Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Second Quarter 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 standby. 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.
Thank you, and good morning, everyone. I'm going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer regarding forward looking statements at the back of the presentation. Starting on Page 1, the firm reported net income of $6,200,000,000 EPS of $1.55 and a return on tangible common equity of 13% on $25,200,000,000 of revenue, a strong result this quarter, particularly given the backdrop. And while there are no significant items shown here on the page, our underlying performance was even stronger if you exclude the impact of other notable items, primarily credit, legal and tax, all of which you'll hear about as I go through the presentation.
And that strength was driven by increased client trading activity across markets and an improvement in IB fees compared to the Q1 as well as strong core loan growth of 16%, reflecting good demand across both consumer and wholesale and record consumer deposit growth, up $54,000,000,000 Before I go through the results, let me spend a moment on 2 topics that are top of mind. First, an update on wholesale credit. You will see that the total wholesale credit costs this quarter were approximately $200,000,000 Within this, charge offs of $150,000,000 were principally driven by oil and gas and metals and mining, and those charge offs were very substantially offset by reserve releases, so they were previously reserved, which means that underlying the net $50,000,000 reserve build, we saw incremental reserve actions this quarter of about $200,000,000 principally one energy name downgraded in the CIB. Although the oil and gas sector remains stressed and reserves will continue to be idiosyncratic, overall trends have been somewhat positive with oil prices continuing to stabilize and firming sentiment in the sector improving access to capital markets. In addition, outside of energy, we still have not seen contagion or deterioration in our wholesale or consumer credit portfolios.
2nd, on Brexit, uncertainty running up to the referendum led to a risk off environment and following the decision, the markets were quite volatile as expected and volumes were materially higher in the immediate aftermath. The market functioned quite well, absorbing the volatility and despite the significant increases in volumes, our systems were stable, and we continue to support client activity with decent trading performance. With respect to next steps, as you know, the ultimate relationships between the U. K. And the European Union broadly and access to the single market and passporting specifically will likely unfold slowly and over an extended period, depending on when Article 50 is invoked.
We continue to work on plans for the full range of outcomes, but we will be appropriately patient. The most important point is that we remain committed to fully supporting our European and U. K. Clients across businesses, and we will be fully able to do this. And while executing against certain of these options would be complex, ultimately, we will protect the franchise and minimize any friction costs so that they will be manageable for the company.
Moving on to Page 2. Revenue of $25,200,000,000 was up $700,000,000 year on year on higher net interest income. For the full year, expect NII to be up more than the $2,000,000,000 we guided at Investor Day, despite headwinds from a flatter yield curve. Given that our sensitivity is significantly skewed to the front end of the curve and our industry deposit REIT price to date has remained low, coupled with continued strong loan and deposit growth. Non interest revenue was flat year on year, with the increase in markets revenue being offset by declines in IB fees as well as asset management.
Adjusted expense of $14,100,000,000 was down $140,000,000 reflecting continued progress against our commitments. We still expect full year expense of $56,000,000,000 plus or minus as the second half of the year includes our expectation of an increase in the SEI surcharge in the 3rd and 4th quarters. Moving on to capital on Page 3. The firm's advanced fully phased in CET1 ratio was 11.9%, with standardized at 12.1%, both up about 15 basis points from the prior quarter. The improvement in both ratios was driven by net capital generation with RWA remaining relatively flat.
Firm SLR remained flat to the prior quarter at 6.6% as capital generation was offset by balance sheet growth. This quarter, we returned $4,400,000,000 of net capital to shareholders, including $2,600,000,000 of net repurchases and common dividends of $0.48 a share. Finally, we're pleased we did not receive an objection to our capital plan and the Board authorized gross repurchases of up to $10,600,000,000 Moving on to Page 4 and Consumer and Community Banking. Consumer and Community Banking generated $2,700,000,000 of net income with an ROE of 20%, reflecting continued strength in business drivers. We had record deposit growth again this quarter, up 10% year on year.
Average loans were up 11% with core loans up 23%, driven by mortgage and auto, but with continued strength across all products. And we had record business banking loan originations of $2,200,000,000 up 14% year on year and with a strong pipeline up 17%. We added nearly 2,000,000 households year on year with an increase of 700,000 since last quarter, reflecting strong acquisition trends, including the launch of Freedom Unlimited. And finally, our active mobile customer base remains the largest among U. S.
Banks, up 18%. Revenue of $11,500,000,000 included some non core items, which contributed a little under $200,000,000 principally a one time gain on Visa Europe and negative mark to market on Square. Adjusted for this, revenue was up 2%. Consumer and Business Banking revenue was up 3%, reflecting strong deposit and account growth. Mortgage revenue was up 5% with rates remaining low supporting production margins and on growth in NII as we added $14,000,000,000 of high quality loans to our portfolio this quarter, partially offset by lower servicing revenue.
Card, Commerce Solutions and Auto revenue was up, but flat if you exclude the non core items I mentioned, with growth in card and auto offsetting the impact of card renegotiations. Expense was down 3%, driven by lower legal expense and continued progress against our efficiency commitments, allowing us to fund the incremental marketing and auto lease growth that we talked about at Investor Day. Finally, credit trends across the consumer businesses continue to be favorable with charge offs in card trending up slightly. Over the last 2, 3 years, we have responsibly expanded our credit box in card in the prime and near prime space. As these vintages season, we would naturally expect a higher loss rate and performance is in line with our expectations.
These loans are coming on at ROEs higher than the portfolio average. So as the mix of our portfolio increasingly reflects these newer vintages, we do expect loss rates to continue to trend up, but to do so slowly. And as such, we built $250,000,000 of reserves this quarter. Moving to auto credit, competitive pressures have caused some lenders to take more layered risk. We have maintained our underwriting discipline with average FICO scores and LTVs better than the industry and with a very sharp focus on avoiding risk layering.
Our credit performance is in line with expectations and we built $50,000,000 in reserves this quarter, largely reflecting volume growth. Against these reserve builds, we saw releases of $125,000,000 principally driven by mortgage. Turning to Page 5 and the Corporate and Investment Bank. CIB reported net income of $2,500,000,000 on revenue of $9,200,000,000 and an ROE of 15%. In banking, IB revenue was $1,500,000,000 down 15% in a market down 18%, largely driven by lower equity underwriting fees.
We maintained share and ranked number 1 in Global IB fees, ranking number 1 in North America and EMEA. Advisory fees were flat versus a wallet that declined 15%. This quarter, we ranked number 2 globally and grew share by 50 basis points. In equity underwriting, global issuance improved after a weak Q1, but was down from a strong quarter last year, with fees down 37% and a market down 42%. We continued to rank number 1 globally, growing share by 30 basis points and we ranked number 1 in every product category for the first half of this year.
Net underwriting fees were down 2% from a strong prior year, largely in line with the market which was down 4%, and we ranked number 2 globally. Moving on to the outlook for fees. Given the decline in M and A volumes, lower wallet is expected in the second half of twenty sixteen. We expect to see positive momentum in ECM as the new issuance market continues to improve, and we expect DCM to be broadly in line with the first half, reflecting robust high grade bond issuance offset by lower acquisition finance. Lending revenue of $277,000,000 was down 8%, reflecting mark to market losses on hedges of accrual loans.
Markets revenue of $5,600,000,000 was up 23% year on year. As I mentioned at the beginning, the Brexit vote triggered a spike in volatility and volumes across asset classes. We were able to meet our clients' needs, execute their transactions and provide liquidity. Fixed income revenue of $4,000,000,000 was up 35% versus a weak Q2 last year. The positive momentum that we saw in March continued into the Q2 with strong performance in rates and currencies in emerging markets on higher client flows, and performance also improved in credit and securitized products as client risk appetite recovered in a more stable environment, driving increased primary and secondary market activity.
Equities revenue was 1,600,000,000 dollars up 2% compared to a strong second quarter last year. With respect to the quarter, client activity is returning to more normal levels and trading performance so far has been fine. Credit costs of $235,000,000 were driven by a reserve build for oil and gas. And finally, expense of $5,100,000,000 was down 1% year on year with a comp to revenue ratio for the quarter of 30%. Moving on to Page 6 and Commercial Banking.
Overall, a solid quarter for Commercial Banking with net income of nearly $700,000,000 on revenue of 1,800,000,000 dollars and an ROE of 16%. IB revenue rebounded from the Q1. It was up 23% sequentially and flat year on year. And we continued to see strong momentum in loan growth, with average loan balances up 13% year on year. Commercial real estate loans grew 18%, reflecting continued outperformance in both commercial term lending and real estate banking, and C and I loans were up 9% on increased origination activity in both corporate client banking and middle market.
Revenue was up 4% year on year, driven by higher deposit NII and loan growth. And expense of $731,000,000 was up 4%, reflecting continued investments in bankers and technology. Finally, credit performance continues to be in line with our expectations, with net charge offs of 14 basis points, driven by oil and gas, but almost fully reserved. And outside of energy, credit performance continues to be strong. Moving on to Page 7 and Asset Management.
Asset Management reported net income of $521,000,000 with a 29% pre tax margin and an ROE of 22%. Revenue of $2,900,000,000 was down 7% year on year as we continue to feel the impact of weaker markets, lower performance fees and lower brokerage activity. Expense of $2,100,000,000 was down 13% year on year, largely driven by lower legal expense and recall that the prior year included a non call off. AUM of $1,700,000,000,000 and client assets of $2,300,000,000,000 were both up 1% sequentially and down 5% and 3% year on year respectively. We had positive long term flows of $3,000,000,000 as we continue to see strong net inflows into our fixed income products, with equity market weakness and volatility causing clients to derisk resulting in outflows in equity and multi asset.
Our long term investment performance remained good, with 81% of mutual fund AUM ranked in the 1st or second quartiles over 5 years. Lastly, we had record loan balances of $112,000,000,000 up 4% year on year, driven by mortgage, up 20%. Turning to Page 8 and corporate. Corporate reported a net loss of $166,000,000 which included 2 notable items. There was a net legal benefit reflecting some favorable developments in the quarter, offset by a number of tax items, including additions to tax reserves the developments relating to open audit periods.
As a result of the tax items, our managed tax rate for the quarter was 39%, Adjusted, it would have been closer to 36%. Now turning to Page 9 and moving on to the outlook. To reiterate, our firm wide guidance for the full year on each of revenues, expenses and charge offs at this point is largely unchanged, obviously market dependent. So to wrap up, a strong quarter reflecting our leadership positions and the benefits of our diversified franchise, with the consumer businesses firing on all cylinders and with robust loan growth across all businesses. We had a good result in markets continuing to demonstrate our ability to support clients no matter the environment.
And just before I open up to Q and A, just for those of you on the phone, Jamie is here. He has a very hoarse voice, so we'll try and use it sparingly. But if you hear him properly, that's why. Operator, open up the line, please.
It comes from the line of Brian Boron with Autonomous.
Good morning.
Good morning, Brian.
I know it's very early, and it's probably limited in what you say because you mentioned, it depends on the timeline of Brexit and how passporting works. But is there any kind of qualitative thoughts you can give us around the operational and or legal issues we should be watching as this develops, legal entity restructuring, net impacts of, moving people versus lower cost geographies and things like that?
Well, let's see, Brian. I know that everybody is keenly interested to hear what we have to say. But the truth of the matter is, it's very, very early days. The new government is just forming as we speak. Negotiations need to be given some time to unfold and take shape.
And so it's really too early to hypothesize that we would hope that we can continue to operate the way we are right now, but we will just continue to evaluate the landscape, as I'm sure you will, over the coming weeks, months and quarters and plan accordingly. The most important thing is that we intend to continue to support our European franchise and clients throughout.
I appreciate that. And maybe switching gears, you mentioned the consumer business was firing on all cylinders. Clearly, there's some nervousness in the market that the credit cycle is turning. So I wonder if you could touch on 2 things, which are maybe a little bit more detail on the seasoning impact you saw, you mentioned in card, is it just seasoning or is there any like for like deterioration? And then in auto, you mentioned risk layering.
What particular factors are you seeing layered in the underwriting box that make you concerned right now?
Yes. So on the card space, we as you know, we have loans running off. We're replacing them all over the time. Over the course of the last couple of years since the end of 2013, we made some changes to our credit box and our credit risk policies very, very thoughtfully, and we've been monitoring them very closely. And what we're seeing in terms of the loss rates and the seasoning of them is fully in line with our expectations.
And these loans are coming on at higher risk adjusted margins. So the ROEs are at or above the portfolio ROEs. So nothing that would speak to anything other than our full expectations for our credit risk appetite. And with respect to auto, not to speak for others, but obviously, when you look at lower FICO scores and higher LTVs and longer terms on top of each other in an environment where you've already seen used car prices soften some and they're likely to continue to do so, it's something to watch. And so we've been very, very thoughtful about that, not just today, but as we've been going through the cycle.
And not only on an absolute basis do we compare favorably in terms of LTVs and FICO scores and even terms to the industry, but we've been very, very careful in and low percentage of subprime origination, very, very careful about looking at those layered risks. So nothing in our and remember for auto this year, I think the charge off rate is going to be sort of 40 ish basis points compared to a long run average of more like 60. So we're sort of reverting to a more normal level if nothing else and used car prices will ultimately come down and we're being thoughtful about that.
Your next question is from the line of Jim Mitchell with Buckingham Research.
Hey, good morning.
Good morning, Dave.
Maybe just talk
a little bit about the net interest margin and the outlook there. It was down 5 basis points. It looked like it mostly in the funding costs. I just wanted to get a sense of what was driving, I think long term debt was up, trading liability costs were up. Can you just kind of give us a sense of what's going on there and how to think about that going forward?
Yes. So at the risk of not getting like overly complicated, the long term debt expense, so our NII was flat with loan growth and NII on loan growth being offset by long term debt expense, which was largely to do with the hedging of non dollar debt and just relative quarter over quarter small moves in currency levels and currency basis. So I would honestly characterize it not to sort of underplay as quarter over quarter noise. Looking forward and so when you look at our NIM, you have NII flat, you have the balance sheet growing as we expected both on loans and trading assets. So NIM just naturally is down a few basis points, but we would be looking for our NII to be up slightly in the 3rd Q4 and for our NIM to be relatively stable.
Okay. That's helpful. And maybe just one follow-up on the prior question on credit. How should we think about the provisioning going forward in consumer? Is that going to be a consistent build?
Or is that sort of a catch up that we saw this quarter?
So I mean, I would say there's going to be 2 things. First of all, obviously, when you talk about consumer, it kind of gets dwarfed by card. So let's start with card. We are growing the portfolio. We added 4% core loans year over year in card.
And so naturally, as the portfolio grows over time, you would expect to add to reserves. So there'll be some of that, but I would characterize it as modest. And then as these vintages continue to season, we've been experiencing very, very low loss rates at circa 2.5%. They will tend up slightly. And so there will be a little bit of rates impact too.
But again, as I say, with very accretive ROEs. So I would look forward and expect there to be some reserve adds over the course of the next several quarters on a combination of those factors, but for all the right reasons. And similarly, volume wise in auto, we should see some adds, but again, in comparison to card, modest.
Your next question is from the line of Erika Najarian with Bank of America.
Hi, good morning. So my first question is, given how well JPMorgan did on the CCAR relative to last year's results, and it seems like RWA and SLR exposure have stabilized over the past few quarters. How comfortable are you perhaps allocating more balance sheet to the investment bank given that you seem to be very well positioned to continue to gain market share, especially in markets?
So as you know, Erica, everything that we do, we do with a view to, 1st of all, the client franchise and making sure that we're supporting our clients and then secondarily, with a view to all of our binding constraints. So we will provide capital and access to the CIB, but also taking into consideration our overall objectives of making sure that we stay in the 3.5% G SIB bucket. So we will continue to try and find
was there anything to call out on the equities, the $1,600,000,000 equities number that could be a little bit more one time in nature for the quarter?
Not anything significant. No, I think you've got to compare it to the prior year, which was stronger, particularly this time last year in Asia. And that's less true today, stronger in Europe, less strong in Asia. It's more of a regional story than any particularly significant items.
Your next question is from the line of Betsy Graseck with Morgan Stanley.
Hi, good
morning. Good morning, Betsy.
Okay, two questions. 1 on the outlook page. I see on the printed page, it's the same as what you had last quarter for the company overall obviously. But I heard the emphasis on NII was on the plus side, right, dollars 2,000,000,000 year on year plus. Is that the right nuance that you're trying to communicate?
Yes. So let me two pieces to the story. So yes, the guidance is $2,000,000,000 plus year on year. You recall when we came into Investor Day, we said we would expect $2,000,000,000 rate flat. It looks like rates will be flat at least in the front end at this point, at least for the majority of the year, if not the whole year.
But you've seen already in the first two quarters that year over year we're up $1,400,000,000 So we were doing better than that on a combination of lower deposit basis re prices and also on strong loan growth. But if you annualize that, that would be too high. We are going to have some impact in NII of the lower 10 year. It's not significant, but it will offset that to a degree. So we would expect our NII to be between $2,000,000,000 $2,500,000,000 up year on year, largely strong loan growth, low reprice.
And then on the loan growth side, I mean, you've been funding this, in part from just a mix shift, right, where your loan to deposit ratio has moved up very nicely. It's still very low at 60 percent, but up 2 percentage points Q on Q and up from 61 year on year. And I'm just wondering how far do you think you can take that before you might want to look to fund loan growth with deposit growth more ratably?
Okay. So I mean, I would say we've been doing a combination. We've been growing our deposits more strongly than the industry. So we continue to be net net attracting more deposits in the industry. And also, as you say, a mix shift out of securities and into loans.
Our outlook for loan growth through the range of this year is to be at the higher end of our range. We said 10% to 15% core loan growth. And at this point, demand still seems robust. So we would expect to be at the higher end of that range, and we certainly have been this quarter. So at this point, I would say that it's a combination of factors.
And remember that the way we think about our investment security portfolio also takes into consideration how we think about positioning the firm's duration of equity. So all of those factors will contribute.
Your next question is from the line of Glenn Schorr with Evercore ISI.
Good morning, Glenn.
Good morning. Just one more rate question. As you mentioned, you're super sensitive on the front end of the curve and you just alluded to the curve is flatter. I'm curious about that great chart that you roll out on Investor Day that talks about we make $3,000,000,000 more through 2018 if rates stay flat and $6,000,000,000 more if the curve goes down the implied path. The implied path is now lower.
Just curious how much those numbers change if the current curve holds?
Okay. If I get this wrong, I apologize. But I think it was actually we make $3,500,000,000 on the rates implied and $6,000,000,000 on normalized rates. But in any case, let me just talk about rates flat versus implied right now. And just because things can change so quickly, I'll just focus on 2017.
Rates flat from here. So with the 10 year at about 1.5% and IOER at 50 basis points because of the loan growth, notwithstanding any sort of long end pressure, we would still expect year over year our NII next year to be up between $1,000,000,000 $1,500,000,000 implied, which is actually not that much different from that. So it does have about 20 basis points better long end rates by the end of 2017, but otherwise relatively flat through the end of 2017 would be about $500,000,000 more that.
That is perfect. Thank you. Other question was, there's some regulators chirping a little bit about concerns in commercial real estate. Some of the other banks have mentioned that you're growing like a weed, and your credit is great. So can we just talk a little bit about what you think you're doing differently to both get that growth and then what you're doing to avoid mistakes of the past and that will be good?
Growing like a sunflower, not like a wind.
Fair.
So look, I'll say a couple of things. The first is a lot of that growth is commercial term lending. And it is the case that we have the technology and a process that has speed and certainty of execution and competitive funding costs. So it is the case that it's the value proposition that we're able to bring to clients, I think, that differentiates us. We're able to close in times that are a fraction of what the industry is.
And secondarily, we're really concentrated on sort of densified supply constrained markets, low rent stabilized. So these are not the same properties that had problems in the past. We have since the previous cycle, we have looked carefully at our underwriting and there are some things and some regions and some products that we either don't do or don't do significantly less of. So we're very, very careful, but we're looking at some really good credit quality in our commercial real estate portfolio right now.
Your next question comes from the line of Matt Bournelle with Wells Fargo Securities.
Hi, Matt. Hi, Marianne. Thanks for taking my question. I wanted to ask a couple of wanted to ask a question on the cost side of things, where the overhead ratios both in the CIB and the consumer bank dropped fairly materially quarter over quarter. I guess I'm just looking for some guidance here in terms of how much of the expense initiatives that you've already been talking about both in the CIB and the how much progress did you make in this quarter on that?
And was that an outsized contributor to the improvement in the overhead ratios?
So I would say in the CIB, it's also a revenue story. So you need to consider both factors. Sure. And in the yes. So let me talk about where we are on the expense commitments.
And you'll recall that whether you remember a $4,800,000,000 number or a $5,500,000,000 number in total. We're about 70% of the way through delivering against that across the CIB and the CCB at the end of the second quarter, and we continue to make progress. In the CCB, obviously, it is generally more progressive. And in the CIB, it's a bit more about technology and operations, and it takes some time to deliver that. But fundamentally, we continue to chug through that, and we will get there over the course of the next several quarters.
So I would say in line with our expectations, and it is a contributing factor.
Okay. And then just in the CIB specifically, you mentioned the comp ratio there was 30%. That's sort of at the low end of your of the range that you typically talk about, which is 30% to 35%. I'm presuming that's largely driven by the better than expected revenues. Was there anything else going on there?
Or was that just pretty much a result of a benign revenue, a relatively benign revenue environment?
So I would say the comps revenue ratio is an outcome just for what it's worth. Obviously, we try to give the range to give people an idea, but we pay competitively and we pay for risk adjusted performance. But there's nothing notable going on. We've been actually at the lower end of our range for a little while now.
Your next question is from the line of Mike Mayo with CLSA.
Good morning, Mike.
Hi. How is CIB doing in Europe and against European Bank competitors in terms of revenue growth, share, the degree of competition, some competitors are pulling back and you guys have stayed the course. Are you seeing the benefit from that?
So it's always a little tricky. The share thing is going to become clearer with the rearview mirror than it is necessarily at a moment in time. It does feel like we are doing fairly well competitively, not just against European banks, but just generally, and not just in Europe, but generally, because we, as you say, have continued to be there for clients across products across the globe. So I would say that we feel like we are doing fairly well. We'll know whether that is share gains when we are able to actually look at that in the rearview mirror.
But there's still plenty of competition out there. And so we're just focused on serving our clients the right way. But it does feel a little bit like we're doing well.
And I know you were asked already about Brexit. Maybe if we can hear from you, Jamie, about the implication to Brexit. Mary Anne, you said, minimize friction costs. If you can just give us some sense of what that means, you've given us a lot of guidance about the recent quarter and the year ahead, but you have what could be a monumental event and you haven't really talked to investors about that since Brexit occurred. So how do you think about the currency risk, the costs, the revenues and are you delaying any investments given the increased uncertainty?
Yes. So I'm going to try to tell you as best I can, if you can hear me. So number 1, we do think it'll reduce. Number 1, I'm not sure I can say it. Number 1, we do think it'll reduce the GDP of the UK and the EU a little bit.
Obviously, that's not going to affect our business plans that would affect the economy as a little bit. Number 2, we know that it's going to create certainty for an extended time period. So we don't think we can answer or make certain all these things you want to know because there are a lot of parties involved. We are hoping that the political leaders are very sensible. It makes sense for both the EU and for Britain to think through the process to make it sensible, whatever changes they make to give businesses time.
I'm talking about years time to adjust to the new reality which we don't know what it is. I think the most important thing is that we will continue in every single country to serve our clients day in and day out. But as extra cost so be it. I'm not really worried about it. What I wish it would be nice if it doesn't create huge turmoil.
So I'm hoping the EU is sensible and but we're going to be prepared as Marion mentioned. There are this range of outcomes and anyone in our shoes will try to be prepared for each one of them, but we're not going to like pull back on serving people in Italy, Germany, France, UK or Spain because it might lead to higher costs. I would accept the higher costs as opposed to disrupt our clients.
And I would also point out, Mike, that competitively, we are not in this situation alone. And so we're going to take our time to work out what the right course of action is. And obviously, we'll update you as and when that becomes clearer. But we're not going to be at a competitive disadvantage. If anything, as we talked about earlier, we feel like we're in a position of strength.
Your next question is from the line of Brennan Hawken with UBS.
Good morning. Thanks for taking the question. I just first off had a follow-up. So on Brexit, post this development, have you seen any impact on your banking pipelines? Has this had any impact on appetite for M and A, particularly if there is a component that involves either the continent or
the UK?
So it's the truth of the matter is it's a bit early to say for that too, and I hate to continue to repeat that. But I will tell you that generally speaking, uncertainty is not particularly conducive or constructive for M and A. But in this case, I think there are some offsets. So I would start with, in terms of the actual strategic dialogue with CEOs and at the Board at Boardrooms, it is as good as it's ever been. And if you think about just the other factors that would be supportive of M and A, like cheap financing globally, low organic growth, good multiples, solid economy in the U.
S. And globally notwithstanding, a bit of the steam taken out in Europe or the U. K, all of that should continue to be supportive for strategic M and A. Yes, and so at the end of the day and currency could be supportive of cross border activity. So there are puts and takes.
I'm certain that there'll be some people who think carefully through the right timing and what to do. But at the end of the day, the strategic proposition should ultimately win out in most cases. And similarly, volatility, generally speaking, is not particularly conducive in terms of ECM, but investor appetite is still there and there have been deals priced post Brexit. So it's a little early and there's still activity. Volatility is reasonably subdued at this point.
And I think because there are no event calendars out there right now, there's still quite a lot of opportunity in the space. Obviously, DCM, low rates would be a tailwind, notwithstanding the M and A and ECM landscape.
Great. Thank you for that. And then one more on credit here. So it seems as though we had 30 day delinquency rate actually go down quarter over quarter. So it seems like maybe in the card business, so it seems like maybe it's a cure rate issue.
Is that the right assumption? And then could you give maybe a little color on how much the non prime growth has been has driven in recent vintages versus prior?
So I'm going to start with the second part of the question. So we are still very much concentrated in the prime and near prime space, but we have a higher percentage of our origination in the near prime space, reasonably meaningfully higher over the course of the last couple of years. So where we may have previously been, I think, 40% above 760 now, that's less than that and there's more like 20% or 30% below 700%. But at the end of the day, it's still pristine credit, relatively speaking. With respect to the delinquencies, is it a cure rate issue?
Not specifically, no.
Your next question is from the line of John McDonald with Sanford Bernstein.
Hi, Mary Anne. I'm not sure if this is too early, but when you think about expenses longer term beyond this year, if you think about 2017, if we find ourselves in a similar revenue environment next year, when you wrap in your cost save objectives and where you want to be on investment spend, do you think you'll be shooting for expenses to be kind of in the same range of that $56,000,000,000 next year if things don't change on the revenue front?
So look, we're not really doing much in the way of 2017 guidance right now. It will ultimately honestly depend on the opportunities we see in front of us to continue to invest and to add customers. And I think we are at a very good run rate of investments. We've increased reasonably significantly in terms of marketing dollars and also lease growth, and that will drive profitability in the medium to longer term. So it's possible if we see the opportunity to continue to do that, we would do it.
But we have no specific guidance yet.
Okay.
Revenue environment can change reasonably quickly, particularly, as you know, with rates and to a lesser degree market. So we're not going to sort of overreact to a short term phenomenon.
Sure. Just more near term, you talked at a recent conference about the tax rate going forward. Just with the kind of issues you had this quarter with the tax rate looking at 39%, you said it would be 36%. What should we think about going forward? Is it that 36?
Yes. I mean, with tax is much like legal. Generally speaking, the reserve changes are somewhat episodic. Outside of those, yes, 36% is a good central case for our managed tax rate.
Your next question is from the line of Steven Chubak with Nomura.
Hi, good morning.
Good morning.
Mary Anne, I had a question on the outlook. You reaffirmed the fee income guidance of $50,000,000,000 plus or minus for the full year. And I'm trying to gauge, just given the tough start to the year in trading in 1Q, the subdued second half M and A commentary and second half trading seasonality that we would typically expect. The $50,000,000,000 target does appear somewhat ambitious. And I didn't know if you felt like that was a fair assessment or just given what you're seeing across the businesses that the $50,000,000,000 is still readily achievable?
So starting with the qualification that, obviously, as you suggested, it's going to be market dependent, but also remembering that we knew when we gave the guidance that we would expect the second half to be seasonally lower. So here's what I would say. First half market challenged, second half market is better, net net first half of market sorry, 1st quarter market is challenged, 2nd quarter better, net net first half relatively flat year over year. So call it a wash with the acknowledgment that we knew we would expect seasonal declines in the second half of the year. Mortgage better, so you may recall that we said we would expect mortgage revenues to be down year on year, actually by a reasonably significant amount, given obviously where the rate environment is as well as some positive MSR results in the first half of the year, we would expect mortgage revenues to be more like flat.
And against that, to your point, lower IB fees and lower asset management revenues given the environment. So the way I would characterize it is there are puts and takes, but net net, it's still a reasonable central case. So we are not changing it, but it's market dependent.
Thanks, Mary Anne. And just one more for me on CCAR. Just given that you've had some time to digest the latest set of results, the improvement in PNR was probably the most impressive aspect of the release, at least based on our own findings. But from what you could gather, based on your own internal assessment, like what were the primary drivers of the increase where maybe we have some limited visibility, such as areas like off risk? And does a favorable CCAR outcome inform your view in terms of which constraint is currently most binding?
And maybe how you might change your deployment tack across the different businesses?
Okay. So I would say if you look at the last 3 years of PPNR, notwithstanding that there have been obviously differences in the scenarios, 2015 CCAR results, so not this year's, but last year's were low. Not to say that, that means that these results are more normal, but I would say if you look at the 3 years and look at the PPNR results now, it's more consistent with the sort of portfolio risks, the revenue generation we would expect. And you can see that because it's much more consistent with our results. So I don't have insights that I can share with you specifically to try and reconcile the Fed's results year on year, nor do we really try to do that.
You're right, operational risk is likely a piece of it, and that was disclosed in that information. So I would just say, there can be volatility, but I feel like this is not an unreasonable place to think that the PPNR would start. And it's consistent, as you can see, relatively speaking, with what we calculated. Analysis that we've done a couple of years in a row now, where we said using the CCAR results from the Fed, what would that imply our CET1 ratio would need to be to pass. It had previously been a little less than 11%, with the improved PPNR and therefore the improved results at this point it would be a little less than 10%.
So in that context as we sort of look forward sometime in the near future maybe in Q3 to getting the sort of 2017 CCAR changes in proposed form hopefully. It will alleviate to a little bit of that pressure, but I still would suggest to you, as we said in Investor Day, that CCAR may, depending on how the GSIB surcharges included in the minimum may become binding. It's not likely will become binding. And so we'll continue to take that into consideration as we go forward. And we are already taking it into consideration as we think about optimizing against the multiple binding constraints we have.
Your next question comes from the line of Brian Kleinhanzl with KBW.
Yes, thanks for hearing.
So a
quick question on the mortgage originations. The correspondent channel didn't change all that much quarter on quarter, although I thought with seasonality a pickup in refi that would have increased in the Q2. Can you talk about kind of how you're thinking about correspondent mortgage originations and given that refi volume looks strong at the start of the Q3, should we expect to pick up in the correspondent in the Q3?
So I mean, we think about using all of our channels based upon obviously the demand and our capacity and our appetite to want to continue to close strongly for our customers. We've obviously also been focused in the anticipation of it becoming a more purchase oriented market very much on building out the retail channel and the retail distribution channel, and that's been very successful. So there's less correspondent contribution this quarter. It is a lever we will like to use going forward.
Okay. And I can't really discuss too much on the legal side, but is there a right way to think about legal expenses going forward like an ordinary cost of doing business for a bank your size? Is it 1% of revenues is kind of an ongoing run rate for expected legal expenses going forward? Or is there not the right way to think about it, it's just episodic?
Well, at this point, I'd still say at this point, we would still say it will be episodic. And while we are hopeful that the overall sort of structural costs will start coming down or has come down, and that's a good thing, there will still be potentially some puts and takes in the legal space. There's no real way, obviously, of forecasting a run rate. I would just do what many of you have done, I think, and go back and look at what the legal expense looked like in the years preceding the crisis and make your own determination whether it's going to be structurally a little higher, but it probably wouldn't be multiples of that.
Your next question is from the line of Ken Usdin with Jefferies.
Thanks. Good morning. Hey, Mary Anne, I was wondering just if you could I know it's a little backward looking now and you made your points already about what normal trading seasonality could be. But can you kind of help us understand the products that drove the really strong fixed trading? And kind of what happened in June?
Was it volumes? Was it spreads widening? And then I guess I would actually ask what you typically consider what normal JPMorgan seasonality is, as you mentioned?
Okay. So it was particularly strong in rates, but nevertheless, also very strong year over year in currencies, emerging markets, credit trading, SPG. So I mean, it was pretty broad based. But remember, you also have to think about it relative to the equivalent quarter last year, and we didn't have a particularly strong Q2 last year. So on a relative basis, that is an important factor, but it was pretty broad based.
I would more volume than anything. And then seasonality, I'm sorry. Look, it's anyone's guess, and I think you can go back and look over time. But last year, we saw we had a weak second quarter, as I said, and so we didn't see as much seasonality. But if you look at last quarter's run rate, I don't know that, that would be a bad place to start.
Last year's Q3 run rate would not be a bad place to start.
Understood. Okay. And the second question just is on the wholesale reserve, you mentioned it's been nice to see the energy prices start to stabilize and it seems like you're able to kind of stabilize the amount of reserve bill outstanding aside from that one credit. What needs to happen for you to get even more comfortable where you could see some of that reserve start to come out underneath the context of that you're also growing the wholesale business extremely fast as well?
Yes, I mean, so I'm going to start with a couple of general comments, which is we talked about the fact that the charge offs that we've experienced in the quarter were credits that we had previously reserved for. So we're at the point now where at least as a sort of basic matter, as we're experiencing charge offs, we feel like we're in a reasonably good reserve position, notwithstanding that idiosyncratically there may be additional adds. I mean, what we would need to see is continued firming of sentiment in the sector, continued access to capital markets to allow companies to repair their balance sheets and continued stabilization, if not improvement in oil and gas prices. And so everything is constructive on that path, but it needs to continue along the same path. And yes, we are growing our portfolio.
And so even if it were not for energy, we would, all other things equal, be adding to reserves. But there are also time decay, pay down, lots of other puts and takes too.
Your next question comes from the line of Gerard Cassidy with RBC.
Hi, Gerard.
Hi, Mary Anne. Thank you. Mary Anne, can you give us some color? Obviously, your consumer loan growth has picked up quite nicely. You pointed to it's going to be at the higher end of the range for the year.
What are your guys seeing on consumer behavior? Has it improved and they feel stronger about their own job prospects, which is enabling them to borrow more? Are there any metrics that you guys are looking at from that end?
So I mean, just to say, we obviously have our own spend data to look at and it continues the card spend is up 8% year on year. Energy continues to be a tailwind for consumers. The labor market continues to be solid and improving, and sentiment is still good. Housing still improving. So I mean, really just looking at the same things you're looking at, and we obviously have a slightly different lens to it.
But all other things equal, consumer are in consumers are in very good shape and demand is there for the products. And we've been investing outside of consumer in new products and inside consumer, sorry, in the Freedom Unlimited space and also in marketing. So we're growing not only because the demand is there, but also because we're investing.
I see. And then coming back to credit, obviously, your Q1 results had the results of the targeted Shared National Credit Exam for oil. Traditionally, obviously, we have the Shared National Credit Exam every year and 2nd quarter results normally reflect that exam. Do your 2nd quarter results reflect the Shared National Credit exam?
Our second quarter results reflect everything that we have and we know of at the end of the quarter, and we're not going to make any specific comments on regulatory exams.
Okay. Thank you.
Your next question comes from the line of Eric Wasserstrom with Guggenheim Securities.
Great. Thanks. Marianne, just a couple of quick follow ups on the auto lending business. The originations came down a bit and you talked about the dynamics around that previously in the quarter and at the Investor Day. But when I pull auto lender or auto dealers, They say that where they had primarily seen you retreat was from very high FICO sort of super prime new lending and leasing, but that their experience with Chase remained very consistent in the mid FICO range.
And I just wanted to see if that was consistent with your view internally.
Not specifically. I'm not sure. I haven't pulled the dealers myself, but we continue to have very high FICO scores and not I'm not aware of that, but I can't comment.
Okay. And then just one follow-up on auto credit. The obviously the Manheim issue points to perhaps some rising severity given default. But at this stage, is there anything that suggests to you that we should see a higher frequency of default?
In our portfolio at this point, no.
Okay. And your next question will come from the line of Paul Miller with FBR.
Yes. Thank you very much. One of the things about what we saw is the mortgage rates, I mean, the 10 year dropping down to record levels and mortgage rates probably falling right behind it. Can you give us a little outlook? Are you seeing an uptick in refis?
We've seen the refi indexes go up very high. And any outlook on where you think the mortgage market is going to be in the next quarter or 2?
Yes. So we are expecting refi to be stronger in the coming quarters. And the mortgage market, as best we can tell, will be around $1,700,000,000,000 $1,800,000,000,000 this year.
And the other follow-up question is there are some news articles out there about JPMorgan securitizing conforming loans. This hasn't really been done a lot by anybody. Can you I don't know if you can address that, the economics behind that or what's the thought behind that instead of getting Fannie and Freddie wraps just securitizing yourself?
Yes. So we've done one and we're looking at more securitizations in the mortgage space. And we are keeping a vertical stripe and we're retaining the loans on our balance sheet or the securities on our balance sheet, I should say. And in doing that, we're being able to get private capital to take the majority of the lower credit risk and get better capital treatment for ourselves. Yes, in terms of the RWA that it attracts.
Your next question is from the line of Matt O'Connor with Deutsche Bank.
Thank you. Most of my questions actually have been answered, but just a quick follow-up on the credit card originations in terms of dipping down to the lower prime or below. You said something like 20% to 30% had FICO scores below 700%. And I didn't know if that was for new originations or for the portfolio overall that you're referring to?
New originations. Okay.
All right. That's it for me. Thank you.
Your next question comes from the line of Marty Mosby with Vining
Sparks. Thanks. I wanted to ask you a little bit about the focus everybody has on the flattening of the treasury curve, but yet earlier you were able to say that going into next year, you would see 2016 NII growth of $2,000,000,000 to $2,500,000,000 only really fall to $1,500,000,000 to $2,000,000 which means that that flattening of the yield curve is very manageable. Just talk about asset yields as your earning asset yield actually went up one basis point, what you're being able to see in the market versus what's happening in the treasury curve?
So I mean, I'll just start by sort of orientating you on why that would be the impact for us. And if you look at if you look at our balance sheet and you look at what we have in fixed rate loans versus what we have in either IOER or in LIBOR loans, it's about $650,000,000,000 And so we're much more sensitive to the front end of the rate curve. And if you look at our earnings at risk disclosures, a 100 basis point parallel shift would be around $800,000,000 And so obviously, we haven't seen and won't hopefully see anything of that order of magnitude. So that kind of gives you an ability to sort of size up, notwithstanding compounding, why you've only seen our NII relative to prior expectations come down by that much.
In this particular quarter, your funding costs went up. Is that a lag effect from what the rate hike in kind of December still just now coming through? Or was there something else maybe more unusual about the funding costs that we saw that drove the margin down this particular quarter.
Yes. So I think earlier on the call, somebody else asked the question and I made the comment that it's really more related to the results from our hedges of non dollar debt, long term debt. And so in the Q1, the dollar weakened in the second quarter, it strengthened. And with some currency basis in the Q1 that we didn't see in the second quarter, It really is, not to dismiss it, but it really is accounting, nothing really else than that.
And your next question is from the line of Betsy Graseck with Morgan Stanley.
Hi, Betsy.
Hi, again. Just a follow-up on the card new originations. I know one of the key things that you've done for many years is to focus on relationship, lending relationship offerings. And so, are when I hear the 20% of the new originations are below FICO of 700, is that a shift from the relationship strategy that you have? Or does it reflect the fact that you do have significant relationships on deposits, etcetera, with folks in that FICO band?
Yes. No, no shift from our desire to want to be with engaged customers and our rewards programs, our products are all geared towards that. So it's really just a credit decision. And yes, we do have relationships with many, many customers in that still near prime space.
And your next question is from the line of Gerard Cassidy with RBC. Hi.
Hi, thank you. As a follow-up, Mary Anne, your consumer business obviously has been very, very strong. Can you share with us the update on ClearExchange? It's expected to be rolled out later this year and what that might do to even grow the mobile business even more than it's growing now.
Yes. So, look, obviously, P2P payments is P2P real time payments is very important to our customers. So therefore, it's important to us. It's also important for us and the industry that it's done in a safe and secure way. And so early warning, the fraud protection that they are able to provide, as well as bank level cybersecurity and then the absence of the need to provide your bank credentials, we think is very strongly positive for our customers.
And we expect to see volume go across that. We've all as you know, we have QuickPay already and we saw reasonably significant volume $21,000,000,000 on QuickPay last year and growing. So I would expect to see more and more P2P payments. And it's good for our customers. It's good for us.
So if you look at the whole payment space, Chase Paymentech is gaining share. ChaseNet is doing very well. Chase Pay, we've signed up lots of different people. And one piece of that is the P2P. So today, right now, if you use Chase QuickPay, it was very easy within Chase to Chase.
It's now just as easy to go from Chase to a bunch of other banks. We've just started rolling out. It's soon to be rolled out to 60% of American banking accounts and then we're going to make it available to all banks. So you will be able to go P2P real time through Chase Quick Pay, it will be a special app for Chase Quick Pay, it will also be branded under another name which we haven't pulled out yet, which I think will be rolled out shortly. So I think it's a great success that the banks can get together and do this.
And this will be a great service, which I think shows you the banks making progress and what you would have called prior FinTech.
Thank you for the color.
There are no other questions at this time.
Thank you, everyone. Thank you, operator.
Thank you.
Thank you again for joining us today. This does conclude today's call. You may now disconnect.