Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's First Quarter 2015 Earnings Call. This call is being recorded. 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.
Thanks, operator. Good morning, everyone. I'm going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer regarding forward looking statements at the back of the presentation. So starting on page 1, the firm reported net income of $5,900,000,000 for the quarter and EPS of $1.45 a share and a return on tangible common equity of 14 percent on revenue of nearly $25,000,000,000 up 4% year on year reflecting strong performance.
The quarter was characterized by a constructive environment supporting broad strength in underlying performance. We saw higher levels of volatility in client activity on the back of a number of macro events driving higher markets revenues. We also saw strength across IB fees and core loan growth was strong up 10% year on year. Included in the results was firm wide legal expense of approximately $500,000,000 after tax. Outside of legal, other smaller notable items on a net basis did not contribute significantly to the result, which means that a more core earnings number would have been well the other side of $6,000,000,000 Adjusted expense, which excludes legal, was $14,200,000,000 down $100,000,000 from the 4th quarter with an adjusted overhead
ratio of 57%.
And outside of a modest reserve build for oil and gas, which I'll come back to, credit trends remained benign and firm wide net charge off remained low at $1,100,000,000 We continue to make progress against our capital targets reaching a fully phased in CET1 ratio of 10.6%, while returning over $3,000,000,000 to shareholders in the quarter. Finally, we're pleased that we did not receive an objection to our capital plan and the Board announced its intention to increase the quarterly dividend by 10% to $0.44 a share and authorized gross share repurchases of 6 $400,000,000 Before I move on, you'll notice we streamlined our earnings press release for the quarter to simplify the format and focus in on key messages. Skipping over page 2, turning to page 3 and our balance sheet. As I said, the firm's fully phased in CET1 ratio advanced was 10.6%, up about 45 basis points quarter on quarter. With earnings, model benefits and the combined impact of portfolio runoff and other RWA reductions being offset by capital distributions.
The fully phased in standardized CET1 ratio was 10.8%, up from 10.5% in the Q4 of 2014. While we made very good progress during the Q1, the pace of capital accretion during the year won't be linear, particularly given the timing of model benefits. We continue to expect our ratio to be 11% plus or minus at the end of this year. The firm and the bank FLR improved slightly from last quarter at 5.7% and 6% respectively. On page 4, we've added a new page on our balance sheet given the objectives we outlined at Investor Day on non operating deposits.
If I turn to page 4. As you look at the balance sheet, it's important to look both on an average and on a spot basis. If you look on the left, our average balance sheet is higher by $46,000,000,000 which reflects a significant ramp up in deposit in the 4th quarter. But if you look next to that, you can see on a spot basis that March is actually relatively flat to December. And if you move to the right, end of period deposits are also flat quarter on quarter, but with a relatively significant mix shift towards retail deposits, with other deposits down $24,000,000,000 predominantly driven by client actions related to non operating deposits, reflecting good progress towards our goal and what has effectively been a matter of weeks since Investor Day.
We're actively engaged with our clients and working with them to implement plans to further reduce these deposits and we expect the Q2 to be meaningful in this context. We're still committed to our goal of reducing them by up to $100,000,000,000 by the end of the year. Moving on to NIM and NII. It's the higher average cash balances on deposit growth as well as some asset reductions that drove the 7 basis point compression in NIM. And in terms of NII, day count was a large driver of the decline.
Turning to page 5 and Consumer and Community Banking. The combined consumer businesses generated $2,200,000,000 of net income for the quarter and an ROE of 17%. Revenue of $10,700,000,000 was up 2% year on year, driven by healthy growth in balances and in non interest revenue, partially offset by spread compression. Revenue declined 2% sequentially reported or 4% if you were to exclude the loss in the 4th quarter associated with portfolio exits in card. And this decline is driven by seasonality in NIR as well as fewer days in the quarter.
We remain focused on the customer experience and on our strong customer satisfaction rankings and we continue to grow households and see very low levels of attrition. And we're deepening relationships. Our average deposits are now over $500,000,000,000 up 9% year on year. We have record client investment assets up 12%. Our active mobile customer base is up 22%.
Card sales volume up 8% and our overall loan book grew for the 3rd consecutive quarter with core loan growth of 15% year on year. And across CCB, we remain disciplined on expense management. Year on year expenses were lower by nearly 2 $50,000,000 and our headcount is down about 1900 so far this year. And you'll recall that at Investor Day, we committed to reduce expenses by about $2,000,000,000 in 20 17 relative to 2014. And while it will not be exactly linear, you should assume a meaningful down payment towards that €2,000,000,000 in 2015.
Moving to page 6, Consumer and Business Banking. CBB generated net income of $828,000,000 for the quarter, up 10% year on year and with an ROE of 28%. We continue to see robust performance across our drivers. Average deposit balance growth was up 9%, up €39,000,000,000 from last year. And in Business Banking, the momentum we saw in 2014 carried over into 2015 and supported loan originations of $1,500,000,000 up 2% year on year, but with average loan balances up 6% also driven by higher utilization rates.
These underlying drivers helped offset the impact of the low rate environment. NII was down 5% quarter on quarter in line with our guidance on lower deposit margin which was down 12 basis points, driven by lower reinvestment rates as well as day count. NIR while down seasonally quarter on quarter was up 5% year on year due to strong client investment and debit revenues. Expenses was up 3% year on year reflecting continued improvement in branch efficiency. Mortgage Banking on page 7.
You'll notice we simplified the reporting for mortgage banking here. It's now consistent with the other CTV lines of business, but the additional detail by sub line of business is still available in our earnings supplement. So overall net income was $326,000,000 for the quarter. Originations were strong at $25,000,000,000 up 7% quarter on quarter as we maintain share in a larger market and realize higher revenue margins. And we added $15,000,000,000 of high quality loans in the quarter to our balance sheet, driving slightly higher NII quarter on quarter despite fewer days.
Although production was higher, our total revenue declined quarter on quarter on lower repurchase benefit and lower servicing revenue. Expense of $1,200,000,000 was down 6% quarter on quarter and down 13% year on year, but excluding legal would have been down 19% year on year over a $250,000,000 despite higher volumes as we continue to tightly control our costs. On credit, we continue to see improvements in home prices and delinquencies and released $100,000,000 of NCI reserves this quarter. And you can see the net charge off rate at 30 basis points was down 25 basis points year on year. Moving on to Cars, Commerce Solutions and Auto.
Net income of $1,100,000,000 down 3 percent year on year with an ROE of 22%, but excluding reserve releases net income was up 11%. In the quarter, we moved our commercial card loans to the CIB to align with the client relationships. This was a $1,300,000,000 reduction in card loan balances and relatively modest impact of less than $50,000,000 on each of revenue and expense. Revenue of $4,600,000,000 was relatively flat year on year with the card revenue rate of 12.2% in line with guidance on solid sales growth and reflecting continued investments in acquisitions. And in auto, we saw solid loan and lease growth partially offset by spread compression.
Expense was up 2% year on year predominantly driven by higher auto lease depreciation. In card, we saw end of period loan growth of $3,000,000,000 excluding the commercial card transfer I just mentioned and we saw sales growth of 8%. This sales growth is lower than recent growth rates, which have typically been in the double digits, reflecting the impact of lower gas prices estimated to be about 200 basis points as well as a generally competitive environment. Commerce Solutions, we're gaining share. Volume was up 13% year on year, driven by continued strong spend as well as the addition of new merchants.
And in auto, results continued to reflect steady growth in new vehicle sales and stable used car values. It was the 14th consecutive quarter of loan and lease growth with average balances up 6% year on year. Year to date, the pipeline remains healthy, reflecting continued strength in the market as well as the strength of our manufacturing partners. Finally on credit, card delinquency rates and net charge offs remained low. On page 9, the Corporate and Investment Bank.
CIB reported net income of $2,500,000,000 on revenue of 9,600,000,000 dollars and an ROE of 16%. Revenue was up 8% year on year as market conditions in the quarter benefited both Investment Banking Markets and our businesses performed well. In Banking, our IB fees of $1,800,000,000 were up 22% year on year. We continue to rank number 1 in global IB fees with 8.6% share, up 100 basis points since last year. Advisory fees were up 42%, which was a strong start for both JPMorgan as well as the market with some large transactions.
In fact, this was our highest Q1 on record and we saw share gains of 150 basis points. Debt underwriting fees were up 16% driven by acquisition financing. Aside from that, debt issuance was generally lower. And equity underwriting fees were up 13% in a market that was up only 4. Our wallet rank improved to number 1 both globally and in the U.
S. Looking forward for IB fees, we had some notable large transactions in the Q1 and so we do expect the 2nd quarter to be lower, although our pipeline remains strong. Our pipeline remains strong. Treasury Services revenue of $1,000,000,000 was down 2% year on year, mainly driven by lower deposit NII and lower trade finance revenue. And lending revenue was $353,000,000 up 9% given dividends on restructured securities.
Moving on to markets revenue of £5,700,000,000 was up 9% year on year. But if you exclude business simplification, both total markets as well as fixed income markets would have been up 20%. A number of macro events occurred in the quarter including central bank actions, the Swiss franc decoupling, stronger dollar and oil price volatility, which supported market performance broadly currencies, emerging markets, rates, commodities and equities. In fact equities had one of its strongest quarters, up 22%, with strength in derivatives and cash in particular across the U. S.
And Asia. The first half of the quarter for FICC was particularly strong. The market has absorbed a number of the macro events at this point and recent sentiment is that the Fed will act later rather than sooner this year. As a result, while we are still seeing good client flow and volatility does remain elevated, it is somber. With respect to business simplification, in the Q2, it will have an overall neutral impact to our P and L, but will have or drive a $300,000,000 decline year on year in revenue with a $300,000,000 offset in lower expenses.
Security Services revenue $934,000,000 was down 9% year on year, driven by 2 factors. First, the impact of change in presentation for client revenue sharing agreements in our ADR issuance business. Effective this quarter, these pass through payments to clients will be treated as a reduction of revenue having formally been treated as an expense, but with no P and L impact. 2nd, at the end of the 4th quarter of last year, there was a significant client exit and the revenue impact of this is reflected in this quarter's results. So for the remainder of 2015 given those two facts, we expect security services revenue to be in the range of $950,000,000 to $1,000,000,000 a quarter depending on seasonality.
Lastly on expense, total expense was 5,700,000,000 up 1% year on year with a comp to revenue ratio of 32% for the quarter, flat year on year and an overhead ratio of 0.59%. Non compensation expense declined due to business simplification, partially offset by higher legal expense year on year. Moving on to page 10 in the Commercial Bank. It was a strong quarter with respect to the underlying fundamentals in this another record quarter for Investment Banking revenue with gross revenues of over $750,000,000 In absolute dollars, it was our strongest quarter ever for loan growth, adding over $5,000,000,000 in loans across C and I and CRE and revolver utilization was at its highest level since 2,009. Credit quality remained exceptional with continued low net charge offs of only 3 basis points.
So overall financial performance for the quarter was solid. Net income was $600,000,000 on $1,700,000,000 of revenue and an ROE of 17%. Revenue increased 4% year on year, driven by record investment banking revenue, which was up nearly 70% on increased equity underwriting and M and A activity, was partially offset by continued yield compression. Expenses increased 3% year on year as we continued to invest in controls, but our overhead ratio was consistent with the prior year. We're reaching a peak in control costs in this business and you should expect expenses to stabilize from here.
Loan balances increased 11% year on year and 3% quarter on quarter. C and I loans grew 4% sequentially in line with the industry, driven by higher utilization in our corporate client banking book. And in CRE loan growth was 3% continuing to exceed the industry on strong activity in both multifamily lending as well as real estate banking. Finally on credit and reserve. For the full term, we added a little over $100,000,000 to reserves relating to oil and gas exposure this quarter, the majority of which is here in the Commercial Bank.
We review our energy exposure on a name by name basis and under a range of commodity price assumptions. This quarter's reserve build reflects downgrades in the E and P portfolio. And if the current price environment continues, it's reasonable to accept some further reserve builds during 2015, but relatively modest. However, in the context of a funded portfolio of $15,000,000,000 this is a very modest build and it's fully within the range of our expectations at this part of Recycle for Energy. And although we're taking reserves, it is not clear that they will translate into credit losses as the industry and our clients are not standing still, but actively working to manage liquidity and leverage in the face of lower prices.
Moving to page 11 in Asset Management. A good quarter in Asset Management net income of $500,000,000 ROE of 22 percent and 27 percent pretax margin on $3,000,000,000 of revenue. Revenue was up 7% year on year, driven by flows and higher banking balances and expense of 2 point $2,000,000,000 was up 5% year on year, primarily driven by investments in infrastructure and controls and including modest legal expenses. This marks the 24th consecutive quarter of long term net inflows at $16,000,000,000 driving record AUM of $1,800,000,000,000 up 7% year on year and client assets of $2,400,000,000,000 with strength in multi asset and equity flows. In banking, we reported strong balances in both lending and deposits.
Average loan balances were up 8% year on year and average deposits up 6%. And we reported strong investment performance with 79% of mutual fund AUM
ranked in the 1st or second quartiles over
5 years. Turning to of $221,000,000
but the result included
a net loss of $221,000,000 but the result included a loss in the quarter of $173,000,000 pre tax primarily due to a timing impact of costs associated with certain non operating deposits we plan to exit. On other corporate, as we've completed the spin off of OEP and other portfolio sales during the Q1, the remaining private equity business is not expected to be a significant contributor to the firm's earnings. Therefore beginning this quarter and going forward, we will be disclosing our corporate private equity results as part of other corporate. This quarter private equity contributed a modest positive to the results. Also included in the results are the corporate, the $300,000,000 pretax of legal expense, which is largely offset by 177 $1,000,000 of net income from tax items.
Moving to page 13 and the outlook. I've addressed most of this guidance through the presentation. I just want to highlight a couple of items. 1st, in CCB and the consumer businesses, a couple of geography points relative to analyst models. We guided in the Q4 to expect the Q1's consumer bank revenues to be down on deposit margin compression.
We saw that this quarter as expected and we expect deposit margins to remain pressured as rates remain low. In the Mortgage Bank at Investor Day, we guided for revenues to be down approximately $1,000,000,000 for the year on lower servicing revenues as well as lower repurchase benefit. We saw some of that this quarter and that guidance remains. Against that, as I said earlier, across CCB, we do expect to deliver a meaningful portion of $2,000,000,000 expense reduction guidance in 2015. Finally on this page on Asset Management for the full year, expect the pre tax margin and ROE to be at the low end of the through the cycle target range.
So wrapping up, a strong result for the quarter in a constructive environment. We saw strong market and transaction activity despite continued margin compression. The performance continued to reflect the strength of each
of our
franchises, strong markets revenue and IBCs, 9% growth in retail deposits, 10% core loan growth and good progress against our capital, our balance sheet and our expense commitments. With that operator, please can you open up the line to questions?
Certainly. And your first question is from the line of Glenn Schorr with Evercore ISI.
Hi, Glenn.
Hello there. Just one quick clarification question on the performance in was great. You mentioned it's pretty much across the board. Do you think there's any seasonality, any one time events, block trades, anything like that that would lift such good performance in the quarter?
It wasn't anything particularly noteworthy in terms of one time events. It was really quite broad, particularly in derivatives. In cash, the performance was, I would say, solid year over year because we saw strength in the Americas this year, but we had strength in Europe last year. And I think the Q1 of 2014 wasn't particularly strong. So I think we were flattered a little bit with a relative comparison, but it was a really strong absolute and we think probably strong relative performance.
And maybe this is a related question, but I'm not sure which line it would flow through. From what I understand you guys and others have been pushing or talking with your prime brokerage clients to help improve ROAs in the business. Is part of that flowing through and just that better equity performance more business with clients?
Yes, this is where it would be. I wouldn't say it's a driver, but we are as you said and the whole industry is looking to work with clients to optimize the use of balance sheet and improve returns. So we've seen some of that, but I wouldn't say it was a key driver.
Okay. Switching gears in Jamie's letter, you talked about mentioning the need to push the new G SIB rules to the product and the client level. Yeah. And it piqued my curiosity. I'm just curious how different is that from what you've already done?
In other words, each step of the way you've been early in adopting and pushing out to the desk level higher capital charges. Is this just mean more of the same meaning higher capital charge, higher capital charge? Or is there something different there that you need to do?
No, I mean it is more of the same. Obviously, GSIB took on a slightly heightened focus when we had some doubling happen in the proposal in December. So we've always been measuring and monitoring and tracking GSIB at a very granular level. But we are obviously on a path now to aggressively manage it, which means that we're going to be just a little bit more focused on that constraint, not uniquely also with advanced capital, standardized limits, balance sheet caps alike. So it's more of the same.
Honestly, again, just a heightened focus on this given the U. S. Proposal and given the impact of at least at this point FX translation.
And different than RWA, it affects certain products more than others and we pointed out non operating deposits stuff like that. Certain businesses more than others we pointed out clearing and certain clients more than others we pointed out financial institutions. So it's just kind of a multi variant thing that's not mystical. And we're actually already starting to reprice some of these businesses to get adequate return on GSIB capital. And we've seen other people do that too.
That's right. I mean, we may be in a different position with GSIB, but others are leverage constrained. And just generally speaking, we are starting to see a lot more discipline around balance sheet and pricing is following somewhat generally.
Your next question is from the line of Mike Mayo with CLSA.
Hi, Mike.
Your line is open. Please unmute your line if you have it muted on your end.
We can get right back in the queue later.
Yes. Your next question is from the line of John McDonald with Bernstein.
Hi, John.
Hi, good morning, Mary Anne. I was wondering on net interest income. Do you have an outlook for how the net interest income dollars could trend from here? Assuming that you don't get much help from higher rates, what are the key drivers? And what's kind of your outlook for NIM and NII dollars for the year?
So for again assuming for a second that rates don't rise until the back end if not the end of the year and we can come back to that if you like, we would expect our NII dollars to be stable to slightly up because we're still seeing growth in our interest earning assets. Obviously, this quarter we were down some on day count. It was a big chunk of the quarter on quarter reduction. So we're really going to see the biggest lift in NII when we do see end of rates rise and we'll see when that is. And similarly on our NIM, we would expect NIM to be stable particularly given as we talked about what we've seen dilute on NIM more particularly over the course of the last year or 2 has been this significant increase in cash and we're going to see some of that at least stabilize in turn as we start to reduce operating non operating deposits.
So we should see NIM relatively stable and again start to rise when rates rise.
Rise. And your next question, it comes from the line of Erika Najarian with Bank of America. Yes. Good morning. On the CCAR, do you expect any potential surcharges on the CCAR to come out when U.
S. Final rules on SIFI buffers come out? And in addition to that, has the have you learned anything from CCAR in terms of the transparency of the process? Has is there a progression in terms of the back and obviously,
I don't know the next time obviously, I don't know. The next time we're going to in all likelihood get CCAR instructions including the rules and the minimums is likely to be sometime towards the end of this year for the next CCAR cycle as we get prepared to deliver that. So all I can say is what you know, which is clearly the door was left open for the minimum to be increased or potentially to include some element of the surcharge. We're hopeful that won't be the case because we would say the surcharge should be carried in baseline times to be used in stress and to have all firms to end up well capitalized afterwards, but have no more insights than that for you. With respect to the dialogue with the Fed, look it's definitely much further progressed than it was 2 years 3 years ago and every year it gets better in terms of the bilateral conversations it's constructive.
I don't think however you could today or will likely ever be able to characterize it as transparent and clear. Maybe potentially by design in terms of understanding or being able to reconcile exactly what their models do and what their results are driven by. So I won't be able to clarify for you what changed in their results or what difference between ours and theirs, but the dialogue itself is continuous.
Your next question is from the line of Matt O'Connor with Deutsche Bank.
Good morning.
Good morning.
The drop in the adjusted expenses, I think about 3% year over year came in a little bit better than we were thinking while revenues were also a little bit better. Obviously, you've got a lot of cost saving programs underway that you mentioned earlier in the call at Investor Day. But should we think that maybe you're running ahead of schedule or that the cost saves could be more? Or is it just lumpiness as we kind of
go quarter to quarter?
Yes. Look, I think that the best way to answer that is that we are still firmly with our guidance of adjusted expenses being $57,000,000,000 plus or minus by the end of the year or for the year, sorry. Obviously, we will always try and outperform that, but I wouldn't characterize 1 quarter as a change in that guidance at this point. Okay.
And then just separately, obviously a big company out there announced it's exiting most of its banking assets. And just wondering if there's any interest or appetite within your commercial bank to bulk up the acquisition there in terms of asset purchases versus a complete company?
So look, I mean the most important thing obviously in all of that is that we were delighted to be able to partner with the large company on their strategic transformation and that's the most important thing about that transaction for us. I'm not going to comment specifically on whether or what JPMorgan will be interested in terms of asset purchases. We're much more focused on partnering strategically with the company.
Your next question is from the line of Mike Mayo with CLSA. Please go ahead.
Hi, this is Chris Barr on behalf of Mike Mayo. I just have a question relating to your CET1 ratio guidance. Do you give any kind of guidance on the Tier 1 leverage ratio by the end of this year given your CET1 of 11%?
No, we haven't given any specific guidance, Chris.
Do you think there's any way you'll be able to kind of manage that ratio higher in the context of this year's CCAR?
In the context of the CCAR we just had?
Yes.
Look, I mean, we're going to we expect our it's a little complicated this year and we sort of articulated at Investor Day because we're going to move at some point whether it's the 3rd or the 4th quarter to have standardized RWABR binding constraints. So 11% plus or minus is our target on CET1 and that's what we said.
Your next question is from the line of Gerard Cassidy with RBC.
Thank you and good morning. Mary Anne, you mentioned that treasury service revenues were down due to the trade finance revenue area. And I noticed on the balance sheet the trade finance outstandings have dropped meaningfully on a year over year basis. Can you share with us what's going on in that line of business?
Yes. I mean there's a couple of different things. One was a little specific. We had a portfolio of loans that we held for sale and have subsequently exited from the balance sheet which drives some of it. And but in addition just generally a competitive environment and lower demand particularly in Asia.
And then second, you mentioned that you obviously had a very strong advisory business in the quarter and you gained market share of 150 basis points. Do you have any sense of who you took the market share from? Was it European Investment Banks or U. S?
Not specifically, no. I will tell you that while we're obviously delighted with the performance, it was a relatively strong market and there were some larger transactions. So we're happy with the specifically comment on where it came from.
Your next question is from the line of Eric Wasserstrom with Guggenheim.
Thanks and good morning. I just wanted to follow-up on your energy comments. Could you help us understand what events it was that led to the reserve building? Was it company specific events in the form of bankruptcies or just something else in your internal ratings migration?
Yes. It's definitely more the latter. So basically, if you think about the E and P portfolio in particular, when we think about the redetermination somewhat semi annually of the borrowing base and looked at those companies on a client specific name by name basis, there was some contraction in the borrowing base and therefore some downgrades that drive our reserving methodology. It doesn't mean that we feel that those companies are necessarily in significant difficulty, but that's the way the resulting methodology works. And as I said, we do this on a client by client basis.
We're comfortable with our exposures and clients are looking to manage their own defensive position. So it's not clear that they will necessarily be realized in losses. In fact, if the implied curve rather than flat for long oil prices is in fact how things play out, it's possible that there'll be very little in the way of credit losses experience.
Okay. And just on that last point, your view on that is because of a recovery in prices rather than restructuring actions or things that your clients are undertaking. Is that fair or is it a bit of both?
Follow-up on the energy point. Obviously, you have the reserving and then you mentioned the 200 basis point impact on spend. I'm wondering if you could just expand the discussion of energy. Are there positive offsets that you're starting to see in the businesses elsewhere either in terms of whether it's credit or borrowing or investment banking opportunities that may be popping up? How do you can you summarize the benefit if at this point you can see any positive offsets?
Yes. So first of all just on the contraction in the spend driven by oil prices. It's pretty typical in this part of the cycle that you would see lower energy prices in the first instance drive savings rates up and you see consumer spend for the energy dividend, so to speak, lag that. So the fact that we saw that happen in the Q1 is not atypical and it doesn't mean that we don't expect the spend to grow and for that energy dividend to ultimately translate into higher spend going forward. So it's more of a normal timing phenomenon is our expectation.
But with respect to other activity, yes, we saw active equity capital markets with some defensive issuance. And generally, I think it's a positive overall for the businesses and for the economy.
And my follow-up question is just with respect to the Security Services business, you mentioned the change in presentation and then there was the client loss. Is there a way you can help us understand just what the organic growth rate of the business is adjusted for the reclassifications whether it's on a sequential quarter or year over year basis?
Not readily, but we can get back to you.
Your next question is from the line of Jim Mitchell with Buckingham Research.
Good morning. Maybe just talk go back to the capital ratio issue for a second. You noted that standardize your 10.8% and that you still feel that will be your constraining factor by the end of this year. So if you're already at 10.8%, your target is 11%. I know it's plus or minus, but it does seem like you got 3 quarters hit 20 basis points.
So is there anything unusual that you're expecting in the coming quarters? Or is it just, hey, you never know quarter to quarter, but all else vehicle looks like you can probably hit 11 if not better. Is that a fair way to think about it?
Yes. Nothing specific to call out in the second half of year and we should hit 11 if not a little better yet.
And as you've looked at the surcharge the GSIB surcharge more, the proposal, do you feel better or worse? Is there you feel are there any areas where you think you can pull the lever more significantly to improve that ratio or lower the charge?
Yes. I mean look I would say 7 weeks or 6 weeks or whatever it is after Investor Day that the messaging hasn't really changed which is we have every intention of aggressively managing the score doing it as we talked about earlier in a very granular way. And we're already working on that. And you see that in the most obvious place which is in the reduction already to date in non operating deposits. Already to date in non operating deposits.
But we continue to work on all of the things, so derivative notional compression, level 3 assets, financing. Obviously we're still thinking about what the response should be in terms of risk intermediation and clearing. And so I think 6 weeks on from Investor Day, the story is the same. We feel we are fully committed to ensuring that we are safely within the 4.5% bucket. And we may not stop there, but it's we're only a few months into this.
We have a question from the line of Gerard Cassidy with
RBC. Thank you. Mary Anne going back to the reserve build, which obviously was done for the oil and gas as you mentioned. Can you share with us in the Corporate and Investment Bank, I know on a total dollar amount relative to the corporation, it's not significant, but there was a big increase in the non accrual loans from $110,000,000 to $251,000,000 in the quarter. Can you give us some color on what drove that?
Yes. I would obviously, you noted it from a small base, so that's notable. There are 2 specific transactions or 2 specific exposures that were moved to non accrual. One of them was moved on somewhat of a technicality, a sovereign downgrade, which we fully expect to recover on. But that's the way we have to present it.
And the other smaller piece was one other isolated exposure. So I wouldn't overthink it right now. It's 2 exposures and it's $200,000,000 in total.
And again and that was not oil and gas related obviously it's in the CIB area that was in the commercial bank?
The first the sovereign downgrade was did have oil and gas underlying exposure. But again, it was on a technicality rather than on the fundamentals of the company. And we fully expect to recover on that.
Focus on the very, very small number, okay?
Okay. Your next question is from the line of Brennan Hawken with UBS.
Good morning. You highlighted the Swiss franc as a tailwind for FICC. Could you maybe size that for us?
No. I would just say that overall our sense is that the market is neutral relative to the event we happen to be able to benefit a little from it. Some others will be more neutral and some may have lost that. These things happen regular way in trading businesses and it just happens to be the case that that event and the volatility it drove is good for our client franchise. And it just goes to show you I think it really just goes to show you that we're in a business where expertise matters and risk discipline matters.
And we were able to capitalize on both of those not just for the Swiss francs but also for the other macro events in the quarter.
Sure. I know that the higher volatility of course would drive higher volumes. I was just talking about the events specifically and if there were some one time gains involved in that so that we can kind of adjust for a core figure here.
No, I mean, I wouldn't even characterize them as one time gains. I would characterize them as one of a number of items that drove our performance in the business.
Okay. Fair enough. And then on the energy front, a lot of the focus was on the CEB and the energy exposure there, but you all mentioned that there's exposures in CIB too. Can you give us maybe an update if there was any changes in any of those exposures or loans this quarter?
Yes. So I mean overall there's a total firm. The reserve build that we took was a little over $100,000,000,000 4 5ths of which was in the commercial bank. So we did experience we do all of this on a name by name basis. So we did it across our portfolios, but the majority was in the CB E and P portfolio.
Your next question is from the line of Paul Miller with FBR Capital Markets.
Yes. Thank you very much. On your deposit discussion about pushing out, I think you said during your Investor Day that you would like to get about $3,000,000,000 of non core deposits off the balance sheet. And I know you said that you hope to make progress in the 2nd quarter. How should we model that out?
And what type of benefit have you modeled out to the NIM with that $3,000,000,000 of deposits?
It was $100,000,000,000 1 dollars I'm sorry. I'm sorry.
No, no worries. Dollars 100,000,000,000 I mean look at the end of the day you can see that over the course of the last since whatever the Q3 of 2012 our cash balances grew by a couple of $100,000,000,000 and that has been a very large contributor to the compression in our NIM, not the only one. So as we push out the non operating deposits, we would expect to see that help. But remember, we're still growing retail deposits. So if you look at this quarter in particular, even though we reduced our non op deposits related to client actions by about $20,000,000,000 the majority of that $24,000,000,000 we had flat deposits.
So we're continuing to grow the good retail deposits. So I would say it would be a tailwind, but it would be a tailwind to a sort of stabilizing and slightly improving NIM outside of rate rises.
And then real quick on the on your professional which is your professional services. Professional services was down like from $2,000,000,000 to $1,600,000,000 Is that mainly due to some of that legal cost maybe starting to go away from the crisis?
No. I'm sorry that I off the top of my head can't remember the number you're saying. But no, our legal expenses forget the legal expense that relates to reserves that we take and settlements that we reach, our regular way expense for third parties in legal isn't down substantially quarter on quarter or year on year at this point, although at some point it will be.
Your next question is from the line of Steven Chubak with Nomura.
Hi, good morning. So Marianne, I was hoping that we could dig into the RWA progress that we saw in the quarter. And specifically, I was hoping that you could disaggregate how much of the sequential decline that we saw was a function of the plan mitigation actions and model benefits that you've cited versus actual FX driven declines? All else equal, one could surmise that we should expect RWAs in a long term context actually coming out below that $1,500,000,000,000 target that you've cited in the past?
So specifically with respect to the quarter, I would say that the wholesale parameter updates credit parameter updates model benefits is about half of the RWA reduction with the other half coming from regular way portfolio runoff as well as some reductions in market risk associated with market risk positions, reductions in private equity, reductions in commitments. So some position reductions rather than driven specifically by FX. Look we're running above $1,500,000,000,000 now and we said we're going to manage both the advance and standardize to that number over the course of the next couple of years. So if FX is or if the currency translation is a tailwind then we would hope to do better. But at this point let's get there.
Okay. Fair enough. And another question on capital, but relating to CCAR. Mary Anne, you've noted on this call and in the past that you don't expect CCAR to be JPMorgan's binding constraint longer term. But just given the reduction that we saw in the ask or the need to use the Mulligan in the last exam, I was just hoping you could cite some of the planned mitigation actions that you expect to take, so that we could see you guys get on the path towards delivering on that 55% to 75% net payout target?
So at the moment our CET1 ratio launching into CCAR was 10% or below 10%, not the 12% that we expect to run at once we've built our capital to our target level. And so you are right that right now under CCAR Tier 1 leverage was our binding constraint both last year and this year. And so a combination of our capital strategy around how we think about the issuance of preferred together with balance sheet actions will be how we think about mitigating that limitation in the short to medium term. But ultimately, it sort of doesn't change the fact that once we get to our target, assuming that is the 12% that we articulated at Investor Day that again we don't think we should be leverage constrained. So, yes, we're going to work on that obviously and we're continuing to build capital.
But when we launched into CCAR, we weren't at that level.
Your next question is from the line of Nancy Bush with NAB Research
LLC. Jamie, you warned in your annual letter about the possibility of another flash crash. Yesterday, I think Simon Potter at the Fed warned about it and cited HFT as one of the issues. Larry Summers warned about it about a week ago. Are these warnings going anywhere?
I mean, are they being translated into action anywhere in the system?
To give it a little perspective, I also spoke in that the banking system is much stronger to start with. And every bank and the system is much stronger. So just trying to think through what are the effects of some of these things. And we look at that as kind of a warning shot across the bow. What I worry about more is what happens in a stress environment.
And yes, I think people are paying attention to what's going on in the markets. And if there has to be changes down the road, there might be some changes that are relevant to that.
Okay. Secondly, Mary Anne a question about Commercial Banking. The returns in Commercial Banking have remained in sort of the high teens over the last number of quarters, and it's certainly respectable sort of 17% to 19%. Is there any way those returns improve materially? Or are we as rates go up?
Or does that get offset by competitive factors? And are we at sort of a normalized level for that business?
Well, I think I mean the best way to think about it is the through the cycle target that Doug Petnote put out at Investor Day, which is 18%. So that doesn't mean to say that, I mean, we will benefit when rates rise in this business and it is very competitive and spreads are compressing and there's a lot of factors going on. But through the cycle 18%, so with some years below and some above. Just the question on core growth in security services outside of presentation changes and client exits is currently in the low single digits. So obviously a little bit muted because we're working on balance sheet optimization, but certainly growing and in the low single digits.
And in terms of looking at advisory and who we are gaining share from principally European banks. Okay. No more questions?
There are no more questions.
Thanks everybody. Thank you.
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