Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's First 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, operator. 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 $5,500,000,000 EPS of $1.35 and a return on tangible common equity of 12% on $24,000,000,000 of revenue.
And despite the general market backdrop and energy, our results this quarter were quite good and pretty straightforward. Consumers remain on solid footing, leading to robust growth in business drivers and strong financial performance. In Consumer, we saw double digit growth in deposits year on year, healthy loan growth across products driving 17% core loan growth for the firm and high single digit card sales volumes. The wholesale businesses performed in line or better than expected and delivered decent results in challenging markets with significant volatility and global macro uncertainty. The firm's results included one significant item, $773,000,000 of wholesale credit costs, of which $529,000,000 related to oil and gas reserves and $162,000,000 related to metals and mining reserves, which were generally in line with our guidance.
We also experienced some charge offs this quarter in these sectors, totaling $48,000,000 which were already contemplated in the Investor Day guidance of up to $4,750,000,000 of charge offs this year. While oil prices have improved somewhat in March, they do remain near historically low levels, and the market is not expecting the recovery to be strong. Further, natural gas, which is a meaningful portion of our portfolio, does remain depressed. We don't feel that current prices are sufficient to spur a meaningful restart of production, and many of the cost reductions and conservation actions that have been taken are not easily and quickly reversed. Therefore, the impact of oil prices is somewhat asymmetric on credit costs.
Reserves are name specific. They're based on downgrades reflecting the actual financial condition and liquidity position of borrowers. As such, we likely will see some incremental reserve builds for the rest of the year, but they will be increasingly situation specific and our ability to estimate them will improve over time. However, using reasonable stress assumptions on draws, downgrades and considering spillover effects to closely related companies, those incremental reserves could reach $500,000,000 plus or minus this year, but with a very high degree of variability around that number. Continue to believe overall our client base is relatively well positioned to weather this downturn, and we will be there to support them whenever feasible.
We also monitor the contagion, and aside from experiencing a couple of name specific issues in very closely related companies and observing some general stress in oil regions, we are not seeing anything broad based and would not expect losses to be significant. Moving on to Page 2. Pausing on this page for just a moment, a few comments on overall revenue and expense. We told you that the first rate hike, together with our strong loan growth, would drive 2016 NII higher by $2,000,000,000 the $700,000,000 increase in net interest income year over year that you see here is in line with that. However, sequentially, NII was only up slightly as expected given the absence of certain securities gains that we had in the Q4 as well as day count.
Non interest revenue was down $1,500,000,000 year on year, primarily driven by the market environment in both the Corporate and Investment Bank as well as Asset Management, with the biggest drivers being lower IBCs and fixed income markets revenue, in both cases versus a very strong prior year. Adjusted expense of $13,900,000,000 was down 2% year on year on lower performance based compensation, while continuing to self fund incremental investments and growth. Turning to Page 3. The firm's fully phased in advanced CET1 ratio was 11.7%, with standardized at 11.9%. The improvement to both ratios was driven primarily by net capital generation.
Recall that we ended the year with very low levels of inventory. And as expected, we did see that reverse with our spot balance sheet up $70,000,000,000 quarter on quarter, reflecting growth in deposits and an increase in trading assets and secured financing activity. This also drove a slight increase in RWA, net of runoff and model calibration. Firm SLR improved to 6.6%, and we returned $3,000,000,000 of net capital to shareholders this quarter, including $1,300,000,000 of net repurchases and common dividends of $0.44 per share. Lastly, the Fed did not object to a $1,900,000,000 increase in our capital plan, giving incremental capacity for repurchases next quarter.
Moving on to Page 4 and Consumer and Community Banking. You'll notice that we consolidated Consumer into 1 page, and for your reference, we've included the old pages in the appendix. CCB generated $2,500,000,000 of net income and an ROE of 19% with strength across all lines of business. And TNS just announced that for the 4th consecutive year, we are the number one consumer retail bank, reflecting our ability to attract, satisfy and retain customers. The fundamental business drivers remain strong, with average loans up 12% year on year and core loans up 25%, driven by mortgage and auto, but with strength across products.
And we saw record deposit growth of $50,000,000,000 up 10%. We added over 1,000,000 households since last year, and our active mobile customer base was up 19%. Revenue of $11,100,000,000 was up 4% year on year and up 1% sequentially, if you exclude from last quarter nearly $200,000,000 from the Square IPO and a branch sale. In Consumer and Business Banking, revenue was up 4% year on year, reflecting that record deposit growth I mentioned, as well as higher account and transaction volumes, and investment revenue up 4% despite the challenging environment. Mortgage revenue increased 7% on higher MSR risk management and strong loan growth, partially offset by lower servicing revenue.
Card, commerce solutions and auto revenue was up 2% on strong auto loan and lease growth, 8% growth in card sales and 12% in merchant processing volumes, all of which more than offset the impact of card renegotiation. Expense was down 2% year on year with an overhead ratio improving to 55% as we continued to make progress against our commitments, more than offsetting $200,000,000 in incremental marketing and auto lease growth. Finally, credit trends in the consumer businesses continue to be favorable. Now turning to Page 5 and the Corporate and Investment Bank. CIB reported net income of $2,000,000,000 on revenue of $8,100,000,000 and an ROE of 11%.
In banking, IB revenue was $1,200,000,000 down 24% year on year, driven by lower equity and debt underwriting fees, but in line with the market which was down 27%. We continued to rank number 1 in global IB fees and ranked number 1 in 3 regions: North America, EMEA and LatAm. It was another strong quarter for advisory, up 8% versus a wallet that declined 15%. We gained share, ranking number 1 as we benefited from a number of deals that were announced in 2015 and closed this quarter. Equity underwriting fees were down 49% in line with the market as volatility kept issuers on the sidelines.
We maintained our number 1 rank globally and increased our lead. Debt underwriting fees were down 35%. And while we were down more than the market, it can be explained by a tough comparison with several large acquisition finance deals in the Q1 of last year, as well as being conflicted out of several large deals this quarter. In terms of the outlook, we expect a sequential decline in M and A to be more than offset by an increase in debt and equity underwriting if the recent market improvements continue. Treasury Services revenue was down 5%, driven by business simplification.
Lending revenue was down 31%, primarily reflecting mark to market changes on both hedges of accrual loans and securities received from restructuring. Moving on to markets. Markets revenue was $5,200,000,000 and was down 11% year on year, reflecting decent performance given the environment and especially in light of the strength in the Q1 of 2015, where we saw elevated client wallets and trading, particularly in January last year, particularly around the Swiss franc event. In fact, if you indulge me, adjusting for our outperformance year over year, results would have been down by mid single digits. Fixed income revenue was down 13%.
The 1st couple of months of this quarter, as you know, were challenging across markets, but some stability returned in March. And overall, I would characterize the quarter as seeing reasonably solid client activity, but given the market backdrop, it was more difficult to monetize flows. We saw better performance in rates and lower performance across other asset classes. Equity markets revenue was down 5%, and although flows were steady, idiosyncratic events and sharp moves were tough for our clients, both on the way down and back up. Asia equities continued to outperform, driven by market volatility, particularly in Japan.
With respect to the Q2, the relative stability we saw in March has continued into April so far. However, it's also the case that markets are still quite illiquid in certain parts and will be prone to somewhat abrupt directions. So while investors have started to deploy cash and capital markets are wide open for well understood names, there is still remaining caution for more challenging issuers. Although there's been noise in the data globally, there is an emerging belief that it's fundamentally better, but we need to continue to see no downside surprises. And as such, we remain somewhat cautious about the Q2.
Security Services revenues was $881,000,000 in line with guidance. Credit adjustments and other was a loss of $336,000,000 mainly driven by CBA on spread widening. Credit costs of $459,000,000 were driven by reserve builds for oil and gas and metals and mining as discussed earlier. And finally, expense of 4,800,000,000 was down 15% year on year, driven by lower performance based compensation and lower legal expense, with a comp to revenue ratio for the quarter of 32%. Moving on to Page 6 and Commercial Banking.
The Commercial Bank generated net income of $500,000,000 on revenue of $1,800,000,000 and an ROE of 11%. Outside of credit costs for oil and gas, the Q1 was very solid performance. Revenue was up 4% year on year, driven by higher loan balances and deposit net interest income, offset by lower IB revenues versus a record last year. Expense of $713,000,000 was up 1% year on year and down 5% quarter on quarter, but in line with recent trends if you exclude the impairment taken on leased corporate aircraft last quarter. We saw strong growth in our loan book with average loan balances up 13% year on year and 3% quarter on quarter with portfolio spreads relatively flat for a couple of quarters now.
Our commercial real estate business continued to exceed the industry with growth of 18% year on year, reflecting superior execution while maintaining credit discipline. In C and I, loans were up 9% year on year, driven by robust originations in Corporate Client Banking. Finally, on credit, we added $300,000,000 to reserves mostly related to oil and gas, but we continue to see very low net charge offs. Moving on to Page 7 and Asset Management. Asset Management reported net income of $587,000,000 with a 30% pretax margin and 25% ROE.
Revenue of $3,000,000,000 was down 1% year on year, driven by weaker market and lower brokerage revenues. Excluding the impact of the sale of an asset this quarter, which contributed $150,000,000 to the revenue number, adjusted revenue, AUM and client assets were down, each generally in line with lower markets. Expense of $2,100,000,000 was down 5% year on year, largely driven by lower performance based compensation. Despite these lower markets, we saw positive long term flows of $12,000,000,000 this quarter, with strength in fixed income, multi asset and alternatives, and including the benefit of a large mandate, being partially offset by outflows in equity products given volatility. Our long term investment performance remains strong with 80% of mutual fund AUM ranked in the 1st or second quartiles over 5 years.
Loan balances of $110,000,000,000 were up 7% year on year with record mortgage balances up 20% and solid growth in traditional lending. Before I move on, as you're aware, the Department of Labor issued the final fiduciary rule last week. It's a long and complex set of requirements and details will matter. It will take time to fully digest. On first read, there are no significant new provisions from the proposal that would change our position, which is that we've been a fiduciary for over 150 years.
And based on our current advisory business, we are confident in our ability to adjust and be successful. Perhaps one of the biggest positives is the longer time to implement, which allows us to be even better prepared. Skipping Page 8 as we actually have nothing significant to call out on corporate, I will move on to the outlook on Page 9. We've included our guidance from Investor Day on the page, and it's unchanged, so I won't go through it. So just two new points to highlight.
For Asset Management, the 1st quarter revenues adjusted for the $150,000,000 were a little over $2,800,000,000 And assuming relatively constructive markets, we would expect those revenues in the Q2 to be flat to up, but to be less than 3,000,000,000 dollars And obviously, expense will also be flat to up in line with those revenues on performance based compensation. In the Commercial Bank, we expect revenues will be up modestly on continued loan growth, but we also expect expenses to increase to about $725,000,000 as we add bankers and execute on our technology and product investment strategies. The upshot of which is we expect pre provision net revenue for the commercial bank to be relatively in line with the Q1. Before moving to Q and A, I want to make a few comments about the news this morning regarding Living World. Obviously, we were disappointed with the conclusion reached by the joint agencies on our resolution plan.
We have taken this planning process very seriously, and we believe we've made substantial progress. Having said that, the most important thing is we work with our regulators to understand their feedback fully and in more detail, and we are fully committed to meeting their expectations. So wrapping up, despite challenging market conditions, we delivered really quite good performance in the quarter with diversification allowing us to perform well in difficult environments and be there for our clients. Operator, you can open up
Your first question comes from the line of Matthew Verneau. One moment. Please go ahead.
Good morning. Thanks for taking my questions. Miriam, maybe a couple of questions on energy. You noted that the provision was slightly above your guidance this quarter relative to what you mentioned you thought it might be in late February. Guess I'm curious in terms of what your expectations are in terms of your guidance relative to potential draw downs, particularly in the $10,000,000,000 of high yield loans that you have on drawn and what your ability is to potentially mitigate potential draw downs based on the financial condition of your borrowers?
So, hi, Matt. So the first thing I would say is, with respect to oil and gas, honestly, I think $529,000,000 is pretty close to $500,000,000 plus or minus. So that was pretty much in line. Where you are seeing it be a little bit higher was on Metals and Mining. We were expecting close to $100,000,000 and there were a couple of extra downgrades that came through in the quarter.
And that kind of timing is going to happen. It doesn't change the overall perspective for us. With respect to drawers, when we when I gave some sort of indicative guidance about what you might expect to see potentially in the rest of the year in terms of reserve builds, we do try to take into consideration the likelihood that we will see incremental draws. And clearly, we will work with borrowers to try and help them such that, that may not be necessary. In other cases, we can reduce our exposure in redetermination cases.
But we will expect to see some draws and that's contemplated in our guidance. And I want to make sure that everyone understood that we tried to be very complete. So this is not just oil and gas and metals and mining. As the NAICS code would suggest, we've looked at very closely related companies in shipping and marine transportation and the like. So we're trying to be very complete.
And we've yet to take a loss?
We have taken a couple.
Like almost?
Yes, nothing, not very much.
Fair enough. That makes sense. But that dovetails nicely actually into my follow-up. In terms of the wholesale non accrual balances, those were up about $1,200,000,000 quarter over quarter. Can you give us a sense as to how much of that was Energy and metals and mining?
And were there other areas of the portfolio that added to that? And what's your outlook for wholesale non accruals over the course of the next couple of quarters?
So of the $1,000,000,000 to $1,000,000,000 was a combination of oil and gas and metal mining for the vast majority. And outside of that, consistent with my comments on contagion, there's not any sort of thematic other noteworthy thing to mention to you. And obviously, as we continue to watch the sort of cycle play out over the next several quarters and we evaluate some clients that may be experiencing stress, it's likely that we will see some more NPLs. But I gave you context around what we're expecting to see in terms of reserves. So they will go up, but not two numbers that I consider to be large in the context of our wholesale portfolio.
Your next question comes from the line of Glenn Schorr with Evercore ISI.
Hi. Just one follow-up. What was the drawn on energy facilities this quarter? It doesn't seem to be too big, but and then related to that, what's the reserve as a percentage of drawn credit right now?
The draws were about $1,300,000,000 in the quarter. So some, but not excessive. And after the reserves that we put in the Q1, the coverage ratio is 6.3%.
6.3%. What is the
comp balance?
And then maybe a little bit of different question.
Sorry, Glenn, just on that $6,300,000 that's a firm. If you look in the commercial bank, obviously, it's higher. So you've got a sort of different portfolio mix in the commercial bank versus the CIB. So for some parts of our portfolio, it's closer to 9% or 10%, and in other parts, it's lower. Sorry.
Your second question?
I appreciate that, Nai. Thank you. The other question is on growth. We've been waiting for a long time, but you've been seeing great growth across a lot of different products. I mean CRE up 18% and the commercial banks, C and I up 9%.
At this stage of the cycle, I appreciate the consumers shown a lot of strength. Is there any growth where we scratch our heads and said, wow, is that growing too much? It sounds funny that for me to be asking for less growth, but just curious to get your thoughts.
It's a perfectly reasonable question. And obviously, when we look at growth in CRE or the commercial real estate businesses of 18%, it's an obvious question, are you doing something different? And the answer is, no, we're not. We haven't changed our geographies. We haven't changed our risk appetite.
It just simply is the case that we have a good process, and we are continuing to focus on our sort of core capabilities and our core risk segments. We've been able to take advantage of the opportunity because our process is better and to a lesser degree, but nonetheless to a degree, given that the CMBS market has been somewhat disrupted.
Your next question comes from the line of Betsy Graseck with Morgan Stanley.
Hi, good morning.
Hi, good morning. I have
a question on the living wells. The indication today was that there were 4 areas that you needed to enhance. Liquidity was one of those. And I was a little surprised to see that given the strength of your liquidity book. I guess what I'm wondering is, does the Living World submission and the changes that you have to make have an impact on your current business, at all?
In other words, do you need to build liquidity to meet the requirements that the regulators have? Or this is in a, obviously, worst case scenario you would build at that time?
So Betsy, obviously, we're having only received the specific feedback less than 24 hours ago. We still have to get into the analysis phase about what it all means. I would start with your opening comments that considering our liquidity, you were surprised. This doesn't appear to be a statement about the adequacy, obviously, of JPMorgan's liquidity, which is very significant, as you know. But it's really about how we analyze and think about that, at the material legal entity level and the inter affiliate nature of how we fund our entity.
So I can't tell you with any clarity exactly what will be required as we get into the analysis. It wouldn't be my core expectation that it would require us to do a meaningful overall new liquidity actions, but we have to do the work.
So as we think about the implications of this morning's announcement, it's around your planning and procedures as opposed to a likely impact on the business operations today and the results that you can generate. Is that a reasonable
conclusion?
Again, just based on the based on our preliminary read, I think there's going to be significant work to meet the expectations of the regulators. And our plan already had us doing a lot of work around actual real simplification of legal entities and other things. So I don't know that there are going to be significant changes. It's not my primary expectation that there would be, but we do need to have a moment to go through the details.
The liquidity of the company is extraordinary. We have $400,000,000,000 in incentive banks around the world, $300,000,000,000 of AA plus short duration securities, just about $300,000,000,000 of very short term secured, really top quality repo or type of stuff like that. The trading book is $300,000,000,000 which is mostly very liquid kind of stuff. So it's the liquidity is extraordinary.
And I would say just again, we need to do the work and we need to figure out obviously what the response to that will be. But it is encouraging that some plans were found to be credible for large systemic financial institutions. And if they have been able to adequately show the preparedness, we're confident we should be able to do the same. We just need to make sure that we understand the details of what it is that we don't have in our plan today that we need to change, and we're committed to doing it.
Your next question comes from the line of Gerard Cassidy with RBC.
Thank you. Good morning. Mary Anne, can you expand upon your comments in your opening dialogue about the energy exposure? You're not too worried about the contagion risk, but you did say that there are a couple of specific issues relating to some very closely related companies. Can you give us more color on what you're referring
to? Yes, absolutely. So I just wanted if you use the industry codes the way that you could if you want to expand your thinking to just what is technically considered to be an oil and gas company, you would miss out on, for example, a marine shipping company that all they do is ship oil. And therefore, their financial condition and their performance is going to be directly related to the health of the energy sector. Those companies, we have identified them specifically.
They are managed within our energy risk team. They are not managed by a different team. So I was simply saying that some of the companies that we are watching and in 1 or 2 small cases that have experienced some stress are not traditional energy companies, but their condition is directly related to oil and gas.
Thank you. And then on the loan growth, which is obviously very strong, what are your people on the front lines saying about commercial real estate? Are there any changes in terms of underwriting metrics that your frontline people are seeing since that we are starting to see in certain markets like multifamily, which you guys have already identified as some weak spots. Are there any other underwriting issues that are cropping up now that you didn't see 3 months ago or 6 months ago?
So obviously not for us. I would say that it's competitive and as is the C and I space is very competitive. Commercial real estate is also competitive, but it's not irrational. And we aren't seeing or at least we are not seeing very rational proposals on structure and risk. Meanwhile, we haven't changed our risk appetite.
We haven't changed our underwriting standards. We continue to have lower LTVs and higher debt coverage ratios pretty consistently, consistent geography. So speaking for JPMorgan specifically, there's been no change in our underwriting standards. In fact, if anything, since the last crisis, obviously, or the last recession, we tightened our underwriting standards and we've moved away from some of the riskier types of that business, so homebuilders and a lot of construction loan business.
Your next question comes from the line of Michael Mayo with CLSA. Hi.
That was a very serious CEO letter you had in the annual report, but two questions related to that. One would be you, Jamie, indicate the potential for higher interest rates and just looking for some more color into why you think that's the case and if you're preparing the bank for a scenario of higher rates or if you're just trying to set a tone at the top or perhaps be contrarian. I know you gave some technical factors in the CEO letter. And then the second thing is just the contrast between what you have in the CEO letter, liquidity, trading, governance, oversight with the living will letter that came out today. And just to follow-up on the earlier question, do you simply have to write a better resolution plan or might you have to change a little bit the way you do business and does this make you have a more conservative CCAR ask?
Hey, Mike. I'll start and then Jamie can add to it. So on the interest rate point, the callers are pretty consistent with what we said over time, which is we have the belief that the U. S. Economy is continuing to move in the right direction, that the consumer is on solid footing and that despite the noise in the data and some of the volatility in the market, global growth will continue, albeit at a moderate pace.
And obviously, stability in the markets in March has continued to help us with that thesis. And so that coupled with the fact that the Fed themselves, both while they're dovish in their narrative in the minutes and also their dots are continuing to talk about gradual increases and the debate around negative rates has kind of quietened. So we don't particularly run the company with a day to day view on what's going to happen with interest rates. We are positioned for rising rates, as you know and have been. But we also understand what the performance of the company looks like if there are no more rate rises or when we stress our portfolios in lots of different ways.
So we are positioned for rising rates. It is our central case that that will happen. The market is pricing less than one hike in this year. The Fed does say too. Our research says too.
We're just going to have to wait and see. I'll also start and then Jamie can jump in on the Living World thing. We have to face value in discussions with our regulators that we need to meet their requirements, whatever they may be, all of the rules, whether it's capital, whether it's liquidity, whether it's stress testing, whether it's resolution plans. And if we do that and satisfy them, then we can continue to operate the company the way that we think it is best for our clients and communities around the world. And so at this point, we need to remediate and address the issues and the feedback they've given us and resubmit a plan for assessment that we hope will be credible and that's certainly what we will commit to do.
And that's what we're focused on.
Was
there anything else from Jamie on that? Because if you compare and contrast the CEO letter to what the regulators just said about you guys, it's not completely consistent.
Well, I don't I mean, I don't think it's inconsistent. We're trying to meet all the regulations, all the rules, all the requirements. It's been we've been doing that now for 5 or 6 years. It is 5 what is it, 6 years since Dodd Frank was passed. They have their job to do and we have to conform to it.
Yes. And I know it's easy to sort of overlook the first few statements where there's an acknowledgment that progress has been made. And none of the feedback in the letter negates the significant progress across the industry on capital liquidity stress testing. So it is consistent, but we have more work to do and we'll do it.
And on the interest rate stuff, I wasn't predicting it. I'm simply saying, I think there is a chance it will be different than what people expect and it will be a little they say it will be gradual and full of sudden.
Your next question is from the line of Brian Foran with Autonomous.
Hi, good morning.
Good morning.
I wonder on trading, you appreciate that you reported first, so you haven't seen the market yet. But two questions around the whole thesis, last man standing versus restructures. 1, do you have any sense of whether your performance overall in really thick represented market share gains or not this quarter? And then 2, with some of the guidance coming out of the European banks in particular being very poor and some of the restructurings maybe accelerating steam, is there any thought around comp and maybe use that as a lever to improve returns over the remainder of the year and into next?
So starting so obviously, we're the first to read out. And it's very difficult when you think about performance because you also have to think about the relative performance in the comparable periods in prior years and the like. So I would say that down mid single digits adjusted for what we would consider to have been outperformance last year is really quite good performance. So I don't know that we gained share, but I certainly think we protected share. And it may differ across the different product sets.
So I think in general, we feel pretty good about our performance, and we have no anything to the contrary.
And I'd just add that $5,000,000,000 plus of sales and trading in a quarter like this, I look as good, earning decent returns, we have good margins, we're not quite sure about share, but it was quite I would look as quite a good performance and trading losses were what we had was 6 days you said to me or 6 days, yes. 6 days, they were so it's like $40,000 So the actual results were just that's really good. I look at that as a very healthy business.
Yes. And then with respect to the sort of restructuring and whether that presents opportunities for us broadly defined, including in compensation for better performance, we pay for performance and we pay risk adjusted returns and we're not looking to try and make changes to what we've been very consistent about over time. And you can see our constant revenue ratio of 32% this quarter is in line with the ratio in the Q1 of last year and in fact the Q1 of the year before. So lower obviously on lower revenues, but no a fair pay for the performance. And obviously, we intend to ensure that we are competitive, but we're not going to take any direct actions as a result of that in terms of the European We've
also got big deals done near the end of the quarter in Watson Digital, Numerical Cable, which is part of sales and trading. We also got we did this, I thought, a very creative Chase, I thought we'd call it Chase Trust, the first real securitization in a long time in the mortgage business. We do revenue risk sharing and I think it's quite good.
Your next question comes from the line of John McDonald with Bernstein.
Hi. Just a question on expenses. First, was there any legal expense in the quarter? And then just a broader question, Mary Anne, are the incremental expense saves you're getting from your programs falling to the bottom line? Or is it some of it getting reinvesting?
Like in CCB, I noticed the headcount is up a little bit on Page 11, just the last couple of quarters. Does that reflect like reinvestment of the cost saves? And then just on the legal side, if you had anything this quarter. Thanks.
So on legal, I would so the number is circa 0. Pretax is actually slightly positive after tax. We did some true ups of our assessments on penalties. So actually, net net, about 0 this quarter, which I'll take it for the quarter, but it doesn't necessarily predict the future. In terms of expenses, so we talked at Investor Day, Gordon, in particular, but also Daniel, that we are continuing to invest in our businesses and across the board, in fact, adding bankers and technology and digital digitizing, etcetera.
So we continue to do that across the businesses. And I mentioned in the CCB page that the net expenses, albeit down, includes the self funding $200,000,000 of incremental investments year over year and growth. But you did notice the headcount in the consumer businesses is up slightly. And that's a combination of the investments we're making in technology and digital. That's about 500 of the heads and the other 1500 is increasing part time staffing in the branches so that we have flexibility to make sure that we have loading at the right times of day for making sure the customer experience is good.
So I would characterize it all as very consistent. And yes, we continue to invest. And that is in part what you're seeing in the headcount in CCB.
And you saw a new credit card, Freedom Unlimited, 1.5% back. Doing a lot of stuff in Chase Pay. So the Starbucks thing, we have probably the top digital site and we continue to win awards in the consumer bank. So we'll always be investing there.
Your next question comes from the line of Erika Najarian with Bank of America.
Yes, good morning. You fielded a lot of questions on energy credit quality, but taking a step back, given that the delinquency statistics outside of energy still remain fairly stable, could you give us an outlook for how you think credit quality trends will play out for the rest of the year if the base case is slow growth in the U. S?
So it is our expectation across both the consumer and the wholesale businesses outside of energy that the credit trends will remain favorable or credit will be relatively benign. We're not expecting to see material increases, except for the fact that we're growing our loan portfolio. So when we did Investor Day, we talked about charge offs this year will go up year on year, and they'll go up to potentially as high as $4,750,000,000 But half of that would be on the back of the fact that we're growing our portfolios. And so you would have natural sort of BAU levels of charge off from that. And then the other half would be on energy.
So we're not expecting or seeing at this point anything other than good credit quality for the rest of 2016 outside of the obvious.
Great. And just one more follow-up question on the living will. You help us understand what you think the regulators meant in terms of if the remediation is not met by October 1 this year that there could be more stringent prudential requirements. Would that could that possibly mean higher capital or liquidity standards if the expectations aren't met by October?
I guess we always thought
of the living well as more of a cost issue rather than a further tax on regulatory ratios?
So I will start by saying that, as you know, our regulators have extraordinary powers over a wide range of requirements for us regardless and many ways of influencing those, and you're familiar with most of them. It is absolutely the case that as you look at the resolution process that there are provisions that talk about if remediation is not satisfactory with or cured within a 2 year period, there are the possibility that the regulators could jointly decide, may jointly decide to take other actions that could include capital or liquidity or leverage or operating model discussions. So obviously, they do have those powers. October is not that far away. We're going to do our very, very best to make sure that we put our best foot forward and remediate the issues.
And then we have another submission in July of 2017. So not to suggest that we won't fully remediate them to the very best of our ability, but the live in will process I expect to continue to be somewhat iterative over the next several cycles and we will continue to push ourselves to raise the bar and I'm certain that the bar will continue to be raised on us as it should.
Your next question comes from the line of Matt O'Connor with Deutsche Bank.
Good morning.
Good morning,
Matt. If I look at the Q1 net interest income, which was at least better than what I had, good NIM and think about your full year outlook, If I take it literally, it implies flattish net interest income dollars from here. And I'm just wondering if that's too little of interpretation or if maybe there are some offsets to the loan growth from, say, lower long term rates as we think about the rest of the year?
Okay. So we talked about the fact that if there's no change in rates and if we continue to grow our loans, we'd expect our NII to go up by $2,000,000,000 And so you're right, if you look at the run rate right now, that would be relatively flat from here. I think in our favor, because of the easing that's still going on around the rest of the world and the sort of dovish Fed comments, there's been lower repriced just in the industry generally. So that's in our favor. And you know we're much more sensitive to the front end of rates.
So while not suggesting that the long end of the curve has no impact, it's relatively modest. So $2,000,000,000 maybe a little more, The biggest driver of significantly higher NII above that guidance would be if we had another hike earlier than December.
And then just separately, any comments on the Treasury's ruling on inversion as you think about M and A, kind of broadly speaking for the industry and for you guys specifically? And if you can frame how much that's driven your M and A revenues in the past or the industry? Any color around that would be helpful.
So not going to talk specifically about the Treasury's actions other than saying that we would support fair tax reform in general. With respect to the impact on our business, either historically or going forward, it wouldn't be 0 and it wouldn't be significant.
Your next question comes from the line of Jim Mitchell with Buckingham Research.
Hey, good morning. Maybe we could talk a little bit about CCAR. I've had some investors express concern about the Fed's inclusion of negative rates. Have you found that to be difficult in terms of modeling? And overall, I guess, given the improvement on the flip side, given the improvement in your capital ratios, do you think that there's you should be able to see some improvement or increase in CCAR into now that you've looked at it for a few months?
Okay. So obviously, I'm not going to be able to talk specifically about our plans that we've submitted because we just submitted them and we haven't had any feedback and they're confidential. But I will tell you that obviously negative rates, it was the first time this has been in the scenario. It is not the first time we have thought about it and it's not the first time that we've experienced it in at least in other parts of the world in Europe, Japan and elsewhere. So we have had strategic discussions.
We understand broadly what we think we would do and what would happen to our balance sheet. We can model it and we can affect it. So in that sense now, I mean, obviously, we'll continue to work that process through if it continues to be a feature of CCAR. You're absolutely right that year over year, our launch point is a higher level of capital and our balance sheet and our credit quality continues to improve. And our risk levels have not materially changed.
So as a general matter, we would hope and we've also added press. So as a general matter, we would hope to have incremental capacity, but nothing inconsistent with what we have said externally, which is that the Board would like over time to continue to have the capacity to potentially increase dividends and that we would like the capacity to within a reasonable range repurchase ourselves and that's the framework that we have used to submit our
plan.
Your next question is from the line of Steven Chubak with Nomura.
Hi, good morning.
Morning.
So Mary Anne, within the Asset Management segment, you noted that the revenues were down in line with the market. But if we isolate the fee income components to exclude some of the gains you highlighted as well as other income, the revenues declined by double digit both quarter on quarter year on year, which is a bit more pronounced than what we had expected. And I was hoping you could speak to maybe some of the factors outside of the market declines that are maybe impacting revenues in that business, specifically what you're seeing in terms of retail engagement and maybe whether you've seen any improvement in sentiment now that the markets have recovered pretty nicely off the February trough?
So if I do the sort of I don't want to use the word call. If I adjust for the full impact of the asset sale that was in the quarter, not just the $150,000,000 in this quarter, but also the revenues that were present with respect to that in the Q1 of last year, my adjusted revenues are down about 4% to a market that on average, while I appreciate that it recovered in March, but the market on average for the quarter was down around 5%. So we would characterize that as generally in line. And similarly, if you do adjustments on the balance sheet side, the assets on the management and client assets. So certainly, you can speak to Jason afterwards and reconcile our numbers so that we're not confusing each other.
I'm sorry, what's the second part of your question?
The retail engagement.
Retail engagement. So retail engagement picked up in March, as you would expect. We saw positive flows. We obviously saw negative flows for the quarter in equities. That's not surprising.
And then we saw positive flows, particularly in multi asset. So we did see some reasonably healthy retail flows in the quarter, but primarily in March and somewhat offset by outflows in equities.
Excellent. Thank you.
Thank you.
Your next question is from the line of Brennan Hawken with UBS. Good
morning, Mary Anne. Quick question on NIM here. Can you talk about how sustainable you think the NIM expansion might be and whether or not there's anything one time in the numbers we should adjust for?
As I would have it, in this quarter, there is nothing onetime that you need to adjust for. Last quarter, there obviously was. So we would expect that our NIM should be stable to improving over the course of 2016, the extent to which it would improve, obviously, depending upon what happens in terms of gradual rising rates.
Okay, great. Thank you. And then on the energy exposures in the loan book, can you comment on maybe whether or not some of the equity capital raising that we've seen in the energy space has perhaps taken some of the tail risk away from that book? And then is it possible also to update us on the criticized exposures in oil and gas? I believe in the 10 ks, it was somewhere around $4,500,000,000 at year end.
Okay. So with respect to equity capital raises, I mean, obviously, to a degree, that would be true, although those companies that were able to access the equity capital markets are not those that are experiencing the most stress. So obviously, all other things equal, it's a positive, but I'm not sort of necessarily thinking it's going to take significant steam or the pressure off. With respect to second part of your question, I'm so sorry.
The C and C.
Jason will get back to you. I'm sorry, I don't have the answer.
No problem. Thanks so much.
Your next question comes from the line of Eric Wasserstrom with Guggenheim Securities.
Thanks. Marion, can you comment on what competitive conditions are like in the credit card market currently and if there's been any change around the intensity of competition for co brands and rewards. And I think, Jim, you alluded to the launch of a new product. I'd love to get an update on your initial thoughts about how that's going.
Okay. So no, nothing has changed in the car's competitive landscape, including in co brand. It's still very competitive, albeit that we are we saw a little bit of deceleration in sales growth year over year last year, and we've seen that trend back positively for us this year. So we feel good about that, and we've been increasing our marketing spend. And as Jamie just say, we launched Freedom Unlimited quite recently.
And it has been quite recent, but early feedback is very positive with respect to Freedom. We're seeing 50% increases in activity and interest. There's going to be a degree of cannibalization of other products. We would expect that. But so far, so good.
And we just like to give our customers choices and it's being favorably received.
Great. Thank you. And on the auto has been a big area of focus and you touched on it certainly during your Investor Day. But in the mid cycle range, is there anything going on a macro level that would suggest some significant likelihood of credit quality deterioration?
So the Manheim is down slightly. We continue to believe and expect that it will continue to trend downwards. And so loss of unit will continue to trend upwards just given where it is today and also the amount of lease inventory that will ultimately go into the used car space over the course of the next several years. However, the fundamentals are still good. The market is still solid.
We have pulled back on subprime a while ago. It's a small part of our originations. And so other than seeing some delinquencies pick up as expected in some of the energy related states but not very significantly. There's nothing at the moment that's on the burner.
For us.
I do think it's the issues in the market.
Your next question comes from the line of Paul Miller with FBR.
Thank you very much. In the mortgage banking segment, you wrote down the MSR by almost it's like $900,000,000 Was there any hedging gains? I couldn't find them in the documents. Any hedging gains to offset that?
So the MSR P and L for the quarter was positive $124,000,000 and there were a combination of sort of BAU immaterial factors that added up to that and probably about half of it was a combination of hedge performance and the market.
Okay. And the other then on the mortgage banking side, have you been seeing you saw the MBA Today release that the purchase applications are the highest since 2010 or something in that order. Are you seeing the spring buying season, especially on the purchase side, starting to pick up?
Yes, yes. So our purchase applications are up 30%, I think, year on year. We continue to see positive momentum in that space and we are seeing spring activity continue to be robust as expected.
Your next question comes from the line of Ken Usdin with Jefferies.
Hi, thanks. Good morning. Just two
quick follow ups on the fee side. Understanding that market dependence is built into the outlook to get the $50,000,000,000 of fees for the year. I'm just wondering, have now run rated the combination of I guess the question is really what are the things that you expect to get better from the Q1 on the fee side outside of normal seasonality?
Okay. So in terms of run rated, the 2 biggest drivers of the walk that we gave at Investor Day were the CardCo brand renegotiations and the mortgage banking non interest revenue. I would just point out that while we are seeing some of the incremental impact of Card renegotiations that will play out over the course of the year. But on the positive side and on the positive side, mortgage banking, just given where rates were over the quarter, has been positive relative to set the central expectations when we did Investor Day. So those two things are worth noting.
But we are seeing really quite good drivers in non interest revenue drivers across the consumer space generally, in debit, investments, in fees and accounts, in the sort of 4%, 5% range and sometimes in the range higher than that. So we're continuing to see exactly what we expected, which is the majority of our businesses will continue to deliver mid- to high single digit growth, and they seem set to do that. The card impact will be what it will be, and mortgage NIR will end up down year over year, whether it's $700,000,000 or $600,000,000 we'll see. And so the biggest driver of what the end result will be is going to be markets.
Yes. Okay. And I know it's a smaller line item, but just noticing the guide for security services to be flat from here. There's always some seasonality in there too. But I'm just wondering if you can just give comment about what you're seeing in that business and are there any incremental challenges that leave you kind of with a flat outlook?
Yes. I mean, look, the business is not immune to markets either. So obviously, as you look at the performance for the quarter, our fees have been impacted by lower asset levels. And we also have got the tail impact of some business simplification, just getting the tail of that out of the performance. We are also seeing the benefit of higher rates.
So I would characterize the majority of those negatives on lower fees and simplification is being behind us. So the trajectory, if rates continue to rise, would be upwards, but that's why we said market dependent. We were not expecting our performance to go down from here, flat to up, but depending on rates.
Your next question comes from the line of Christopher Wheeler with Atlantic Equities.
Yes, good morning. The question is already on the compensation ratio. You obviously done a fantastic job on the cost base. But one of the issues that strikes me is clearly with the reduced revenues, particularly in the Capital Markets business, your comp down about €400,000,000 in the compared to the Q1 of the quarter of last year. And obviously, what we've experienced generally is you're holding the ratio reasonably steady for the second or third quarter and then slowing up with a lower ratio in the 4th quarter.
So I'm looking at the estimates we have for revenues on a well known provider of data. We've got pretty flat revenues being forecast by people like me, whether we're light or long. Should we be thinking about how you're going to build a bonus pool on the against this background and whether we should be looking at thinking thinking that you're going to have to retain the comp ratio at a pretty similar level through the year if indeed we don't see any uptick in revenues and they remain reasonably flat?
So the comp
I just use 32%.
Yes. Well, we've given the range 30% to 35%. We've been at the lower end of that range. When we performed very strongly, we could drift up. If we performed less strongly, we pay for performance.
And I think we did a good job in the Q1.
We have among the lowest ratio. And we're paying our people properly and well.
And consistently.
Yes. But I'm by no means arguing about the quality of the ratio. I'm just interested in sleep because clearly what we're seeing on Wool Street is and indeed in Europe is the difficulty of building a pool when you've been so used to having a very strong Q1, obviously makes it quite difficult. Maybe just as a follow-up, which is vaguely related. Could I just ask, you talked earlier about there's a question earlier about competition and picking up market share, which indeed you clearly have.
But one of the questions I perhaps just wanted to ask is, an area you've been pushing hard on is equity, cash equities in particular. My sense is that actually a lot of the players, including the Europeans who are doing massively slot shillings, are putting more capital into equities on the back of the fact that it's a lower capital business. And therefore, they think they can get higher returns. And just maybe that's why the Mueller pulled out of European equities yesterday. What are you seeing in the equity space in particular?
Because I don't I'm not seeing as much sort of withdrawal as we have done in the fixed space.
That's very fair. And we talked about it pretty often that people, when they restructure, they restructure out the things that they were less strong at, less profitable at. And in many cases, they double down where they continue to have strength and we are seeing that. And that's what we mean when we say there's always someone left to physically compete in every part of our business and Equities is no exception, if not the poster child for that. However, the equities business here at JPMorgan, we've rebuilt our technology platform.
We have rebuilt the prime well, we've built the prime brokerage international capabilities. The 2 of those work hand in glove, and we have every opportunity to continue to gain share and win.
And we've done very well gaining share in electronic trading and the prime broker has been built in Asia and Europe where we had some weaknesses. So you've seen our share go up and we intend to win it. We have top notch research which helps obviously helps drive the equity business too.
Your next question comes from the line of Gerard Cassidy with RBC.
Thank you. Marion, just as a follow-up, I just want to make sure I understood you correctly on the $500,000,000 of incremental reserve build for energy for the remainder of the year, that's for the total of the following 9 months. Is that correct?
That's correct.
I mean, give or take?
Give or take. And that's right. Obviously, there's a high degree of variability around it. If we had complete ability to understand it, we would lean into those reserves, but there's a it's name specific, it's situation specific, it will evolve over time. We just wanted to give you an indication that there's likely to be some more costs.
It could be plus or minus quite a bit from that, because we've had to make some stress assumptions in there. But 500 to 9 months, yes.
Okay. Thank you. And then I know there was the Energy specific shared national credit exam that the Q1 results for the industry will reflect similar to your own. But we also have the traditional shared national credit exam that's been done for 20 plus years. Any color on how that's going, the normal Shared National Credit Exam?
Yes. No, Jared, I'm not going to make any comments about SNC, except to say that everything that we know and are aware of is reflected in our results.
Your next question comes from the line of John McDonald with Bernstein.
Hi. Two quick follow ups, Mary Anne. Getting a couple of questions about just the math on the energy reserve ratio. I think you mentioned 6.3%. Just to be clear, is that the reserve for loans, overfunded loans and then there's an additional reserve for unfunded commitments?
Correct. Yes.
Okay, got it. And then did you tell us the size of your energy commitments and whether they changed at all this quarter?
They changed by a couple of $1,000,000,000 on a single name that we like.
And there are no further questions at this time.
Thanks very much. So wait,
before you all go, we should say goodbye to Sarah Youngwood, who goes on to a bigger and brighter job as CFO of the Consumer Bank, and she did outstanding job, and she's being succeeded by Jason, who's going to say hi right now. Hello. Hi. And yes, congratulations, you guys have done an outstanding job.
I say that. Thank you, everyone. I'm nearly forgot. Thank you.
Thank you for joining today's conference call. You may now disconnect.