Please stand by. We are about to begin. 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, Marianne Lake. Ms. Lake, please go ahead.
Thank you. Good morning, everyone. I'm going to take you through the earnings presentation. It's available on our website. Please, if you could refer to the disclaimer regarding forward-looking statements at the back of the presentation. Starting off on page one, the firm delivered strong performance this quarter. Net income of $6.3 billion, EPS of $1.54, and a return on tangible common equity of 14% on revenue of $24.5 billion. 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 $14.2 billion 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. We've delivered on our non-operating deposit commitment.
While there were no significant items this quarter, there were some smaller items that are worth calling out. On the positive side, we had consumer loan loss reserve releases of a little over $300 million, as well as a little under $300 million of a benefit in DVA/FVA on wider spreads. Against that, we saw reserve builds across wholesale of $250 million, of which approximately $140 million related to oil and gas, as well as firm-wide legal expense of a little less than $300 million. If you take those four items and net them, together they contributed zero to net income. Finally, included in the result is $330 million of a benefit from tax discrete items. If you adjust for all of those, our net income is strong at $6 billion. Skipping over page two and on to page three.
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 credits, as well as some data enhancements, with loan growth offsetting run-off. We continued to build Tier 1 capital, adding $3.4 billion of preferred stock this quarter. We returned $2.6 billion of net capital to shareholders, including $1 billion of net repurchases and dividends of $0.44 a share. Preferred issuance together with a reduction in average assets drove the firm's FLR to reach 6%. For more details on our balance sheet reduction, turn to page four.
Last quarter, I told you that you should expect us to make meaningful progress on our balance sheet in this quarter, and we did just that. Year-to-date, our balance sheet is down over $120 billion on a spot basis, driven by a reduction of over $100 billion of non-operating deposits across our wholesale businesses, partially offset by continued growth in consumer deposits. We also saw a $36 billion 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 billion 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 core 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 two basis points quarter-on-quarter, and NII. Quarter-on-quarter, the reduction in cash drove a four basis point improvement, was partially offset by lower yields. As I said, firm NII was flat. Turning to page five on Consumer & Community Banking. The performance for the combined consumer businesses was characterized by sequential revenue growth on stronger fee revenue and positive operating leverage, generating $2.5 billion of net income, an ROE of 19%, and an overhead ratio of 56%. Revenue of $11 billion 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 million 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 billion in 2017 relative to 2014, while continuing to self-fund investment in the business. In the first half of this year, expenses were down approximately a half a billion dollars versus the same period last year, and our head count, down roughly 6,000 year-to-date. Moving to Consumer & Business Banking on page six. CBB generated net income of $831 million, 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% 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 billion year-on-year, and we are pleased to see that 30% of this growth is driven by our investments in business banking and CPC and new builds. Client investment assets were a record, up 8% or $16 billion. In business banking, average loan balances were up 6%, with loan originations flat against a 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. Non-interest revenue is growing solidly and expenses will decrease. We expect positive operating leverage. Mortgage Banking on page seven. Mortgage net income was $584 million for the quarter. Originations were $29 billion, up 19% quarter-on-quarter on seasonal increases in the purchase market. We continued to execute our strategy of adding high-quality loans to our balance sheet, totaling $19 billion this quarter, and the origination pipeline continues to look strong. Total revenue increased sequentially, primarily driven by higher MSR revenue. As you can see, you look at our non-interest revenue is down $500 million year-on-year. We still expect non-interest revenue to be down about $1 billion for the full year, in line with previous guidance.
Expenses of $1.1 billion were down $200 million or 15% year-on-year, down 9% quarter-on-quarter despite higher volumes as we continued to manage down our costs. On credit, we continued to see improvements in home prices and delinquencies. As a result, we released $300 million of NCI reserves this quarter, and you can see our charge-off rate was 21 basis points. Moving on to page eight, Card, Commerce Solutions, and Auto. Overall, net income of $1.1 billion, up 30% year-on-year, and an ROE of 23%. Revenue of $4.7 billion 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. In Card, we saw core loan growth of 3% and sales growth of 7%, with delinquency rates and charge-offs remaining low. Commerce Solutions continued 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's healthy.
Moving to page nine and the Corporate & Investment Bank. 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 Revenue, and principally, this now incorporates the revenue share with the commercial bank here in this line rather than in the markets revenues where it was previously being reported. Additionally, Trade Finance revenue, which was previously reported in Treasury Services, is now being reported in Lending. Digging into the numbers, the CIB reported net income of $2.3 billion on revenue of $8.7 billion and an ROE of 14%, reflecting a strong result in a mixed environment. In banking, IB revenue of $1.7 billion is up 4% year-on-year.
This quarter, we continued to rank number one in global IB fees with 8.2% wallet share and widening the gap to number two. We ranked number one in fees in North America and EMEA, and gained share improving to number two in Asia. Another strong quarter for advisory, up 17% year-on-year as activity levels remained high. We maintained our number two 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 in EMEA. With lower wallet share, as we gave back some of the outsized share gain we had in the first quarter. This quarter, we ranked number two globally with strong performance in the U.S. on acquisition finance and follow-ons.
Net underwriting up 1%, we maintained our number one ranking with strength in high grade, also on the back of the healthy M&A market. Treasury Services was down 2% year-on-year on lower net interest income, the lending item of $302 million 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, revenues would be about $875 million ± per quarter, and lending approximately $350 million. That's given the trade finance transfer. Moving on to markets. Revenue of $4.5 billion was down 1% year-on-year, excluding business simplification and a gain in the prior year on the IPO of Markit, which we previously disclosed, but with strong relative performance in rates and in equity markets. Fixed income revenue was $2.9 billion, 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 first quarter 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 markets. As I mentioned, equity markets had another strong quarter, up 27% year-on-year on revenue of $1.6 billion, 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 third quarter markets revenues with a corresponding decline in expenses.
As I look into the third quarter in analyst models, I see relative to our markets results this quarter, you have revenues in markets going up sequentially. We're fully expecting to see normal seasonal declines in the third quarter markets revenues. Securities service revenues of $1 billion was in line with guidance, up seasonally on the European dividend season. Moving on to expense. Total expense was down 15% year-on-year at $5.1 billion 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. Comp to revenue ratio for the second 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 billion 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 million to reserves in the quarter, reflecting select downgrades, including oil and gas. Despite this, BAU credit performance as a portfolio, as I said, remains very strong. This drove net income of $525 million on revenue of $1.7 billion 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 first quarter. 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 million. Loan balances increased 12% year-on-year and 4% quarter-on-quarter.
C&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 million on revenue of $3.2 billion 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 billion, with strength in North America and multi-asset flows. Driving record AUM of $1.8 trillion up 4% year-on-year, and client assets of $2.4 trillion. In addition, we had record loan balances, which were up 9% year-on-year.
Expense of $2.4 billion 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 targets. Lastly, we reported strong investment performance with 78% of mutual fund AUM ranked in the first or second quartiles over five years. Turning to page 12 and corporate, Treasury and CIO reported a net loss of a little over $100 million. Other corporate reported net income of $552 million, which included a benefit from discrete tax items I previously mentioned. On page 13 is our outlook page. Any guidance that I was going to give, I've made through the presentation. The page is here for your reference.
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 commitments. With that operator, we'll open up the line now for Q&A.
Great. Your first question comes from the line of Erika Najarian with Bank of America.
Hi, good morning.
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. I guess the question is in 2 parts. 1, what do you think the chances are of any or all of the CCAR surcharge or the CET1 surcharge to be included in CCAR? 2, what are the next steps in terms of business model adjustments if that did pass?
Obviously, we don't have any particular insights. I think the comments you're referring to are comments about the support for evaluating the possible inclusion of some or all of. Really, it hasn't changed relative to previous comments. The door has clearly been left open for that, but we have no further information. So far, it's evaluating the possible inclusion of some or all of the surcharge. We're just going to have to, I suppose, wait and see. By the way, if it happened for us, it would happen for everyone. We've shown you before, not that that's a good outcome, but we've 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.
If everybody has to increase their minimum, it is 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. Our commitment is to go to firmly within the 4.5% bucket for the surcharge. If we believe we can do it, and it's economic, and it's not going to hurt our clients, we may go further. Look, 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. 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?
We actually haven't really changed our point of view since Investor Day and previously about the fact that we're expecting retail deposits. There are other people who have slightly differing 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 compliant 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. 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.
Hi. I see your markets revenue are down 1% year-over-year, the way you look at this. I'm trying to reconcile that with Jamie's comments two 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. Can you shed more light on what type of repricing you're seeing with any specific examples? The transparency for us on the outside is pretty weak.
Yeah. Obviously, when you talk about trading, when you have two months to go in a quarter you don't know the exact number. Repricing is a complex issue. 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, 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, it seems that people are charging pretty much for repo. We need to get a return on it. Exotic derivatives, which are, again, very small, are being 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. Credit, we've really not seen any repricing effectively in commercial credit. You've seen a little bit in 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. Trade finance, you've seen a little bit of repricing. 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.
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've cut back on FHA volumes, et cetera. You're protecting your margins, but you're actually shrinking your revenues in some cases. 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 I'm willing to give you other business which is not credit sensitive, et cetera." It's kind of a whole amount of things taking place in there.
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.
Just one follow-up.
I think most what you see in trading is just volume related and spread related, et cetera. 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. It's unclear.
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?
Yeah, I'm talking about basis points, 20 basis points, 15, 10. That's all you need in 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 Graseck 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 the 2Q numbers or we're going to see more benefit in 3Q from the actions you took?
Hey, Betsy. What I said, and hopefully it was clear, is that we actually exceeded our commitment. We actually shrunk our non-operating deposits by more than $100 billion and not just grew our consumer deposits, but we're also able to grow wholesale operating deposits. We had a good mix shift both in consumer versus wholesale, but also within wholesale. We feel really great about that. There are two 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. The second is, we will likely look to potentially push a little farther, but it gets harder and harder each marginal next $5 billion or $10 billion, as you get more and more closely aligned to operating accounts and operating business.
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. That's the lens we.
The progress has also been made in level 3 assets.
Sure
derivative receivables.
Confirm, yeah.
certain balance sheet items, RWA. The effort to optimize the balance sheet for G-SIFI, et cetera, is not going to stop. That we're going to continue to do.
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 basis than on an average basis. The equation looking forward will be much the same math we said at Investor Day. Approximately 25 basis points revenue on approximately $100 billion average for half a year, there would be some expense benefits on FDIC costs, et cetera. Not a very big number. I think that was the question.
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. Marianne, 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 billion in adjusted expenses for 2015, how much of the ultimate cost saves does that 57 target for this year incorporate? How much would you have achieved already in 2015? Any thoughts on the trajectory for remaining saves after this year?
Let me do this in two parts. 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 on our way to delivering against that. The commitment $2 billion in 2017 versus 2014. It's not exactly linear, but you can consider it to flow through time. If you look at the CCB page on whatever page that is, I think we showed that for the first half of the year, our expenses are down over the first half of last year by half a billion dollars. That gives you a sense for how we're tracking. On the CIB, obviously the commitment is somewhat newer. At Investor Day this year, $2.8 billion in 2017 versus 2014. I would characterize that in sort of two parts.
A billion and a half is Business Simplification. The majority of Business Simplification, not all, but the majority will come out of our run rate in 2015. You've already seen that in the first and second quarter when you've seen the $300 million, $400 million expense reductions in each of the quarters on Business Simplification. The other $1.3 billion, which is all the reductions in technology and operations and headcount is going to be things we're working on it actively. We have programs, we have people, it's going to be more of a 2016 and 2017 benefit. If I was to look at the first half of 2015 versus the first half of 2014, take the $500 million 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?
Yeah.
Okay, great. The quick follow-up is on RWA. Any update to your year-end RWA targets and thoughts about how we should think about potential RWA levels longer-term?
Advanced RWA is down $36 billion-$37 billion, 1.536. We said a little greater than 1.5. We're still on track to be 1.5 or a little greater than 1.5 advanced at the end of the year. Standardized right now is at 1.515, pretty close to $1.5 trillion against the target at the end of the year of 1.55. That's a little better. Obviously on the standardized, you have some upward pressure as we continue to grow those really great loans that we're growing. 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 Burnell with Wells Fargo.
Good morning. I'm just curious in terms of your core loan growth. You mentioned that that's up about 12% year-over-year. Can you give us a sense as to where that's growing the strongest, perhaps where you're seeing a bit more weakness within-
Yeah, I mean.
The core loan growth specifically?
Yeah, of course. I'll do it in three parts. First of all, it's growing pretty solidly or strongly, so either in line or in many cases, better than 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. That's driving some of that outperformance. The one that is most challenging, but still growing, is middle market. It's fiercely competitive. Everybody's chasing that sector. You can go through the businesses. We had 8% loan and lease growth in auto, 6% business banking, 19% core in consumer, 4% in commercial, so 3% core in card. It's solid to strong pretty much across the board, most competitive in middle market and flattered by portfolio and mortgages.
Okay, Marianne. For my follow-up, I noticed, I guess you were quoted in an 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?
Yeah. 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. We said we might expect more reserves in the second half of the year. There's another redetermination cycle in the fall, and 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. We're not going to make any comments on regulators.
By those reserves, do you not mean we're going to have losses?
Correct. We're reserving for downgrades doesn't necessarily mean that they're going to be cat losses.
Your next question is from the line of Ken Usdin with Jefferies.
Thanks. Marianne, just wanted to follow up on that last point. Your commentary about credit for the second half is in line, your $4 billion plus, and you had $1 billion of charge-offs this quarter again. 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?
Credit, like charge-offs, have been very benign across the wholesale space. They've reverted to somewhat more normal levels in auto. I'm not expecting there to be big step changes in the underlying charge-offs in the wholesale space. We continue to see improvements at a slower pace in mortgage, but at 21 basis points, we're sort of getting down there. Card, while it's slightly above at that 2.6% above our 2.5%, it's also pretty much getting there. It's one of the reasons why we've said, expect the second half to look like the first half in terms of order of magnitude and expect net low for long.
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 million release from the NCI portfolio. Is this kind of it for reserve release, and can you talk about your outlook there?
Yeah. I would say. 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 reserves, 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. I would still expect there to be more reserve releases over the course of the next 18 months in hundreds of millions of dollars in total, not billions any longer of course. We have $1.8 billion reserved right now. In the purchased credit-impaired space, clearly that's a life of loan model, we'll continue to evaluate that model against parameters that we have and expectations. That will be what it is at the time. 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 on some of that seasonal, but it was a little stronger than what 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 accounts and we should start to see that revenue line track more closely with spending, or is this something unusual this quarter?
You're absolutely right. All the underlying phenomenon are still there. We're still seeing spread compression, but we're seeing 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. I would say, our near-term guidance is that we're expecting our revenue rate to be at the lower end of that 12%-12.5% range. 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. 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. We told you we would hope to drive core loan growth in the card space, low single digits. In this quarter, it was 3%.
Your next question-
I just want to emphasize, Marianne mentioned it, but emphasize Chase Paymentech, which has seen really good growth, probably 50% faster than the industry, but we're also signing people with Chase Paymentech combined with ChaseNet. We're running real volume across it, and we're signing up a lot of folks for that for Chase Pay. This strategy of ours is kind of coming to fruition. We hope it'll be a good driver of happy customers and good growth for the next 10 years.
Your next question is from the line of Steven Chubak with Nomura.
Hi, good morning.
Morning.
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 points RWA target.
Yeah. Obviously we don't give you lots of details on our issuance plans. You're right. One of the drivers for us to issue, in part, not exclusively, as you know, we were Tier 1 leverage constrained in CCAR. As a result of issuing this, we not only help TLAC, but we help our CCAR stress capacity. We're at about 160 spot RWA. We're not going to talk about forward issuance, but we've made progress.
Okay. Then just a follow-up regarding Marianne, 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 Volcker implementation deadline, which is looming. Taking all those factors into consideration, how should we be thinking about the near-term trading outlook?
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 in form with Volcker. While that was real reshaping of the business, the last 18 months have been really focused on getting operationally ready around the reporting and the metrics. It's been hard work and we are ready. 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. That will be entirely gradual.
With respect to the trading, it is too early for us to say anything specific about the third quarter, except to say, all other things equal, we would expect to see normal seasonality from the market dynamics. Nothing has changed that fundamentally wouldn't have us expecting normal seasonality in the third quarter.
I just want to point out that trading, if you look at it over a long period of time, we've become very consistent. I think in 2014, we had no trading loss days, and even this year, there have only been a handful of trading loss days. Obviously, some areas are up and some are down, but our shares are high. 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 it's 95% of FX trading by transaction is electronic. You can do a lot of that on your mobile phone or iPad now. The business is actually doing fine. The returns on risk are very good. We used to report that, but kind of return on VaR are very good.
It's become a much more stable business that clients need over time.
Right. 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 German bund sell-off and China well. It just speaks to the strength of our risk management discipline. We generally do pretty well in more difficult markets.
Your next question is from the line of Paul Miller with FBR.
Yeah, thank you very much. You guys had a very decent Mortgage Banking quarter in the second quarter 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 third and fourth quarter, especially with the new regulations coming out with the disclosures with TILA-RESPA?
We saw a stronger seasonal purchase market. We actually gained a little share in the purchase market in the quarter. Refi held up pretty well just because of pipelines coming into the quarter. We are expecting that to both seasonally in purchase and in refi to fall back down to smaller levels in the third seasonally. No direct impact from the disclosure requirements.
Part of the quarter was the reserve takedown, don't double count that. That may not be there next quarter.
Right.
But the-
Okay. Can you talk a little bit about my follow-up question on the tax rate? Should we be modeling in 28%-30% going forward? Is that 25% just an outlier?
The way I would think about it is our normal tax rate for the year is 30% plus or minus. Just given the way tax reserving is, it's usually biased to being fairly conservative. 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. 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 for others, assuming it continues the rest of this earning season. To 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? 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 it's perhaps a little too early to tell on the former.
Okay. Just separately, what type of mortgage loans are you adding? Are these jumbo? Are they-
Jumbo
fixed rate?
Yeah. Over half are jumbo, the other half are conventional conforming C plus.
Okay. I guess, are you choosing to add some mortgage loans instead of securities? You've got a smaller securities book than a lot of peers, and it seems like there's capacity to add there.
We have a fairly large securities portfolio, and our decisions around that are in part driven by our overall interest rate risk positioning. With respect to the mortgages, it's fundamentally a best execution decision for us. We will portfolio a loan 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.
If you could put a jumbo on a higher ROE than a Fannie Freddie, you would do that.
Yeah.
part of the investment portfolio is for liquidity, obviously because non-operating deposits are down, portions of that can 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 fixed income, 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. 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 in terms of the potential disruption?
there's been a lot of press and reports, including recently on Markit liquidity, 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. the reality is that we talked about the fact that that was likely to be a phenomenon that happened more frequently as we transition to a more normal environment. we are very disciplined about how we trade and support our clients. generally, we've been able to weather them very well, as has generally the community. Not that we know, but we haven't got any horror stories around the EMEA bond sell-off or other things this quarter.
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.
Yeah. If you look at the big picture, we pointed this out, the financial system, like in the U.S., banks are much more sound. Trading books have more capital liquidity. The whole system is better off. You can't look at one piece and say, "What will that do?" The second is that obviously there's less liquidity in the marketplace, and it's a whole bunch of factors. It's hard to tease out exactly which one. Trading books have more capital, more liquidity. I think people are a little worried about potential Volcker Rule violations, so being a little more cautious. There are obviously structural changes in electronic trading, HFT, and each business is slightly different. I wouldn't say everyone's affected exactly the same. It's also true that the system is 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. JPMorgan is fine. 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? Someone's quoted as they saying markets always pull back when there are tough times. That is true. The question is, will it be harder and worse? Will it feed back into the real economy? It's not will there be lack of liquidity. During the crisis, there were two market makers out there, and we were one of them. You need them a little bit, but it doesn't stop markets from gapping out.
We're not saying this is a terrible thing, just be very cautious about it. We are always trying to be very cautious.
Speaking of cautious, the last one I have is on living wills. I know we have a little bit of time before we hear anything. 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. Curious your thoughts on progress made, and then maybe timing on when we might hear the regulators' thoughts.
Yeah. 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. We feel that we made very, very significant-- I would agree with you, the industry. JPMorgan specifically made very, very significant progress in addressing the feedback between getting it and the July submission date. Obviously we feel like we have a credible plan. That's not to say that we won't continue. Some of our plans, and you saw it in some others' disclosures, we're going to continue to work very hard at simplifying our legal entity structure over the next few years.
Interconnectedness and operational resiliency and reporting readiness, all the things that are going to make it even better. 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.
We respond to every single thing regulators raise with the huge resources to meet their needs. It'll probably be iterative over time about they'll make more demands this year, et cetera. By the way, I think it's a 50-page public-
Yes
part that you can actually read, and it shows you. That's a 50-page summary of a, I think a 200,000-page-
Yeah
detailed report.
Your next question is from the line of Gerard Cassidy with RBC.
Thank you. Good morning. Marianne, you mentioned a 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, it's very broadly competitive, we compete obviously with big banks, regional banks, and non-banks. It's not that we are losing loans and deals most often on price. It's normally on size of holds or non-banks taking whole deals or on structures. It's very, very competitive, everybody likes the sector for growth, everybody's trying to make progress, we are being very, very disciplined, as a result of that, slightly lower growth than the industry average. You might not want us to always grow at the industry average. You want us-
Right
to hold true to discipline.
Remember, we look at the whole relationship, I forgot the exact number, if you look at a 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, 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?
The way I always 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 right footprint as a macro matter at about 5,600, 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. You would see, I think Gordon said approximately 150 net down in each of the next couple of years, that's probably still the right way to look at it's really perfecting the network, moving branches to the areas we like, where there's a high density of affluence.
Then, as you know, really looking at the nature of branches, 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. Definitely responsive to the evolution in customer preferences. Mobile and online is not only a fantastic customer experience evidenced in our experience stats, it's also a lower cost to serve. We're also improving the profitability of the very highly transactional customers. I think Gordon used the word omni-channel. We have a place for everything in our suite, branches are very important, we're just going to be evolving them to continue to meet customer needs.
One add is that we are thinking about attacking a new city for the first time.
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. I would have expected that to come mainly out of the Corporate & Investment Bank. When you look at the disclosures on your average asset level, it's essentially been $850 billion plus or minus each of the last five quarters. 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 two-thirds. Then you've got the commercial bank, and you've got a little bit in asset management. It is the majority of the number, but there are still sizable numbers, particularly in the commercial bank, in the financial solutions space.
Yeah.
Then when you look at our overall balance sheet, you see cash going down because of the deposits, you see securities going down, strong loan growth offsetting, then small reductions in trading and securities financing.
When I look at total assets in the CIB, it's $845 this quarter versus $846 last year. It just doesn't look like a whole bunch came out of there.
Are you doing year-over-year?
You guys are showing the wrong time periods.
Are you starting at the year-end or year-over-year?
Yeah. Well, if you go linked quarter, it's $865-$845. I'm just curious. It doesn't seem to mesh up to-
Well, we're looking more operating deposits, too.
Yeah. We talked about the deposit reduction is over-achieving in non-op and improving mix in operating. Trust me, I'm not looking at what you're looking at, I do trust you. Trust me that 60% of it is CIB.
Okay. No, 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 quarter. I was just kind of curious how it all works because it didn't-
We'll clarify off this line because.
Yeah, settle that by DM.
Okay. All right. Thank you.
Your next question is from the line of Eric Wasserstrom with Guggenheim Securities.
Thanks. My question has been addressed. Thank you.
Thank you, Eric.
Your next question is from the line of Brennan Hawken with UBS.
Yeah. 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&A discussions in Europe this quarter, and maybe an update on the IB bank backlog at this point.
M&A, we don't think Greece has affected the M&A dialogue very much, because it's been very active pretty much around the world. When I say around the world, it's also like European companies coming to America, American companies going to Europe, et cetera. Those conversations continue.
A lot to Europe, yeah.
A lot to Europe, yeah. Greece had no real effect on that. Remember, Greece is a very small % of the Eurozone in total. Economically, it's not a driving factor for most of the companies there. Psychologically, maybe it's going to affect some people, I don't see why a company that has its own ambitions is going to change them because of Greece.
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 American companies financing in euro because it's cheaper to do that even if you swap back to dollars. You saw a lot of American companies going to Europe to do that.
Okay. Thanks for that. Then on Securities Services, I know that you all highlighted 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?
Yeah, I think if you go back to last quarter, Brennan, and take a look at the remarks from last quarter, we talked about the change in presentation of some expenses versus revenues for the ADR business that drove a reduction, but just a classification issue. Then in addition, we did lose a large client at the end of last year, and that is having an impact. I think if you go back and look at the second quarter, hopefully that will make it clear. The guidance when we made that presentational change, and obviously we talked about the client exits a few quarters ago, the guidance was given those, we would expect the revenues to run between $950 seasonally, and this is obviously a strong season, and therefore it's at between $950 and $1 billion seasonally, and therefore it's at the $1 billion.
Marianne 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. Sarah finds it very frustrating that she can't get it corrected quarter after quarter. We said, "Here is the number that is actually our best guess. Please put in your third and fourth quarter models." Mortgage revenue is another one which has been ongoing for us. What's the other one? Should we just get on the table whatever it is?
That's it.
Your next question is from the line of Nancy Bush with NAB Research.
Good morning. 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. I'm just wondering, can you just tell us how you feel about individual markets right now?
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 what 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. Branches, it is very important that you look at branches city by city and do you have the right footprint. If you remember the old A&P, which never changed its locations and it never changed its sizes, and just failed. Any retail business, you should always be adding in the new communities, subtracting in some, having the branches adjust to the new reality, what's getting bigger, getting smaller. In our case, it's getting smaller. We're not getting smaller because we're guessing this stuff.
We're getting smaller because there's less need for operations in branches now. People are doing far more on mobile phones like that. We actually do it city by city. We don't set an overall guideline, say you have to do X, Y, or Z. It's city by city. 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. Remember, we also added on top of that, small business, private banking, some middle Markit, other business that WaMu wasn't even in. That was part of the expansion of those businesses, too. When I said a new city, I'm talking about what we've never really done.
I was talking about this way back at Bank One when we stopped. We did the merger with JPMorgan, is going into a city de novo that we've never been in. From there, you've got to look at how many branches you're going to open, how long it's going to take. We do want to do more of those, and that'll have nothing to do with WaMu because those are places that WaMu wasn't.
Okay. Another geographic question. I get that Greece is not that important to the Eurozone. The events of the past couple of weeks seem to have been a lot of theater, frankly. The events in China in the last couple of weeks have been somewhat worrisome. Have your plans for China changed at all, given what seems to be a retreat from open markets there?
No. I don't think there's been a retreat from open markets there either. Remember, we've always said about China, you've got to look and plan for long run, which we do in all businesses. McKinsey has a report that shows that they're going to have 25% of some of the Fortune 1000 in, I forgot, it was 10 or 12 years. Enormous growth in their companies. There are companies going overseas. There are companies doing more M&A. We did that one unique transaction where ChemChina bought Pirelli in Italy. Obviously, when we have a unique network, we can help a Chinese company and an Italian company at the same time. 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.
I think it's a mistake not to grow because you're going to have tough times. I have never seen an economy that didn't have tough times. If you went back to the U.S. 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. We're not going to change. What we've seen with the officials in China is that they are very responsive to changes. You could argue whether they should have gotten that involved in the stock market. You can't manipulate stock markets. They're very responsive to lending. They've changed the reserve policies, the RMB policies, the QFII policies, the Shanghai-Hong Kong Stock Connect.
Not everything they do is going to work. They still seem very committed to more and more market reform, more and more of taking SOE, rationalization of SOEs, and then taking them public so there's some market discipline there to create more of a consumer society. What we've always said, I think they have the wherewithal to meet their kind of short-term objective of growth. We expect that they will have bumps in the road. We expect that. We're going to look right through that. Also, remember, their market went from $4 trillion value, so it's a $10 trillion economy. It went from $4 trillion market value to $10 trillion. Now it's back to $6 trillion. I think those are the numbers. The American stock market's done that round trip a couple of times itself. The American economy is $18 trillion.
I think our stock market is $25 trillion. 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.
Oh, hi. Thanks. Just a quick follow-up. Marianne, 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. 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.
Marianne, you showed a NIM thing that NIM would go back to 265-
Yeah
to 275. Remember, when we say deposit beta, it is byproduct, and it's got gamma. The first 25 basis points, second, a different 25 basis, third different, the third 25 basis points. 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. We don't think that's changed dramatically. As Marianne 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 rates going up than we have in the past.
Okay, because last time rates rose, our NIM didn't move up that much.
Well, listen, there's a.
Yeah.
It's a unique circumstance when you're at zero. There are a lot of things that happen when rates go to 25 basis points that you will pass very little of that on. We also see that we'll see that in money market funds, we'll see that in some forms of deposits, et cetera. 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 Steven Dong in for Gerard. Just two follow-ups. You'd mentioned the credit downgrades. I believe you'd said oil and gas. Were there any other sectors? If there were, just some figures on them?
Yeah. The credit downgrades included oil and gas, and we called it out just because in total, oil and gas was $140 million of our total net 250 reserve build.
Yeah
I said that there were select names. It's like a dozen names. It's not really like there's another sector, just very discreet names.
Okay, great. Thank you. Just a second follow-up. Can you just give us your mortgage duration and how far you're willing to take it?
No, we're not going to give you that. When you say mortgage duration, obviously we build into all of our models mortgage duration, and you guys can calculate that yourself by looking at disclosures in the 10-K that show mortgages at 3%, 3.5%, 4%, 4.5%, et cetera. Obviously, we can change that at will with our investment portfolio and things like that. It's all in the NIM already. Obviously, we have negative convexity in our portfolio.
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. Obviously, if any of these reports are 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, the bad, and the ugly. Marianne 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. Don't be surprised one of these days I don't show up. Don't read anything into it. Thank you for being here.
Ladies and gentlemen, this concludes today's call. You may now disconnect.