine we want to think that through Iran or stuff like that. Again, we run the company serving our clients. We'll be fine with a crisis like that.
Interest rates, no. Okay? Not for JPMorgan Chase. Someone's going to get hurt. I do think that the 10-year bond is subject to a bout of volatility that will surprise people when the time comes. Okay? I think we were here last year, it was at 1.5% or something like that. Now it's 2.35%. We don't know. I think there are a lot of reasons that people may not want to own that particular security. You'll see the volatility when people get 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 rushing into 10-year anymore. I look at that as a little bit. Will someone get hurt? Yeah. 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 have thought through some of the interest rate exposures. It's not credit, it's not really markets, it's not risk. I think 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 it looked before. The trade is one that I think has the possibility of disrupting things. I think Mexico has been a great neighbor. I don't think NAFTA's going to be the issue, and I think NAFTA will be renegotiated. It's going to be about China. China, United States, that relationship, that trade relationship. Could we be surprised there? It's possible. I'm sure there are others.
We run through I don't know how many different fear things we run through to make sure we can handle them. That's it.
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 fades somewhat.
I think other banks need to merge. America still has too many banks. I think part of the solution for smaller banks is that they get allowed to merge again. As you know, there's been very few because it's so hard to get them done. First of all, I love the fact, I've said this continuously, that we have been growing organically and can grow organically for 20 years. Okay? I don't like relying on doing acquisitions to fix a problem, which is kind of what all this has been doing for years. To get share, to get size, to get scope, to get brand. Mergers are tough. Being able to say that we can grow every bit organically is a great thing to do.
At one point, we and other banks, the regulators won't look askance on growth and acquisitions and stuff like that. It might be fintech payments. It could be something overseas. We don't sit around and say we're missing a huge something. If we did, we might do that. We've got to change our mindset a little bit because we haven't been thinking that way for so long. It's like we've been let out of jail. We'll see. Go ahead, Guy.
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 was going to be a significant Title II change?
This becomes very complicated. I think the regulators have the right to say that, "Can you recover yourself?" and stuff like that. We did a lot of work, I don't think it was worthwhile. To say, "Can you recover?" Title II, I think the American public has the right to say, we want a bank that can fail and that is not too big to fail. 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? You didn't, by the way, this last go around. We did, just so you know. That is by capital liquidity requirements, all those various things that protect you.
The second one is that the bank can fail, but you have an orderly unwind, it doesn't take down the American economy. Last time around, some of these financial failures were part of the reason, not the only reason, but you had the American economy looked like it was going into the tank. That is a reasonable thing to have this how do you manage that? How do you manage people? Now, the biggest part of that was done with TLAC ISDA contracts. Lehman, if you look at just Lehman, even before the Living Wills, before no one had the right to take over Lehman by law. They had no receivership for it. Okay?
Even if they did, they didn't have people who knew how to manage it. Now they do. Okay. The second one is the ISDA contracts all got terminated in bankruptcy causing this huge rush to capital, everyone having to run into markets to rehedge their positions. Those two things are gone. Already Lehman would've been far more orderly than it would've been before. Instead of selling a fairly good investment bank in the middle of the night for zero, you would have a much more orderly unwind. You know who financed Lehman after bankruptcy? On the order of I think it was almost $100 billion. We did. It wasn't the Fed. Because we had the capability to do that, we had security and stuff like that, even though it was kind of scary.
I think they've already got some of those pieces in place. The last piece is that they want more detail about how it would take place. This thing about the lender of last resort. They also have this Chapter 14, which we kind of support Chapter 14 which is I call it bankruptcy for big dumb banks. I do think for the American public, I hate the word resolution because it sounds like you're bailing 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. They'll fire management, they'll fire the board, and the name has to be put on the wall of shame forever. Never to be used again.
There's no question that Old Testament justice applied, because that's a little bit of what got the American public upset. You do have to have some kind of backstop. They have the window. That's what the window is for, against good collateral. 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'll be a crisis unknown. 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. You've hurt the public, not helped them. I do think there's an issue about skin in the ceremony and how that should work.
You kind of recast it as, like you said, bankruptcy for big dumb banks with debtor-in-possession financing, essentially.
Yeah.
Right.
Remember, the government gave debtor-in-possession financing to GM. Okay. I could go on and on. JPMorgan didn't need any help. It was others who needed help during the crisis. You do need something that can handle something extreme. Again, it may not be a bank at all. It may be something that got built up over maybe a non-bank that people weren't looking closely at. I don't think that's an issue today, but it might be an issue down the road.
Thanks.
Hey, Jamie. Steve Rukes from Matrix Asset. Just getting to technology, you've had this revolution in technology the last five and 10 years. A lot of people still think it's in the first inning. When you look at banking, it's very people and paper and an intensive process. When I look at your returns, it's a very good 15%. What gets it higher? When you look at technology, 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 five years?
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? First, you have to do infrastructure all the time." 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. Now you can do a payback on that NPV, but you should be doing it anyway. That's kind of like you're upgrading your generators every five or 10 years or something like that in your house or however you run it. Every other thing, every other major project, you show why you're doing it. 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 can do other things that very well may drive it up. We think if you have a neat new product or neat new service that's very different, you have a competitive thing. It's possible that Chase Pay Over Time does that. It's possible in some of Mary's areas because there are areas where the E is very little. You can add the product, but there is no equity. Okay. Therefore, it should drive your return up, and there's no reason the market should drive it back down because you're competing in that product, but you're just adding incremental volume. You could have that in some of Dan's areas.
He may get incremental volume from certain things he thinks through that doesn't change anything and drives the return up. Some of that may be technological driven. Some of it may 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. I appreciate it. Thank you.