Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's 4th 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, Mary Anne 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.
So starting on Page 1, we had a strong end to the year with record net income for the 4th quarter of $6,700,000,000 EPS of 1.71 dollars and return on tangible common equity of 14% on revenue of $24,300,000,000 reflecting strong performance broadly across our business in a more constructive environment. You'll see on the page a tax benefit of $475,000,000 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 $600,000,000,000 and record card sales volume up 14% on continued strong momentum. In addition, markets revenue was the highest on record for a 4th quarter, up 24% year on year.
And credit performance remains strong with net reserve releases across both consumer and wholesale. Moving on to Page 2 and some more detail about the 4th quarter. Revenue of $24,300,000,000 was up $600,000,000 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 $13,600,000,000 was flat year on year, and this quarter's result included nearly $200,000,000 of after tax legal expense.
Credit costs of $860,000,000 in the quarter included a net reserve release of a little over $400,000,000 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 3. Another full year record net income of $24,700,000,000 and a return on tangible common equity of 13% on $99,000,000,000 of revenue. And while net income was up 1%, our EPS of up $6.19 dollars was up more than that as we continued our disciplined capital return to shareholders.
Revenue was up $2,500,000,000 driven by NII up $2,700,000,000 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 $56,000,000,000 as expected, and our adjusted overhead ratio improved to 57%, as we continue 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 $1,000,000,000 year on year. In addition, legal expense for the year was a modest positive. Credit costs for the year were $5,400,000,000 net charge offs of $4,700,000,000 were in line with guidance and included $270,000,000 of charge offs related to oil and gas and Metals and Mining.
And we added $670,000,000 of net reserves, reflecting builds in card and energy, largely offset by releases in mortgage. Finally, net capital distributions for the year were approximately $15,000,000,000 up $4,000,000,000 or 37%, including dividends of $1.88 a share, up 9%. Turning to Page 4 and 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 $2,500,000,000,000 $1,500,000,000,000 of RWA. SLR was down slightly from the prior quarter 6.5 percent as our average balance sheet was higher this quarter, primarily driven by deposits. Moving on to Page 5 and Consumer and Community Banking.
Consumer and Community Banking generated $2,400,000,000 of net income and an ROE of 17%. We grew deposit a record $60,000,000,000 year over year, up 11%, exceeding $600,000,000,000 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 on year and surpassed the $1,000,000,000,000 mark last year, and our active mobile customer base continues to grow and was up 16%. Revenue of $11,000,000,000 was down modestly year on year, reflecting a reduction in card revenue. Recall that last year included a $160,000,000 gain on the Square IPO. And in addition, strong momentum in card and auto was more than offset by the investments 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 $6,300,000,000 was flat year on 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 $275,000,000 in the PCI portfolio $150,000,000 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 $150,000,000 and $50,000,000 in Business Banking, both on the back of strong loan growth. Charge offs increased year over year driven by card as newer vintages continued to season in line with our expectations. And 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 6 on the Corporate Investment Bank. CIB delivered a very strong result with net income of $3,400,000,000 and an ROE of 20%.
Adjusting for legal, tax and credit costs, the ROE was a strong 17% for the quarter. Revenue of $8,500,000,000 up 20% year on year was our best reported performance ever for a 4th quarter. As we look at the full year, a moment on lead tables. In Banking, we ranked number 1 in global IB fees and number 1 in North America and EMEA, and we were the only bank among the top 5 to grow share. In M and A, we continued to rank number 2 globally and did more deals than anyone else last year.
In ECM, we maintained our number one ranking, improved our share and were number 1 in volume across all products and in both North America and Europe. And in DCM, we ranked number 1 across high yield, high grade and loans. Back to the quarter, IB revenue was $1,500,000,000 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, and 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 $950,000,000 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 4th quarter in total and for each of fixed income and equities. And like last quarter, the strength was broad based. Revenue of $4,500,000,000 was up 24% year on year, in part flatted by a weaker Q4 last year, but on the whole driven by momentum carried forward from the 3rd 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. And equities revenue was up 8%, reflecting strong performance in derivatives. Credit costs were a benefit of nearly $200,000,000 primarily driven by oil and gas and Metals and Mining. And finally, expense of $4,200,000,000 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 7 and Commercial Banking.
Another outstanding quarter in Commercial Banking with net income of $687,000,000 record revenue of $2,000,000,000 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 $2,300,000,000 up 5% year on year as we gain 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 $189,000,000,000 up 14% year on year with growth in both C and I and CRE. C and 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 And CRE loans were up 19%. Finally, credit performance remains strong with a net charge off rate of 11 basis points, driven by a couple of oil and gas names largely reserved for, and we saw a modest increase in loan loss reserves driven by select client downgrades. In CRE, we have no net charge offs and we reiterate 3 quarters of this portfolio is multifamily lending to owners of stabilized Class B and C properties in supply constrained markets.
And 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 8. Asset Management reported net income of $586,000,000 with a 30% pretax margin and an ROE of 25%. Revenue of $3,100,000,000 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 $2,200,000,000 was down 1% year on year.
For the full year, we long term net inflows of $23,000,000,000 in a challenging environment, driven predominantly by fixed income, multi asset and alternatives. In addition, we gathered $24,000,000,000 of liquidity flow this year. However, for the quarter, we saw net long term outflows of $21,000,000,000 obviously disappointing, but on a more positive note, we saw liquidity inflows of $35,000,000,000 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 $1,800,000,000,000 and $2,500,000,000,000 respectively, driven by net inflows as well as higher market levels. And our long term investment performance remains solid with 80% of mutual fund AUM ranked in the 1st or second quartiles over 5 years.
And we had record loan balances up 4% and record deposit balances up 9%. Moving to Page 9 in corporate. Treasury and CIO was flat quarter on quarter with a net loss of around $200,000,000 and other corporate was a loss of $144,000,000 primarily driven by legal expense. Turning to Page 10 and the outlook. Looking forward to the Q1, 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 $3,000,000,000 reflecting seasonality of performance fees. And recall that last year's Q1 included a $150,000,000 gain on the sale of an asset. On expense, expect CCB to be up around $150,000,000 sequentially on higher auto lease depreciation as well as seasonally higher compensation and marketing, and expect expense in the Commercial Bank to be up quarter on quarter to around $775,000,000 as we continue to invest. Obviously, we're looking forward to Investor Day and we'll give you more detailed 2017 guidance then. So to wrap up, a record 4th 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 and 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'll give us more at Investor Day, but just in terms of that Q1 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? Yes.
So, hey, Ken, you guys have a busy day to say. So I would say that the Q1 is always a quarter in which we have a bunch of different factors. Most notably you also have day count issues in the Q1. So 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. And so if you recall back to the Q3, just to kind of reorient everyone, at that point when we didn't have the December hike, we said rate's flat. So on growth alone, we would expect NII for the full year to be up about $1,500,000,000 Obviously, we have had the 25 basis point hike in December, and based upon that alone, so now the new rate is flat, that $1,500,000,000 would be about $3,000,000 a little over $3,000,000 So 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. And if I could
ask a follow-up just on
the volume side, you had another great year of double digit loan growth. And 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?
Yes. So I think the way to think about it and again, I think we talked a little bit about it last quarter and you maybe see it in the Q4. So we've been growing our loans in the we said at the beginning of the year 10% to 15%. We sort of revised that to be at the top end of that range. So we've been growing at around 15% core loan growth.
The 4th quarter was 12%. So I wouldn't call it a deceleration per se, but it is a little bit lower. So 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. And of course, to a degree, it will depend upon our mortgage portfolio, but we intend to continue to add to that too. So sitting here today, I'd say more high single, 10%, plus or minus, and we'll give you more update at Investor Day.
Okay. Thanks very much.
Your next question comes from Betsy Graseck with Morgan Stanley.
Hi, good morning.
Good morning.
I just wanted to dig in a little bit on the forward look NII up a bit, but also expenses up a bit. And 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? Because the question I've gotten from people is, why aren't you dropping the NII benefit to the bottom line here?
So just taking the two things separately, Betsy, I would say the NII upside is dropping to the bottom line. But as we you saw all of our underlying drivers across all of the businesses, volumes, transactions, everything is growing very strongly. And although we still have some work to do to finish the large expense programs, we're near the end of that. So 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. And that would also support growth in non interest revenue outside obviously of the card phenomenon that we talked to you about.
And then 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?
To optimize
Sorry, carry on.
No, to optimize your position.
Right. So when we think about our investment securities portfolio, we think about it as responding to structural changes in our balance sheet, which is probably predominantly driven by loans and deposits. And it's always important, I think, to remember because we focus a lot on structural interest rate risk, but 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. So we had some excess cash as well as the fact that rates rose.
So two things happened in our investment securities portfolio, mortgages extended and we did add to duration. So we have a very disciplined risk management framework that's based that's been consistent through time based on our expectations and normal rates in the future. And we just executed on that strategy.
Okay. So no change
to duration?
Yes. We added to duration in accordance with our framework.
Okay.
Your next question comes from the line of John McDonald with Sanford Bernstein.
Hi, good morning. Mary Anne, I was wondering if you could comment a little bit about some more color in 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. So 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. Now obviously, we need to continue to back test battery 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. But 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. So we're delighted with the response that we've had and we've actually kept it up for longer than we initially expected.
But 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. But 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. So obviously at a lower premium, it would be more so. But 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.
And to take the points down from $100,000 to $50,000 have less than a 10% reduction in the overall value through the lifetime of the engaged customer on average.
Okay. And 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 those some seasoning as the book matures? What kind of outlook would you have on the card charge offs?
So 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 Waters gave. He's given guidance for 2017 as we continue to see the newer vintages season of 2.75 percent plus or minus and that's still our expectation. So 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. But 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? And 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?
Yes. So I'll give you a couple of things and hopefully that will help. So 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 $3,000,000,000 over several years, but 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 that bend down is a sharp bend as we continue to be held very sort of hard compliance burdens. But nevertheless, we are seeing some efficiencies as we mature our processes and automate them.
Offsetting against that and 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. So naturally that is happening. We are not going to continue at this point carving out the cost of regulatory control because that is our operating model, it's our new normal. And 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. But we will continue to be more and more efficient.
And certainly, if we are 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. And 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 this 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?
So I think in the conference in November, Kevin Waters said that as we look at the new products and we look at them growing coming out 2016 and into 2017, we'd expect the card revenue rate 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. So Jamie, your comments says that the U. S.
Economy may be gaining momentum. If you can give some of the basis for that comment, is it more risk one by investors or more CapEx by companies Or is this more hope?
No, I mean, I think it's actual detail of retail spend, auto sales, house prices, household formation, confidence numbers. So I'm not basing it in the market. I'm just basing it. If you look at a broad range of things, it looks like growth may have gotten a little bit better in the Q4. Plus, if you take a walk around the world, Japan is doing a little bit better, Europe is doing a little bit better.
In fact, one of the IMF or some of us came out yesterday and thought the global growth is going to tick up next year. So 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 really react that much to the weather, because when
you grow, you're going to really react that much to the weather, because when you grow to add bankers and stuff, 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. So I'm hoping you're going to see a little bit of that too, but they'll wait for a little regulatory relief.
Why are you saying this might be a little bit more than just weather that this might be more sustainable when you say the economy might be turning?
No, I'm saying we don't react to small change in the economy to how we grow and expand our business. But I just said, it looks to us, if you look, of course, 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 and
And 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. And that is typically what binds us not our appetite to invest the dollars. So I think we've told you pretty consistently that and you've seen it, we added 130 net new bankers, we opened 8 offices in the commercial bank. We're investing in technology very, very broadly payments, digital across the company.
So 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. And in the same way, a more confident outlook in the economy won't step change that, but 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. And just wanted to get a sense of how you're thinking about it. Do you share that optimism?
And 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, etcetera? Thanks.
So I would say just if we separate the 2 and just talk for one second about banking, the fundamentals for a solid M and A year are there. And obviously, there will be puts and takes depending on what happens in the policy and reform space. But we're optimistic about a solid M and 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. And Debt Capital Markets has a solid pipeline in terms of the refinance arena, but having said that interest rates may have an impact.
So I think pretty solid pipeline coming into the year, but lots of factors will ultimately affect the full year. With respect to trading, I mean, Jamie said, we've said this before, we're a client flow oriented business and there will be a lot of micro and event driven activity. And as long as it's not discontinuous, we should be able to intermediate transactions with our clients. And 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. So 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. And maybe
as a follow-up on the expense side, the comp ratio in the Invesco 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
there? So just reminding you about our sort of philosophy on comp to revenue. We pay comp to revenue is just a calculation obviously we pay for shareholder value added. So 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. And as you have stronger performance, you would expect to see a lower ultimate outcome. But importantly, we were some tailwinds in the numbers this year included a stronger dollar. So as we pay, remember, comps revenue isn't just on the front office compensation. It all supports our salaries, benefits and compensation.
And we have a large number of people that we pay not in dollars. So that was a bit of a tailwind. Some of that will carry on, but maybe not at the same level. And 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.
Yes. Thank you very much. Hey, Jamie. One of the things that we're seeing some of the new politicians coming 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, we have to 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. And all those things, that should be done for the good of the United States of America, not for the good of JPMorgan Chase.
And so I do think it's too tight. And I think there's one thing that if you get around too quickly, it will help the housing market a little bit, it will help housing formation, it will reduce the cost of mortgages, it will make it available to more people.
Your next question comes from the line of Glenn Schorr with ISI.
Hi, thanks.
Hi, Glenn.
Hello there. So 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. There's the big concern that people have is that it gets competed away by irrational behavior.
So curious to get your thoughts on that just big picture in general, if things go well, how much of that do you retain?
So starting off with sort of interest rates. And 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've built the branches, we acquired the accounts, we've built the technology and the services. So we've been growing our deposits very strongly and we're going to enjoy the benefits of that. With respect to how much we'll 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 $10,000,000,000 plus and embedded in that are assumptions obviously around rates paid.
We think that rates 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, but also that we are coming off of 0 rates and the improvement in technology. So we've been, we think appropriately conservative, but we'll find out in the fullness of time. So far, 2 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. And everything is behaving quite rationally right now.
So, in fact, if anything, a little better than we had modeled. So 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, so 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. That is a good thing, okay. So it's not a good thing for JPMorgan Chase per se, but it's a good thing for the world. It's good thing for growth. And a lot of studies actually show the beneficiary of that is wages.
And so it's important to understand that a good tax policy is good for growth in the country in general. It's not just good for companies, it will eventually be competed away.
So when should I take that lower tax rate out of my model? Kidding. I
would put it in that listen, you're not going to really know for probably 9 months to a year exactly what it is. So I wouldn't worry too much about it. And 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 I mean, again, there's a lot of wood to be chopped, the sausage to be made before tax form gets done. And some of these things are brand new. They've never been talked about or done before. So you're going to read a lot of studies in the next 6 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, utilities will be in different position in unleveraged companies. And plus, I think people are going to be able to convert what would have been interest expense to some other kind of expense. So let the work get done before we spend too much time guessing about it.
I also think that we are while interest deductibility is one point, repatriation of cash is another point. And there are puts and takes, and you have to think you have to see the whole package before you can see what the net impact is. But ultimately, if these things get done rationally and grow the economy, then it's good for our franchise just broadly. So don't focus on DCM, focus on the whole thing. And 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 $3,000,000,000 versus 1.5,000,000 before the rate increase. That's obviously a nice lift for just a 25 basis point bump on the short end. So I guess, 1, does that include the benefit of longer term rates, since they've moved up as well since ninethirty, which I assume it does, but just to confirm that. And then secondly, what's the leverage to rising rates from here as we think about movements in both the short and long end?
Yes. Okay. So yes, Matt, it does include the benefit of higher long end rates. And if you get the Q and get our disposal in earnings at risk and do some math, you'll get pretty close to numbers that look similar to that dollars 1,500,000,000 or more. And then with respect to rate sensitivity from here, clearly it's not linear.
So you can see if we just look at the Q3, the first 100 basis points just as an illustration is $2,800,000,000 two 100 basis points is 4.5. So as we clip away 25 basis points at a time, our $2,800,000,000 will start to come down. And so that's broadly
the outlook.
The next 10Q will the next round.
Next 10Q will show the next.
But obviously, it's less and less as rates go up. It's not linear. Unless we act we change duration, which we may also do at one point.
And that was actually getting my follow-up question. I mean, 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%. So 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?
Yes. So I mean, 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. So that is having an impact. But 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. And 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. Good morning. It's just a quick question on the credit and the reserve releases as it relates to the energy and 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?
Yes. So the answer is across the Metals and Mining and Energy, we have a little over $1,500,000,000 of reserves. I mean, there is a normal level of reserves that we will have that would be a large chunk of that. And as you saw in 2016, we did take charge offs of a little less than $300,000,000 So 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. But 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, then we will see more reserve releases, but it's going to take some time. We'll start to see some of that. You 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. And so 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. And then also on CRE, again, strong loan growth year over year. I mean, I understand that you're focusing in these housing constraints markets, but is there a limit to how much you can grow in those markets?
Yes. I mean, I would say that when we 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. And while we continue to believe there's great opportunities there, they will be lower. So 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, but 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. Marion, just to follow-up a couple more questions on card. I know you've talked quite a bit about it already. But 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. But I would say, you saw us invest heavily in the business in 2015 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. And in both cases, while it has had an impact on our revenues, in one case in the short term and another case more structurally, in both cases, these are still very attractive returns. And so card is still a very attractive ROE business, very important to our customers.
We're after deep engaged relationships through time with them. And so we are going to continue to invest and grow.
Great. And 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. I 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. And a lot of sick optimists in particular that we've spoken with have really latched on to your remarks. And I was hoping you could provide some context as to how you determine the fifty-fifty split.
Should we be taking those comments literally? And how you're thinking about the fixed fee pull 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. So you can break apart certain exotic derivatives, certain types of CDOs. Across the whole spectrum, there were things that disappeared and we would 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 is still a credit So they just went to another product. But 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, next month. Remember, we don't run the business next quarter next month because assets and management are going up, the needs of corporations are going up, the fixed income market is going to go up, the needs for FX are going up, the needs for hedges are going up. So over time, we know there's going to be a cyclical increase.
And we're just trying to estimate how much of the downturn is cyclical. And so there will be a flip side of that. And I think you might have gotten to the end of the secular and the cyclical decline.
Thanks, Jamie. That's extremely helpful color. And Mary Anne, 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. And from what I recall last year's update, Daniel actually guided to an expense target of about $19,000,000,000 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?
So I will obviously give you a lot more detail about all of this at Investor Day, but really quick because I knew the $19,000,000,000 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 $19,000,000,000 that he guided to did have some assumptions about some legal costs in there. The CIB didn't have legal costs in the year. And 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.
Now for full disclosure, we have intentionally reinvested some of that, but it was a tailwind that meant that apples to apples, it would still be a little high. I would tell you that compared to the targets that they set, we still have a few $100,000,000 to deliver on. And Daniel will go through at Investor Day.
Great. Thanks for taking my questions.
Your next question comes from the line of Andrew Lim from Sachin.
Hi, good morning. I was just wondering if you could talk a bit about raised trading. I mean, to my mind, that was a product that was done particularly well this quarter. But I was wondering looking forward how you see that performing, whether 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. So maybe that might tail off a little bit.
And 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 set going forward? Or do you see some more positive than that?
Okay. To just talk about rate trading for a second, you're right that it was a part of the strength story in the Q4 this year. It was also a strong Q4 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, but it was a strong performance in the quarter. And we would expect that to continue. It's much more interesting to for our clients to trade around a moving yield curve and rates above 0.
So 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. And so we're hopeful that would be the case. In terms of the excitement and enthusiasm of our businesses lending versus we're enthusiastic about all of our businesses and would want to defend share and grow them all. I mean the reality of the CIB revenue performance in markets and in general, it was very strong in 2016. So we will try our hardest to replicate that.
But it will be a challenging comparison, but we're proud of it. So we gained share competitively over the course of the last couple of years. And I don't think you should necessarily expect that we can continue to gain share at that pace, but defend it, we will.
I mean, 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 it is kind of episodic and goes in and out. Corporation, a lot of companies don't need to borrow. When they do, it's good. It may be inconsistent. It might be because of M and A or something like that or a bridge book will always be driven by certain types of activity.
So the loan book isn't something the CIB loan book isn't something you're going to say that you're growing. That is more to serving clients in the way they need. One other thing I just want to point out, which is across all of our businesses, but just take trading in particular is part of it we're always creating efficiencies, part of it we're investing is big data straight through electronic exchanges, online services, like I think 97% of FX. I think it's 50% or 60% of U. S.
Interest rate swaps. All these things have become electronic and digitized and straight through for clients. So that's where some of the investments are going. And you're going to see more of that, not less. But 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, Mary Anne.
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?
Yes. So 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 fluffy 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, DC, San Francisco. We're still very active there, but just keeping an eye on those markets.
But 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 '90s. So we're keeping an eye on it.
Okay, great. And I know you talked about the duration of the securities portfolio, it's in line with Yes.
I just wanted to add to that. So we don't want to give you all of our secrets in that business, but we do so well at it. But we're very disciplined about where we see supply and demand and pricing. And 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. And so the other thing I want to point about CTL is the exceptional performance of CTL through the last great recession. I mean, we were really pleased with how it happened.
So we try to look at all these things through the cycle, not just what are they doing in good times.
Certainly. And Mary Anne, 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 Q3?
We don't disclose that.
Okay. All right. Thank you.
Thank you.
Your next question comes from the line of Matt Farnell from Wells Fargo.
Good morning. Just a quick question for you, Mary Anne. 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. But just within the residential mortgage portfolio, it looks like that slowed in the Q4, 3rd Q4 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 buying are you slowing your purchases of your own originations? Or is that is there something else going on there?
So, there's a couple of different things. First of all, we about a little more than half of our originations are jumbo. We retain all of those. And then when you look at the conforming space, it's really honestly consistently a best execution decision. And so 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. But we intend to keep adding to our portfolio. We like the mortgage asset classes. Even though spreads have compressed in the Q4, OAS and ROEs are holding up. And so I would expect us to continue to grow it strongly.
And from quarter to quarter, it may go up or down a few percent, but over a year, we'll continue to add to the portfolio.
Okay. So 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 $21,000,000,000 of long term product outflows and you had $35,000,000,000 on liquidity products inflows. And 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, but there's still a premium for increasing liquidity still?
I think there was a little bit of that in the Q4, particularly related to actively managed product. I think you're accurate. We haven't seen everybody else yet, but I think it will be true in that when we see everybody.
Do you foresee that premium for liquidity lessening as we kind of go into the rerisking of better economy and some things that improve the outlook?
That's a really hard question to answer. I have to think about that a little bit.
And then my last thought was, when you look at M and A, we had M and A kind of suppressed when things were more regulatory constrained and the outlook was negative on the overall economy, not an 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 what we might get a deregulation that may change their perspective on the long term opportunities. So just thought there might be a little pause here.
I think that I mean everything is going to end up being reasonably name specific. So I mean that may be true in some cases for some companies and industries where deregulation and what would be more helpful. But generally, as I said, the trend is towards lower sorry, less mega deals, more flow and the fundamentals are in pretty good shape. And then there will possibly be tailwinds in terms of tax reform and other things. So I think net net, we think the underlying flow in the M and A market and the fundamentals are set to have a pretty positive year.
I just thought maybe in the second half versus the first half, but 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.