Please stand by. We are about to begin. 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 stand by. At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon, and Chief Financial Officer, Marianne Lake. Ms. Lake, please go ahead.
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 one, the firm reported net income of $6.2 billion, EPS of $1.55, and a return on tangible common equity of 13% on $25.2 billion of revenue. A strong result this quarter, particularly given the backdrop. 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.
That strength was driven by increased client trading activity across markets and an improvement in IB fees compared to the first quarter, as well as strong core loan growth of 16%, reflecting good demand across both consumer and wholesale, and record consumer deposit growth up $54 billion. Before I go through the results, let me spend a moment on two 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 million. Within this, charge-offs of $150 million were principally driven by oil and gas and metals and mining. Those charge-offs were very substantially offset by reserve releases, so they were previously reserved. Which means that underlying the net $50 million reserve build, we saw incremental reserve actions this quarter of about $200 million, 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. Second, on Brexit. Uncertainty running up to the referendum led to a risk-off environment. Following the decision, the markets were quite volatile as expected. Volumes were materially higher in the immediate aftermath. The market functioned quite well, absorbing the volatility. Despite the significant increases in volumes, our systems were stable, and we continued to support client activity with decent trading performance.
With respect to next steps, as you know, the ultimate relationship 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. 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 two. Revenue of $25.2 billion was up $700 million year-on-year on higher net interest income.
For the full year, expect NII to be up more than the $2 billion 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 as industry deposit reprice 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 $14.1 billion was down $140 million, reflecting continued progress against our commitments. We still expect full year expense of $56 billion ±, as the second half of the year includes our expectation of an increase in the FDIC surcharge in the third and fourth quarters. Moving on to capital on page three.
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 $4.4 billion of net capital to shareholders, including $2.6 billion 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 $10.6 billion. Moving on to page four on consumer and community banking. Consumer and community banking generated $2.7 billion 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. We had record business banking loan originations of $2.2 billion, up 14% year-on-year, and with a strong pipeline up 17%. We added nearly 2 million households year-on-year, with an increase of 700,000 since last quarter, reflecting strong acquisition trends, including the launch of Freedom Unlimited. Finally, our active mobile customer base remains the largest among U.S. banks, up 18%. Revenue of $11.5 billion included some non-core items which contributed a little under $200 million, principally a one-time gain on Visa Europe and a 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 billion 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 two, three 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. 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. As such, we built $250 million 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. We built $50 million in reserve this quarter, largely reflecting volume growth. Against these reserve builds, we saw releases of $125 million, principally driven by mortgage. Turning to page five and the corporate and investment bank. CIB reported net income of $2.5 billion on revenue of $9.2 billion and an ROE of 15%. In banking, IB revenue was $1.5 billion, down 15% in a market down 18%, largely driven by lower equity underwriting fees. We maintained share and ranked number one in global IB fees, ranking number one in North America and EMEA. Advisory fees were flat versus a wallet that declined 15%. This quarter, we ranked number two globally and grew share by 50 basis points.
In equity underwriting, global issuance improved after a weak first quarter but was down from a strong quarter last year, with fees down 37% in a market down 42%. We continued to rank number one globally, growing share by 30 basis points. We ranked number one 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%. We ranked number two globally. Moving on to the outlook for fees. Given the decline in M&A volumes, lower wallet is expected in the second half of 2016. We expect to see positive momentum in ECM as the new issuance market continues to improve. 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 million was down 8%, reflecting mark-to-market losses on hedges of accrual loans. Markets revenue of $5.6 billion 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 billion was up 35% versus a weak second quarter last year. The positive momentum that we saw in March continued into the second quarter, with strong performance in rates and currencies in emerging markets on higher client flows. 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 $1.6 billion, 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 million were driven by a reserve build for oil and gas. Finally, expense of $5.1 billion was down 1% year-on-year, with a comp to revenue ratio for the quarter of 30%. Moving on to page six and commercial banking. Overall, a solid quarter for commercial banking with net income of nearly $700 million on revenue of $1.8 billion and an ROE of 16%. IB revenue rebounded from the first quarter. It was up 23% sequentially and flat year-on-year. 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.
C&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. An expense of $731 million 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. Outside of energy, credit performance continues to be strong. Moving on to page seven and asset management. Asset management reported net income of $521 million, with a 29% pretax margin and an ROE of 22%. Revenue of $2.9 billion 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 $2.1 billion 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 $1.7 trillion and client assets of $2.3 trillion were both up 1% sequentially and down 5% and 3% year-on-year respectively. We had positive long-term flows of $3 billion as we continue to see strong net inflows into our fixed income products, with equity market weakness and volatility causing clients to de-risk, resulting in outflows in equity and multi-asset. Our long-term investment performance remained good, with 81% of mutual fund AUM ranked in the first or second quartiles over five years. Lastly, we had record loan balances of $112 billion, up 4% year-on-year driven by mortgage up 20%. Turning to page eight and corporate. Corporate reported a net loss of $166 million, which included two 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 for 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%. Turning to page nine 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. 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.
Just before I open up to Q&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. If you hear him croaky, that's why. Operator, open up the line, please.
Comes from the line of Brian Foran with Autonomous.
Good morning.
Morning, Brian.
I know it's very early, it's probably limited in what you can say because you mentioned it depends on the timeline of Brexit and how passporting works. 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?
Honestly, Brian, I know that everybody is keenly interested to hear what we have to say, 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, it's really too early to hypothesize. We would hope that we can continue to operate the way we are right now. 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. 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.
Yes.
I wonder if you could touch on two 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? Then in auto, you mentioned risk layering. What particular factors are you seeing layered in the underwriting box that make you concerned right now?
On the card space, as you know we have loans running off. We're replacing them all 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 thoughtfully, we've been monitoring them very closely. What we're seeing in terms of the loss rates and the seasoning of them is fully in line with our expectations. These loans are coming on at higher risk-adjusted margins. The ROEs are at or above the portfolio ROEs. Nothing that would speak to anything other than our full expectation for our credit risk appetite.
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. We've been very thoughtful about that, not just today, but as we've been going through the cycle. 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 careful in a low percentage of subprime origination. Very careful about looking at those layered risks. Remember, for auto this year, I think the charge-off rate's going to be 40-ish basis points compared to a long-run average of more like 60.
We're reverting to a more normal level if nothing else, used car prices will ultimately come down, we're being thoughtful about that.
Your next question is from the line of Jim Mitchell with Buckingham Research.
Hey, good morning.
Morning, Jim.
Maybe just talk a little bit about the net interest margin and the outlook there. It was down five basis points. It looked like it was mostly in the funding costs.
Yeah.
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 give us a sense of what's going on there and how to think about that going forward?
Yeah. At the risk of not getting overly complicated, the long-term debt expense, 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. I would honestly characterize it, not to underplay it as quarter-over-quarter noise. Looking forward, 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. NIM just naturally is down a few basis points. We would be looking for our NII to be up slightly in the third and fourth quarter and for our NIM to be relatively stable.
Okay. That's helpful. 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?
I would say there's going to be two things. First of all, obviously, when you talk about consumer, it kind of gets dwarfed by card. Let's start with card. We are growing the portfolio. We added 4% core loans year-over-year in card, naturally, as the portfolio grows over time, you would expect to add to reserve. There'll be some of that, but I would characterize it as modest. As these vintages continue to season, we've been experiencing very low loss rates at circa 2.5%. They will trend up slightly, there will be a little bit of rate impact too, but again, as I say, with very accretive ROEs.
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. 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. 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?
As you know, Erika, everything that we do, we do with a view to, first 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. 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. We will continue to try and find capacity to be able to recycle it and grow high ROE, high ROA business.
Great. Was there anything to call out on the equities, the $1.6 billion 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. 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.
Morning, Betsy.
Okay, two questions. One 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. I heard the emphasis on NII was on the plus side, right? $2 billion year-on-year plus. Is that the right nuance that you were trying to communicate?
Yeah. Two pieces to the story. Yes, the guidance is $2 billion plus year-on-year. You recall when we came into Investor Day, we said we would expect $2 billion rates 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. You've seen already in the first two quarters that year-over-year we're up $1.4 billion. We were doing better than that on a combination of lower deposit basis reprices and also on strong loan growth. If you annualize 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. We would expect our NII to be between $2 billion and $2.5 billion up year-on-year.
Largely strong loan growth, low reprice.
On the loan growth side, 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 66%, but up two percentage points quarter-on-quarter and up from 61% year-over-year. 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. I would say we've been doing a combination. We've been growing our deposits more strongly than the industry. 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%-15% core loan growth, and at this point, demand still seems robust. We would expect to be at the higher end of that range, and we certainly have been this quarter. At this point, I would say that it's a combination of factors. Remember that the way we think about our investment securities portfolio also takes into consideration how we think about positioning the firm's duration of equity. All of those factors will contribute.
Your next question is from the line of Glenn Schorr with Evercore ISI.
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 billion more through 2018 if rates stay flat and $6 billion 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, I think it was actually we make $3.5 billion on the rates implied and $6 billion on normalized rates. In any case.
Right
let me just talk about rates flat versus implied right now. Just because things can change so quickly, I'll just focus on 2017. Rates flat from here. With the 10-year at about one and a half 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 and $1.5 billion implied, which is actually not that much different from that. 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 a half a billion dollars more than 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 it. You're growing like a weed and your credit is great. 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'll be good.
Growing like a sunflower. Not like a weed.
Fair.
Look, I'll say a couple of things. The first is a lot of that growth is commercial term lending. It is the case that we have the technology and a process that has speed and certainty of execution and competitive funding costs. 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. Secondarily, we're really concentrated on sort of densified supply-constrained markets, low rent stabilized. These are not the same properties that had problems in the past. 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 do significantly less of.
We're 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 Matthew Burnell with Wells Fargo Securities.
Hi, Matt.
Hi, Marianne. Thanks for taking my question. I 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 CCB. How much progress did you make in this quarter on that, and was that an outsized contributor to the improvement in the overhead ratios?
I would say in the CIB, it's also a revenue story, so you need to consider both factors.
Sure.
Yeah. Let me talk about where we are on the expense commitments, and you'll recall that, whether you remember a $4.8 billion number or a $5.5 billion 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. In the CIB, it's a bit more about technology and operations, and it takes some time to deliver that. Fundamentally, we continue to chug through that, and we will get there over the course of the next several quarters. I would say in line with our expectations, and it is a contributing factor.
Okay. Just in the CIB, specifically, you mentioned the comp ratio there was 30%. That's at the low end of the range that you typically talk about, which is 30%-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 or relatively benign revenue environment?
I would say the comp to 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. There's nothing notable going on. We've been actually at the lower end of our range for a little while now.
Okay, your next question is from the line of Mike Mayo with CLSA.
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-
Sure
You guys have stayed the course. Are you seeing the benefit from that?
It's always a little tricky. The share thing is going to become clearer with a rear view 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. Not just in Europe, but generally, because we, as you say, have continued to be there for clients across products across the globe. 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 rear view mirror. There's still plenty of competition out there, and so we're just focused on serving our clients the right way. It does feel a little bit like we're doing well.
I know you were asked already about Brexit. Maybe if we can hear from you, Jamie, about the implications of Brexit. Marianne, you said, quote, "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. You have what could be a monumental event, and you haven't really talked to investors about that since Brexit's occurred. How do you think about the currency risks, the costs, the revenues, and are you delaying any investments given the increased uncertainty?
Yes. I'm going to try to tell you as best I can if you can hear me. Number one, we do think it'll reduce. Number one, I'm not sure I can say this. Number one, we do think it'll reduce the GDP of the U.K. and the EU a little bit. Obviously, that's not going to affect our business plans, though it'll affect the economies a little bit. Number two, we know that it's going to create uncertainty for an extended time period. 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. If it adds extra cost, so be it. I'm not really worried about it. It would be nice if it doesn't create huge turmoil. I'm hoping the EU is sensible, we're going to be prepared, as Marianne mentioned. There's a range of outcomes, anyone in our shoes will try to be prepared for each one of them. We're not going to pull back on serving people in Italy, Germany, France, U.K., or Spain because it might lead to higher costs. I would accept the higher cost as opposed to disrupt our clients.
I would also point out, Mike, that competitively, we are not in this situation alone. We're going to take our time to work out what the right course of action is. Obviously, we'll update you as and when that becomes clearer. 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. On Brexit, post this development, have you seen any impact on your banking pipelines? Has this had any impact on appetite for M&A, particularly if there is a component that involves either the continent or the U.K.?
The truth of the matter is it's a bit early to say for that, too, and I hate to continue to repeat that. I will tell you that generally speaking, uncertainty is not particularly conducive or constructive for M&A. In this case, I think there are some offsets. I would start with, in terms of the actual strategic dialogue with CEOs and at the boardrooms, it is as good as it's ever been. If you think about just the other factors that would be supportive of M&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 to strategic M&A.
China.
At the end of the day, currency could be supportive of cross-border activity. 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. At the end of the day, the strategic proposition should ultimately win out in most cases. 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. It's a little early. There's still activity. Volatility is reasonably subdued at this point. 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&A and ECM landscape.
Great. Thank you for that. Then one more on credit here. It seems as though we had 30-day delinquency rate actually go down quarter-over-quarter. It seems like maybe in the card, sorry, business. It seems like maybe it's a cure rate issue. Is that the right assumption? Then could you give maybe a little color on how much the non-prime growth has driven in recent vintages versus prior?
I'm going to start with the second part of the question. 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. 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. At the end of the day, 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, Marianne. I'm not sure if this is too early, 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 billion next year if things don't change on the revenue front?
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. 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. That will drive profitability in the medium to longer term. It's possible if we see the opportunity to continue to do that, we would do it. We have no specific guidance yet.
Okay.
The revenue environment can change reasonably quickly, particularly, as you know, with rates and to a lesser degree, market. 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 like in that 36?
Yeah. I mean, with taxes, 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.
Marianne, I had a question on the outlook. You reaffirmed the fee income guidance of $50 billion ± for the full year. I'm trying to gauge, just given the tough start to the year in trading in 1Q, the subdued second half M&A commentary and second half trading seasonality that we would typically expect. The $50 billion target does appear somewhat ambitious. 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 billion is still readily achievable.
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. Here's what I would say. First half market's challenged, second half market's better. Net net first half of markets Sorry, first quarter market's challenged, second quarter better. Net net first half, relatively flat year-over-year. Call it a wash with the acknowledgment that we knew we would expect seasonal declines in the second half of the year. Mortgage better. 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. Against that, to your point, lower IB fees and lower asset management revenues given the environment. The way I would characterize it is there are puts and takes. Net net, it's still a reasonable central case, we are not changing it. It's market dependent.
Thanks, Marianne. Just one more from me on CCAR. Just given that you've had some time to digest the latest set of results, the improvement in PPNR was probably the most impressive aspect of the release, at least based on our own findings. From what you could gather, based on your own internal assessment, what were the primary drivers of the increase where maybe we have some limited visibility, such as areas like op risk? 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. Look, I would say if you look at the last three years of PPNR, notwithstanding that there have been obviously differences in the scenarios. 2015 CCAR results, not this year's but last year's, were low. Not to say that means that these results are more normal, I would say if you look at the three years and look at the PPNR results now, it's more consistent with the sort of portfolio risks, the revenue generation we would expect. You can see that because it's much more consistent with our results. 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, that was disclosed in their information.
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. In respect to what that means for what's most binding, what it does mean is if you look at the 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 result, at this point it would be a little less than 10%.
In that context, as we look forward, sometime in the near future, maybe in the third quarter, to getting the sort of 2017 CCAR changes in proposed form hopefully, it will alleviate to a degree a little bit of that pressure. I still would suggest to you, as we said in Investor Day, that CCAR may, depending on how the G-SIB surcharge is included in the minimum, may become binding. If not likely will become binding. We'll continue to take that into consideration as we go forward. 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 very much. A quick question on the mortgage originations. The correspondent channel didn't change all that much quarter-on-quarter, although I would've thought with seasonality and a pickup in refis, that would've increased in the second quarter. Can you talk about how you're thinking about correspondent mortgage originations? Given that refi volume looks strong at the start of the third quarter, should we expect a pickup in the correspondent in the third quarter?
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. There's less correspondent contribution this quarter. It is a lever we will like to use going forward.
Okay. I know you 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 as kind of an ongoing run rate for expected legal expenses going forward? Or is there not the right way to think about it, and it's just episodic?
Well, at this point we would still say it will be episodic. While we are hopeful that the overall structural cost 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.
Hi, Ken.
Thanks. Good morning. Hey, Marianne. 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. Can you kind of help us understand the products that drove the really strong FICC trading and kind of what happened in June? Was it volumes? Was it spreads widening? I guess I would actually ask what you typically consider what normal JPMorgan seasonality is, as you mentioned.
Okay. It was particularly strong in rates, but nevertheless, also very strong year-over-year in currencies, emerging markets, credit trading, SPG. 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 second quarter last year. On a relative basis, that is an important factor, but it was pretty broad-based. More volume than anything. 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 had a weak second quarter, as I said, and so we didn't see as much seasonality. 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 third quarter run rate would not be a bad place to start.
Understood. Okay. 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 stabilize the amount of reserve build 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?
Yeah. 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. 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. 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. Everything is constructive on that path, but it needs to continue along the same path.
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. 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, Marianne. Thank you. Marianne, 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 looking at from that end?
We obviously have our own spend data to look at. 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. Sentiment is still good. Housing's still improving. Really just looking at the same things you're looking at, and we obviously have a slightly different lens to it. All other things equal, consumers are in very good shape, and demand is there for the products. We've been investing outside of consumer in new products and inside consumer, sorry, in the Freedom Unlimited space and also in marketing. We're growing not only because the demand is there, but also because we're investing.
I see. Then coming back to credit. Obviously, your first quarter 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 second quarter results normally reflect that exam. Do your second quarter results reflect the shared national credit exam? Is that going to-
Our second quarter results reflect everything that we have and we know of at the end of the quarter. 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. You talked about the dynamics around that previously in the quarter and at the Investor Day. When I poll auto dealers, they say that where they had primarily seen you retreat was from a 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. I just wanted to see if that was consistent with your view internally.
Not specifically. I'm not sure. I haven't polled the dealers myself, but we continue to have very high FICO scores and I'm not aware of that, but I can't comment.
Okay. Then just one follow-up on auto credit. Obviously, the Manheim issue points to perhaps some rising severity given default. 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. Our next question will come from the line of Paul Miller with FBR.
Hey, thank you very much. One of the things about what we saw is the 10-year dropping down to record levels and mortgage rates probably following 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. Any outlook on where you think the mortgage market's going to be in the next quarter or two?
We are expecting refi to be stronger in the coming quarters. The mortgage market, as best we can tell, will be at around $1.7 trillion-$1.8 trillion this year.
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. 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, you're securitizing them yourself.
We've done one, and we're looking at more securitizations in the mortgage space. We are keeping a vertical stripe. We're retaining the loans on our balance sheet or the securities on our balance sheet, I should say. 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. 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, 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%-30% had FICO scores below 700, and I didn't know if that was for new originations or for the portfolio overall that you were 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. Yet, earlier you were able to say that, going into next year, you would see 2016 NII growth of $2 billion-$2.5 billion, only really fall to $1.5 billion-$2 billion, which means 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, and what you're being able to see in the market versus what's happening in the Treasury curve.
I'll just start by sort of orientating you on why that would be the impact for us. 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 billion. We're much more sensitive to the front end of the rate curve. If you look at our earnings at risk disclosures, a 100-basis point parallel shift would be around $800 million. Obviously we haven't seen and won't hopefully see anything of that order of magnitude. 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? Was there something else maybe more unusual about the funding costs that we saw that drove the margin down this particular quarter?
I think earlier on the call, somebody else asked the question, I made the comment that it's really more related to the results from our hedges of non-dollar debt, long-term debt. In the first quarter, the dollar weakened. In the second quarter, it strengthened. With some currency basis in the first quarter that we didn't see in the second quarter, not to dismiss it, but it really is accounting. Nothing really else than that.
Your next question is from the line of Betsy Graseck with Morgan Stanley.
Betsy.
Hi again. Just to 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. When I hear that 20% of the new originations are below FICO of 700, is that a shift from the relationship strategy that you have? Does it reflect the fact that you do have significant relationships on deposits, et cetera, with folks in that FICO band?
Yeah, no. No shift from our desire to want to be with engaged customers and our rewards programs, our products are all geared towards that. It's really just a credit decision. Yes, we do have relationships with many customers in that still near-prime space.
Thanks.
Your next question is from the line of Gerard Cassidy with RBC.
Hi.
Hi. Thank you. As a follow-up, Marianne, your consumer business obviously has been very strong. Can you share with us the update on clearXchange, it's expected to be rolled out later this year, what that might do to even grow the mobile business even more than it's growing now?
Yeah. Look, obviously, P2P real-time payments is very important to our customers, 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. Early Warning, the fraud protection that they are able to provide, as well as bank-level cybersecurity and the absence of the need to provide your bank credentials, we think is very strongly positive for our customers. We expect to see volume go across that. As you know, we have QuickPay already, and we saw reasonably significant volume, $21 billion on QuickPay last year and growing. I would expect to see more and more P2P payments and it's good for our customers, it's good for us.
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. 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, who I won't name now. We've just started to roll it out. It's soon going to be rolled out to 60% of American banking accounts, and then we're going to make it available to all banks. You will be able to go P2P real time through Chase QuickPay. There'll be a special app for Chase QuickPay. It'll also be branded under another name, which we haven't rolled out yet, which I think will be rolled out shortly.
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 are making progress on 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.