Please stand by. We are about to begin. Good morning, ladies and gentlemen. Welcome to JPMorganChase's third quarter 2016 earnings call. This call is being recorded. Your line will be mute 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 JPMorganChase's Chief Financial Officer, Marianne Lake. Ms. Lake, please go ahead.
Thank you. Good morning, everyone. I'm going to take you through the earnings presentation which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on page one and taking a look at the quarter, we had strong performance in each of our businesses, despite the continuation of reasonably challenging conditions. Bringing it all together, this quarter's result was clean, with no significant items, and with the firm reporting net income of $6.3 billion, EPS of $1.58, and a return on tangible common equity of 13% on $25.5 billion of revenue. Highlights of the quarter include the highest reported revenue for a third quarter in the CIB, with IB fees up 15% and markets revenues up 33%, with strong performance across the board.
Robust core loan growth for the company of 15% on the back of sustained demand across businesses, and the continuation of strong credit performance, including a net release for oil and gas. Card sales are back to double-digit growth year-on-year, and we saw a strong positive market reaction to new proprietary products. Finally, we had record consumer deposit growth up 11%. Before I move on, we recently submitted our 2016 resolution filing. The board and management believe that we submitted a credible plan and more than met the requirements for the October submission. It was a tremendous effort across the company, involving all businesses and functions, and we took many significant actions. Perhaps most notably, improving the firm's overall liquidity and pre-positioning our material legal entities for both liquidity and capital. We determined this was in the best interest of the company, albeit at some cost.
We took many other important actions which hopefully you've had the chance to review in our public filing. Moving back to the quarter, moving on to page two. Revenue of $25.5 billion was up $2 billion year-on-year or up 8%. On the back of continued strong growth in core loans, net interest income was up $700 million and is trending for the full year to be above the $2.5 billion guided last quarter. Non-interest revenue was up $1.3 billion, driven by strong performance in the CIB. Adjusted expense of $14.5 billion was up $500 million both year-on-year and quarter-on-quarter, largely driven by two notable expense items in consumer, which I'll talk about later. As well as the increase in FDIC surcharge which took effect this quarter, and some higher marketing expense.
Credit costs of $1.3 billion in the quarter includes consumer reserve builds of $225 million, primarily card, but against that we have a net reserve release in wholesale for oil and gas of about $50 million. As I said, net income was $6.3 billion and while down 8% year-on-year, you will recall that there were a number of significant items in last year's results, most notably significant tax benefits. If you adjust for tax, legal expense, and credit reserves, net income is up over $800 million year-on-year. Dealing with oil and gas here, we're encouraged by how quickly investor sentiment and risk appetite for the sector returned as the outlook for both oil and gas prices continued to improve. Capital markets opened more broadly to these clients, and we experienced lower draws against our facilities than previously anticipated.
A combination of paydowns, opportunistic loan sales, and select upgrades more than offset the impact of downgrades. If the environment remains broadly consistent with today, we would not expect further significant builds in the fourth quarter for energy. Moving to page three on capital. Key takeaways from this page. Capital and leverage ratios were broadly flat quarter-on-quarter, with a CET1 ratio of 11.9%. Net capital generation was offset by strong loan and commitment growth. Our spot balance sheet closed a little over $2.5 trillion, principally a result of strong deposit growth as well as liability actions taken to raise liquidity in the context of resolution, which also drove up liquid assets. While HQLA was up $23 billion quarter-on-quarter, our liquid assets were up significantly more than that, as excess liquidity at the bank is not included in reported HQLA.
Finally, we returned $3.8 billion of net capital to shareholders, including $2.1 billion of net repurchases and common dividends of $0.48 a share. Moving on to page four on Consumer and Community Banking. Consumer and Community Banking generated $2.2 billion of net income and an ROE of 16%. We continue to experience record deposit growth more than twice the industry average, up 11% year-on-year. More than half of that growth is from existing customers. Based on the FDIC survey for 2016, we were number one in absolute growth and grew share in each of our top 30 markets. Core loan growth remains strong at 19%, and while it's primarily driven by mortgage, we also saw 14% growth in auto, 9% in business banking, and 7% in card loans. Card new account originations were up 35%, with strong demand for Sapphire Reserve and Freedom Unlimited.
With more than three-quarters of new accounts being opened through digital channels. Card sales volume was up double digits this quarter, and we expect share gains to accelerate. To close on drivers, we saw merchant processing volumes up 13% and our active mobile customer base up 17%. Revenue of $11.3 billion was up 4% year-on-year. Consumer and Business Banking revenue was also up 4% on the back of strong deposit growth. Mortgage revenue was up 21% on higher MSRs management, but also on higher production margins and growth in NII, as we continue to add high-quality loans to our portfolio. Card, Commerce Solutions & Auto revenue was down 1%, as the strong momentum in card and auto volumes and balance growth was offset by higher card origination costs and the remaining impact of co-brand renegotiations.
While the new account origination costs do cause a near-term drag on revenue, it's a high card problem to have, as we expect these accounts will be strongly accretive over time. Looking forward, assuming strong demand for Sapphire Reserve through the fourth quarter, we would expect revenue for CCS&A to be down about $200 million quarter-on-quarter on higher acquisition costs. It will clearly be dependent on the number of new accounts originated. Expense of $6.5 billion is up year-on-year, as I said, driven by two notable items totaling $175 million, as well as the increased FDIC surcharge. The first item relates to liabilities assumed from a merchant in bankruptcy, and the second is a modest increase in reserve for mortgage servicing.
Underlying this expense performance is an incremental investment of $250 million in marketing and auto lease growth, which is in line with Investor Day guidance and largely self-funded with expense efficiency. The credit environment remains favorable. In card, we built $200 million of reserve this quarter, reflecting growth in the portfolio, including newer vintages, which have a higher loss rate than the portfolio average. Consistent with our discussion during the second quarter and consistent with how we underwrite the loans. In auto, we built $25 million of reserves on the back of high-quality loan growth. Turning to page five and the corporate and investment bank. Total revenue to CIB of $9.5 billion, up 16% year-on-year, was the best reported performance for a third quarter and included the highest IB fees on record for a third quarter too, up 15%.
With strong markets performance across the board, revenues up 33%. Expense was down 20% year-on-year on lower legal costs, but also with strong expense discipline more broadly. Coupled with solid credit performance, including a modest reserve build for oil and gas here, the business delivered a pretty clean $2.9 billion of net income and a 17% ROE this quarter. Diving deeper, IB revenue of $1.7 billion was up 14% year-on-year, with strong performance across products. We ranked number one in global IB fees, maintaining share on a year-to-date basis, and ranked number one in North America and EMEA. Advisory fees were up 8% year-on-year, we continued to rank number two globally and have done more deals than anyone else so far this year. In equity underwriting, fees were up 38% year-on-year. With a stable market backdrop and strong investor demand, issuance was up across products and particularly in IPOs.
We ranked number one in wallet globally and in North America and EMEA, we also ranked number one on a number of deals basis for overall ECM and IPOs. Debt underwriting had the highest third quarter on record, with strong market-wide bond issuance, record high grade bond supply in August, yields near record lows. Fees were up 12% from a high watermark last year, we ranked number one. In terms of outlook, given the strength this quarter, we expect IB fees to be down in the fourth quarter sequentially, but relatively flat year-on-year. Markets revenue of $5.7 billion was up 33% year-on-year. Clients were active and risk management conditions were favorable. Fixed income revenue was up 48% compared to a weaker third quarter last year.
Rates was a standout in terms of performance this quarter as markets stayed active post-Brexit, with good client flow, as well as anticipation of and uncertainty around central bank actions. Currencies and emerging markets matched a very strong third quarter last year but was slowed down slightly. Credit and securitized products came back from a weak prior period, with a recovery in the energy sector and central bank actions motivating clients to put money to work, producing a much more constructive market making and new issuance environment, resulting in a particularly strong quarter. Equities revenue was up 1% compared to a strong third quarter last year, with Asia matching last year's strong performance and strength in North America flow derivatives offsetting weakness in cash volumes. Taking treasury services and security services revenues together, each were over $900 million, with strong forward pipelines and levers to higher rates.
Moving on to page six in commercial banking. Commercial banking reported record net income of $778 million on revenue of $1.9 billion and an ROE of 18%. Revenue was up 14% year on year, driven by a trifecta of NII on loan growth, higher deposit spreads, as well as higher IB revenues. Loan growth continues to be strong across both C&I and CRE, outperforming the industry. C&I loans were up 10% year on year, despite competition for quality loans, as the investments that we've been making this year are delivering results. We've added over 100 net new bankers, opened seven new offices, and further built out our specialized industry coverage. We've added nearly 600 new relationships in middle market this year. CRE loans grew 19%, reflecting strong originations in both commercial term lending and real estate banking. We're also seeing stable to improving new loan spreads.
IB revenue was up 57%, in part driven by a few large transactions, but bringing year-to-date IB revenues closer to flat versus last year, which is a strong performance. Expense growth of 4% is driven by our investments, and as I said, these investments are already paying off. Finally, credit performance remains strong, with a net charge-off rate of 10 basis points, roughly half of which was driven by oil and gas. In addition, you see further reserve releases for oil and gas here, as I mentioned earlier. Outside of energy, credit quality is good, and the commercial real estate portfolio had no net charge-offs during the quarter. Leaving the commercial bank and moving on to asset management on page seven. Asset management reported net income of $557 million, with a 29% pre-tax margin and an ROE of 24%.
Revenue of $3 billion was up 5% year on year, driven primarily by strong banking results on higher loan and deposit spreads. Expense of $2.1 billion was up slightly year on year and up 2% sequentially on higher incentive compensation. We saw positive long-term flows of $19 billion, with strength in multi-asset, including the benefit of a large mandate this quarter, as well as inflows in alternatives and fixed income, partially offset by outflows in equity products. In addition, we were the beneficiaries of $22 billion of liquidity flows this quarter, capturing more than our share of money in motion, given money market reform. AUM grew 4% and overall client assets 5%, to $1.8 trillion and $2.4 trillion, respectively, driven by markets as well as long-term flows. Our long-term investment performance remains solid, with 80% of mutual fund AUM ranked in the first or second quartiles over five years.
Lastly, we have record loan balances of $114 billion, up 5% year-on-year, driven by mortgage. Skipping over page eight on corporate, where the results were very close to home and where there are no significant items to highlight. Turning to page nine and the outlook. Looking forward to the fourth quarter, expect net interest income to be up modestly quarter-on-quarter on continued strength in loan growth, even as we digest the incremental cost of resolution-based liquidity actions, which will be fully in our run rate in the fourth quarter. Expect non-interest revenue to be down quarter-on-quarter based upon our current outlook for IB fees and assuming flat year-on-year markets revenues. Also including higher card acquisition costs and seasonally lower mortgages. All else equal, expect NIR to come in at $50.5 billion ± for the full year, market dependent.
Finally, expect adjusted expense in the fourth quarter to be flat year-on-year, bringing full-year expense in at approximately $56 billion, consistent with our guidance and self-funding the consumer items I mentioned. To wrap up, strong performance whichever way you look at it this quarter. We're continuing to demonstrate that our operating model and our platform is working for our clients, that our scale across businesses gives us operating leverage, and that our investments through time are paying off. While as a company, we are proud of this quarter's performance, and in particular, proud of the growth in the underlying business drivers, we take a long-term disciplined view and remain focused on delivering excellent customer experience, strong execution, particularly in risk management and expenses, so that we can continue to deliver best-in-class performance. With that, operator, please open up the line and we can take questions.
From CLSA.
Good morning, Mike.
Hi. Can you talk about the competitive environment in capital markets? You had a strong growth. Is that due to better markets, better share, or both?
I think there's three or four things to mention. The first is that I would say that the industry generally had a pretty weak third quarter last year. When you think about the year-over-year comparison, we are a little flattered by last year's performance. Not necessarily more so than our peers, but nevertheless we are. We talked about the fact that this quarter, the conditions were relatively favorable broadly, and compare and contrast that to last year where there were pockets of activity and client flow, but there were also pockets where people were really sitting on their hands and not transacting. I think client flow quite broadly across the environment would characterize the quarter. In terms of the competitive performance, I would say it feels like we did well. Obviously, we're the first to report apart from Citi this morning.
It feels like we did relatively well, we may have gained some share. Certainly, hopefully the momentum in terms of the business we've been building and the way we are serving our clients will serve us in that capacity, not just this quarter but through time. Obviously there can be a bit of volatility in the market share space. We prefer to look at it more through time, and we feel pretty good about the performance.
Specifically versus the European banks, are you looking to use your balance sheet more to gain share?
I would say we don't specifically target a competitive set. I will tell you that our balance sheet, we talked about it many times on this call before, that we do have the capacity to put our balance sheet and our resources to work for our clients, for our best clients. We think about using those resources in the context of overall relationships. If any peer is more leverage constrained and has less access, we may have competitive advantage, and certainly we will continue to make those resources available to our clients.
Your next question comes from the line of Glenn Schorr from Evercore ISI.
Hey, Glenn.
Hi, thanks very much. Curious on card delinquencies ticking up. I know you've been guiding towards that. When you see it's the only part of credit that has anything but great trends. You mentioned on your comments, newer vintages will have a higher loss rate than the portfolio average. You mind just drilling down a little bit more color on what exactly is driving that? Is that going down credit a little bit, or is that just expected seasoning as you'd thought?
I don't know, Glenn, if you recall that we had a bit of a discussion about this last quarter and sort of guided to the fact that we would expect to see our loss rates go up slowly. Partly because obviously at 250 basis points, I think we could call that pretty low historically. Also because over the course of the last couple of years, we have been changing the mix of our originations a bit to the prime, near prime space. Still completely within our credit risk appetite and at risk-adjusted margins that are better than the portfolio average. We're getting paid for that. We're doing it within our risk appetite, doing it judiciously. As a result, as those vintages become a higher percentage of our overall population, they will have a gentle upward pressure on the charge-off rate.
What we're seeing in terms of the delinquency uptick and the charge-off gradual increase is completely in line with how we underwrote those loans and our expectations. As you look forward for us over the course of the next several quarters, and we would expect those phenomena to generally continue, again, slowly. We're growing our portfolio. We're going to see the seasoning of those vintages as the mix increases and as they become more seasoned, cause us to build reserves, but for the right reasons.
Fair enough. Just one follow-up. If I could get just a high-level comment on, has anything material changed in terms of rate or curve sensitivity as you remix the portfolio and as you're getting all this great loan growth? I'm just curious on current positioning.
No, nothing significant, Glenn. No significant changes to our sensitivity.
Your next question comes from Betsy Graseck from Morgan Stanley.
Hey, good morning.
Morning, Betsy.
I had a question on the card strategy, and I know we all know that you've created the closed loop, and you're using that in part. It seems to drive really efficient pricing in the marketplace on the credit card products. What I'm obviously seeing is an increase in share on card issuance, and you're taking some nice share in the merchant space as well. I just want to understand what the goal is and how far you're willing to push this. Market share versus ROA, ROE.
Look, I would say that all of the things that you mentioned, whether it's the closed loop network, whether it's our new proprietary products, whether it's our investments in the technology platform and the business in merchant services, are all at good returns that ultimately will drive the business to be profitable in the future as it has been in the past. We haven't given specific guidance for ROE targets for this business, but nothing has changed over the medium term for what we think the performance of the business would be.
Is it fair to suggest that part of the market share improvement here is coming from some give up of profitability and the underlying question is really how much market share do you want in this business? You're already at 18%-22% market share of the credit card space, depending on which numbers you want to use.
Yeah, it's a very competitive business, and it's very profitable. All other things being equal, we would like to continue to gain share.
Your next question comes from the line of Ken Usdin from Jefferies.
Thanks. Good morning. Marianne, just wondering, you mentioned that part of the increase in consumer costs this quarter was planned investments and that you're continuing to self-fund. I'm just wondering, as you think forward, we get past this good year that you've had, will that be a kind of underlying expectation for you guys, again, with the understanding that the revenue environment will always take things up or down. Do you have an aspiration that you can continue to keep costs flat?
Look, we haven't given specific cost guidance going out beyond this year at this point, but our objectives will remain consistent with those that we stated previously, which is we continue to try and become more efficient across our businesses. As you know, we're at the tail end, but not finished on a couple of large expense programs in our largest businesses so that we create capacity to be able to invest in the businesses broadly, whether that's in products, in marketing, in investment, in innovation, all of which we're doing as much as we can, as long as we do it well. It's going to come down to if we think we have investment opportunities that we can execute well that have an appropriate return, we would like to keep doing that.
In order to have the right to do it, we would like to become more and more efficient in our core business operations. We haven't actually given guidance. I think I would characterize it as expenses under control, creating capacity to invest, but we will decision investments based upon their merits and obviously explain them to you in the future at Investor Day, if not another venue.
Understood. Okay, if I can come back to another Investor Day point from earlier this year. You had mentioned that you had felt comfortable with an 11% CET1. You plan to get to your CET1 to 12%. You're at 12.1 now already. Just within the construct of Governor Tarullo's recent commentary, does 11% still feel like the right time? Did you sense anything from the commentary that would change your philosophy around where you'd like to live and that potential comment you made at February to potentially go above 100 if in fact this was the right mechanism?
First of all, I would say that based upon the speech, and obviously you know that there are still some unanswered questions with respect to specific parts of the proposal, which I'll come back to. Based upon the speech, moving to a baseline minimum standard is more consistent with how we think about our capital management policy and using the capital stack add up, using our GSIB score and our stress drawdown, actually, you would come out with a capital constraint under CCAR that's pretty much on top of our regulatory capital minimum. In that sense, because of the offsets, because of the lack of balance sheet growth, lack of RWA growth, and the curtailment of capital distributions, we've actually ended up in a place where we look to be approximately equally bound based on last year's test by both of those two measures.
Which is a space we've played in for a while. As we've talked about before, we've been bound by many constraints, somewhat equally over a period of time, and striving to operate within that constraint and maximize shareholder value. I think the things we don't know are obviously how funding or liquidity shocks will be incorporated. In any case, this is not for the 2017 CCAR cycle, so it's a whole cycle away from now. We will be operating in 2017 under the same basic test constructs as we have previously. I don't think it's a clear and present danger necessarily that we will be able to look at payout ratios that are above the top end of our range. Meanwhile, we are at the top end of our range now.
Your next question comes from the line of Jim Mitchell from Buckingham Research.
Hey, good morning. Maybe just a quick follow-up on FICC and your commentary, and maybe you can have a broader commentary around how the widening LIBOR or rising LIBOR yields have helped your businesses across the board in FICC or anywhere else. Just help us understand how that's playing through the income statement.
Yeah. I would just, generally speaking, with respect to our rate sensitivity, as I think you know, we are most sensitive to the front end of the curve, but to IOER and Prime. We do have LIBOR-based assets, but also liabilities. A good example would be commercial loans on the asset side or long-term debt on the liability side, but our notional mismatch is not particularly big. As a consequence, the impact of LIBOR curve moves has been not very significant on our P&L. We wouldn't expect it to be. I will say that the LIBOR moves were one of the features that our rates business had a perspective around, and they got good client flow in and around that trade.
It was one of the catalysts, one of many, but one of the catalysts that we point to in terms of the ability for rates to monetize flow, as we had a lot of client flow around that conviction. I wouldn't be able to put a number on it for you.
Okay. Fair enough. Maybe just a follow-up on deposits. You guys had very good trends in retail, but on the institutional side, there was quite a bit of flow, it looked like, as well. Any particular drivers there? Was it money market reform helping the flows in institutional or something else?
We obviously did get some good inflows, liquidity flows in terms of money market reform into our government fund. We also have been very focused in our other wholesale businesses on continuing to attract operating deposits. As I look at our overall strong deposit growth, I wouldn't say it was equally, but it was pretty much equally wholesale operating and retail deposit growth. We feel good about both of those.
Your next question comes from Matt O'Connor from Deutsche Bank.
Good morning.
Good morning, Matt.
In light of some of the selling issues over at Wells Fargo, I was just wondering if you've thought about reevaluating how you approach the consumer, how you compensate staff. This is obviously not a JPMorgan specific question, but just for the overall industry, I think it's something that folks are wondering about. There's clearly some stuff that's black and white that you shouldn't do, but I think we also worry that there might be some gray areas that are somewhat less known. Just how are you thinking about the way you conduct business, and compensate staff in light of what's going on?
I might just give for context, remind you or maybe you recall that for a number of years now, for a fairly long time, we've been standing up at Investor Day and other venues saying that customer experience is the central tenet for how we think about engaging with all of our clients, but certainly our retail clients in the branches. We've been very focused on investing in customer experience broadly defined and have made great progress, I think, in doing that. We had talked about the fact that what we are looking for very clearly is deep customer relationships, engaged customers who want to be a primary bank. We want to gather a deeper share of wallet, so balances, not necessarily products. Again, remember saying, cross-sell is an outcome, it's not an objective.
That's certainly the philosophy with which we have designed our compensation and performance structures for the branches. We review them regularly, at least annually, to make sure that they continue to be aligned with our objectives. Again, objectives about the engaged relationship with customers, good customer experience in the right products for the right reasons, the right way. As we think about those objectives and how we've designed our plan, and as we look inwardly, not just obviously because of the news now, but also, regularly in our BAU capacity, we feel like our plans are designed to incent those behaviors.
Okay. That's helpful. Thank you very much.
Your next question comes from Erika Najarian from Bank of America.
Hi, good morning. Just a question. Back to CIB, you had a slide during Investor Day that showed a walk to $19 billion of expenses by 2017. If some of the factors that you mentioned that drove revenues into CIB higher repeat for 2017, is that $19 billion number still achievable? I guess, a better way to ask it, will any incremental revenue uplift from here fall to the bottom line?
I would say first of all, I'll tell you we're on track with respect to the commitments that Daniel made to you to deliver over time the $2.8 billion of expense saves. While we are not finished yet, we are substantially through that program. It's moved from being a plan through execution to being in the later stages of execution. We feel very good about that, which means that all other things equal, that $19 billion is still a reasonable level of expense target. However, obviously, we pay for performance, clearly, if we have significant outperformance next year relative to our expectations at the time of setting those plans, there would be some variable costs associated with it. For every dollar of outperformance, the variable cost may not always be the same.
Obviously, it also depends upon the mix and the payout ratios and all those sorts of things. A large portion of it would be. It would be obviously, as you know, incredibly accretive because we would be leveraging all of our scale. The only variable cost would really be comp, largely.
Got it. Just as a follow-up to that, a follow-up to Ken's question, actually. He mentioned the stress capital buffer. Outside of the static balance sheet and capital distribution offset, is there an element to this in terms of just getting better at the test that you could do to reduce that stress capital buffer without actually taking risk down significantly?
First of all, based upon last year's results for us, we are at the floor for the Stress Capital Buffer. Not to suggest, by the way, that we wouldn't continue to want to properly understand and better understand how we can, through time, make sure that we are performing the best we can under stress within our risk appetite. We are at that floor right now. Within those constraints, what we're trying to do is to be within our risk appetite, manage risk properly, but also add shareholder value. We have to carry that capital anyway, so we would want to use it, but use it well.
Your next question comes from Tim Hayes from FBR.
Hi, this is Tim Hayes for Paul Miller.
Hi, Tim.
Can you give any color on your outlook for margin throughout 2017? To me, Fed commentary suggests that rates could remain low and potentially hover around these levels over the next 12 months. How could we think about your NIM in that type of scenario? What would a December rate hike do for your outlook?
Just for your purposes, I'm going to talk about NII. We don't really manage to NIM, but you can obviously back into it. If we ended up in a situation right now where rates were flat throughout all of 2017, which for what it's worth, I don't think is pretty much anyone's central expectation right now. If we were rate flat, you've seen us grow our core loans and our loan balances pretty strongly, pretty consistently across businesses. While we may not be able to replicate a 15% core loan growth forever, certainly we can continue to grow our loans. On that plus mix shift away from securities over time, we should be able to deliver $1.5 billion of incremental NII next year, rates flat.
You know that if we're fortunate enough for the right reasons, that we see a hike this year at the end of this year and get the full benefit of that next year. It will be higher than that. You've seen our earnings at risk disclosures. They've been pretty close to a $3 billion number on 100 basis point move for a while, most of which is front end.
Okay, thank you. Switching gears. Your CRE and C&I lending was pretty strong this quarter. Regulators have obviously grown a little bit more cautious on those segments. If you could just give any color for your outlook on lending to those segments going forward.
Yeah. Look, we're aware, obviously, of the riskier types of our lending, the types of lending that attract scrutiny for reasonable reasons, considering how they performed in past cycles. We're also mindful of where we are in the cycle and take that into consideration in our underwriting. We have and continue to avoid what I would characterize as the riskier segments and those segments that performed poorly in previous cycles. We really stick to our knitting, if that's an American expression, in terms of continuing to do what we're good at within our risk appetite.
If you think about our commercial real estate growth, commercial term lending is about three-quarters of our portfolio, you know that we're very focused on smaller loan size, Class B, Class C properties with low vacancy rates, so rent stabilized, supply-constrained markets, underwrite to low LTVs, good debt service coverage. We look at forward rates and current rents. We really have an expertise in a specific niche, and we compete on speed and certainty of execution, not on credit and structure. We feel pretty good about our exposures. Even in the more traditional real estate banking space, we have avoided the riskier segments with limited construction lending exposure. Home builders, minimal exposure. We're pretty disciplined about it.
Your next question comes from Eric Wasserstrom from Guggenheim.
Thanks very much. Marianne, at a conference just before the end of the quarter, another bank talked about improving underwriting conditions in the auto lending space, particularly sort of in the mid to lower FICO range. Are you seeing anything similar?
We're a primarily prime lender in auto. We're the number one prime lender. We actually have the lowest share in subprime among national banks. It's less than 5% of our origination. I wouldn't speak specifically to underwriting in the lower FICO sectors, not where we play-
Sure.
At this point.
Sure. I think the reference was to below 700, which includes sort of the bottom end of the prime segment, which has been an area of intense competitive focus. I'm just wondering if you've seen anything in that segment.
Not that I would comment on, except for we have recently decided to pull back on 84-month-plus term loans on all FICO bands, just as where we are in the cycle and as we see the risks of that type of lending. We continue to calibrate our underwriting, but I wouldn't comment on seeing anything specifically.
Got it. Is that influencing your reserve expectations for consumer at all?
Auto?
Yes.
We built $25 million of reserves this quarter for auto, and we expect to continue. We think the auto opportunity is still strong. We have a great franchise. We have great manufacturing partnerships that are growing strongly, too. As we grow that portfolio, I would expect us to continue to grow reserves modestly in 2017. However, we are expecting charge-offs to stay under control.
Your next question comes from the line of Steve Chubak from Nomura.
Hi, good morning.
Good morning.
Marianne, I appreciated your remarks on the latest guidance from Tarullo relating to GSIB Capital. One of the questions we've been getting from a lot of folks is because this SCB is calculated based on stress losses year-to-year, and historically CCAR results have been pretty volatile. I'm wondering how you're thinking about the appropriate management cushion or buffer above the minimum. Historically, it had been about 50 basis points just for AOCI volatility and maybe operational risk losses. Do you now have to also handicap CCAR volatility when thinking about that cushion?
Yeah. You're right, and obviously even specifically for JPMorgan, if you look at our stress results calculated by the Fed over the course of the last three years has been reasonable volatility. Clearly, it's not the case that we would expect it to be completely stable. I would not expect to see the same levels of volatility going forward as we've seen historically as the test has, as you know, over time, occasionally included new, not insignificant features. While that may continue to be the case, I would think that there'd be a bit more stability. We haven't actually gone through and finalized our thinking about what the buffers would look like.
Yeah, understood. One more question, just thinking about capital management priorities. Given that the new proposal, as you noted, allows for curtailment of the buyback or termination of the buyback and then curtailment of the dividend halfway through the test, do these changes, as well as the softening of the 30% dividend cap, alter your thinking about how you prioritize buybacks versus dividends?
Yeah. Before I talk about the prioritization of capital distributions, I would just start by saying our capital management policies prior to this year's CCAR and this year's resolution had us making those actions regardless of whether they were allowed to be reflected in a test. Obviously, as part of the resolution planning, we have revised our policies to include more granular triggers. Our policies do, with some specificity and pretty granularly through time, through a stress, speak to the sorts of actions that we would be leaning into and taking, even if they don't get reflected in the test. With respect to the prioritization, look, the soft cap on dividends has been lifted. Dividends are ultimately still a part of the baseline minimum standard. There will be possibly some natural constraint there.
It hasn't changed at this point anyway, the board's determination or management's determination about the order of priority. We would like to continue to have the capacity to grow our dividends. I think, even though there may be some natural constraints, I think it would be above 30.
Your next question comes from Gerard Cassidy from RBC.
Thank you. Good morning, Marianne.
Good morning, Gerard.
A quick question. You pointed out that about three-quarters of your credit card acquisitions, organic growth are coming through mobile channels or digital channels, I should say. Can that be moved over to other consumer products, or is it just unique to credit cards that you're going to be able to generate that much growth through the digital channel?
We are very focused across the spectrum of our businesses on developing better digital capabilities to allow seamless engagement with customers and acquisition through digital channels. There are complexities associated with documentation and standards for know your customer and anti-money laundering that we're continuing to work through, but ultimately it should be achievable, and we're working on it. One of the things that we have previously mentioned is that majority of our consumer accounts are opened in branches. One of the reasons, among others, why branches are so important to us as well as advice centers, and we'll continue to work on trying to see how far and how fast we can move people to be able to have a better digital experience opening accounts with us.
Okay, thank you. As a follow-up, obviously third-quarter results in investment banking were very strong. Fourth quarter seasonally is weaker than third quarter, as you pointed out. Are there any other reasons why you think the fourth quarter numbers may be weaker than the third quarter, other than the traditional seasonality?
I'll start by pointing out that all of our businesses, not just the ones that I talked about at the high level, not just macro spread equities, but even if you go a level below that, quite granular, all of our businesses did really quite well this quarter. Not to overuse the phrase, firing on all cylinders, but it really was pretty consistent. Normally you might see pockets of more strength and less strength. I think it would be hard to imagine replicating this kind of strength through time consistently. The fourth quarter is seasonally low, and we have no reason to expect that it would not be.
Your next question comes from Betsy Graseck from Morgan Stanley.
Hi. Hey, I just wanted to follow up on FRTB and Basel IV and how you're thinking about the implications for JPM at this stage.
There isn't a whole lot of really clear new news. As we think about all of the FRTB we talked about before, modest and manageable, nothing about that has changed for us. Obviously there's the advanced and standardized credit operational proposals out there. The most important thing that we've yet to, and there are pluses and minuses in it and different for us than others maybe, but, the one thing that we haven't really heard about yet, Betsy, is how it will all be calibrated, and calibration will be very important. We're expecting to hear over the course of the next short while, and maybe that will be delayed some just given some of the discussions. We'll update you when we hear a bit more about how it's all going to come together. Right now it's still a little unclear.
Okay, thanks.
There are no further questions at this time.
Many thanks, everybody.
This concludes today's conference call. You may now disconnect.