Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Second Quarter Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation.
Please stand by. At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon and Chief Financial Officer, Mary Anne Lake. Ms. Lake, please go ahead.
Thank you and good morning everyone. I'm going to take you through the earnings presentation. It's available on our Web site and please if you could refer to the disclaimer regarding forward looking statements at the back of the presentation. So starting off on page 1, the firm delivered strong performance this quarter. Net income of $6,300,000,000 EPS of 1.54 dollars and a return on tangible common equity of 14% on revenue of $24,500,000,000 The quarter's performance was characterized by strong underlying fundamentals across each of our businesses with stable NIM and NII, good growth in fee drivers as well as strong IB fees, good expense discipline with adjusted expenses flat quarter on quarter at $14,200,000,000 and an adjusted overhead ratio of 58% and low levels of charge offs and core loans up 12% year on year.
We also made significant progress on our balance sheet and we've delivered on our non operating deposit commitment. While there were no significant items this quarter, there were some small items that are worth calling out. On the positive side, we had consumer loan loss reserve releases of a little over $300,000,000 as well as a little under $300,000,000 of a benefit in DDA FCA on wider spreads. Against that, we saw reserve builds across wholesale of $250,000,000 of which approximately $140,000,000 related to oil and gas as well as firm wide legal expense of a little less than $300,000,000 If you take those 4 items and net them, together they contributed 0 to net income. So finally, included in the result is $330,000,000 of a benefit from tax discrete items.
If you adjust for all of those, our net income is strong at $6,000,000,000 Skipping over page 2 and on to page 3. We continue to make progress against our capital targets with the firm's advanced fully phased in CET1 ratio reaching 11%, up 35 basis points quarter on quarter and standardized fully phased in was 11.2%. The improvement to both ratios was driven by net capital generation along with an overall reduction to risk weighted assets, primarily from lower risk across market and counterparty credit as well as some data enhancements with loan growth offsetting runoff. We continue to build Tier 1 capital adding $3,400,000,000 of preferred stock this quarter. And we returned $2,600,000,000 of net capital to shareholders, including $1,000,000,000 of net repurchases and dividends of $0.44 a share.
Preferred issuance together with a reduction in average assets drove the firm's SLR to reach 6%. For more details on our balance sheet reduction, turn to page 4. Down over $120,000,000,000 on a spot basis, driven by a reduction of over $100,000,000,000 of non operating deposits across our wholesale businesses, partially offset by continued growth in consumer deposits. We also saw a $36,000,000,000 reduction in trading assets and secured financing as we continued to make progress simplifying our balance sheet. On the previous page, you may have seen that HQLA was down $82,000,000,000 this quarter, primarily reflecting those lower levels of cash.
However, the firm remains LCR compliant given the significant outflow assumptions that was associated with those deposits. In addition, the reduction in deposits together with strong loan growth resulted in an improved loan to deposit ratio, up 5% since year end. These balance sheet actions translated to relatively flat NIM, up 2 basis points quarter on quarter and NII. Quarter on quarter, the reduction in cash drove a 4 basis point improvement was partially offset by lower yields. And as I said, firm NII was flat.
Turning to page 5 and Consumer and Community Banking. The performance for the combined consumer businesses was characterized by sequential revenue growth on stronger fee revenue and positive operating leverage, generating $2,500,000,000 of net income, an ROE of 19% and an overhead ratio of 56%. Revenue of $11,000,000,000 was down 4% year on year driven by mortgage, but up 3% quarter on quarter on seasonally higher credit and debit sales volume as well as higher MSR revenue. Our focus on customer experience continues to drive growth broadly and we have 19% core loan growth driven by mortgage. Also our active mobile customer base is up 22% to over 21,000,000 customers and we are the largest and fastest growing among major U.
S. Banks, reflecting our strategic objective to have a best in class mobile offering. We remain focused on our commitment to reduce expenses by $2,000,000,000 in 20.17 relative to 2014, while continuing to self fund investment in the business. In the first half of this year, expenses were down approximately $500,000,000 versus the same period last year and our headcount down roughly 6,000 year to date. Moving to Consumer and Business Banking on page 6.
CBB generated net income of $831,000,000 flat quarter on quarter and down 8% year on year with an ROE of 28%. Net interest income was flat sequentially with modest spread compression offset by deposit growth and NIR was up 7% seasonally and 2 percent year on year on continued strong client investment and debit revenue. Expenses were up 1% year on year, largely due to increased legal costs. Excluding these expenses were down 2% due to continued improvement in branch efficiency. We continue to see robust performance across our drivers with attrition well below industry averages, average deposit balances up 9% or $41,000,000,000 year on year and we are pleased to see that 30% of this growth is driven by our investments in Business Banking and CTC and Newbills.
Client investment assets were a record, up 8% or $16,000,000,000 And in Business Banking, average loan balances were up 6% with loan originations flat against the record last year and in a highly competitive environment. Stepping back and looking forward to the second half, our NII is stable and will increase when rates rise. Noninterest revenue is growing solidly and expenses will decrease, so we expect positive operating leverage. Mortgage Banking on page 7. Mortgage net income was $584,000,000 for the quarter.
Originations were $29,000,000,000 up 19% quarter on quarter on seasonal increases in the purchase market. We continue to execute our strategy of adding high quality loans to our balance sheet, totaling $19,000,000,000 this quarter and the origination pipeline continues to look strong. Total revenue increased sequentially, primarily driven by higher MSR revenue. But as you can see, if you look at non interest revenue is down $500,000,000 year on year. We still expect non interest revenue to be down about $1,000,000,000 for the full year in line with previous guidance.
Expenses of $1,100,000,000 were down $200,000,000 or 15% year on year and down 9% quarter on quarter despite higher volumes as we continued to manage down our costs. On credit, we continue to see improvements in home prices and delinquencies. And as a result, we released $300,000,000 of NCI reserves this quarter. And you can see our charge off rate was 21 basis points. Moving on to page 8, hard, commerce, solutions and auto.
Overall, net income of $1,100,000,000 up 30% year on year and an ROE of 23%. Revenue of $4,700,000,000 was up 3% year on year on card sales volume and auto loan and lease growth, partially offset by spread compression. The card revenue rate for the quarter at 12.4% was up quarter on quarter seasonally. Expense was down 4% year on year, driven by lower legal expense with the recent settlement regarding debt sale and collection practices having previously been reserved. And in card, we saw core loan growth of 3% and sales growth of 7% with delinquency rates and charge offs remaining low.
Commerce Solutions continue to experience strong growth with volumes up 12% year on year, driven by continued strong spend and the addition of new merchants. We've recently signed several new strategic clients, including Chevron, Cinemark, Gap Inc, Marriott and Rite Aid. Together they represent an incremental 5% to our volume and the majority have signed up for ChaseNet. Lastly in auto, results continued to reflect steady growth in new vehicle sales and stable used car values. We saw average loan and lease balances up 8% year on year and the pipeline is healthy.
Moving to Page 9 and the Corporate and Investment Bank. So before I dig into the numbers, we did make some reporting changes this quarter. If you look at the top of the table, Investment Banking fees is now named Investment Banking previously being reported. Additionally, trade finance revenue, which was previously reported in treasury services is now being reported in lending. So digging into the numbers, the CIB reported net income of $2,300,000,000 on revenue of 8,700,000,000 dollars and an ROE of 14 percent reflecting a strong result in a mixed environment.
In Banking, IB revenue of $1,700,000,000 is up 4% year on year. This quarter we continued to rank number 1 in global IDCs with 8.2 percent wallet share and widening the gap to number 2. We ranked number 1 in fees in North America and EMEA and gained share improving to number 2 in Asia. Another strong quarter for advisory, up 17% year on year as activity levels remained high. We maintained our number 2 ranking and grew share by over 100 basis points from last quarter.
Equity underwriting fees were down 5% from a strong prior year for IPOs and EMEA with lower wallet share as we gave back some of the outside share gain we had in the quarter. This quarter we ranked number 2 globally with strong performance in the U. S. On acquisition finance and follow ons. Debt underwriting up 1% and we maintained our number one ranking with strength in high grade also on the back of the healthy M and A market.
Treasury Services was down 2% year on year on lower net interest income and the lending item of 3 $2,000,000 was down 32% year on year, primarily driven by losses on restructured securities. Given the reporting changes we've made going forward, you should expect for Treasury Services, revenue would be about $875,000,000 plus or minus per quarter and lending approximately $350,000,000 and that's given the trade finance transfer. Moving on to markets. Revenue of $4,500,000,000 was down 1% year on year, excluding business simplification and a gain in the prior year on the IPO of market, which we previously disclosed, but with strong relative performance in rates and in equity markets. Fixed income revenue was $2,900,000,000 down 10% year on year similarly adjusted.
In macro products, the quarter was dominated by EMEA with a bond sell off and economic and political uncertainty including Greece. This uncertainty slowed the momentum we saw in the Q1 and kept clients on the sidelines in currencies and emerging markets, but drove strong performance in rates. Credit and securitized products were down on a continuation of general weakness in the market. And as I mentioned, equity markets had another strong quarter, up 27% year on year on revenue of $1,600,000,000 with strong performance in all three regions relative to last year and outperformance in Asia, particularly China and Hong Kong on the back of client interest first to participate in the rally and later to hedge. Looking forward, business simplification would drive a 9% decline year on year in 3rd quarter markets revenues with a corresponding decline in expenses.
And as I look into the Q3 in analyst models, I see relative to our markets results this quarter, you have revenues in markets going up sequentially. Fully expecting to see normal seasonal declines in the 3rd quarter markets revenues. Security service revenues of $1,000,000,000 was in line with guidance, up seasonally on the European dividend season. And moving on to expense. Total expense was down 15% year on year at $5,100,000,000 and an overhead ratio of 59% as we successfully executed the expense reduction associated with business simplification and with lower legal expense.
Compensation expense down 4% year on year comps revenue ratio for the 2nd quarter 30% flat year on year. Moving on to the Commercial Bank. In Commercial Banking, the underlying businesses continue to perform well with strong loan growth, up $6,000,000,000 quarter on quarter and record end of period loan balances with good credit fundamentals and low non performing loans. We also saw continued momentum in IB revenue off of a record last quarter, which was driven by a large transaction. However, we added $187,000,000 to reserves in the quarter, reflecting select downgrades including oil and gas.
Despite this, BAU credit performance of the portfolio as I said remains very strong. This drove net income of $525,000,000 on revenue of $1,700,000,000 and an ROE of 14%. Revenue was flat year on year, driven by continued spread compression in loans and deposits, partially offset by growth in loans and flat sequentially despite the record Investment Banking performance in the Q1. Expenses were up 4% year on year on increased control related staffing and down slightly quarter on quarter. For the rest of the year for each quarter, we expect expenses to remain around $720,000,000 Loan balances increased 12% year on year and 4% quarter on quarter.
C and I loans grew 3% sequentially in line with the industry with middle market growth being somewhat challenged by strong competition, but with more strength in corporate client banking driven by short term financing activity and new facilities for our existing client base. CRE loans grew 5% and continued to exceed the industry on strong activity in both commercial term lending, which had record originations in the quarter and in real estate banking. Moving on to Page 11 in Asset Management. Net income of $451,000,000 on revenue of 3,200,000,000 dollars reflected solid growth up 6% year on year and 6% quarter on quarter, driven by continued net long term inflows, marking the 25th consecutive quarter at $13,000,000,000 with strength in North America and multi asset flows, driving record AUM of $1,800,000,000,000 up 4% year on year and client assets of $2,400,000,000,000 In addition, we had record loan balances which were up 9% year on year. Expense of $2,400,000,000 was up 17% year on year, primarily driven by legal expense and to a lesser extent the impact of moving an asset to held for sale.
Adjusting for those two items, expense would have been up more in line with revenue and margins in line with our target. Lastly, we reported strong investment performance with 78% of mutual fund AUM ranked in the first or second quartiles over 5 years. Turning to page 12 and corporate. Treasury and CIO reported a net loss of a little over $100,000,000 and other corporate reported net income of $552,000,000 which included a benefit from discrete tax items I previously mentioned. So on page 13 of our outlook page, any guidance that I was going to give I've made through the presentation, the page is here for your reference.
So to wrap up, strong reported and strong underlying results this quarter across our businesses in an environment that continues to remain somewhat challenging with double digit core loan growth with broad based strength in our underlying drivers and with continued execution and excellent progress against our capital, our balance sheet and expense commitment. So with that operator, we'll open up the line now for Q and A.
Great. And your first question comes from the line of Erika Najarian with Bank of America.
Hi, good morning. My first question is the capital progress has clearly been solid this quarter. Last week, however, there seems to have been more support in the Fed in terms of including the SIFI surcharge in the CCAR test. And I guess the question is in 2 parts. 1, what do you think the chances are of the CCAR any or all of the CCAR surcharge or the CET1 surcharge to be included in CCAR?
And 2, what are the next steps in terms of business model adjustments if that did pass?
So, obviously, we don't have any particular insights. I think the comments you're referring to comments about the support for evaluating the possible inclusion of some or all of. And so really that it hasn't changed relative to previous comments and the door has clearly been left open for that, but we have no further information. And far it's evaluating the possible inclusion of some or all of the surcharge. So we're just going to have to I suppose wait and see.
Meanwhile as you know, we are and by the way if it happens for us it would happen to everyone and we've shown you before not that that's a good outcome but we shown you before that we think that regardless the competitive peer set that we have is going to cluster at or around similar capital levels. And so if everybody has to increase their minimum, it's going to be a similar position for everyone. Meanwhile, we're continuing to execute on everything that we've already told you we're going to do to optimize our capital. And our commitment is to go to firmly within the 4.5% bucket for the surcharge. And if we believe we can do it and it's economic and it's not going to hurt our clients, we may go further.
So we'll respond when we see the rules and we're not going to stop continuing to do the best we can to optimize our returns based on scarce resources.
Got it. And just the second question is, you've clearly made also progress in terms of your deposit mix. As we potentially anticipate a rising rate environment for the back half of the year, given what the regulators have done in terms of saying, okay, here are the good deposits, here are the not so good deposits. How should we expect the pace and magnitude of retail deposit repricing or pass through if the Fed does raise rates in the second half of this year?
So we actually haven't really changed our point of view since Investor Day and previously about the fact that we're expecting retail deposit and there are other people who have slightly different views, but we're expecting retail deposits to reprice higher and faster in this cycle than in previous rising rate cycles given the competition for good high quality LCR retail deposits, given the advancements in mobile banking, given the awareness in the general environment around low rates and the desire to participate in rising rates. So when we think about our sensitivity and our reprice, we model in an assumption that it's going to be higher, somewhat higher.
Your next question is from the line of Mike Mayo with CLSA.
Hi. I see your markets revenue down 1% year over year the way you look at this, But I'm trying to reconcile that with Jamie's comments 2 months ago at a New York conference where you said there's repricing in rates, derivatives, prime brokerage, clearing and trade finance. I'm guessing it's just risk off. So can you shed more light on what type of repricing you're seeing with any specific examples because the transparency for us on the outside is pretty weak?
Yes. So and obviously when you talk about trading when you have 2 months to go in quarter, you don't always you don't know the exact number. And repricing is a complex issue. I mean, I'll give you some very specific things and I'll tell you why it's hard to figure out exactly what shows up. Clearing, we've definitely seen people start to charge for clearing and effectively charge their balance sheet 25 basis points, 50 basis points.
It's a small business. I don't think it's going to dramatically affect those lines. Prime broker, we've seen a similar type of thing. Repo, there seems that people are charging pretty much for repo. We need to get a return on it.
Exotic derivatives, which are again very small have been repriced to, I would say, full capital and liquidity. Muni credit has probably been repriced a little bit. Again, it's
a small
market. If you go to credit and trading, so credit, we've really not seen any repricing effectively in commercial credit. You've seen a little bit mortgage to make up for the extra cost in mortgage. You've seen a little bit in auto, it got more aggressive, not less aggressive. So trade finance, you've seen a little bit of repricing.
And I know these are not all trading numbers. What you don't see, Mike, is that in a lot of cases, where you may have repriced a little bit, you're also shedding business. So that you have in other words, you're protecting your margins by because of AML costs you're going to not do certain types of business anymore. In FHA, the lifetime cost of servicing, you cut back on FHA volumes etcetera. So you're protecting your margins, but you're actually shrinking your revenues in some cases.
And that's happening a little bit with clearing and prime broker and stuff like that. You want your best clients. In other categories, clients are like deposits, we haven't seen repricing effectively, I don't think of non operating deposits. On the other hand, some clients are saying, let's restructure a relationship that makes more sense for you, JPMorgan. And they're willing to give you other business, which is not credit sensitive etcetera.
So it's kind of a whole amount of things taking place in there. But the goal is to get a proper return on your capital, not necessarily to show revenue growth in that line item. It's very easy to show revenue growth.
And just one follow-up.
When you see Most what you see in trading is just volume related and spread related etcetera. Like even in trading, spreads are narrow, but breadth is also very low, which means spreads can gap out pretty quickly, which eventually could be good for trading. So it's unclear.
So when you say a little repricing, I mean, is it bigger than a bread box? I mean, are we talking about basis points or 1% or 5%? What are you talking about here?
Yes, I'm talking about basis points, 20 basis points, 15, 10. That's all you
need is some of these things
to get an adequate return on capital as we currently look at capital.
Your next question is from the line of Betsy Grawczyk with Morgan Stanley.
Hi, good morning. Good morning. Question on the deposit shrinkage. You obviously finished the program you announced at Investor Day. Just wondering if you're going to take it further, what the impact on revenues has been?
And do you expect that the full benefit to NIM is already in 2Q or in the 2Q numbers or we're going to see more benefit in 3Q from the actions you took?
So, hey, Leslie. So, what I said and hopefully it was clear is that we actually exceeded our commitment. So we actually shrunk our non operating deposits by more than $100,000,000,000 and not just grew our consumer deposits, but we're also able to grow wholesale operating deposits. So we had a good mix shift both in consumer versus wholesale, but also within wholesale. And so we feel really great about that.
There are 2 priorities after that. The first is protecting that position and making sure that we're able to not have inflows of those deposits as the industry continues to absorb them. But the second is, we will likely look to potentially push a little farther. But if it gets harder and harder each margin next $5,000,000,000 or $10,000,000,000 as you get more and more closely aligned to operating accounts and operating business. And we've always said that we want to do this for the right reasons for capital efficiency, but not do it in a way that's going to materially harm our clients.
So that's the lens.
And the part is also been made in Level 3 assets, derivative receivables, certain balance sheet items, RWA. So the efforts to optimize the balance sheet for GSIFI, etcetera, is not going to stop. That we're going to continue
to do. But it's not I don't anticipate us launching another and announcing another program. We've already done a little better. We'll continue to try and do a little better. In terms of revenue impact, not very much right now as you might very well know because you can see that the balance is much more on a spot base than on an average basis.
But the equation looking forward will be much the same math we said at Investor Day, approximately 20 5 basis points revenue on approximately $100,000,000,000 average for half a year, but there would be some expense benefits on FDIC costs, etcetera. So not a very big number. I think that was the question.
Yes. And the NIM benefit should flow into 3Q as well?
Little bit, yes.
Your next question comes from the line of John McDonald with Sanford Bernstein.
Hi, good morning. Mary Anne, I was wondering if you could remind us about the timing of your expense reduction targets in the Consumer and Investment Bank. Specifically, if you hit the $57,000,000,000 in adjusted expenses for $15,000,000 how much of the ultimate cost saves does that $57,000,000 target for this year incorporate? How much would you have achieved already in $15,000,000 And any thoughts on the trajectory for remaining sales after this year?
Yes. So let me do this in two parts. And I'm going to start with the consumer businesses where the commitment is actually a couple of years old and we're sort of well, well on our way to delivering against that, the commitment $2,000,000,000 in 2017 versus 2014 and it's not exactly linear, but you can consider it to flow through time. And if you look at the CCB page on whatever page that is, I think we show that for the first half of the year, our expenses are down over the first half of last year by $500,000,000 So that gives you a sense of how we're tracking. On the CIB, obviously the commitment is somewhat newer at Investor Day this year, dollars 2,800,000,000 in 2017 versus 2014.
I would characterize that in sort of 2 parts. Dollars 1,500,000,000 is business simplification. The majority
of business simplification, not all, but the majority will come out of our run rate in 20
$300,000,000 when you've seen the $300,000,000 $400,000,000 expense reductions in each of the quarters on business simplification. The other $1,300,000,000 which is all the reductions in technology and operations and headcount is going to be things that are working on it actively. We have programs, we have people, but it's going to be more of a 20 16 and 2017 benefit. So if I was to look at the first half of twenty fifteen versus the first half of twenty fourteen, take the 500 in consumer and business simplification in the CIB space, that's probably the right way to size it, about a quarter so far this year.
A quarter of the total? Yes. Okay, great. And then the quick follow-up is on RWA. Any update to your kind of year end RWA targets and thoughts about how we should think about potential RWA levels longer term?
So, RWA advanced RWA is down $36,000,000,000 $7,000,000,000 $1,500,000,000 $1,500,000,000 We said a little greater than $1,500,000,000 We're still on track to be 1 point 5 or a little greater than 1.5 advanced at the end of the year. Standardized right now is at 1.5.15. So pretty close to 1.5 trillion against the target the end of the year of 1,550,000,000. So that's a little better. But obviously on the standardized you have some upward pressure as we continue to grow those really great loans we're growing.
And so if you look to our Investor Day targets, we're still hoping to maintain the discipline around both of those at approximately 1.5
through time. Your next question is from the line of Matt Bournelle with Wells Fargo.
Good morning. I'm just curious in terms of your core loan growth. You mentioned that that's up about 12 percent year over year. Can you give us a sense as to where that's growing the strongest, where you're seeing a bit perhaps where you're seeing a bit more weakness within the core loan growth specifically?
Yes, of course. I'll give it in 3 parts. First of all, it's growing pretty solidly or strongly. So either in line or in some in many cases, best in the industry across most of the product categories. The one that's growing the most strongly because of the way we're portfolioing loans is mortgage.
So that's driving some of that outperformance. And the one that is most challenging, but still growing is middle market, fairly competitive. Everybody's chasing that sector. But you can go through the businesses. So we had 6% loan growth 8% loan and lease growth in auto, 6% business banking, 19% core in consumer, 4% in commercial, so 3% core in card.
So it's solid to strong pretty much across the board, most competitive in middle market and flattered by portfolio and mortgages.
Okay, Marianne. And for my follow-up, I noticed I guess you were quoted in earlier meeting today suggesting that there could be further provisions for the oil and gas portfolio. There's been some media reports prior to this week about regulators potentially looking a bit more carefully at your portfolio as well as a number of other banks. Can you give us a little more color as to how you're thinking about the potential trends there? And any comment you might want to give in terms of where the regulators are focusing?
So yes, what I said earlier is not inconsistent. It's entirely consistent with what we said last quarter. We built reserves modestly for oil and gas last quarter on the back of the spring redetermination of borrowing base. We built another modest reserve this quarter. And we said we don't we might expect more reserves in the second half of the year.
There's another redetermination cycle in the fall. And it's I'm not going to say likely, but it's possible we'll be selectively downgrading some clients. None of that is out of our expectations. It's completely normal levels considering the cycle and how we think about the credits. We're still very happy.
And we're not going to make
any comments on regulators. Those reserves do not mean we're going to have losses?
Correct. So we're reserving for downgrades doesn't necessarily mean that they're going to be cash losses.
Your next question is from the line of Ken Usdin with Jefferies. Thanks.
Mary, I just wanted to follow-up on that last point. Your commentary about credit so the second half is in line, you're $4,000,000,000 plus and you had $1,000,000,000 of charge offs this quarter again. So on that point, just one question about where you continue to see underlying improvements. Card, obviously, is still above your guidance, but can you give us some of the thoughts about where any existing improvement can come from?
So I mean credit like charge offs have been very benign across the wholesale space. They've reverted to somewhat more normal levels in auto. So not expecting there to be big step changes in the underlying charge offs in the wholesale space. At 21 at 21 basis points we're sort of getting down there. And card while it's slightly above 2.6 percent above our 2.5 percent, it's also pretty much getting there.
So it's one of the reasons why we said expect the second half to look like the first half in terms of order of magnitude and expect net net low for long.
And then to your point about not expecting to be much loss from the energy provisioning and that we could see energy provisioning, plus this quarter you had a nice $300,000,000 release from the NCI portfolio. Is this kind of it for reserve release? And can you talk about your outlook there?
Yes. So I would say in the non credit sorry, just to clarify the comment on oil and gas, we said they will not necessarily translate into losses. We're not going to predict which ones will or won't. On the for non credit impaired portfolio, we are continuing to see improvement in charge offs as well as home prices, albeit a little bit more gradually. So I would still expect there to be more reserve releases over the course of the next 18 months in 100 of 1,000,000 of dollars in total, not 1,000,000,000 any longer of course.
We have $1,800,000,000 reserved right now. In the non credit in the purchase credit impaired space, clearly that's a life of loan model. And so we'll continue to evaluate that model against parameters that we have in it and expectations. So that will be what it is at the time. And in card, we're not expecting any significant reserve actions.
Your next question is from the line of Jim Mitchell with Buckingham Research.
Hey, good morning. Maybe we can just ask a question on card fees. That's been an area where growth in card fees have been pretty flat for a while as you ramp up reward spending. We saw a pretty nice jump quarter over quarter at some of that seasonal, but it was a little stronger than we saw the last couple of years. Are we getting to a point where you're
lapping some of these higher reward costs and growth in new
more closely with spending? Or is this something unusual this quarter?
So you're absolutely right. All the underlying phenomenon are still there. We're still seeing spread compression, but we're very strong growth in spend. We aren't quite lapped yet on new accounts going through the revenue rate. We will eventually be, but it's a good thing to be adding these new accounts that will drive strong spend in the future.
So I would say our near term guidance is that we're expecting our revenue rate to be at the lower end of that 12% to 12.5% range. And yes over time as spread compression abates and we continue to drive strong growth with the quality of our products and our partnerships, we would expect that to start to edge up.
Okay. And on the card loan side, it seemed like you saw a decent uptick this quarter. Are you starting to get past some of the runoff and seeing more of a core driver?
Yes. Yes. So I mean we told you we would hope to drive core loan growth in the card space low single digits and this quarter it was 3%.
Your next question
And I just want to emphasize, Mary Anne mentioned it, but emphasize Chase Paymentech, which has seen really good growth probably 50% faster in the industry, but we're also signing people with Chase Paymentech combined with Chase Net, we're running real volume across it. And we're signing up a lot of folks for that for Chase Pay. So the strategy of ours is kind of coming to fruition. We hope it will be a good driver of happy customers and good growth over the next 10 years.
Next question is from the line of Steven Chubak with Nomura.
Hi, good morning.
Good morning.
So first question on capital. I just want to get a sense as to how we should be thinking about preferred issuance plans going forward now that you've met the 150 basis point RWA target?
Yes. So obviously we don't give you lots of details on our issuance plans. You're right. 1 of the drivers for us to issue in part not exclusively was it's not as you know, we were Tier 1 leverage constrained in CCAR. So as a result of issuing this, we not only help TLAP, but we help our CCAR stress capacity and we're about 160 spot RWA.
So we're not going to talk about forward issuance, but we've made progress.
Okay. And then just a follow-up regarding, Mary Anne, your comments about the trading outlook for at least in the near term, recognizing it's still very early days in the quarter. Since the very start, we've seen or at least we've experienced a number of global shocks. And on the regulatory front, we do have the bulk of implementation deadline, which is looming. So taking all those factors into consideration, how should we be thinking about the near term trading outlook?
So to start with Volcker, we aren't expecting Volcker to have an impact in the near term trading outlook. We've been talking very consistently over an extended period of time about the fact that we've reshaped our business through time to be compliant in substance and inform with Volcker. And so while that was real reshaping of the business, the last 18 months has been focused on getting operationally ready around the reporting and the metrics and it's been hard work and we are ready. So I don't expect it to have a direct impact on near term trading. Clearly over time, we need to continue to sort of evolve the feedback loop with regulators, but that will be entirely gradual.
With respect to the trading, it is too early for us to say anything specific about the Q2 sorry, the Q3 except to say, we are all other things equal, we would expect to see normal seasonality from the market level. Nothing has changed that fundamentally wouldn't have us expecting normal seasonality in the Q3.
I just want to point out that trading if you look at it over a long period of time has been we've become very consistent. I think in 2014, we had no trading loss days. And even this year, there's only a handful of trading loss days. And obviously, some areas are up and some are down, but our shares are high. We do I think we're doing a great job servicing clients.
We're adopting all the new rules like 50% of interest rate swaps are on SEF today. I think 95% of FX trading by transaction is on is electronic. You can do a lot of that on your mobile phone or iPad now. So the business is actually doing fine. The returns on risk are very good.
We didn't need to report that, but kind of return on VAR are very good. So it's become a much more stable business that clients need over time.
And just to add to that, I would say that we also talked about in the sort of period of transition towards a more normal economy and rising rates you might see some shocks like this. We've weathered both the EMEA bond sell off in China well. And it just speaks to the strength of our risk management discipline and we generally do pretty well in more difficult markets.
Your next question is from the line of Paul Miller with FBR.
Yes. Thank you very much. You guys had a very decent mortgage banking quarter in the Q2 with rates going up. We know that the refis have started to come down, but the purchase market has been stronger I think than people expected in the second quarter. What do you see going into the 3rd Q4 especially with the new regulations coming out with the disclosures with telarespa?
So with respect so we saw a stronger seasonal purchase market. We actually gained a little share in the purchase market in the quarter and refi held up pretty well because of pipelines coming into the quarter. But we are expecting that to both seasonally in purchase and in refi to fall back down to smaller levels in the 3rd, seasonally. So and no direct impact from the disclosure requirements.
And part of the quarter was the reserve takedown. So don't double count that. That may not be there next quarter.
Okay. And then can you talk a little bit about the tax my follow-up question on the tax rate. Should we be modeling in 28% to 30% going forward? Is that 25% just an outlier?
So the way I think about it is our normal tax rate for the year is 30% or minus. Just given the way tax reserving is usually biased to being fairly conservative and so as you know we have seen discrete tax gains periodically, some of them not insignificant resulting from completion of settlements and audits with tax authorities. So not to say that you should necessarily model in directly 30, but we don't predict or forecast the tax benefits.
Okay. Thank you very much.
Your next question is from the line of Matt O'Connor with Deutsche Bank.
Good morning.
Good morning.
The equity trading has been very strong the last couple of quarters, both for you and others assuming it continues the rest of this earnings season. Just step back and think about some of the drivers there. You mentioned some repricing. We've obviously seen some deepening of some markets increased volatility. Can we think about there being potentially a long term secular recovery in the equities trading?
Or do you think it's more just stocks are going up, there's global QE or too early to tell?
It's definitely the latter and I think perhaps a little too early to tell on the former.
Okay. And then just separately, what type of mortgage loans are you adding? Are these jumbo? Are they fixed rate?
Yes. So over half of jumbo, the other half are conventional conforming C plus.
Okay. And I guess are you choosing to add some mortgage loans instead of securities because you've got a smaller securities book than a lot of peers and it seems like there's capacity to add there?
So we have a fairly large securities portfolio and our decisions around that are in part driven by our overall interest rate risk positioning. But with respect to the mortgages, it's fundamentally a best execution decision for us. We will portfolio alone where it makes economic sense to do it relative to distributing it other than jumbo where clearly they will always go on our balance sheet.
And we would if you put if
you can put a jumbo on a higher ROE than a Fannie Freddie, you would do that. And part of the investment proposal liquidity and obviously because non operating deposits are down, portions of that come down too.
Your next question is from the line of Glenn Schorr with Evercore ISI.
Hi, thanks. I just want to follow-up on the conversation on in fixed income and I agree with you. It seems like you weathered the whole Greece and China storm pretty well. The thought on the lack of liquidity in fixed income markets gets a lot of attention. You guys have the most market share, have the lowest standard deviation in the business as a liquidity provider.
That's a good thing for you. But curious curious on how you're thinking about preparing for what seems to be a pretty serious issue and how serious of an issue do you think it is that in terms of the potential disruption?
So I mean, we have there's been a lot of press and reports including
recently on market liquidity and there are a
number of factors playing into it. Reports including recently on market liquidity and there are a number of factors playing into it. It's true that liquidity in some cases has dried up quite quickly when there's been extreme volatility and it's fed on itself. But the reality is that we talked about the fact that was likely to be a phenomenon that happened more frequently as we transition to a more normal environment and we are very disciplined about how we trade and support our clients. And generally, we've been able to weather them very well as has generally the community.
We haven't I mean not that we know, but we haven't got any stories of horror stories around the EMEA BONTELLO for other things this quarter. So I think it's definitely an issue, one that we need to watch, one that has multiple root causes and one that we're generally taking in our stride.
And if you look at the big picture and we pointed out the financial system like in the United States banks are much more sound trading books and more capital liquidity. The whole system is better off. So you can't look at one piece and say what will that do. The second is that these obviously there's less liquidity in the marketplace. And you and it's a whole bunch of factors.
It's hard to tease out exactly which one. But trading books have more capital, more liquidity. I think people are a little worried about potential bulk rule violations, have been a little more cautious. There are obviously structural changes in electronic trading, HFT, and each business is slightly different. So not every I wouldn't say everyone's affected exactly the same.
It's also true that the system was pretty resilient to what happened with the currencies and treasury. That's a good sign. I think what we are going to be really cautious about is when markets aren't that good. So and don't JPMorgan is fine. So, this we're not talking about whether JPMorgan is going to have a hard time with liquidity.
We are not. The question I really would have is when markets are tough, will there be a feedback from these violent markets? Will it be more violent or less violent? And someone's quoted that they're saying their markets always pull back and when they're tough times. That is true.
The question is will it be harder and worse, will it feedback into the real economy. It's not will there be lack of liquidity. Like there were during the crisis, there were 2 market makers out there and we were one of them. And so you need them little bit, but it doesn't stop markets from gapping out. So keep we're not saying this is a terrible thing.
Just be very cautious about it. And we are always trying to be very cautious.
Speaking of cautious, the last one I have is on living wells. I know we have a little bit of time before we hear anything. But if you look at the comments from the previous year, what they wanted you all to address, it seems like there was a massive amount of progress made. I'm not sure what you can tell us, but curious your thoughts on progress made and then maybe timing on when we might hear the regulators' thoughts?
Yes. So I can tell you that obviously we took the feedback from the regulators as the industry did exactly as you would expect entirely seriously put loads of resources and effort to bear in making as much progress as we thought was humanly possible over the course of the period and we feel that we made very, very significant I would agree with you, the industry but JPMorgan specifically made very, very significant progress in addressing the feedback between getting it and the July submission date. And obviously, we feel like we have a credible plan. That's not to say that we won't continue. And some of our plans and you saw it in some other disclosures, we're going to continue to work very hard at simplifying our legal entity structure over the next few years and interconnectedness and operational resiliency and all the things and reporting readiness, all the things that are going to make it even better.
So we think we made very, very significant progress. We think our plan is credible. We don't know exactly when we'll get feedback probably in the fall.
And we respond to every single thing regulators raise with a huge resources to meet their needs. And it will probably be iterative over time about they'll make more demands this year etcetera. And by the way, I think it's a 50 page public part that you can actually read. It shows you that's 50 page summary of a I think a 200,000 page detailed report.
Your next question is from the line of Gerard Cassidy with RBC.
Thank you. Good morning. Mary Anne, you mentioned couple of times about the competitiveness in the middle market lending space. Can you give us some color on what you're seeing whether it's underwriting standards and what kind of product type in the middle market that is most competitive?
Well, I mean it's very broadly competitive and we compete obviously with big banks, regional banks and non banks. And it's not that we are losing loans and deals most often on price. It's normally on size of holds or non bank taking hold deals or on structures. But it's very, very competitive and everybody likes the sector for growth and everybody likes so everybody is trying to make progress and we're being very, very disciplined and as a result of that slightly lower growth than the industry average. And you might not want us to always grow at the industry average.
You want us to hold true to discipline.
Remember, we look at the whole relationships. I've got the exact number, but if you look at the middle market relationship, I think something like half, maybe even a little bit less of the revenues are from the lending.
You guys have made great progress with the penetration of the mobile banking app that you've created as well as online banking. And you can you showed us that your branch count is down over 100 branches on a year over year basis. What do you see for the branches as you go forward? Is that trend line likely to continue as you continue with the increased penetration from the mobile app? Likely to continue as you continue with the increased penetration from the mobile app?
Yes.
So the way I would characterize it is we had a period of time following the Wamu merger where we were in new markets and we didn't have the right distribution footprint where we were building. We said about a year and a half ago that we felt like we had the footprint of a macro matter at about 5,600 and that now we're around perfecting that, which is about consolidating certain branches where it makes sense, building new ones where it makes sense, consolidating them together where it makes sense. So you would see, I think Gordon said approximately 150 net down in each of the next couple of years and that's probably still the right way to look at it, but it's really perfecting the network, moving branches to the areas we like where there's a high density of excellence. And then as you know really looking at the nature of branches, so the footprint, the way we're using them, the way we're staffing them importantly, moving them to more advice and less transaction, more automation. So definitely responsive to the evolution in customer preferences and mobile and online is not only a fantastic that, but it's also a lower cost to serve.
So we're also improving the profitability of the very highly transactional customers. So I mean I think Gordon used the word omni channel. We have a place for everything in our suite and branches are very important. We're just going to be evolving them to continue to meet customer needs.
And one add is that we are thinking about attacking a new city for the first time like in a major way, because we want to see how that works out.
Your next question is from the line of Chris Kotowski with Oppenheimer.
Hi. I was just curious about the reduction of the non operating deposits. And I would have expected that to come mainly out of the Corporate and Investment Bank. And but when you look at the disclosures on your average asset level, it's been $850,000,000,000 plusminus each of the last five quarters. So where is the shrink really happening or how do we see it?
In the non operating deposits within the wholesale deposits, the majority is the CIB, but not quite 2 thirds.
And then
you've got the commercial bank and you've got a little bit in asset management. So it is the majority of the number, but there are still sizable numbers particularly in the commercial bank in the first and second phase. And then when you look at our overall balance sheet, you see cash going down because of deposits, you see securities going down, but strong loan growth offsetting and then small reductions in trading and secured financing.
But when I look at like total assets in the CIB, it's 8.45 this quarter versus 8.46 dollars last year. It just doesn't look like a whole bunch came out of there. It looks like it all came out of the
Are you doing year over year?
You're starting the wrong time period.
Are you starting at the year end or year over year?
Yes. Well, if you go linked quarter, it's 8 $65,000,000 to $845,000,000 I'm just curious, it doesn't seem
to measure. We're talking more operating deposits too.
Yes. So we talked about the deposit reduction is overachieving in non op and improving mix in operating. So trust me and I'm not looking at what you're looking at, so I do trust you, but trust me that 60 ish percent of it is CIB.
Okay. Now I mean where you see it in your public disclosures, it all looks like it's coming out of corporate and other, which is down more than 100 linked quarters. So I was just kind of curious how it all works because it didn't
We'll clarify off this line because Yes. I will get back to you.
Okay. All right. Thank you.
Your next question is from the line of Eric Wasserstrom with Guggenheim Securities.
Thanks. My questions have been addressed. Thank you.
Thank you, Eric.
Your next question is from the line of Brennan Hawken with UBS.
Yes. Hi, good morning. Just following up on the markets discussion, curious whether or not you've seen some of the drama around Greece impact M and A discussions in Europe this quarter and maybe an update on the IB Bank backlog at this point?
The M and A we don't think Greece has affected the M and A dialogue very much, because it's been very active much around the world. And when I say around the world, it's also like European companies in America, American companies going to Europe, etcetera. And those conversations continue.
A lot to Europe, yes.
A lot to Europe, yes. So Greece had no real effect in that. Remember, Greece is a very, very small percent of the Eurozone in total. So economically, it's not a driving factor for most of the companies there. Psychologically, maybe it's going to affect some people, but I don't see why a company that has its own ambitions is going to change them because of Greece.
And I would just with respect to the backlog, I would say very good.
We did see a tremendous amount of something that we've almost never seen before of you American companies financing in euro, because it's cheaper to do that even if you swap back to dollars. So you saw a lot of American companies going to Europe for to do that.
Okay. Thanks for that. And then on Security Services, I know that you all highlighted that it's up quarter over quarter on the that it's up quarter over quarter on the seasonal strength for the dividend season, but it was down year over year. Can you help us reconcile the year over year decline? Yes.
I think
if you go back to last quarter,
remarks last quarter, we talked about change in presentation of some expenses versus revenues for the ADR business that drove a reduction, but just a classification issue. And then in addition, we did lose a large client at the end of last year and that is having an impact. So I think if you go back and look at the Q2 hopefully that will make it clear. And so the guidance when we did those when we made that presentational change and obviously we talked about the client exit a few quarters ago, the guidance was given those we would expect the revenues to run between 9 $50,000,000 seasonally and this is obviously a strong season and therefore it's at between $950,000,000,000 and $1,000,000,000 seasonally and therefore it's at the $1,000,000,000
So Mary Anne gave you all very specific guidelines, which you don't normally do on treasury services, investor services and expenses in the commercial bank, because a lot of you have your models wrong. And Sarah finds it very frustrating that she can't get it corrected quarter after quarter. So we said here is the number that is actually our best guess. So please put in your 3rd and 4th quarter miles. And mortgage revenue is another one which has been ongoing for us.
And what's the other one? So we just get on the table whatever it is.
Okay.
Your next question is from the line of Nancy Bush with NAB
Jamie, you made a comment about attacking new markets and that sort of tags on to what I was going to ask, which is whether there are any of the old WAMU markets where you've not been able to expand, as aggressively as you've wanted to and that you might be thinking about exiting. So I'm just wondering, can you just tell us how you feel about individual markets right now?
So Nancy, it's really important. When we talk about these numbers, by the way, RWA and branches, we are not making commitments to anybody. That's our best guess, knowing we know today, but we reserve the right to change that on a moment's notice for whatever reason that makes sense for the company and clients. And so branches, it is very important that you look at branches city by city and do you have the right footprint. So if you remember the old A and P, which never changed its locations and it never changed its sizes and it failed.
So, any retail business should always be adding in the new communities, subtracting in some, having the brands adjust to new reality was getting bigger, getting smaller in our cases, getting smaller. But again, we're not getting smaller because we're guessing. It's probably getting smaller because the less need for operations in branches now and people are doing far more on mobile phones like that. So we actually do it city by city. We don't set an overall guidelines that you have to do X, Y or Z.
It's city by city. And so for the most part in the WAMU footprint, I think Florida and California for the most part, city by city, we went in and added what we thought we should have. WAMU, remember we also added on top of that small business, private banking, some middle market, other business that WAMU wasn't even in. And those are it was part of the expansion of those businesses too. And so when I said a new Citi, I'm talking about what we've never really done, I was talking about the way back at Bank 1 when we stopped, we did merger with JPMorgan is going into a city de novo that we've never been in.
And there you got to look at how many branches you're going to open, how long it's going to take. And so we are we do want to do one of those and that will be will have nothing to
do with WAMU because it's also
a place that WAMU wasn't.
Okay. Another geographic question. Get that Greece is not that important to the Eurozone and the events of the past couple of weeks seem to have been a lot of theater, frankly. But the events in China in the last couple of weeks have been somewhat worrisome. So I mean, have your plans for China changed at all, given what seems to be a retreat from open markets there?
No. I'm not I don't think there's been a retreat from open markets there either. So remember, we've always said about China, you got to look and plan for long run, which we do in all businesses. And so McKinsey has a report that shows that they're going to have 25% or some of the Fortune 1,000 and I think that was 10 or 12 years, enormous growth in their companies. Their companies are going overseas.
Their companies are doing more M and A. We did that one unique transaction where ChemChina bought Pirelli in Italy. And obviously, when we have a unique network, we can help a Chinese company and an Italian company at the same time. So we're building there for the long run. As a risk management tool, we've always said that the way we treat that is we will be prepared for very tough times.
And I think it's a mistake not to grow because you're going to have tough times. I have never seen an economy didn't have tough times. So if you went back to United States when JPMorgan was building JPMorgan back to 1850 and 1860, well, every single time that you panic because America had a recession, there would be no JPMorgan. So we're not going to change. What we've seen with the officials in China is that they are very responsive to changes and you could argue whether they should have gotten that involved in the stock market and you can't manipulate stock markets.
But they are very responsive to lending, to they've changed the reserve policies, RMB policies, the QFII policies, the Hong Kong Shanghai Connect, not everything they do is going to work. But they still seem very committed to more and more of taking SOE rationalization SOEs and have taken in public, so some market discipline there to create more of a consumer society. And what we've always said and I think they have the wherewithal to meet their kind of short term objective of growth, but we expect that they will have bumps in the road. We expect that and we're going to look right through that. And the fact that the I also remember the market went from $4,000,000,000,000 value.
So it's a $10,000,000,000,000 economy. It went from $4,000,000,000,000 market value to $10,000,000,000 Now it's back to $6,000,000,000 I think those are the numbers. And the American stock market has done that round trip a couple of times itself. And so the American economy is $18,000,000,000,000 I think our stock market is $25,000,000,000 And so there will still be huge opportunities there. If they ever completely reverse what they're talking about doing, you'll see it in far more significant ways than them getting involved in the stock market.
Your next question is from the line of
Betsy Graseck with Morgan Stanley. Hi, thanks. Just a quick follow-up. Mary Anne earlier on you were talking about deposit betas and for a lot of very good reasons expecting that deposit betas will be a little bit faster this time around. But could you round out the conversation as to how you're thinking about how your NIM is going to traject in a rising rate scenario?
Because I got a few questions on whether the deposit betas being a little faster means that the NIM trajectory is likely to be different from last time rates rose for you guys?
So Mary Anne, you showed a NIM thing that NIM would go back to 265 to 275. And remember, when we say deposit beta, it is by product by and it's got gamma. So the first 25 basis points, second it's different 25 basis points, but they're different than the 3rd 25 basis points. And it's a pretty intensive analysis to try to get it accurate. That's what we're trying to do.
And it's all in that number that was presented. And we don't think that's changed dramatically. But as Marion said, we are assuming that whatever happened in the last cycle, this one will be worse. In other words, you'll gather less of the benefit from rights going up than we have in the past.
Okay. Because last time rates rose, Unum didn't move up that much?
Well, listen, there's a unique Yes.
It's This is
a unique circumstance when you're at 0. I mean, there are a lot of things that happen when rates go to 25 basis points that there will be you will pass very little of that on. And we also see that we'll see that in money market funds. We'll see that in some forms of deposits etcetera. The beta gets much higher as rates go up.
If I had to guess, I'd say we're conservative not aggressive.
Your next question is from the line of Gerard Cassidy with RBC.
Hi. This is actually Steve Dong in for Gerard. Just two follow ups. You had mentioned the credit downgrades. I believe you'd said oil and gas.
Were there any other sectors? And if there were, just some figures on them?
Yes. The rate included oil and gas. We called it out just because in total oil and gas was $140,000,000 of our total net $250,000,000 reserve build. But also I said that there were select names, it's like a dozen names. So it's not really like there's another sector, just very discrete names.
Okay, great. Thank you. And just a second follow-up. Can you just give us your mortgage duration and how far you're willing to take it?
No, no, we're not going to give you that. We disclose when you say mortgage ratio, obviously, we build it all of our models mortgage duration and you guys can calculate that yourself by looking at disclosures in the 10 ks that show mortgages at 3%, 3.5%, 4%, 100% etcetera. And obviously, we can change that at will with our investment portfolio and things like that. It's all in the NIM already. So obviously, we have negative convexity in our portfolio.
And there are no further questions.
Thank you, everyone.
Wait, before you all go, I just want to tell you, one of these days I'm not going to come in on this call. I'm not doing it because I want to avoid it. I don't like it. And obviously, if anything is important to really bad, I'm not going to ever try to avoid bad news here because we like to tell the whole truth, nothing but the truth, the good, bad, the ugly. But Mary Anne and Sarah do such a good job that I become unnecessary to be in all of them and I can obviously go do other things.
So don't be surprised one of these days I don't show up. I'm not don't read anything into it. Anyway, thank you for being here.
Ladies and gentlemen, this concludes today's call. You may now disconnect.