Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's fourth quarter and full year 2016 earnings call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation. Please stand by. At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon, and Chief Financial Officer, Marianne Lake. Ms. Lake, please go ahead.
Thanks, operator. Good morning, everybody. Happy New Year. I'll take you through the presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on page one, we had a strong end to the year with record net income for a fourth quarter of $6.7 billion, EPS of $1.71, and return on tangible common equity of 14%, on revenue of $24.3 billion, reflecting strong performance broadly across our businesses in a more constructive environment. You'll see on the page a tax benefit of $475 million included in the result in the CIB, as we were able to utilize certain deferred tax assets. The quarter would still have been a record without that benefit.
Highlights for the quarter included core loan growth of 12% with strength across businesses, continued double-digit consumer deposit growth ending with deposits over $600 billion, and record card sales volume up 14% on continued strong momentum. In addition, markets revenue was our highest on record for a fourth quarter, up 24% year-on-year. Credit performance remains strong, with net reserve releases across both consumer and wholesale. Moving on to page two and some more detail about the fourth quarter. Revenue of $24.3 billion was up $600 million or 2% year-on-year, driven by net interest income on the back of continued strong loan growth, as well as the impact of higher rates. Non-interest revenue was flat year-on-year, with strength in market offset by higher card new account acquisition costs. Adjusted expense of $13.6 billion was flat year-on-year, and this quarter's result included nearly $200 million of after-tax legal expense.
Credit costs of $860 million in the quarter included a net reserve release of a little over $400 million across consumer and wholesale. Energy remained stable, and we saw modest releases in both oil and gas and metals and mining. Shifting to the full year on page three. Another full-year record net income of $24.7 billion and a return on tangible common equity of 13% on $99 billion of revenue. While net income was up 1%, our EPS of $6.19 was up more than that as we continued our disciplined capital return to shareholders. Revenue was up $2.5 billion, driven by NII up $2.7 billion on the back of loan growth and the impact of higher rates. Non-interest revenue remained flat year-on-year, reflecting strength in markets and funding card new account acquisitions, as well as lower Asset Management revenues.
Adjusted expense for the year came in at $56 billion as expected. Our adjusted overhead ratio improved to 57% as we continued to execute on and near the end of our strategic cost programs in CCB and CIB, as well as self-funding incremental investments in growth of nearly $1 billion year-over-year. In addition, legal expense for the year was a modest positive. Credit costs for the year were $5.4 billion. Net charge-offs of $4.7 billion were in line with guidance and included $270 million of charge-offs related to oil and gas and metals and mining. We added $670 million of net reserves, reflecting builds in card and energy, largely offset by releases in mortgage. Finally, net capital distributions for the year were approximately $15 billion, up $4 billion or 37%, including dividends of $1.88 a share, up 9%. Turning to page four on capital.
We ended the year above 12% for both standardized and advanced fully phased-in CET1 ratios, in line with our expectations. Net capital generation for the quarter, while positive, included a 16-basis point impact of higher rates on investment securities AOCI. The advanced ratio improved primarily due to lower counterparty and market risk, whereas standardized was up by less, reflecting the impact of high-quality loan growth. We've been disciplined managing our balance sheet. Our average balance sheet for the quarter was a little over $2.5 trillion and $1.5 trillion of RWA. SLR was down slightly from the prior quarter, 6.5%, as our average balance sheet was higher this quarter, primarily driven by deposits. Moving on to page five on Consumer and Community Banking. Consumer and Community Banking generated $2.4 billion of net income and an ROE of 17%.
We grew deposits a record $60 billion year-over-year, up 11%, exceeding $600 billion. Core loans were up 14%, with mortgage up over 20%, but strength across all products. Auto up 11%, business banking up 9%, and card up 8%. We saw record card sales volume in the quarter, up 14%, marking the strongest growth in a decade. Card new account originations were up 8%, they were up 20% for the full year, driven by strong demand for new products, and nearly 80% of those accounts were opened through digital channels. Merchant processing volumes were up 10% year-over-year and surpassed the $1 trillion mark last year. Our active mobile customer base continues to grow and was up 16%. Revenue of $11 billion was down modestly year-over-year, reflecting a reduction in card revenue.
Recall that last year included a $160 million gain on the Square IPO. In addition, strong momentum in card and auto was more than offset by the investment in our card new account acquisitions. Consumer and business banking revenue was up 4% on strong deposit growth, and mortgage revenue was relatively flat as higher production margins and volumes were offset by lower servicing revenue on lower balances. Expense of $6.3 billion was flat year-over-year, as growth in the business was largely offset by continued expense efficiencies and lower legal. Finally, the credit trends in our portfolio remained favorable. We saw net reserve releases in the quarter, driven by mortgage on lower delinquencies, as well as improving HPI, with releases of $275 million in the PCI portfolio and $150 million in NCI.
On PCI specifically, actual losses have been lower than modeled output, and the release this quarter reflects that trend. We will continue to observe actuals and recalibrate our models as necessary, which may result in future releases. These releases in mortgage were partially offset by a build in card of $150 million and $50 million in business banking, both on the back of strong loan growth. Charge-offs increased year-over-year, driven by card, as newer vintages continue to season in line with our expectations. In auto, we are watching industry trends in subprime and used car prices, but our heavily prime auto portfolio continues to perform well. Now turning to page six on the Corporate Investment Bank. CIB delivered a very strong result with net income of $3.4 billion and an ROE of 20%.
Adjusting for legal, tax, and credit costs, the ROE was a strong 17% for the quarter. Revenue of $8.5 billion, up 20% year-on-year, was our best reported performance ever for a fourth quarter. As we look at the full year, a moment on league tables. In banking, we ranked number one in global IB fees and number one in North America and EMEA, and we were the only bank among the top five to grow share. In M&A, we continued to rank number two globally and did more deals than anyone else last year. In ECM, we maintained our number one ranking, improved our share, and were number one in volume across all products and in both North America and Europe. In DCM, we ranked number one across high yield, high grade, and loans.
Back to the quarter, IB revenue was $1.5 billion, up 1% year-on-year. Advisory fees were down 17% from a strong prior year quarter and impacted by lower announced volumes in the first half of last year. Equity underwriting fees were down 5%, a little better than the market, with strong performance in North America. Debt underwriting fees were up 32% relative to a weak prior year quarter on strong flow issuance as well as acquisition financing. Treasury services revenue of $950 million was up 5%, driven by higher rates and operating balance growth, as well as higher fees on increased payment volumes. Moving on to markets, another strong quarter with the highest revenue on record for a fourth quarter in total and for each of fixed income and equities. Like last quarter, the strength was broad-based.
Revenue of $4.5 billion was up 24% year-on-year, in part flattered by a weaker fourth quarter last year. On the whole, driven by momentum carried forward from the third quarter and the ability to capture flow from higher volatility and client activity. The backdrop was that of a healthier global economic outlook, increased optimism, and global political developments. More specifically, fixed income revenue was up 31% as we saw increased client risk appetite for spread product, as well as clients actively hedging commodities in a better energy market. Equities revenue was up 8%, reflecting strong performance in derivatives. Credit costs were a benefit of nearly $200 million, primarily driven by oil and gas and metals and mining. Finally, expense of $4.2 billion was down 6% year-on-year, primarily on lower compensation, resulting in a comp-to-revenue ratio of 27% for the full year.
Moving on to page seven and commercial banking. Another outstanding quarter in commercial banking, with net income of $687 million, record revenue of $2 billion, and an ROE of 16%. Revenue was up 12% and expense down 1%, with an overhead ratio of 38%. Loan growth remains robust, credit performance remains strong, and client sentiment has improved. Revenue growth was driven by higher deposit NII and loan growth, with loan spreads holding steady, as well as higher IB revenue with good underlying deal flow. For the full year, IB revenue was a record $2.3 billion, up 5% year-on-year as we gained share. Expense was down slightly with the impact of impairment in the aircraft leasing business last year, offset by investments we've made in bankers and technologies this year.
We ended the year with record loan balances of $189 billion, up 14% year-on-year, with growth in both C&I and CRE. C&I loans were up 9% as the investments we've made in specialized industry coverage, as well as adding over 130 net new bankers this year, contributed to growth. CRE loans were up 19%. Finally, credit performance remained strong, with a net charge-off rate of 11 basis points, driven by a couple of oil and gas names, largely reserved for. We saw a modest increase in loan loss reserves, driven by select client downgrades. In CRE, we had no net charge-offs, and we reiterate three-quarters of this portfolio is multi-family lending to owners of stabilized Class B and Class C properties in supply-constrained markets.
The remainder is real estate developers that we know well, and we continue to be disciplined and limit exposures to riskier segments of the market. Leaving the commercial bank and moving on to Asset Management on page eight. Asset Management reported net income of $586 million, with a 30% pretax margin and an ROE of 25%. Revenue of $3.1 billion was up 1% year-on-year, driven primarily by strong banking results on higher deposit NII and continued loan growth, predominantly offset by prior period asset disposals. Expense of $2.2 billion was down 1% year-on-year. For the full year, we had long-term net inflows of $23 billion in a challenging environment, driven predominantly by fixed income, multi-asset, and alternatives. In addition, we gathered $24 billion of liquidity flows this year. However, for the quarter, we saw net long-term outflows of $21 billion.
Obviously disappointing, on a more positive note, we saw liquidity inflows of $35 billion this quarter, gaining share and strengthening our leadership position during this period of money market reform. AUM grew 3% year-on-year, and overall client assets 4% to $1.8 trillion and $2.5 trillion respectively, driven by net inflows as well as higher market levels. Our long-term investment performance remained solid, with 80% of mutual fund AUM ranked in the first or second quartiles over five years. We had record loan balances up 4% and record deposit balances up 9%. Moving to page nine in corporate. Treasury and CIO was flat quarter-on-quarter, with a net loss of around $200 million. Other corporate was a loss of $144 million, primarily driven by legal expense. Turning to page 10 and the outlook.
Looking forward to the first quarter, expect net interest income for the firm to be up modestly, reflecting the impact of the December rate hike, as well as continued loan growth. For Asset Management, expect revenue will be slightly less than $3 billion, reflecting seasonality of performance fees. Recall that last year's first quarter included a $150 million gain on the sale of an asset. On expense, expect CCB to be up around $150 million sequentially on higher auto lease depreciation, as well as seasonally higher compensation and marketing. Expect expense in the commercial bank to be up quarter-on-quarter to around $775 million as we continue to invest. Obviously, we're looking forward to Investor Day, and we'll give you more detailed 2017 guidance then.
To wrap up, a record fourth quarter and a record year, both net income and EPS, demonstrating the strength of the platform. We enjoyed revenue growth. We met our expense and capital commitments, increased payouts to shareholders, and generated good returns on higher capital. As we move into the new year, we remain well-positioned and are excited about the opportunities to grow the business by serving our clients and communities. With that, operator, we'll take Q&A. Operator?
Your first question comes from the line of Ken Usdin with Jefferies.
Hi. Thanks. Good morning. Marianne, I was just wondering, I know you will give us more at Investor Day, but just in terms of that first quarter starting point for NII and just how it translates between growth in the balance sheet and then you mentioned the benefit from the rollover in rates. Can you help us just try to think about, just you parse those views out and think about volume versus rate?
Yeah. Hey, Ken. You guys have a busy day today. I would say that the first quarter is always a quarter in which we have a bunch of different factors. Most notably, you also have day count issues in the first quarter. I can go through that, but I would say most of the benefit, which we expect to be up modestly, will be driven by the rate increase with growth being offset by day count. That's sort of fundamentally how to think about it. It's probably more instructive to think about the full year. If you recall back to the third quarter, just to reorient everyone, at that point when we didn't have the December hike, we said rates flat. On growth alone, we would expect NII for the full year to be up about $1.5 billion.
Obviously, we have had the 25 basis point hike in December, based upon that alone, now the new rate's flat, that $1.5 billion would be about $3, a little over $3. For the full year, we're expecting on the December hike alone that it would be about half volume and about half rate.
Understood. Great. If I could ask a follow-up just on the volume side. You had another great year of double-digit loan growth, obviously we're at this intersection between kind of the what was and then the what will be. Any change to that expectation that you could just grow the loan book, core loan book that is, as strongly as you have in the past few years?
Yeah. I think the way to think about it, again, I think we talked a little bit about it last quarter, and you maybe see it in the fourth quarter. We said at the beginning of the year 10%-15%. We sort of revised that to be at the top end of that range. We've been growing at around 15% core loan growth. The fourth quarter was 12%. I wouldn't call it a deceleration per se, but it is a little bit lower. I think going into 2017, our expectation is that we would continue to grow loans strongly, but possibly at the lower end of that range rather than the higher. Of course, to a degree, it will depend upon our mortgage portfolio, but we intend to continue to add to that too.
sitting here today, I'd say more high single 10% ±, and we'll give you more updates at Investor Day.
Okay, thanks very much.
Your next question comes from Betsy Graseck with Morgan Stanley.
Hi, good morning.
Morning.
I just wanted to dig in a little bit on the forward look. NII up a bit, but also expenses up a bit. I just wanted to understand, is that because you've got the opportunity to reinvest in things that you haven't been able to, and if you could just speak to what kind of timeframe the reinvestment will yield returns. The question I've gotten from people is, why aren't you dropping the NII benefit to the bottom line here?
Just taking the two things separately, Betsy. I would say the NII upside is dropping to the bottom line, but as you saw all of our underlying drivers across all of the businesses, volume, transactions, everything is growing very strongly. Although we still have some work to do to finish the large expense programs, we're near the end of that. Just generally speaking, we're continuing to invest in the businesses, and we'll see the improvement in our expenses flatten out and start to grow with volumes. That would also support growth in non-interest revenue outside, obviously, of the card phenomenon that we've talked to you about.
The related follow-up has to do with how you're thinking about the excess cash you've got and the balance sheet duration, and if there's anything in this new interest rate environment that you would be seeking to do.
So I-
To optimize sheet.
Sorry. Carry on.
To optimize your position.
Right. When we think about our investment securities portfolio, we think about it as responding to structural changes in our balance sheet, which predominantly is driven by loans and deposits. It's always important, I think, to remember, because we focus a lot on structural interest rate risk, that it also is liquidity and liquidity risk. In this quarter, there was a combination of things. You saw that we grew deposits more strongly than loans this quarter. We had some excess cash as well as the fact that rates rose. Two things happened in our investment securities portfolio. Mortgages extended, and we did add to duration. We have a very disciplined risk management framework that's been consistent through time based on our expectations for normal rates in the future, and we just executed on that strategy.
Okay, no change to the duration?
Yes, we added to duration in accordance with our framework.
Okay.
Your next question comes from the line of John McDonald with Sanford C. Bernstein.
Hi, good morning, Marianne. I was wondering if you could comment a little bit about some more color and card trends. You have exciting new products out there. How are the economics of the Sapphire Reserve card been coming in relative to your expectations, and what factors drove the decision to cut the original promotion award back, and should that affect your account acquisition costs? Thanks.
Great. Obviously, the Sapphire Reserve card is still quite young or still quite new, but relative to our modeled expectations, even at the intro promo premium, things are coming in in line or better than our expectations. Obviously, we need to continue to back test that through time, but we're very encouraged by not only the excitement in our customer base, but also the way that the trends are performing in terms of spend and engagement. When we introduce a new product, we intentionally introduce a very exciting premium promo, and it's intended to generate excitement, and I think you would agree it did. We're delighted with the response that we've had. We've actually kept it up for longer than we initially expected.
It's normal for us to come down from those intro rates as the product becomes more mature, and that's what we're doing. To be very clear about our expectations of the performance of the card, even at 100,000 points, we still expected the card to be a strong return and very accretive. Obviously at a lower premium it would be more so. One last thing I would say is everybody gets very interested in the upfront points. It's our opinion that the real value to consumers of that card happens over time with their spend behavior. To take the points down from 100,000 to 50,000 has less than a 10% reduction in the overall value through the lifetime of an engaged customer on average.
Okay. Just as a follow-up on that, in terms of the card credit quality, it's been very good. Would you still expect to see, though, some seasoning as the book matures? What kind of outlook would you have on the card charge-offs?
The charge-offs came in for the year at 2.63%, which is in line with the guidance that we gave, I think, in November, that Kevin Watters gave. He's given guidance for 2017 as we continue to see the newer vintages season of 2.75% ±, that's still our expectation. The newer vintages are performing in line with our expectations.
Thanks.
Your next question comes from the line of Erika Najarian from Bank of America.
Hi, good morning. I know that you've said previously that regulatory reform or regulatory relief will unlikely have any fundamental change in terms of how you're thinking about budgeting. I'm wondering if you could help us understand, sort of over the past few years, how much has regulatory costs grown, and has that peaked anyway? Can you give us a sense of how that could trend over the next few years, either the natural trend of it or what the impact would be of regulatory reform?
Yeah. I'll give you a couple of things, and hopefully that will help. I think a year or so ago, we talked about the fact that, and I'm going to now talk about cost of controls more broadly than just regulatory, that the cost of controls had increased for the company by about $3 billion over several years. That we expected they would peak and start bending down, and that is indeed what we have been seeing. Now, I'm not saying that bend down is a sharp bend as we continue to be held to very sort of hard compliance burdens. Nevertheless, we are seeing some efficiencies as we mature our processes and automate them.
Offsetting against that, one of the reasons why it may be less obvious is that we've continued to increase our spend in cybersecurity as we want to protect the bank and the customers' data. Naturally that is happening. We are not going to continue, at this point, carving out the cost of regulatory or control because that is our operating model. It's our new normal. Until we understand whether or not the forward-looking landscape is changed, we won't be able to give you any kind of idea about how and when that will impact our expenses.
We will continue to be more and more efficient and certainly, if we're able to take a step back and look at the rules and regulations and the way that they are being implemented and make rational changes to it, if that is something that allows us to become more efficient, then we will certainly do that and keep you informed.
Great. Just as a follow-up to John's question on card trends. When you look at the card revenue rate declining about 200 basis points or so year-over-year, is your response to his question essentially implying that we've potentially hit peak promotion in 2016 and perhaps the revenue rate will have some stability to it in 2017?
I think in the conference in November, Kevin Watters said that as we look at the new products and we look at them growing coming out of 2016 into 2017, we'd expect the card revenue rates for the year next year to be about 10.5%, after which, as the cards and the accounts season and drive revenue growth, we should see that continue to trend back up to 11% and above.
Got it. Thank you.
Your next question comes from the line of Mike Mayo with CLSA.
Hi. Is Jamie on the call?
Yes.
Jamie, your comment said that the U.S. economy may be gaining momentum.
Yeah.
If you can give some of the basis for that comment. Is it more risk on by investors or more CapEx by companies or is this more hope?
I think it's actual detail of retail spend, auto sales, house prices, household formation, confidence numbers. I'm not basing it in the market. I'm just basing if you look at a broad range of things, it looks like growth may have gotten a little bit better in the fourth quarter. If you take a walk around the world, Japan's doing a little bit better. Europe's doing a little bit better. In fact, one of the IMF or some of those came out yesterday and thought the global growth is going to tick up next year. It's just those factors.
Is that enough for you to say you're going to invest a little bit more or hire some more people or expand a little bit more? Along those lines, how do you see market share gains potentially playing out?
It's not going to change our plans very much because we don't really react that much to the weather. When you grow to add bankers and stuff, you know you have to do it through a cycle. I do think if there's some regulatory relief, you will see banks be more aggressive in growing, opening branches in new cities, adding to loan portfolios, seeking out clients they don't have. I'm hoping you're going to see a little bit of that too, but that'll wait for a little regulatory relief.
Why are you saying this might be a little bit more than just the weather, that this might be more sustainable when you say the economy might be turning?
No, I'm saying we don't react to the small change in the economy to how we grow and expand our business. It looks to us, if you look across the broad spectrum, capital expenditures, business confidence, consumer confidence, household building, household formation, wage income, wages going up, unemployment going down, auto sales going up, retail sales going up. It looks like it's getting stronger, not weaker. That's what it looks like to me. That's just my own personal belief.
Maybe just, if we give you a bit of insight into the philosophy about how we do our investment and expense budgeting. When we talk to our businesses, regardless to Jamie's point about necessarily whether the external factors are moving, the question is, what do we want to do in terms of products and services and technology and bankers and offices that we can execute on well and responsibly? That is typically what binds us, not our appetite to invest the dollars. I think we've told you pretty consistently that, and you've seen it, we added 130 net new bankers. We opened eight offices in the commercial bank. We're investing in technology very broadly, payments, digital, across the company. I would say that we don't feel like we've been held back in terms of our appetite to invest because of concern around the economy.
In the same way, a more confident outlook in the economy won't change that. We will continue to look for great investments everywhere we can and make them.
All right. Thank you.
Your next question comes from the line of Jim Mitchell from Buckingham Research.
Hey, good morning. Maybe we could just talk a little bit about the investment bank. Obviously, your peers and a lot of investors have been growing in their optimism for this year in terms of animal spirits and everything else. Just wanted to get a sense of how you're thinking about it. Do you share that optimism? Any commentary on how we can think about both banking and trading into the new year with all the moving parts that we have around policy, et cetera. Thanks.
I would say, if we separate the two and just talk for one second about banking. The fundamentals for a solid M&A year are there, and obviously there will be puts and takes depending on what happens in the policy and reform space. We're optimistic about a solid M&A market, but with the continuing trend of fewer mega deals, but nevertheless, good flow. ECM looks set to be quite active, and the IPO market continuing to recover. Debt capital markets has a solid pipeline in terms of the refinance arena, but having said that, interest rates may have an impact. I think a pretty solid pipeline coming into the year, but lots of factors will ultimately affect the full year. With respect to trading, Jamie said it, we don't look at the first couple of weeks, but so far so good.
What I would tell you is, we said this before, we're a client flow-oriented business, and there will be a lot of micro and event-driven activity. As long as it's not discontinuous, we should be able to intermediate transactions with our clients. So far, generally there's been more risk appetite in the investor base, but that can change very quickly as we saw in previous quarters. We will be there to support our clients, and if they're active, everything should be good, but it can change quickly.
Okay, that's helpful. Maybe as a follow-up on the expense side, the comp ratio in the investment bank, I think, dropped around 240 basis points this year or last year. Do you think that's sustainable into 2017, assuming flat to up revenues, or was there anything unusual in there?
Just reminding you about our sort of philosophy on comp to revenue. Comp to revenue is just a calculation. Obviously, we pay for shareholder value added. You need to take into consideration the fact that we've had over time increased capital levels and liquidity levels, and that's reflected in a declining overall comp to revenue ratio. I would say that there are three factors to it being lower. The first is the strength in performance, and payouts aren't linear. As you have stronger performance, you would expect to see a lower ultimate outcome. Importantly, we were from tailwinds in the numbers this year, included a stronger dollar. As we pay, remember, comp to revenue isn't just on front office compensation. It all supports our salaries, benefits, and compensation. We have a large number of people that we pay not in dollars.
That was a bit of a tailwind. Some of that will carry on, but maybe not at the same level. We also just did our normal, regular hygiene and productivity in terms of how we think about the workforce and pay. At the end of the day, we pay for performance. We pay, we think very competitively to retain the best team on the street, and make sure that our shareholders are getting a fair share of any outperformance.
Okay. All right. Thanks.
Your next question comes from the line of Paul Miller from FBR.
Yeah, thank you very much. Hey, Jamie. One of the things that we're seeing some of the new politicians come in talking about opening up the credit box, especially in the mortgage world, that has been really shut down over the last years, mainly to the rules coming from all the things Fannie, Freddie, CFPB. What type of things do you need to see or you think they can do to open up that credit box where banks can take more risks and be protected?
Simplifying the securitization rules, because we've done some securitizations. We think they're excellent, but that would open up the market a little bit. Clarifying safe harbors on certain types of underwriting. For example, it's very hard and risky for a bank to make a loan to first-time buyers, former bankruptcies, even though it could be very good people with brand-new jobs. Self-employed, it's hard to necessarily do all the income verification stuff like that. Simplifying servicing. The servicing standards now have, I think nationwide, we have 3,000 different standards. It's very costly, it's very expensive. It's kind of risky. If you make a mistake, the punishment is pretty high. All those things, that should be done for the good of the United States of America, not for the good of JPMorgan Chase.
I do think it's too tight, and I think there's one thing that if you get around too quickly, it'll help the housing market a little bit, it'll help housing formation, it'll reduce the cost of mortgages, it'll make it available to more people.
Yeah. Okay, Jamie. Thank you very much.
Your next question comes from the line of Glenn Schorr with ISI.
Hi. Thanks.
Hi, Glenn.
Hello there. I guess the question for either one of you is, if we do get some lower taxes and/or better rate environment, I'm curious on your confidence on how much of that can fall to the bottom line, because there's a lot of optimism about what can happen. Stocks have moved well. We're expecting that to move to the bottom line. The big concern that people have is that it gets competed away by irrational behavior. Curious to get your thoughts on that, just big picture in general, if things go well, how much of that do you retain?
Starting off with the interest rates, obviously we've talked for an extended period of time about the fact that we've positioned the company to benefit when rates rise. We built the branches, we acquired the accounts, we've built the technology and the services. We've been growing our deposits very strongly, and we're going to enjoy the benefits of that. With respect to how much will go to the bottom line, we have been, we think, appropriately conservative when we've given you guidance about ultimately how much incremental NII we would expect in a more normal rate environment. If you go back to investor days of past, you would see that we said when normalized, we would expect $10-plus billion. Embedded in that are assumptions obviously around rate paid.
We think that rate paid will be higher this time in this cycle than in previous cycles for a bunch of reasons, including, as you said, competition for high-quality liquidity balances. Also that we are coming off of zero rates, and the improvement in technology. We've been, we think, appropriately conservative, but we'll find out in the fullness of time. So far, two rate hikes, absolute rates at 50 basis points. It's too early, and so far, you would expect there to be convexity in that, and it's not linear. Everything is behaving quite rationally right now. In fact, if anything, a little better than we had modeled. We'll keep watching it. We think we've been thoughtful. We don't know the right answer, and we'll keep you updated as we see how things progress.
Just on the tax side-
Yes
I guess people understand, generally, yes, if you reduce the tax rates, all things being equal to 20% or something, eventually that increased return will be competed away.
Yeah.
That is a good thing. Okay? It's not a good thing for JPMorgan Chase per se, but it's a good thing for the world. It's a good thing for growth. A lot of studies actually show the beneficiary of that is wages. It's important for you to understand that good tax policy is good for growth and the country in general. It's not just good for companies. It will eventually be competed away.
When should I take that lower tax rate out of my model? Kidding.
Listen, you're not going to really know for probably nine months to a year exactly what it is, I wouldn't worry too much about it. Just remember, the most efficient companies do benefit from things like this more than others.
The real follow-up I had was the concept of interest deductibility. If that is the means that they use to pay for the tax hikes, it feels to us like a bad thing. I'm just curious on how you think it impacts your franchise from anything from debt underwriting to anything else?
I think if you look at, again, there's a lot of wood to be chopped and sausage to be made before tax reform gets done. Some of these things are brand new. They've never been talked about or done before. You're going to read a lot of studies in the next six months. Obviously, interest deductibility for banks, it's about net interest income, so it doesn't directly change how you look at it. For everybody else, it affects complete industries differently. How you leverage differently, and utilities will be in a different position than unleveraged companies. Plus, I think people are going to be able to convert what would've been interest expense to some other kind of expense. Let the work get done before we spend too much time guessing about it.
I also think that while interest deductibility is one point, repatriation of cash is another point, and there are puts and takes, and you have to see the whole package before you can see what the net impact is. Ultimately, if these things get done rationally and grow the economy, then it's good for our franchise just broadly. Don't focus on DCM, focus on the whole thing. I think when you get the whole package, if it's done well, which we hope will happen, then it will be good for the economy, good for our clients, and good for our whole franchise.
Okay. Thank you both.
Your next question comes from the line of Matt O'Connor from Deutsche Bank.
If I could circle back to the discussion on net interest income and the rate leverage. I think the outlook for net interest income to grow over $3 billion versus the $1.5 before the rate increase. That's obviously a nice lift for just a 25 basis point bump on the short end. I guess, one, does that include the benefit of longer-term rates since they've moved up as well since 9/30? Which I assume it does, but just to confirm that. Secondly, what's the leverage to rising rates from here as we think about movements in both the short and long end?
Yeah. Okay. Yes, Matt, it does include the benefit of higher long-end rates, and if you get the 10-Q and get our disclosed earnings at risk and do some math, you'll get pretty close to numbers that look similar to that, $1.5 billion or more. With respect to rate sensitivity from here, clearly it's not linear. You can see if we just look at the third quarter, the first 100 basis points just as an illustration is $2.8 billion. 200 basis points is 4.5. As we clip away 25 basis points at a time, our $2.8 billion will start to come down. That's broadly the outlook.
The next 10-Q will show the next round.
Next 10-Q will show the next.
Obviously it's less and less as rates go up. It's not linear.
And then just-
Unless we actively change duration, which we may also do at one point.
That was actually again my follow-up question. On the size of the balance sheet, you did talk about loan growth of about 10% this year. If you look full year 2016 versus 2015, the balance sheet or the earning assets only rose 1%. Maybe tie that into, as you think about duration, the fact that you're sitting on a lot of liquidity and cash, and how we should think about both overall growth on the balance sheet and then potentially some more remixing.
Yeah. What you saw happen in 2016, was not only obviously a rotation from securities and deploying deposits into loans, but also we took a very large amount of non-operating deposits out of the balance sheet in 2016. That is having an impact. We would expect to continue to grow our loans, to grow our deposits strongly, to manage the overall balance sheet through our investment securities portfolio. From here, if everything continues to be as the market implies, we should see margin expansion.
Okay. All right. Thank you.
Your next question comes from the line of Brian Kleinhanzl from KBW.
Hi. Good morning.
Please-
It's a quick question on the credit and the reserve releases as relates to the energy and the metals and mining portfolio. Now that you've actually seen some better credit in there, how much of the reserves are left in that portfolio, and can you still see reserve releases going forward?
Yeah. The answer is, across the metals and mining and energy, we have a little over $1.5 billion of reserves. There is a normal level of reserves that we will have that would be a large chunk of that. As you saw in 2016, we did take charge-offs of a little less than $300 million. We will continue to likely see on a name-specific basis as people work through their business models, that there will be more charge-offs. Ultimately, if energy stays stable or improves, and of course we have to see that be somewhat sustained and find its way flowing through the financial statements of our clients, then as we upgrade them, God willing, we will see more reserve releases, but it's going to take some time. We'll start to see some of that. Think about the large reserves we took.
We took them at the tail end of 2015 and into 2016. We'll start to see new financial data from our clients. We'll start to do the borrowing base redeterminations and look at the impact of prices on reserves in the spring. We'll start getting some data this year, and so we may see some more releases, but it's going to come through over time.
Okay. Thanks. Also on CRE, again, strong loan growth year-over-year. I understand that you're focusing in these housing constraints markets, is there a limit to how much you can grow in those markets?
Yeah. I would say that when I talk about the overall core loan growth going down, still being strong, it does reflect the fact that we've been seeing very strong outperformance in our growth over the course of the last couple of years, particularly in commercial term lending. While we continue to believe there's great opportunities there, they will be lower. We've been printing in the teens pretty consistently, and I would say it will be less red hot and maybe more in the high single digits, we're going to keep you updated.
Okay, thanks.
There's still plenty of opportunity.
Your next question comes from the line of Eric Wasserstrom from Guggenheim.
Thanks very much. Marianne, just to follow up a couple more questions on card. I know you've talked quite a bit about it already. One of the sort of conventional wisdoms at the moment is that 2016 represented the pinnacle of the intensification of the competitive environment, and I just wanted to get your thoughts on whether that's an accurate assessment or not.
Well, I don't know that I would ever try to decide what moment is the time is the pinnacle. I would say, you saw us invest heavily in the business in 2015 and 2016 across a number of different fronts. You saw us proactively renegotiating the card co-brand deals for the vast majority of our portfolio and investing very heavily in exciting new products. In both cases, while it has had an impact on our revenues, in one case in the short term, in another case more structurally, in both cases, these are still very attractive returns. Card is still a very attractive ROE business, very important to our customers. We're after deep, engaged relationships through time with them. We are going to continue to invest and grow.
Great. Just on that point, the ROA expectations that you have as a consequence of the trends that you just underscored, do you consider these to be the sustainable as you get back to that 11% kind of revenue yield?
At this point, yes.
Okay. Great. Thanks very much.
Your next question comes from the line of Steven Chubak from Nomura.
Hi, Jamie. Wanted to start off with a big picture question on the trading side. You made some recent remarks talking about the outlook for the FICC business and alluded to roughly half of the declines versus the peak being attributable to cyclical as well as secular factors. A lot of FICC optimists, in particular, that we've spoken with have really latched onto your remarks. I was hoping you could provide some context as to how you determine the 50/50 split. Should we be taking those comments literally? How you're thinking about the FICC fee pool trajectory overall as some of those cyclical headwinds abate.
We did try to actually analyze it because we got asked a lot about what was secular. You could break apart certain exotic derivatives, certain types of CDOs. Across the whole spectrum, there were things that disappeared and were going to be done no more, for better or for worse. In some cases, by the way, like a CDO, didn't go away because the person's still a credit buyer. They just went to another product. That was our best estimate. I don't want to overdo it or anything like that. I also said that the actual market-making requirements are going to be going up over time. I'm talking over 20 years. I'm not talking over next quarter or next month. Remember, we don't run the business next quarter, next month.
Assets under management are going up, the needs of corporations are going up, the fixed income market's going to go up, the needs for FX are going up, the needs for hedges are going up. Over time, we know there's going to be a cyclical increase. We are just trying to estimate how much of the downturn are cyclical, there'll be a flip side of that. I think you might have gotten to the end of the secular and the cyclical decline.
Thanks, Jamie. That's extremely helpful color. Marianne, maybe just switching over to the expense side for a moment. You also provided some very helpful detail on some of the drivers of the strong expense progress that you've seen in CIB in particular. From what I recall at last year's update, Daniel actually guided to an expense target of about $19 billion by 2017. It looks like you've gotten there essentially a year early, and I'm wondering whether there are more savings initiatives that have not yet been filtered through and could potentially accrete in the coming year.
I will obviously give you a lot more detail about all of this at Investor Day, really quick because I knew the $19 billion would get some excitement. If you go back and talk to yourself to look at the specifics on the slide, you should see that the $19 billion that he guided to did have some assumptions about some legal costs in there. The CIB didn't have legal costs in the year. As a result, it's still a little higher on an apples-to-apples basis than that would imply. Additionally, I talked about the tailwinds in terms of a stronger dollar. For full disclosure, we have intentionally reinvested some of that. It was a tailwind that meant that apples to apples, it'd still be a little high.
I would tell you that compared to the targets that they set, we still have a few hundred million dollars to deliver on. Daniel will go through it at Investor Day.
Great. Thanks for taking my questions.
Your next question comes from the line of Andrew Lim from Société Generale
Hi, good morning. I was just wondering if we could talk a bit about rates trading. To my mind, that was a product that has done particularly well this quarter. I was wondering, looking forward, how you see that performing whether it's supported by what's going on in the yield curve or whether you see that supported more by sort of like one-off euphoria around the election. Maybe that might tail off a little bit. Then just leading on from that, how do you view the opportunities for growth in your capital markets businesses, your CIB versus, say, your lending businesses? Are you equally enthusiastic about both given the opportunity sets going forward, or do you see some being more positive than others?
Okay. To just talk about rates trading for a second. You're right that it was a part of the strength story in the fourth quarter this year. It was also a strong fourth quarter last year, which is pretty much the only reason why we didn't call it out as a bigger driver of the year-over-year growth. It was a strong performance in the quarter, and we would expect that to continue. It's much more interesting for our clients to trade around a moving yield curve and rates above zero. As we see rates normalize, we would fully expect that to be ultimately a beneficiary to the franchise in terms of clients trading and positioning and hedging around that over time. We're hopeful that would be the case.
In terms of the excitement and enthusiasm of our businesses lending, we're enthusiastic about all of our businesses and would want to defend, share, and grow them all. The reality of the CIB revenue performance in markets and in general, it was very strong in 2016. We will try our hardest to replicate that. It will be a challenging comparison, but we're proud of it. We gained share competitively over the course of the last couple of years. I don't think you should necessarily expect that we can continue to gain share at that pace. Defend it we will.
It sounds maybe that you're sensitive to the pressures of year-on-year growth in your CIB business, but you're not really highlighting that in terms of your lending businesses, which obviously you'd expect for the margins to grow, the loan books to grow.
I think the better way to look at CIB lending is that it's kind of episodic and goes in and out. A lot of corporations don't need to borrow. When they do, it may be inconsistent. It might be because of M&A or something like that, or a bridge book will always be driven by certain types of activities. The CIB loan book isn't something you can say that you're growing. That is more to serving clients in the way they need. One of the other things I just want to point out, which is across all of our businesses, but just take trading in particular, is we always create efficiencies. Part of what we're investing is big data, straight-through processing, electronic exchanges, online services. I think 97% of FX I think it's 50% or 60% of U.S. interest rate swaps.
All of these things have become electronic and digitized as straight through for clients. That's where some of the investments are going. You're going to see more of that, not less. It also creates another round of efficiencies every time we do that.
That's great. Thanks very much.
Your next question comes from the line of Gerard Cassidy from RBC.
Good morning, Marianne.
Good morning. How are you?
Good. Can you give us some color? In the past you've talked about in the multifamily, I know you commented on that in your prepared remarks on your multifamily book. Some of the markets that you continue to be a little leery of, can you give us an update to those types of thoughts?
Yeah. We talked before about we had, in certain markets already pulled back, not necessarily because we had a crystal ball, but because we saw them getting frothy before the energy decline. Dallas and Houston would be examples. Parts of Brooklyn would be examples of that. I would say watching more carefully, you've seen as we have that there is some supply coming through in markets, Seattle, Denver, D.C., San Francisco. We're still very active there, but just keeping an eye on those markets. The supply pipeline, while it's real, does not look like it did when we saw the real pressure on the term lending business and the real estate business back in the '80s and '90s. We're keeping an eye on it.
Okay, great. I know you talked about the duration of the securities portfolio. It's in line with-
Yeah. Can I say one thing to that?
Yeah.
We don't want to give you all of our secrets in that business, why we do so well at it. We're very disciplined about where we see supply and demand in pricing. We would have no problem not growing at all. We don't sit at meetings here and say, "Can you grow at 10%? Can you grow at 12%?" No. If we can't meet what we think is proper risk return, we're not going to grow at all. We'll shrink. We have no problem doing that. The other thing I want to point about CTL is the exceptional performance of CTL through the last great recession. We were really pleased with how that happened. We try to look at all these things through the cycle, not just what are they doing in good times.
Certainly. Marianne, coming back to the investment portfolio, obviously you talked a little bit about the duration. Do you have the actual duration of it in years, this quarter versus the third quarter?
We don't disclose that.
Okay. All right. Thank you.
Thank you.
Your next question comes from the line of Matt Burnell from Wells Fargo.
Good morning. Just a quick question for you, Marianne. In terms of the mortgage, in the overall picture, I understand why you're talking about maybe 10% core loan growth rather than 15% more recently. Just within the residential mortgage portfolio, it looks like that slowed in the fourth quarter, third and fourth quarter from a mid-teens year-over-year rate to a low single digit quarter-over-quarter rate. Can you give us a little more color as to what's going on there? Are you slowing your purchases of your own originations or is there something else going on there?
Look, there's a couple of different things. First of all, a little more than half of our originations are jumbo. We retain all of those. When you look at the conforming space, it's really honestly consistently a best execution decision. Particularly in this quarter, it speaks a bit more to our correspondent conforming volume. It's the lowest margin product, and it does somewhat frequently toggle backwards and forwards in terms of best execution, whether we would retain or sell it. We intend to keep adding to our portfolio. We like the mortgage asset class. Even though spreads have compressed in the fourth quarter, OAS and ROEs are holding up, and so I would expect us to continue to grow it strongly. From quarter to quarter it may go up or down a few percent.
Over a year we'll continue to add to the portfolio.
Okay. No real change in your thinking there?
No.
Okay. Thank you very much. That's it for me.
Thank you.
Your final question comes from the line of Marty Mosby from Vining Sparks.
Thanks for taking my question. The thing that jumped out at me was if you looked at the Asset Management group, you had $21 billion of long-term product outflows. You had $35 billion in liquidity products inflows. It seems like now that we're getting past financial crisis when everybody was looking at liquidity, that combining that with continued deposit growth, we're not seeing a change in that perspective, that there's still a premium for increasing liquidity still.
I think there was a little bit of that in the fourth quarter, particularly relating to actively managed product. I think you're accurate. We haven't seen everybody else yet, but I think you will be true in that when we see everybody.
Do you foresee that premium for liquidity lessening as we kind of go into the re-risking of a better economy and some things that improve the outlook?
That's a really hard question to answer, and I have to think about that a little bit.
My last thought was when you look at M&A, we had M&A kind of suppressed when things were more regulatory constrained, and the outlook was negative on the overall economy, and uncertainty. Now we have this positive uncertainty. Wouldn't that delay some activity for at least a couple of quarters for people to kind of see where we're going to end up and see where tax rates are and see we might get a deregulation? That may change their perspective on their long-term opportunities. Just thought there might be a little pause here.
I think that everything is going to end up being reasonably name specific. That may be true in some cases for some companies and industries where deregulation would be more helpful. Generally, as I said, the trend is towards less mega deals, more flow, and the fundamentals are in pretty good shape. There will possibly be tailwinds in terms of tax reform and other things. I think net-net, we think the underlying flow in the M&A market and the fundamentals are set to have a pretty positive year.
I just thought maybe the second half versus the first half. Thanks for your response.
We'll see.
No more questions, operator?
There are no further questions.
All right. Thank you, everyone.
Thank you very much.
This does conclude today's call. You may now disconnect.