Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Third Quarter 2015 Earnings Call. This call is being recorded. 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 afternoon, everyone. Thank you for joining us. I'm going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer regarding forward looking statements at the back of the presentation.
Starting on page 1, the firm reported net income of $6,800,000,000 EPS of $1.68 and a return on tangible common equity of 15% on $23,500,000,000 of revenue. If you exclude tax adjustments, legal expense and net reserve releases, our adjusted performance was $1.32 a share with a 12% return on tangible common equity. And we've only adjusted for these three items because other smaller items that might be considered non core netted to 0. Underlying results were somewhat mixed on the back of market conditions. The Consumer business had strong performance with loan growth across products, driving overall firm wide core loan growth of 15%.
In the Corporate and Investment Bank, we saw outperformance in Investment Banking revenue and solid trading performance. Commercial Banking revenue was down driven by lower IB revenues in a declining market and Asset Management revenues reflected lower market levels driving weaker client sentiment and transactional revenues. There were 2 significant items this quarter. First, tax benefits of $2,200,000,000 the size of which speaks to the complexity of tax matters during the financial crisis. We took appropriately prudent position in our tax reserves, and now we've reached resolution on those matters.
The majority of this is in corporate with a portion in the CIB. The second item is firm wide legal expense of $1,000,000,000 after tax relating to a range of matters, including the recently announced CDS settlement. Also reflected in our results is a net reserve release of $281,000,000 pretax, which reflects a little less than $600,000,000 of consumer reserve releases as favorable credit trends continue, offset by a build of a little over $300,000,000 in wholesale, approximately $160,000,000 of which is additional reserves associated with the oil and gas sector, given expectations that energy prices will remain lower for longer. Skipping over page 2 and turning on to page 3 in our balance sheet. We continue to make progress against our capital targets and as expected advanced and standardized fully phased in CET1 ratios are in line with each other at 11.4% this quarter.
Also, we continue to expect the standardized ratio will be our floor from here, and the improvement to both ratios was driven by net capital generation. We also built Tier 1 and total capital, adding $1,200,000,000 of preferred stock and $1,500,000,000 of subordinated debt this quarter. We returned $2,700,000,000 of net capital to shareholders, including $1,000,000,000 of net repurchases and dividends of $0.44 a share. Firm and bank SLR were at 6.3% and 6.5%, respectively, with the increase driven almost equally by capital generation and a reduction in average assets. While we're on the balance sheet, you can see on the call outs on the page that on a spot basis, our balance sheet is down $160,000,000,000 year to and an incremental $32,000,000,000 this quarter, as we reduced non operating deposits by over $150,000,000,000 exceeding our commitment.
Total deposits are only down €90,000,000,000 reflecting growth in more stable balances, particularly consumer. Finally, with respect to GSIB, we estimate that today we are squarely in the 4% bucket given actions taken and the final U. S. Rules as compared to 4.5% at the beginning of the year. Now let's turn to Page 4 and Consumer and Community Banking.
The combined consumer businesses generated $2,600,000,000 of net income and an ROE of 20%. Revenue of $10,900,000,000 was down 4% year on year, driven by mortgage on lower net servicing revenue. We remain on track to deliver expense reductions versus our $2,000,000,000 commitment and year to date expenses were down around $600,000,000 reported and over £700,000,000 adjusted for legal expense. Our headcount is down 10000 year to date and more than 40,000 since 2012. Underlying business drivers are strong and based on the 2015 FDIC deposit survey, which just came out, we grew our deposits nearly 2x the industry growth rate.
Average loans are up 8% with core loans up 23%. Our customer base continues to expand. We added 900,000 households year over year and our active mobile base is up 21%. Moving to Page 5, Consumer and Business Banking. CBB generated strong results with net income of $954,000,000 and an ROE of 32%.
NII was down 1% quarter on quarter and 7% year on year, driven by spread compression offset by continued growth in deposits. And non interest revenue is growing solidly, up 5% quarter on quarter seasonally and 5% year on year on continued strong debit and investment revenue. Overall expenses were down 3% year on year on lower headcount from branch efficiency. We continue to see robust performance across key drivers. Average deposits were up 9%, and we grew deposits in all of our top 50 MSAs and gained share in 9 of our top 10.
Client assets were up 3%, but down 4% quarter on quarter, broadly in line with the market, and net new money was positive $3,000,000,000 for the quarter. Business Banking loan growth remained strong with average loan balances up 6% year on year and originations up 4% from a strong 2014. Next, mortgage banking on Page 6. Overall, net income was $602,000,000 for the quarter. Originations of $30,000,000,000 were up 41% from the prior year and up slightly quarter on quarter as we benefited from a strong pipeline and continued improvement in the purchase market.
We continued to add high quality loans to our balance sheet totaling $19,000,000,000 this quarter. Total revenue decreased sequentially, primarily driven by lower net servicing revenue on lower MSR risk management. We expect non interest revenue to be down around $250,000,000 year over year in the 4th quarter. Expenses of 1,100,000,000 dollars were down 13% year on year despite higher volumes as we continue to manage down our costs. On credit, we released $575,000,000 of reserves, including $200,000,000 in the non credit impaired portfolio and £375,000,000 in the purchase credit impaired portfolio, reflecting an improvement in both actual and expected delinquencies and a sustained improvement in home prices.
Finally, our net charge offs were $41,000,000 and approximately $60,000,000 normalized and this is a reasonable estimate for the near term. Moving on to Page 7, Card, Commerce, Solutions and Auto. Overall net income of $1,100,000,000 with an ROE of 22% and revenue of 4,800,000,000 dollars was up 2% year on year on higher operating lease income in auto as well as card revenue up slightly reflecting higher NII on volume, spread and lower interest reversals, offset by the impact of changes to some of our co brand partnerships. On our partners, we were thrilled to announce the renewal of 2 of our key partners, United Airlines and Southwest Airlines. We look forward to continued investment and growth in these important relationships.
And while we reprice to the current competitive market, our ROE target for the card business in total remains unchanged. However, expect the revenue rate for the 4th quarter to be 11.75 percent plus or minus. Expense was $2,200,000,000 up 8% year on year, driven by higher auto lease depreciation and higher marketing spend. On drivers, we continue to see strong year over year growth in volumes and transactions across our businesses. In card, core loan growth was 3%, sales growth was 6%.
Commerce Solutions volumes were up 11%, driven by continued strong spend from existing clients, but also from the addition of new merchants. Lastly, in auto, results continue to reflect steady growth in new vehicle sales and stable used car values. We saw average loan and lease balances up 9% and the pipeline
is good. Finally, on credit,
the net charge off rate for the quarter was 2.41 basis points, and we expect net charge offs of around 2.50 basis points over the medium term. Turning to Page 8 and the Corporate and Investment Bank. CIB reported net income of $1,500,000,000 on revenue of 8,200,000,000 dollars and an ROE of 13% adjusted for legal, taxes and reserves. In Banking, it was a strong quarter with IB revenue of $1,500,000,000 up 5% year on year. We continue to rank number 1 in global IB fees and ranked number 1 in North America and EMEA.
It was another outstanding quarter for advisory, up 22%. We grew wallet share by 150 basis points year over year, maintaining our number 2 ranking. Equity underwriting fees were down 35%, generally in line with the market, but from a particularly strong prior year. This quarter, we ranked number 1 both in North America and EMEA. Debt underwriting was up 17%, driven by higher non investment grade fees.
We maintained our number 1 ranking, gaining 30 basis points of share. However, expect DCM fees to be down year over year given the current pipeline. Treasury Services revenue were flat quarter on quarter, but down 4% year on year on lower deposit spreads with underlying transaction volumes remaining stable. Moving on to markets. Revenue of $4,300,000,000 was down 6% adjusted for business simplification, with mixed results in fixed income, but another strong performance in equities.
Fixed income revenue was £2,900,000,000 down 11% adjusted. In macro products, we saw strong performance in currencies and emerging markets, driven by higher activity on the back of market volatility in Asia and Brazil. Rates was down slightly given a particularly strong September of last year and commodities was down on low levels of client activity again compared to a strong
prior year.
It was a slow quarter in credit with lower volumes as clients were on the sidelines given the challenging market conditions. Equity markets had another strong quarter with revenues of £1,400,000,000 up 9% year on year, driven by reasonably broad strength across products and regions, with good performance in cash, a particular strength in Asia and derivatives. Security Services revenue was $915,000,000 versus guidance of $950,000,000 given depressed market levels which impacted both revenues and assets under custody, with emerging markets, which is one of our more profitable segments, being hit particularly hard. If markets remain at these levels, 4th quarter revenues will also be lower than previous guidance. On credit, we saw a reserve build of $232,000,000 including $128,000,000 for oil and gas.
Finally, on to expenses. Total expense was up 2% year on year at $6,100,000,000 Compensation expense was down 13% with a comp to revenue ratio of 30% in the quarter and non compensation expense was up 14%, driven by higher legal expense, partially offset as we realized the expense benefits of business simplification. Moving on to Commercial Banking on Page 9. Commercial Banking generated net income of $518,000,000 on revenue of $1,600,000,000 and an ROE of 14%. Revenue was down 5% quarter on quarter, driven by lower Investment Banking revenue as we saw fewer large transactions in the quarter.
However, the pipeline for the Q4 is solid and we still expect record gross IB revenues this year exceeding $2,000,000,000 Expenses of $790,000,000 were in line with guidance. Loan balances were a record at $162,000,000,000 up 13% year on year and 2% quarter on quarter, driven by continued outperformance in Commercial Real Estate where quarter on quarter growth of 4% exceeded the industry across both multifamily and real estate banking. C and I loans were flat, in line with the industry. Mature markets were relatively flat, but we saw growth in our expansion markets, up 4% quarter on quarter. Credit performance of the portfolio remained strong with no net charge offs and an $84,000,000 increase in reserves included a modest build for oil and gas.
Overall, while results were mixed this quarter, the underlying fundamentals of the Commercial Bank remain strong. Pipelines are trending higher in C and I and remain robust in commercial real estate. Our expansion market loan balances are up 20% year on year. Calling activity is up substantially across client segments and we've added around 400 new middle market relationships this year. Moving on to Page 10 and Asset Management.
Net income $475,000,000 with a 28% pre tax margin and 20% ROE. Revenue of $2,900,000,000 was down 5% year on year, driven by lower markets, which also drove lower transactional revenue, as well as the sale of retirement planning services in 2014, which drove $70,000,000 of the year over year decline. Looking forward to the 4th quarter, expect revenues to show normal seasonality from this low base assuming current market levels. Expenses were relatively flat and AUM of 1,700,000,000,000 and client assets of 2,300,000,000,000 held up well and were relatively flat year on year with negative markets and outflows driving a 4% sequential decline. We were not immune to the impact of interest rate uncertainty in equity markets and while we did experience overall modest net outflows, we had positive flows in our less market sensitive multi asset class and alternative platforms.
In Banking, we had record loan balances of $109,000,000,000 up 7% year on year, driven by mortgage, which was up 19%. And lastly, we continue to report strong investment performance with 81% of mutual fund AUM ranked in the 1st or second quartiles over 5 years. Turning to Page 11 in Corporate. Treasury and CIO's results for the quarter were very close to home. Other corporate reported net income of £1,800,000,000 driven by tax benefits.
And finally, firm wide NIM was up 7 basis points quarter on quarter given the mix shift away from cash and securities towards higher And given market implied, our NIM and NII should And given market implied, our NIM and NII should be relatively flat in the 4th quarter. Finally, our loan to deposit ratio improved 8 percentage points year to date to 64%. Turning to Page 12 and moving on to the 4th quarter outlook. A few items to call out. First, you'll see we updated our adjusted expense target to $56,500,000,000 or minus for the full year, which is better than our previous guidance and would equate to the 4th quarter adjusted expense being relatively flat to the 3rd.
We're expecting core loan growth of 15% plus or minus to continue in the 4th quarter. And finally, on markets revenue. Starting with business simplification, which will drive a 2% decline year on year. In addition, we expect to see normal seasonal declines in the Q4 versus the 3rd. And looking back over the last 3 years, that decline has been on average around 0.15%.
And so far in October across asset classes, the markets are pretty quiet. Obviously, we're only 2 weeks into the quarter and it's too early to give specific guidance, but based on those facts alone, analyst estimates appear high. Wrapping up, overall, the company performed quite well against the backdrop of interest rate uncertainty and volatile markets. We continue to invest in our businesses, and our underlying drivers are growing strongly and we're gaining share. And we have more than successfully delivered against each of our capital, balance sheet and expense targets.
And just before I finish, on one of those investments we're making, I want to update you on the progress we're making on our payment strategy. We continue to capitalize on our leadership position in payments. We have unparalleled assets in our issuing scale. We have the largest wholly owned merchant acquirer, our own closed loop network in ChaseNet and now a digital wallet in Chase Pay, which will be launched more broadly this year. The beauty of this is that we're able to bundle all of these capabilities together to provide better pricing and experiences for merchants, including access to data, as well as a better and more relevant experience for customers.
We expect to process more than $50,000,000,000 of Chase card volumes over Chase Net in 2016, And Gordon will share more details at Money 2020. With that, operator, please open up the line to Q and A.
So I'm curious the capital markets related commentary, I get there could be a hangover effect into Q4 and I'm guessing that's the primary driver behind your analyst estimates appear high on Q4. But can we talk about what you're actually seeing in terms of where the financing markets are maybe drawing the line, meaning are the deals that underwriting you expect to fall off in the Q4 based on your pipeline, is that a function of timing that you think could come back next year? Are these marginal deals where markets are drawing the line? I'm trying to get at the ultimate question of, is this the first time that FICC could actually grow in 2016 just because of the beat down it took in the back half of this year?
So there are a couple of different questions in there and maybe I'll try and separate them. My comments about the seasonality in the Q4 were most particularly towards markets revenues and less so towards the IB revenue space. With IB revenues, it's a mixed story. So talking now about the sort of banking revenues rather than the markets revenues. So the pipeline for M and A remains very constructive and really pretty good.
So we're expecting to continue to have strength in M and A in the Q4. With ECM, you saw obviously a pretty sharp fall off in activity in the Q3. We have seen the pipeline in ECM to the degree that that shows you visibility into the Q4, which is somewhat limited. We have seen that build up. And so there is the possibility that we'll be able to pull through some of that into the Q4.
But that will depend upon how the markets behave. With respect to DCM, our sort of guidance there was a commentary really mainly to the strength of the Q4 last year. And on relative basis, the pipeline is down. And it's really to do with the normal refinances are slowing and the maturity wall is smaller. But it's still healthy, just not going to be at the same levels that we saw last year.
And maybe just a follow-up in FICC in general, I know none of us have a crystal ball. But the slowdown in activity that we see some of its clients sitting on hands, maybe you could separate that between any providing of liquidity and marks along the way because we did see a really wide credit spread widening in the quarter?
Yes. I mean, look, the situation for us in markets was one where there was volatility, regardless of how you want characterize it, and people were acting, our clients were acting on the back of that, we were able to capitalize on that flow. We were able to intermediate for our clients, but our capital capital at risk makes some money. And so we did pretty well where there was volatility. And where there wasn't, it was more about, to your point, more about low levels of activity, people on the sidelines.
So it was just tougher to make money because less was happening rather than anything else more significant than that. But so far in the Q4, I mean, we're 2 weeks in, it's too early to say, but there's not been a tremendous change in the landscape.
Your next question is from the line of Ken Usdin with Jefferies.
Thanks. Mary Anne, can you talk a little bit more about the card business and try to help us understand the card revenue pressure that we saw this quarter into the 4th. How much of that is the NII side of things and how much of that is kind of the partner repricing and how far past the Q4 does those resets continue before growth can overcome it?
Yes. So I would so looking at the revenue rate, the guidance, so remember our guidance previously had been you should expect our revenue rate to be at the low end of the 12% Southwest Airlines and partnering with them again for the medium term. And the economics of those deals on a standalone basis are still really very good, but the co brand space is very competitive. And when any of those contracts are going to be renegotiated at this point, they're going to be renegotiated to competitive levels. And so it's really the fact that we're seeing that is going to come through in our revenue rate in the Q4, which is going to push it down to below 12%.
And it doesn't change the fact that the ROE target for the business is still 20% and that the economics of those partnerships are still good.
Just given the numbers, it's $200,000,000 a quarter for 4 quarters until it laps.
Got it. Okay. And then second question just on in this tough revenue environment, first of all, can you just give us a quick update on the progress on the expense plans? And then any does anything change given how tough this revenue environment has changed as far as either accelerating or digging in again? I know your prior comments have focused on obviously always needing to invest.
But in terms of just your focus as you think about next year and building the expense budget against the environment that we're seeing?
Yes. So I would say, first of all, we gave some expense goals in Investor Day for both the consumer businesses as well as for the CIB. And those were, I think, pretty sizable goals $2,000,000,000 in 2017 versus 2014 for the consumer businesses and $2,800,000,000 in 2017 versus 2014 for the CIB. And we are working through that. We are on track in both of them.
I think I said earlier that adjusted the consumer businesses in the 3 quarters so far are $700,000,000 down year over year in expenses. So against the $2,000,000,000 target, we're certainly getting there. And on the CIB, we expected 2015 to be mainly about forcing out those business simplification expenses, and we've essentially done that too. So we're on track. We're pushing hard.
We still have work to do. We are always going to be diligent on expenses. And generally speaking, at Investor Day, we also said we're going to be on a downward trajectory pushing hard to keep them down, but not at the expense of good investments in the business. So obviously, we are going to respond appropriately to the revenue pressure, but not overreact.
I've spoken my whole life about good expenses and bad expenses. Bad expenses are waste, things you don't need. You don't have to trade through processing, things like that. But we want certain expenses to go up. We find marketing opportunities in card, we're going to spend it.
If the investment bank does better, comp accrual is going to go up. So that's how we run the company. It's not ever going to change.
Your next question comes from the line of Mike Mayo with CLSA.
Hi. Just a follow-up to that last question. So of the total $4,800,000,000 of expense savings, how much have you achieved? And if you're on track, why did the adjusted overhead ratio go backwards at 60% in the 3rd quarter versus 58% in the 2nd and 59%
last year? So Mike, thanks for that. So $700,000,000 if you adjust for legal expense in the consumer businesses year to date, we'll do some more in the Q4. And year to date on business simplification, which I think for in total was about $1,500,000,000 we've done $1,300,000,000 So in total that's $2,000,000,000 so far, obviously more work to do in 2016. With respect to the adjusted overhead ratio, it speaks a bit more to seasonality of revenues than anything else.
All right. And one follow-up, clearly, it's due to revenues. So the question, Jamie, if you could answer this, a simple yes or no question. Is the economy getting stronger or weaker? And the reason I asked that, the jobs report from a couple of weeks ago seems to imply the economy is getting softer, yet your loan growth actually your core loan growth accelerated and you're guiding for faster loan growth in the Q4.
So is there noise in that loan growth figure? Or is the economy based on what you're seeing getting stronger and the jobs number is misleading?
So I'll start I'll start yes or no.
No, I'll start and then you can yes or no at the end. So Mike, we would say that the U. S. Economy is doing pretty well there. We're seeing good demand for loans in the consumer space and reasonably good sentiment in the business banking space and our core loan growth numbers do show that.
So there's nothing particularly funky in the loan growth numbers. We do our very best to show them in the right light. I would take a slightly different perspective on the jobs report on the non farm payrolls and not to sort of overthink it, but while I know it was somewhat lower than people were expecting or possibly hoping for, it's still at around $140,000 was almost 2 times what would be required to have stable unemployment. So it's only one report too, you can't overreact to it. So it's not that we're seeing anything that's causing us any concern and our outlook for the Q4 is pretty solid, I think.
Jamie, anything?
Nothing to add.
Your next question comes from the line of John McDonald with Bernstein.
Hi, Mary Anne. You saw some very good improvement in the GSIB surcharge from the 4.5% to 4%, probably came a little faster than some of us expected. Do you have good momentum there to do more there? And how are you thinking about the trade off, the cost benefit trade off of pushing further down on that GSiP bucket?
Yes. So we did better than we had targeted for on our non op deposits. We went we worked very, very hard, but we told you we would on derivative notional compression also on Level 3 assets. It is absolutely the case not to diminish amount of work we've done and the progress we've made that we obviously went after the most impactful least impactful to the client franchise, most impactful to the ratio with the less revenue give up first. And so we made great progress.
It becomes increasingly, not exponentially, but increasingly more difficult for every next basis point. So that's not to say, by the way, that we aren't continuing to work very hard at it and optimize and that we won't push further. But we're not at a place right now where we're going to target anything structurally below this, except for over the longer term, just continuing to work through it. And our overall capital target, we're at 11.4 percent now. Our overall capital target still in the short to medium term is still 12%.
Okay. Thank you.
I just want to add that in the new world, we have to obviously monitor and push down to all the business levels, G SIB, CCAR, Basel, LCR and SLR. And we want to optimize all of them. So we're only living with this for a couple of years now. As we embed it in our systems, we'll have a better way to track and monitor it. Over time, I would expect that GC will come down a little bit.
So it only comes down in lumps. You got to make a big difference to go from 4% to 3.5%. But when I say over time, I'm talking about years. I'm not talking about anything you see this quarter. We're very comfortable where we are today.
But over years, yes, you might have to change from your business strategies, but I think it's a better thing not to be an outlier in G SIB.
Your next question is from the line of Betsy Krawczyk with Morgan Stanley. Hi, thanks. So just a question on the capital getting to 4% now with a goal over time to get to something lower 3.5%, 3%. Does it also give you more room for capital return requests next year, Jamie?
It has nothing to do with next year, Betsy. When I say over time, it's happened that JPMorgan built a global corporate investment bank, 70% of it is financial institutions, 30% corporate. We easily could have been built the other way around, is who you focused on over time. So as you over time, it might be quite easy for us to say that over 5 to 6 years, let's focus more on corporates and less on financials, and that will affect your G SIB fairly substantially. So that's what I'm talking about.
It's nothing to do with CCAR for next year or anything like that.
Well, they're very a couple of really small points on CCAR for next year for what it's worth is we were constrained in CCAR by leverage. We have issued $6,000,000,000 of preferreds in the year. We are reacting to try and make sure that we are managing our binding constraints or our most binding constraints. So we're working on that. The other thing to note is that we're at 11 0.4% as we sit here now.
So we're not gliding a long way from where we need to get to. And both of those things together with obviously our profitability should mean that we have incremental opportunity, but our range is 55% to 75% and we hope to be in that range.
Okay. And then just on TLAC, I know we're still waiting for the Fed decision, but we did get FSA recently. Anything in there that you can respond to as to how you're prepared for TLAC?
So just a couple of things. First of all, I think the FSP thing was sort of leaked. So it's as good as it is. I will tell you that the news on structured notes was not strongly positive, but we hadn't banked on it being. So not entirely pleasing, but not disappointing relative to our sort of models and expectations.
Other things to pay attention to anyway are there's no change to the internal TLAC assumptions. The holding the clean holding company rule is one that we're watching out for. But fundamentally and then there was the timing that is there going to be a substantially elongated transition period. I would call it all sort of fairly marginal, so it hasn't changed the overall picture for us. We're at around 16%, and we'll figure out the FSB proposal that leaked out wasn't shockingly different, and we'll see how the Fed responds.
Your next question is from the line of Jim Mitchell with Buckingham Research.
Hi, good afternoon. Just maybe a question on NII and NIM. I think, Marion, you said it would be relatively flat in the Q4, yet you're still expecting some pretty strong loan growth. Just want to if you can maybe discuss why you think it would remain flat in that scenario and maybe a bit longer term in an environment where we're looking at lower for longer potentially in the rates? How do we think about the NIM a little bit over the intermediate term?
Okay. So with respect to the 4th quarter, remember, we are expecting our loans to grow and overall net net sort of rotation out of cash and securities to loans would be supportive of NII. But remember, the sort of biggest boost to our NIM was associated or one of the big boost to our NIM was associated with changing the mix, reducing our overall cash balances. And so there were a few things going on. The outlook for the 4th quarter being relatively flat was associated with market implied rates, which are relatively flat.
And so in the law of big numbers, that's plus or minus a few basis points is what we're expecting. With respect to looking out to 2016, obviously, we don't know what's going to happen with the rate curve. If rates stay very flat, we should still have upward pressure on our NII associated with the changing mix of our balance sheet. So the fact that we've got a smaller interest earning asset base and more loans and less cash and less securities should be supportive even on flat rates. We don't know when rates will rise, but if market implies are followed or if the Fed dots are anything like realistic, then that will be even more constructive.
And remember, in the 1st year, we get the biggest benefit from short end rates in the first fifty basis points of them.
Right. I was hoping you
would know when rates go up, but
thanks. No, unfortunately not.
Thanks.
Your next question is from the line of Erika Najarian with Bank of America.
Yes, good afternoon. My question is on the credit outlook. The consumer reserve release has continued to offset the wholesale reserve build. And I'm just wondering how should we think about how much is left on the consumer side over the next several quarters, especially given the 23% loan growth that we saw this quarter and your note saying that this momentum should continue?
Yes. So I would say that, first of all, with respect to purchase credit impaired, with this release we did on the 375, that's our baseline expectation for that portfolio. So our baseline expectation is no material incremental reserves. Obviously, if things improve and they're sustained, then there may be more reserve releases, but I wouldn't try and model those. With respect to the non credit impaired portfolio, we talked about you've seen our charge offs at normalized 14 basis points.
Our portfolio quality is really getting quite high. We're cycling through most of the significant risks. So reserve releases will be more modest and a little bit more periodic. And several $100,000,000 next year, maybe $300,000,000 plus or minus, but not significantly more than that.
And just my follow-up question. Following on Ken and Mike's question on expenses, maybe I'll ask it another way. Over the past few quarters, your adjusted overhead ratio was 58 percent to 60%. You noted that you think that net interest income could grow next year even if rates stay low. Could you potentially slide below 58% to 60% band that you reported over the past two quarters relative to you mentioned an efficiency target of 55% if rates actually normalize?
Yes, I mean, look, our efficiency target of 55% was over 3 years or so and we still will be driving to get to around that level, but it does, as you quite rightly mentioned, include not just rates rising, but a fair degree of normalization in rates. So we'll see what happens in 2016. Obviously, it's possible, but we're not going to call an outlook on rates next year. Thanks.
Your next question comes from the line of Matt Bournelle with Wells Fargo Securities.
Good afternoon. Thanks for taking my call. First of all, Marianne, if I could, in terms of some of the credit numbers that you mentioned in terms of the oil and gas provisions, they seem pretty modest in the scheme of your more than 20,000,000,000 dollars of exposure to that industry. How are you thinking about the redetermination process that started this quarter? And how would you guide us in terms of thinking about what the provisions could be in the Q4 following the redetermination this quarter?
Okay. So we've taken some modest reserves in the last few quarters and our overall reserve number obviously is consistent with our redetermination cycle that we reserved for in the Q1. And so there will be another one in the fall. We've been as forward leaning on that as we can be. Obviously, I'm not saying that there may not be any net incremental reserve builds, but we're not expecting them to be significant.
A lot of companies have tried to adjust their expense bases and otherwise help their position. So if energy prices stay around these levels and recover slowly, we're expecting net not to have material incremental reserves in the next quarter. We may see some.
Okay. And then in terms of mortgage banking, you noted that production the production amount was actually up quite nicely year over year, but the revenues in terms of production and also in servicing were a bit weaker, certainly on a quarter over quarter basis, but the expenses were relatively stable on a quarter over quarter basis. Is there something going on there that we might see further improvement in the expense base in the mortgage side of the business in the Q4? Or are we sort of are you at where you think you need to be in terms of the $1,000,000,000 to $1,100,000,000 a quarter in that business?
So just let me deal, first of all, with production quarter over quarter revenues, margins are down, margins are down for two principal reasons. So remember, quarter over quarter, at least on a closed loan volume, we were at a consistent level. Margins are down because we moved a mix shift towards correspondent from retail towards purchase from refi as well as capacity in the industry, more capacity in the industry and therefore less constraints. So the production quarter over quarter revenue is more of a margin number than anything. With respect to year over year, I do want to make this clear, with respect to the guidance year over year that we should expect non interest revenue for the mortgage company in totality to be down $250,000,000 That brings our total year over year NIR down around $1,000,000,000 maybe just a little more, which is what we guided to at Investor Day.
And it's more off the back of lower repurchase reserve releases, lower gains on Ginnie Mae sales and ex I O gains, non sort of non fee based revenues that are to do with our 3rd party UPB as well as the runoff in the UPB. So it's consistent with our guidance. It wasn't fully reflected in everyone's models. I think it was a third part to your question, but I have to say expenses, yes. And on expenses, in the there are 2 so we continue to work very hard in our expense equation both in terms of managing down the particularly in the servicing space by the way, managing down the default inventory in a number of operations cycle process also in our site strategy.
So no, we are not done. We continue to work very hard at it. We have made great progress, but we continue to work hard at it.
Your next question is from the line of Matt O'Connor with Deutsche Bank. Hi.
We've seen some assets change hands and you guys have been mentioned as a buyer for some of the other assets that are out there. Just wondering on what the ability and appetite is out there to buy loans?
So, obviously, we're not going to comment on anything specific. We would be willing to take and we do a look at things when they come up and if we are able to price for the risk and it's in a client segment or an industry we like, we might be interested. But there is no we have no special comments on
it.
Okay. What we're really interested in is growing our underlying core loans with our customers that we can continue to do business with.
And then just separately following up on energy, how exactly do you kind of reevaluate the portfolio? Is it as the defaults happen, that's where there's a big boost to reserves or you get in front of that?
So, it's not as defaults happen. I mean, it's to do it depends on whether it's reserve based lending or whether it's not. But as companies are either downgraded or as they are experiencing change in financial condition or the borrowing base is redetermined, we will act accordingly. We try to be as forward leaning on that as is possible, but it's not we don't have perfect insight until some of that information becomes clear. So that's the process.
And the reserve based lending, you basically take essentially current prices, you discount at a discount rate, you assume expenses, you have real engineering reports and things like that, And you see if you can make rollover the loan at a sound, call it, I'm going to call it 65% LTV. And we think it's pretty good. That's what we're here for, to lend to clients, particularly in tough times. You can't be a bank that every time something goes wrong, you run away from your client. And then we also do things like stress test that down to $30 oil, maintain $30 for 18 months and say, how much more reserves are they put up?
And I think I said somewhere, and you can correct this number, Mary Anne, we're not in the same room, that if that happened, we think we're going to have to put another $5,000,000 or $750,000,000 of reserves, which is just not something we worry a lot about.
Your next question is from the line of Steven Chubak with Nomura.
Hi, good evening.
Good evening.
So Mary Anne, I appreciate your commentary on the preferred issuance that you guys have done so far throughout the year. It looks like you're now above the 150 basis point target. You alluded to that being a function of efforts to manage to your binding constraint under CCAR. I just wanted to get a sense as to what how you guys are thinking about issuance plans going forward? Yes.
So it's obviously a really great question. Unfortunately, we really don't guide to our sort of forward looking issuance. You're right, we are above 150 basis points right now and we're also working on our leverage balance sheet. So we're working at the sort of dials exactly as you would expect us to, but we're not going to make any comments about full additions.
Okay, understood. Had to give it a shot, but
Yes, I got it.
So just moving over to the Investment Banking side and maybe trying to just dig a little bit deeper into some of the guidance you've given on M and A. It looks like the backlogs and expected completions for the Q4 are quite healthy. At the same time, post the August volatility, some of the historically strong M and A indicators like market cap, CEO confidence, those measures appear to be deteriorating. I just wanted to get a sense as to how you're thinking about the M and A outlook beyond the Q4, just given some of the weakness that we've seen in some of those measures?
Yes. So the pipeline for 2016 is building up. So we don't have perfect visibility yet. We think obviously the deals that were being done in 2015 were skewed towards larger deals and we think there may be more flow 2016, but it looks pretty healthy to us so far, but it's building up.
Okay.
Your next question comes from the line of Gerard Cassidy with RBC.
Thank you. Good afternoon. Marianne, can you share with us you loans outstanding, they're essentially flat on a year over year basis, whereas the corporate client business has grown very rapidly. Can you give us some more color behind what's driving those numbers?
Yes. I mean, I think over the last several quarters and forgive me if I'm slightly wrong, but I don't know I'm entirely wrong, our sort of C and I growth has been broadly in line with the industry. Remember that over the course of 2013 2014, we did a lot of work on simplifying our businesses and that had an impact on the pace of our loan growth. But our mature markets are performing well. We're seeing growth in our expansion markets.
We're adding new clients. We're calling our prospects. So everything is set to continue to see growth more going forward than we had in the past.
Okay. And then you talked about the reserve build in the CIB, about $128,000,000 was for oil and gas and the total number was $232,000,000 What was the other areas that required reserve building this
quarter? There was about in CIB, there was about $47,000,000 of metals and mining, about net net $20,000,000 of BAU growth, and then just a few other normal BAU puts and takes, downgrades, upgrades. Other than those three things, there was no one specific call out.
Your next question is from the line of Chris Kotowski with Oppenheimer.
Mine were asked and answered. Thank you.
Thanks, Chris.
Thank you. Your next question comes from the line of Paul Miller with FBR Capital Markets.
Yes.
On your mortgage banking side, I noticed that your jumbo loans or not your jumbo loans, just your residential loans and your balance sheet is growing. Are they mostly jumbos? And they coming out of your normal production, $29,000,000,000 and you're selling less to the government? Can you add some color around those numbers?
So of the $19,000,000,000 that we put on our balance sheet around $10,000,000,000 just a little over $10,000,000 was jumbo, the rest was conventional conforming.
And then are they mainly ARM loans or are they fixed rate loans?
We'll have
to get you the split.
The jumbo is like a 3rd arm. I've got the conforming, I think it's all fixed. That's what I remember.
We'll confirm for
you. Your next question is from the line of Eric Wasserstrom with Guggenheim Securities.
Thanks very much. Marion, if I can just follow-up on some of the consumer credit quality metrics. At the Investor Day and subsequently, Gordon was indicating, unsurprisingly, just given the very low levels that the expectation should probably be for some moderate rate of deterioration and yet we haven't seen it. And I'm guessing that's partly because of the underwriting that's occurred over the past few years. So my question is, what are the circumstances in which we should expect more significant deterioration there?
Is it only macro or is there something else competitively that could influence that at this stage?
So you are right that at these kind of 2.5%, 2 50 basis point levels in card, it does speak to the quality of the loans we're originating and the engagement with the customers, which is much more now about driving, yes, some NII, but really, really good spend and therefore lower credit quality. It's an integrated equation. We're expecting given our originations and the run off portfolio or the worst loans running off in the portfolio that we're building is really very, very clean, we're expecting that those charge off rates to be low for the short to medium term, so readout for the next year for sure. And there will be a combination of things that would drive that. It would but largely it would be environmental.
We don't expect at this point, we have made changes to our credit box, but they aren't material changes and we'll continue to test our appetite to want to do that and that may have an impact. But we're originating the vast majority of our cards in the super prime sector.
And are the dynamics similar in auto as well?
Similar, yes. I mean, we're compared to the industry, our originations are skewed to the prime space. And our LTVs are lower. And our durations are in line or lower.
Great. Thanks very much.
Your next question comes from the line of Brennan Hawken with UBS.
Yes. Hi. Just a quick one at this point. Equities, Mary Anne, you highlighted strength in Asia, which I think probably was better than maybe some had expected given some of the volatility. So could you give some color on the trends you saw in that region in your equities business?
Well, I would the biggest comment I would make is that there was a lot of volatility, particularly in China in the second part of or the last part of the Q2, we were we did pretty well. We helped our clients. We didn't have significant open risk positions. We weren't very directional. So we were able to do well in that situation also in the reversal also on currency moves.
So really it really is a comment I made about we're here to serve our clients. They were transacting. We were able to do risk intermediation intraday for them. And so we kind of made money on both ends.
Thanks for that.
You have another question from the line of Gerard Cassidy with RBC.
Hi.
Thank you. Hi, Mary Anne. Quick question on your consumer business. You guys have shown very strong steady growth in the mobile users. I think it's over $22,000,000 in this quarter, that's up from $18,000,000 a year ago.
Can you share with us what percentage of your customers are actually mobile users? And how does that compare to a year ago? And what does Gordon think? What's the penetration rate that you think you can finally get to there?
So let me just talk qualitatively for a second and we'll get you some numbers. But we're focused on mobile and digital primarily because it's going to be great for the customer experience. It's what our customers want and also because it's a significant enabler for reducing cost to serve and improving efficiency. So we've been very focused on whether it's quick deposit, whether it's quick pay, whether it's our mobile wallet, whether it's our mobile app, and we've been seeing great results. I'm off the top of my head, not going to be able to tell you the penetration rates, but we can get back to you.
Okay. And is there any evidence that you guys can point to where you're actually taking market share from other banks because your mobile products are just more superior than some of the smaller regional banks or community banks?
Well, I can tell you that we are growing our deposits nearly twice the industry. That so I think that's a reasonable indication for a bunch of different reasons and that we have a very highly rated app. I think the most highly rated bank app, but we'll check that too.
Okay. And then finally, your asset yields jumped this quarter, which was good to see, of course. Can you share with us how the Fed funds rate went up as much as it did sequentially? And also your securities yield went up in the quarter sequentially. Can you give us some color behind both those numbers?
Thank you.
So on the Fed funds and reverse repos, we had moved towards higher yielding, for example, emerging markets, assets there. So we got some high yield there. We saw some yields on our trading book moving out of our emerging markets. So there's just a bit of puts and takes. And on securities, was it significant?
I'm sorry, I'll come back to you. Operator, any more?
There are
no further questions.
Thank you, everyone.
Ladies and gentlemen, this concludes today's call. You may now disconnect.