Good morning, ladies and gentlemen. Welcome to JPMorgan Chase'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 standby. At this time, I would like to turn the call over to JPMorgan Chase's Chief Financial Officer, Mary Anne 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 1 and taking a look at the quarter, we had strong performance in each of our businesses, despite the continuation of reasonably challenging conditions.
And bringing it all together, this quarter's result was clean with no significant items and with the firm reporting net income of $6,300,000,000 EPS of $1.58 and a return on tangible common equity of 13% on $25,500,000,000 of revenue. Highlights of the quarter include the highest reported revenue for a 3rd 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. And 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. There was 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 is in the best interest of the company, albeit at some cost. And 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 2. Revenue of $25,500,000,000 was up $2,000,000,000 year on year or up 8%. On the back of continued strong growth in core loans, net interest income was up $700,000,000 and is trending for the full year to be above the $2,500,000,000 guided last quarter. Non interest revenue was up $1,300,000,000 driven by strong performance in the CIB. Adjusted expense of $14,500,000,000 was up $500,000,000 both year on year and quarter on quarter, largely driven by 2 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 $1,300,000,000 in the quarter includes consumer reserve builds of $225,000,000 primarily card, but against that we have a net reserve release in wholesale for oil and gas of about $50,000,000 So as I said, net income was $6,300,000,000 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 $800,000,000 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. So a combination of pay downs, 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 Q4 for energy. Moving to Page 3 in capital. Key takeaways from this page. Capital and leverage ratios were broadly flat quarter on quarter with a CET1 ratio of 11.9 percent as net capital generation was offset by strong loan and commitment growth. Our spot balance sheet closed a little over $2,500,000,000,000 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 $23,000,000,000 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 $3,800,000,000 of net capital to shareholders, including $2,100,000,000 of net repurchases and common dividends of $0.48 a share. Moving on to Page 4 and Consumer and Community Banking. Consumer and Community Banking generated $2,200,000,000 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. And based on the FDIC survey for 2016, we were number 1 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, and with more than 3 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.
So to close on drivers, we saw merchant processing volumes up 13% and our active mobile customer base up 17%. Revenue of $11,300,000,000 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 MSR risk 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 and 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.
And while the new account origination costs do cause a near term drag on revenue, it's a high class problem to have as we expect these accounts will be strongly accretive over time. Looking forward, assuming strong demand for Sapphire Reserve through the 4th quarter, we would expect revenue for CCFA to be down about $200,000,000 quarter on quarter on higher acquisition costs, but it will clearly be dependent on the number of new accounts originated. Expense of $6,500,000,000 is up year on year, as I said, driven by 2 notable items, totaling $175,000,000 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 $250,000,000 in marketing and auto lease growth, which is in line with Investor Day guidance and largely self funded with expense efficiency.
Finally, the credit environment remains favorable. In card, we built $200,000,000 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 Q2 and consistent with how we underwrite the loans. And in auto, we built $25,000,000 of reserves on the back of high quality loan growth. Now turning to Page 5 and the Corporate and Investment Bank.
Total revenue to CIB of $9,500,000,000 up 16% year on year was the best reported performance for a 3rd quarter and included the highest IBCs on record for a 3rd quarter too, up 15%, With strong market 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 $2,900,000,000 of net income and a 17% ROE this quarter. Diving deeper, IB revenue of $1,700,000,000 was up 14% year on year with strong performance across products. We ranked number 1 in global IV fees, maintaining share on a year to date basis and ranked number 1 in North America and EMEA.
Advisory fees were up 8% year on year, and we continue to rank number 2 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 1 in wallet globally and in North America and EMEA, We also ranked number 1 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 and yields near record lows.
Fees were up 12% from a high watermark last year, and we ranked number 1. In terms of outlook, given the strength this quarter, we expect IV fees to be down in the Q4 sequentially but relatively flat year on year. Markets revenue of $5,700,000,000 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 Q3 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 in emerging markets matched a very strong Q3 last year, but was slowed down slightly. And 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 Q3 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 $900,000,000 with strong forward pipelines and levers to higher rates.
Moving on to Page 6 in Commercial Banking. Commercial Banking reported record net income of $778,000,000 on revenue of $1,900,000,000 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 and I and CRE, outperforming the industry. C and 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 7 new offices and further built out our specialized industry coverage. And 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, 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 7.
Asset Management reported net income of $557,000,000 with a 29% pretax margin and an ROE of 24%. Revenue of $3,000,000,000 was up 5% year on year, driven primarily by strong banking results on higher loan and deposit spreads. Expense of $2,100,000,000 was up slightly year on year up 2% sequentially on higher incentive compensation. We saw positive long term flows of $19,000,000,000 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 $22,000,000,000 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 $1,800,000,000,000 and $2,400,000,000,000 respectively, driven by markets as well as long term flows. Our long term investment performance remains solid, with 80% of mutual fund AUM in the 1st or second quartiles over 5 years. Lastly, we have record loan balances of $114,000,000,000 up 5% year on year, driven by mortgage. Skipping over Page 8 and corporate, where the results were very close to home and where there are no significant items to highlight. So turning to Page 9 and the outlook.
Looking forward to the 4th 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 Q4. 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 $50,500,000,000 plus or minus for the full year, market dependent. Finally, expect adjusted expense in the 4th quarter to be flat year on year, bringing full year expense in at approximately $56,000,000,000 consistent with our guidance and self funding the consumer items I mentioned. So 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. And 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.
Can you talk about the competitive environment in Capital Markets? I mean, you had a strong growth. Is that due to better markets, better share or both?
So I think there's just three things 3 or 4 things to mention. The first is that I would say that the industry generally had a pretty weak Q3 last year. And so when you think about the year over year comparison, we are a little flattered by last year performance, not necessarily more so than our peers, but nevertheless we are. And then 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. So 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, with the first two reports apart from Citi this morning, it feels like we did relatively well. So we may have gained some share. Certainly, hopefully, the momentum in terms of 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. But obviously, there can be a bit of volatility in the market share space.
So 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?
So I would say we don't specifically target competitive sets to but 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. So if any peer is more leverage constrained and has less access, we may have a 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.
Hi, Glenn.
Hi, thanks very much. Curious on your on card delinquencies ticking up. I know you've been guiding towards that, but when you see it, it's the only part of credit that has any thing but great trends. You mentioned on your comments, newer vintages will have a higher loss rate than the portfolio average. Can 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 season as you thought?
So 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. I mean, partly because obviously at 250 ish basis points, I think we could call that pretty low historically. But 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. So we're getting paid for that. So we're doing it within our risk appetite, doing it judiciously.
But 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. So what we're seeing in terms of the delinquency uptick and the charge off gradual increase is completely in line how we underwrite those loans and our expectations. And so 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. 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, Graeme. No significant changes to our sensitivity.
Your next question comes from Betsy Graseck from Morgan Stanley.
Hey, good morning.
Good morning, Betsy.
I had a question on the card strategy. And I know, we all know that you've created a 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?
So 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 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. So we haven't given specific guidance for ROE target for this business, but nothing has changed over the medium term for what we think that the performance of the business would be.
But 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, how really how much market share do you want in this business? You're already at 18% to 22% market share of the credit card space depending on
which numbers you want to use?
Yes. I mean, it's a very competitive business and it's very profitable. So 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. Mary, I'm just wondering, you mentioned that part of the increase in consumer cost this quarter was planned investments and that you're continuing to sell fund. I'm just wondering, as you think forward and 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? But do you have an aspiration that you continue to keep costs flat?
So I mean, look, we haven't given specific cost guidance going out beyond this year at this point. But our objective 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 product, in marketing, in investment, in innovation, all of which we're doing as much as we can as long as we do it well. And so 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. And in order to have the right to do it, we would like to become more and more efficient in our core business operations.
So 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. And if I can come back to another Investment Day point from earlier this year, you had mentioned that you had felt comfortable with an 11% CET1. Plan to get to your CET1 to 12%, you're at 12.1 now already. Just within the construct of Governor Tarula'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?
So 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. But 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 sort of capital constraint under CCAR that's pretty much on top of our regulatory capital minimum. So 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. We've been as we've talked about before, we've been bound by many constraints somewhat equally over a period of time and striving to sort of operate within that constraint and maximize shareholder value.
I think the things we don't know are obviously how funding or liquidity shock will be incorporated. And in any case, this is not for the 2017 CCAR cycle. So it's a whole cycle away from now. So we will be operating in 2017 under the same basic test construct as we have previously. And so 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 a broader 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.
Yes. So I was 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. So 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. And so as a consequence, the impact of LIBOR curve moves has been not very significant on our P and 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. And so 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. But I wouldn't be able to put a number on it for you.
Okay. Fair enough. And maybe just a follow-up on deposits. You guys have 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 perform helping the flows in institutional or something else?
Well, I think I mean, we obviously did get some good inflows, liquidity flows in terms of market reform into our government fund. But we also have been very focused in our other wholesale businesses on continuing to attract operating deposits. And so 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. So 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. And 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. So just how are you thinking about kind of the way you conduct business and compensate staff in light of what's going on?
So I will just 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 sort of central tenant for how we think about engaging with our well, all of our clients, but certainly our retail clients in the branches. And we've been very, very focused on investing in customer experience broadly defined and have made great progress, I think, in doing that. And also we had talked about the fact that what we are looking for very, 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.
And so, again, remember saying, cross sell is an outcome, it's not an objective. And that's certainly the philosophy with which we have designed our compensation and performance structures for the branches. And we review them regularly, at least annually to make sure that they continue to be aligned with our objectives. And again, objectives about the engaged relationship with customers, good customer experience in the right products for the right reasons the right way. And so 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, you on back to CIB, you had a slide during Investor Day that showed a walk to $19,000,000,000 of expenses by 20 17. If some of the factors that you mentioned that drove revenues in the CIB higher repeat for 2017. Is that $19,000,000,000 number still achievable? Or I guess a better way to ask it, will any incremental revenue uplift from here fall to the bottom line?
So I would say, first of all, I would say we are on I'll tell you we're on track with respect to the commitments that Daniel made to you to deliver over time the $2,800,000,000 of expense saves. While we are not finished yet, we are substantially through that program. So it's moved from being a plan through execution to being in the later stages of execution. So we feel very good about that, which means that all other things equal that $19,000,000,000 is still a reasonable level of expense target. However, obviously, we pay for performance.
And so 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. But for every dollar of outperformance, the variable costs may not always be the same. So obviously, it also depends upon the mix and the payout ratios and all those sorts of things. But a large, large portion of it would be. It would be obviously, as you know, incredibly accretive because we will be leveraging all of our scale.
So the only variable cost would really be comp largely.
Got it. And 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?
So, well, 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, but we are at that floor right now. So 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 Paul Miller from FBR.
Hi, this is Tim Hayes for Paul Miller.
Hi. Can you give
any color on your outlook for margin throughout 2017? To me, Fed commentary suggests that rates could remain low and potentially have around these levels over the next 12 months. So how can we think about your NIM in that type of scenario? And then what would a December rate hike do for your outlook?
Okay. So I 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. So 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.
And while we may not be able to replicate 15% core loan growth forever, certainly, we can continue to grow our loans. So on that, thus, mix shift away from securities over time, we should be able to deliver $1,500,000,000 of incremental NII next year, right flat. You know that if rates are 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. And you've seen our earnings at risk disclosures.
They've been pretty close to a $3,000,000,000 number on a 100 basis point move for a while, most of which is front end.
Okay. Thank you. And then switching gears, your CRE and C and I lending was pretty strong this quarter and regulators have obviously grown a little bit more cautious on those segments. So just kind of if you could just give any color for your outlook on lending to those segments going forward?
Yes. So, look, we're aware obviously of the riskier types of sorry lending, the types of lending that attract scrutiny for reasonable reasons considering how they performed in par cycles. We're also mindful of where we are in the cycle and take that into consideration in our underwriting. So we have and continue to avoid what I would characterize as the riskier segments and those segments that performed poorly in previous cycles. And 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.
And so if you think about our commercial real estate growth, commercial term lending is about 3 quarters of our portfolio. And you know that we're very focused on smaller loan size, Term B sorry, 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. And so we really have an expertise in a specific niche and we compete on speed and certainty of execution, not on credit and structure. So we feel pretty good about our exposures and even in the more traditional real estate banking space, we have avoided the riskier segments with limited construction lending exposure, homebuilders, 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?
So we're a primarily prime lender in auto. We're the number one prime lender. We actually have the lowest share in subprime among the national banks. So it's less than 5% of our origination. So I wouldn't speak specifically to underwriting in the lower FICO sectors, not where we say at this point.
Sure, 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?
So we have not that I would comment on except for we have recently decided to pull back on 84 months plus term loans on all cycle bands just as we where we are in the cycle as we see the risks of that type of lending. So we continue to calibrate our underwriting, but I wouldn't comment on seeing anything specifically.
Got it. And is that influencing your reserve expectations for consumer at all?
Auto?
Yes.
We've built $25,000,000 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. So 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 Schubach from Nomura.
Hi, good morning.
Good morning.
So, Mary Anne, I appreciated your remarks on the latest guidance from Teruelo relating to GSIB Capital. One of the questions we've been getting from a lot of folks is because this SEB is calculated based on stressed 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 had been about 50 bps just for AOCI volatility and maybe operational risk losses. But do you now have to also handicap CCAR volatility when thinking about that cushion?
Yes. So 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 3 years has been reasonable volatility. And clearly, there's not it's not the case that 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.
And while that may continue to be the case, I would think that there'd be a bit more stability. But we haven't actually gone through and finalized our thinking about what the buffers would look like.
Understood. And 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?
Yes. I just 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 the test. And obviously, as part of the resolution planning, we have revised our policies to include more granular triggers. So our policies do, with some specificity and pretty granularly through time, through 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. So 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. And 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, Mary Anne.
Good morning, Jarrod.
A quick question. You pointed out that about 3 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?
So 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. So 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 still 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. And then as a follow-up, obviously, Q3 results in Investment Banking were very strong, 4th quarter seasonally is weaker than 3rd quarter as you pointed out. Are there any other reasons why you think the 4th quarter numbers may be weaker than the 3rd quarter other than the traditional seasonality?
Well, I would just I'll start by pointing out that all of the businesses, 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. So not to overuse the phrase firing on all cylinders, but it really was pretty consistent. And normally, you might see pockets of more strength and less strength. So I think it would be hard to imagine replicating this kind of strength through time consistently. But the Q4 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. I just wanted to follow-up on FRTB in Basel IV and how you're thinking about the implications for JPM at this stage?
So there isn't a whole lot of really clear new news. So as we think about all of the FRTB, we've talked about before, modest and manageable, nothing about that has changed for us. But obviously, there's the advanced and standardized credit operational proposals out there. The most important thing that we've yet to really 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.
So 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. And we'll update you when we hear a bit more about how it's all going to come together. But right now, it's still a little unclear.
Okay, thanks.
There are no further questions at this time.
Many thanks everybody.