Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's 2015 Investor Day. This call is being recorded. Your line will be muted for the duration of the call.
Good morning. I'm Sarah Young Wood, Head of Investor Relations. Welcome to Invest Today. We have a full program today full of content as usual. And we also have as last year a branch pop up in the lobby, which is going to display our latest innovations for the branches.
So please stop by when you can. But before we start, a few items. First of all, turn off your cell phones please. 2nd, the forward looking statements are in the back of your materials, so in part actually. Take a look.
And last, when we do Q and A, please ask for a mic and say your name. With that, have a great day.
Welcome everybody to Investor Day. We do a lot of work to get this done. It actually helps us. It's very instructive to us about what we want to describe and explain. We actually look at every question you all ask and we try to answer them in these presentations.
So you're going to get 5 really detailed presentations and each one a little bit of Q and A, so you can follow that. I'll get up at the end and do some, but I think presentations are really complete. As usual, we present the good and the bad, the opportunities, the risks. We talk about a little bit of everything. I hope that you will see as these presentations unfold the strength of the management team.
These people are really good. And I think you've heard me talk before about their character, their culture and their capabilities which are exceptional. All these business we have the 4 businesses are top franchises in their business among the best in the world. That hasn't always been true for JPMorgan Chase or for any other company out there. And I just want to separate when you go through the presentation, they separate 2 things in your mind a little bit financial.
So the financial numbers are actually pretty good margins, returns, etcetera, revenue growth. There are a bunch of issues about the price earnings ratio, which Mary Anne and I will talk about a little bit. But the financials are pretty good. In fact, you would almost not know that we've had 4 out of the last 5 years of record earnings. And that's hard to do for any company, much less a company in the business we're in and the environment we've been in over time.
But also look beyond just the earnings and the financials, just look at the market shares. I mean doubling in businesses, growing faster in credit card, merchant processing and investment banking. We've doubled our share in fixed income over the last 5 or 6 years. We've doubled our share in equities. We've doubled our share in commercial banking deposits.
You name it, it's pretty exceptional. And things like customer stat levels, which aren't financial, but they're really important, you're going to see those have been getting better across most of our business too. So hopefully all your questions will be answered. You'll feel I hope you feel like I do about the management team and the businesses when it's over. And I will hand it over to Mary Anne who will start the detailed stuff.
Okay. Good morning, everybody. So it's my pleasure to kick off today with a firm overview and I'm going to dive straight in on page 1. This is a company that has as Jamie said very strong fundamentals that's been consistently delivering strength and stability in our financial performance and has successfully adapted to changes in the regulatory environment over the last several years. And when we think about the strategy for the company, we think first of all about building those exceptional businesses, thinking about serving our clients and our customers the way they want and need to be served over the long term, which involves consistently being willing to invest and innovate.
We've always run the company under Fortress Principles including strong capital, liquidity, risk discipline through the cycle and also more recently focusing on delivering a robust control infrastructure. In addition, we've made significant progress in simplifying the company very broadly and we're committed to ensuring that every one of our employees every day operates with our core values in everything they do, reinforcing our culture. So our objective is to serve our clients while maximizing long term shareholder value and through significant focus on operational efficiency. You'll see in the presentation that we will deliver the benefits of our scale and operating model. And we also intend to continue to balance the pace of capital accretion against the objective of increasing dividends and returning significant capital to shareholders.
And through this presentation and in the conclusion, I'll show you that we'll be able to compete effectively that over the next 3 years, we believe we will deliver a 15% return on tangible common equity on 12% CET1 and an overhead ratio of around 55%. So turning to page 2 and our performance. I talked about the success that we've had in adapting and the consistency and the strength in our financial performance and nothing says that more than returns of 15% from 2010 through 2012 and 15% again in 2013, if you allow us to adjust for the very significant legal expense and on significantly higher capital as you know. If you look at 2014 on the page here, record net income $22,000,000,000 record EPS $5.29 dollars And that's obviously despite the cyclical lows in interest rates in mortgage in markets and still elevated legal expense. And you can see on the next page that that performance is among the best in the industry.
This page shows JPMorgan's performance relative to our primary peers across a number of dimensions. And as I said in 2014, our record $22,000,000,000 of earnings was on a little less than $100,000,000,000 of revenue and for a return of 13%. We returned $10,000,000,000 of net capital to shareholders and we grew tangible book value per share by 10%. And while this graph here is on 2014, the longer term story is the same, one of industry leading financial performance and we expect that that will continue. On page 4, you can see that that performance is what's been generating those double digit growth in tangible book value per share 1 year, 3 years, 5 years, 10 years.
And this consistent growth is after absorbing $35,000,000,000 after tax in legal control and regulatory costs adding $59,000,000,000 to our capital base and distributing 35 $1,000,000,000 of capital to shareholders all since 2010. So continuing on the topic of stability, you can see on page 5 on the next slide. More than half of our revenue today is non interest revenue with underlying drivers growing strongly. The chart on the left you can see in blue that 2 thirds of that non interest revenue is driven by businesses that are stable through time. But what may be surprising is that the diversification benefit the company enjoyed means the overall volatility of the firm's NIR is the lowest among peers on the page.
And if you look at the volatility of total revenue, it's also incredibly low at 3%. And we are underinvested from a duration standpoint. We're positioned anticipating rising rates and we have significant NII upside, which is on the next page on page 6. So this page should be familiar. It demonstrates power of our balance sheet if you assume normalized rates.
It's a static analysis. We haven't assumed growth in interest earning assets here. And the upshot is that we would expect this rate to normalize that our NIM would revert to a new normal level of somewhere in the 265 point range. And that's about 30 basis points lower than NIM that we enjoyed back in 2005 through 2010 and the principal reasons for that are loan runoff, the impact of liquidity compliance, faster deposit repricing and as well an assumed cost of compliance with TLAC. This also reflects normalization assumptions around the balance sheet mix.
So loans to deposits as well as the mix of interest bearing deposits including time deposits. So that's 50 basis points of an increase in NIM and on over $2,000,000,000,000 of interest earning assets that's $10,000,000,000 plus of incremental NII. And in the bullets, consistent with our earnings at risk disclosures, you obviously see the most significant driver of that NII upside is rising front end rates. And finally, we added at the bottom of the page an update on our AOCI sensitivity under a severe rate shock. And you can see that would drive approximately 50 basis points of rapid capital depletion.
Before diving deeper into our leadership positions by business, I want to wrap up this section just with a few comments on valuation and a few comments on the operating model on page 7. We've demonstrated as I showed you that we are delivering among best in class returns and have been doing so consistently and I will show you later we will continue to do that. Yet we're significantly undervalued relative to our peers. And on the page as you know on the top left among the lowest PE multiple on 2016 EPS and top right with the highest current dividend yield. And on the bottom what you have is the regression of price to tangible book value per share against return on tangible common equity 2017, showing that today we're valued at an 18% discount relative to the returns that analysts expect.
That wasn't the case prior to or during the crisis when we traded at a premium to most peers. And in 2017, analysts have also a little over 13%, whereas our price suggests less than 12% return. So let me talk about the operating model on page 8. There's been a lot of focus understandably on our synergies. We've updated the numbers here for 2014.
They fundamentally haven't changed. And you see there that $18,000,000,000 growth or $6,000,000,000 to $7,000,000,000 of net income. And there is a page in the appendix that has some more detail. But these are just the direct and first order synergies that we measure and they don't include all of the other important benefits that the operating model affords us. We have a unique asset and a replica at Bassett in the shape of our company and the mix of our businesses.
And as Jamie said, we spent the last decade building this company into the leader it is today. We do get a benefit from diversification. We do get a benefit from scale. And that's allowed us to make significant investments consistently through time. And scale has always defined the winner in banking and we have been able to consistently demonstrate our ability to leverage that scale and successfully adapt.
And adapt. I said it before, but we delivered a 15% return on 7% capital. We did 15% ex legal on 9.5% and we will do 15% on 12%. We do have the fortitude to operate under Fortress Principles not only in good times, but also in bad through the cycle. We report in the last storm there will definitely be another storm and we didn't make a loss any quarter during that crisis.
But the most important thing is the shape of our company is driven by our clients. Our customers and our employees choose JPMorgan Chase because of the breadth and quality of the whole franchise and because of our 2 iconic brands. We look the way we look. We are the size we are. We are as global as we are because it's what our clients want.
We run the company to maximize value as if we own 100 percent of it. And so we're going to talk in a minute on the next page about how we have thought about the question of a separation. We've also done the work as you would expect and we've drawn our conclusions. Page 9. Our synergies are real and they are what drives our superior returns versus our peers.
It is true that many of our peers do enjoy portions of those synergistic benefits. But in no case do we believe there is a peer that enjoys them all to the same extent that we do. Starting at the top on revenues and expenses. On revenues that's the $15,000,000,000 growth. We do agree that much of that reported revenue synergy should be preserved in a separation.
We also estimate that the revenue loss would be relatively modest. But remember those are just the ones we measure. There are many of the benefits that I just talked about, the benefits of the company as a whole which we don't measure would likely be lost or erode over time. On expenses, we believe there are meaningful expense dissynergies, resulting from the need to duplicate corporate functions, the need to replicate critical infrastructure and the likelihood that each separated entity would look to make significant investments to build themselves out over time. And not to go through a laundry list, but you would need 2 finance functions, 2 audit functions, 2 risk functions, 2 boards, 2 operating committees, 2 Investor Days, 2 General Ledgers, 2 Mortgage Platforms, 2 Global FX Operations, Global Loan Operations, Global Cash Management.
You need data centers. You need 2 Private defense programs and you know we're spending a lot on that. So these are not trivial things and the expense dis synergies are real and they're significant and the list goes on. Moving on to capital. We also agree with you that regulation does require us to hold some excess capital, but it's smaller than you may think given that separated entities would be bound by different constraints.
So the total capital release if we were allowed to do it would be about $15,000,000,000 but it's real. So the question is, if the net income loss is more than 10% on that $15,000,000,000 then it destroys shareholder value. If it's more than 15% on that $15,000,000,000 it would dilute our returns. And we believe the net income loss in the separation through a combination of those measured revenue synergies, the intangible things we don't measure as well as expense to synergies would be significantly more than that. We think it will drive our return on tangible common equity down by up to 100 basis points possibly more.
So in the end, any potential short term PE expansion you get, if you were to get it and you have to ask yourself why the PE is so low for us right now, would be materially offset by value destroyed by reduced net income and by lower returns and over time cap the upside. We firmly believe that delivering on our commitments including the industry leading financial performance that we've had and that we will continue to have, flawless execution against the strategy that you're going to hear laid out for you today. It's a high uncertainty path for multiple expansion for the company and we're confident that in the future we'll trade in line with peers or at a premium like we have in the past. And we are facing the future with the strongest hand, preserving optionality. So I'm going to shift gears and talk about the first pillar of our strategy, which was building those exceptional client franchises, skipping over page 10 and starting on page 11.
We don't measure the strength of our performance based on any quarter. We don't measure it based on any 1 year. We're running our businesses for the long term to deliver maximum value. So the strength of our future financial performance is secured on the consistency and growth in underlying drivers and in our leadership positions. On this page, you can see 4 year CAGRs for what we think are key performance drivers.
We have the strongest core loan growth and strong ungrowth in deposit of our peers, importantly including retail deposits and cumulatively the most IB markets revenues well as cumulatively the most client asset flows by a very large margin. Diving further into consumer on page 13, I mentioned before our number one ranking among large banks in customer satisfaction. And in the chart on the top left, we are the best among large banks, but we are also giving midsized banks a real run for their money today, which we couldn't have said back in 2010. This is a journey we've been on for the last several years and you can see in the chart that working. You saw that in our industry leading retail deposit growth on the prior page.
And here you see we're also leading the industry in credit card sales, digital adoption and growth in payment processing volume which has been 3 times the industry solidifying our position as number 1 wholly owned merchant acquirer. We're continuously focused on the future and innovating and we put some examples of those innovations for you on page 14. I'm not going to run through these. Each of my partners is going to spend time during the rest of the day talking about their innovations. But you can see here that across the board, we are focused on building out products, building out technology and operating capabilities that will serve our clients the way they want to engage with us in the future and to lead the industry.
And if you indulge me, I am actually going go back to the page that I didn't mean to skip. Sorry for this, but if you could go back to page 11. I want to go back to this page because this is what Jamie was talking about. What's impressive about the page is that each of our businesses is truly top tier today and you can see that in the significant particularly impressive is it wasn't the case 10 years ago. We did spend the last decade building these businesses into the leaders they are.
And we've built it with consistent focus gaining market share. We've And we've built it with consistent focus gaining market share. To mention some of the stats in Consumer and Community Bank, since 2016, we've added over 300 basis points of market share in deposits, 500 basis points in card sales. In the Corporate and Investment Bank, number 1 Global IB Fees, number 1 U. S, number 1 EMEA 2014, number 1 Markets Revenue, 16% Share of the Top 10, number 1 Debt Equity Equity Related Long term debt loan syndications and I could go on.
In the commercial bank, we're very proud in 2014 that we reached our target of generating $2,000,000,000 of growth Investment Banking revenues and demonstrated exceptional credit performance throughout the crisis. And asset management continued to deliver very strong investment performance 23 consecutive quarters of long term net inflows and was recently ranked number 1 overall Global Private Bank. All right. So I'm going to move on to the 2nd pillar now and I apologize for that. Moving on to page 16.
Operating with Fortress Principles. So we've consistently met our capital and liquidity target. We reached more than 10% common equity Tier 1 last year end and a firm supplementary leverage 5.5%. Effective year end 2014, we were also compliant with U. S.
Final LCR rules with our own internal liquidity stress framework as well with Basel NSFR. We hold an appropriately conservative amount of liquidity given our duration of equity the calibration range of 16% to 20% under the FFB proposal. So on the next page on page 17, you can see our fortress balance sheet and you can see how it's evolved over the course of the last several years. Overall, our balance sheet has grown by a little over $450,000,000,000 in the last 4 years. However, being bigger is not the same thing as being more complex, nor more difficult to manage.
It's important that you get very granular when you analyze the relative composition of the balance sheet over time. 1st of all in yellow, you can see our cash balances have grown by €440,000,000,000 which accounts for the vast majority of the overall growth in our assets and there are 2 primary drivers for that. 1st of all, new liquidity requirements. But secondly, a significant increase in wholesale non operating deposits, which you will hear more about in a second. In total, the end of 2014, we had high quality liquid assets circled here of $600,000,000,000 Moving down next, we had a little over $350,000,000,000 of secured financing, half of which are open and overnight trades.
The majority of the term book is subject to daily margining and about 70% is secured by HQLA. Trading assets. We've seen a sizable reduction in trading assets over the last 4 years $90,000,000,000 And you can see firm wide VAR and Level 3 assets have gone down each by over 50% the same period. And size is not a proxy for risk, but our trading businesses have evolved in part due to regulation. Our business is less complicated, it's less directional and it's more client driven today than it was 4 years ago.
And we've grown our total loans. We've grown them by $80,000,000,000 net, but with significantly improved underlying credit metrics. So we have always had a fortress balance sheet. It's true it's grown, but it's of a higher quality now than it was 4 years ago. Diving in the next page, page 18 into loans and those credit metrics.
On the left, you can see our core loan growth in 2014 was 8% and an 8% CAGR over the last 4 years while maintaining an improving average FICO score and significantly lower average loan to value. And in wholesale, an improving percentage of investment grade loans and a dramatic reduction in criticized and classified loans. You also see on the right hand side of the page our credit losses if you mix adjusted versus peers are also best in class. Looking forward, we are expecting core loan growth to be strong in 2015 reaching double digits. We're expecting our net charge offs to continue to be very low, a little over $4,000,000,000 for the year.
And we continue to expect to see consumer reserve releases over the next 2 years, partially offset by builds in wholesale on loan growth. Next business simplification on page 19. We delivered against We delivered against an extensive business simplification agenda last year. You can see there's lots of tick marks here on the page. That speaks to the significant amount of work it was to execute against this agenda.
And all of the actions on this page are largely complete. To remind you, we exited businesses, we exited products or clients that were either not at scale, not returning hurdle or had outsized operational risks. And while these actions will have a significant impact year on year on largely complete, we do continue to focus broadly on simplification to make us a better company. We're focusing on making it easier for clients to do business with us. We're focusing on legal entity simplification, not just the number of entities, but more importantly the complexity of their operation.
We're driving in our global technology organization for increased efficiency and increased consistency. We're executing on a vendor rationalization program. We're executing on location strategy programs. So we continue to focus on simplification very broadly. We also recognize that Fortress principles are underpinned by our culture.
So on page 20, JPMorgan Chase's culture has been an historical strength and continues to be a hallmark of the company, but it's one that does require constant vigilance. This is an industry as you know that has had significant issues and we've made mistakes. We need to do everything we can to ensure that include delivering exceptional client service, delivering operational excellence, acting with integrity and having the best team. To that end, last year we rearticulated our business principles and we published a report on how we do business. And now each of our businesses and each of our functions globally are rolling out culture and conduct programs sponsored by the Board and the operating committee.
We expect these programs to be action oriented. We expect to be able to identify gaps and tangible improvements against our expectations reinforcing our culture through constant training and through constant communication. We've already implemented a number of key HR governance processes across the firm, which further strengthened the connection between risk, controls, compensation and our performance management process. So moving on now to the 3rd pillar, moving on to maximizing long term shareholder value, starting on page 22 with our ability to okay. This page is a page.
So JPMorgan Chase, we've constructed an illustrative company here that has our business mix, but we're using peers with the best in class efficiency ratios. If you look at the bottom circles, you can see the firm's overhead ratio excluding legal at 60% is on the face of it best class. But it's not where we expect to run the company and it's a top priority for every member of the operating committee to drive the increased efficiency and expense reduction. There are certain of our businesses notably card CIB, Commercial Bank and Asset Management that show very competitive efficiency ratios, especially in light of the fact that we know we are consistently making significant investments. However, the consumer bank and the mortgage company have meaningful room for improvement and those incremental efficiencies strong, we will do better.
We will deliver the benefits of scale from our operating model. To that end, Daniel is committing to a total expense reduction for the CIB excluding legal of $2,800,000,000 by 20.17 or an overhead ratio or an overhead ratio of between 55% 60%. In addition, we will drive for incremental efficiency across all businesses and expect that the overall overhead ratio for the company will decline to 55% plus or minus on continued expense efficiency as well as some revenue growth. Moving on to our adjusted expense trend on page 23. So the overall level of adjusted expenses has been reducing $60,000,000,000 at its peak in 2012 down to 58 point 4 in 2014.
Underlying that our core expense discipline has been strong. It's what's allowed us to self fund both growth as well as the cost controls and we've maintained significant and consistent investments. In terms of our investments, we continue to spend about $2,500,000,000 a year in marketing, substantially in card and we're fully funding all customer acquisitions that meet our hurdle returns. As well as nearly $3,000,000,000 a year in technology investments across businesses across the firm. And in 20 14, our run rate included an incremental $3,000,000,000 in the cost of controls relative to 2011.
The amount of money we spend on investments every year is staggering. It's a commitment that most companies could not make, which is why we won't only keep pace with the changing market, but we intend to lead it and intend to separate ourselves further from others. So our adjusted expenses I said in 2014 was $58,400,000 and we expect that to decline in 2015,000,000,000 to around $57,000,000,000 and with an exit rate below that. And before I move on, I'm just going to make one comment on legal related to legal expense. By their very nature, legal costs are unpredictable, unpredictable in total and by quarter.
They've also been substantial for us we recognize that. While a couple of notable challenges remain, we have gotten a lot of them behind us, but they will continue to remain unpredictable by quarter going forward. We do however expect the cost will abate, will return to a more normal level, albeit slightly higher than before the crisis. When we get to the simulation at the end of the presentation, we've used $2,000,000,000 annual pre tax that's just consistent with the last year. Moving on page 25 and capital.
So in this section, I'm going to deal with our allocations, our targets, our glide path and our competitive positioning and I'm going to end with a discussion on how we're adapting to USGSIB. Starting on this page then with the capital incentives framework, which now more than ever needs to take into account multiple dimensions and needs to evolve as our business mix and our constraints change. So firstly, consistent with prior years, our primary basis of allocating equity to our businesses remains Advanced fully phased in RWA, which best reflects risk. At the same time, we expect standardized will become our binding constraint possibly by year end or slightly after. And so we've imposed standardized RWA limits on our businesses to ensure that we manage the difference between the two regimes tightly.
Secondly, we've introduced a GSIB assessment framework that measures the return of activities on their marginal GSIB contribution. And we're using framework to identify actions to reduce the score. It's been a benefit of our diverse franchises that allow us to meet the firm's constraints without necessarily binding each business by its own unique constraints. And that has allowed and will continue to allow us to have strategic growth in areas that we like, those high relationship consumer and commercial loans and providing that capacity by tightly managing or shrinking other activities predominantly in the CIB. So we do have time, but we are taking immediate actions.
On page 27 26, capital allocations. So on this page you can see that the allocations to each of our businesses have gone up. In each case they've gone up by 50 basis points year over year. It's based upon the firm's expectation that we'll reach 11 percent plus or minus CET1 by year end and we're targeting 12% CET1 by January 2019 or sooner. 12% would reflect company managing within the 4.5% G SIB bucket, plus an additional 50 basis points of a capital buffer largely to protect from that AOCI shock I showed you earlier.
So you should expect incremental allocations to the businesses in 2016 as the firm moves up its glide path. And the CIB's long term target is 12.5%. We have our pricing and our SBA models today reflecting those future levels of capital. On page 27, we have an illustrative glide path 10.2% we're well above the phase in minimum throughout the transition period. So importantly, we have time to ensure an appropriate glide path, one that reflects a measured pace of capital accretion, balancing that with the payout to shareholders of around 50% and maintain strong overall net payout.
Over the last 2 years, we delivered a total net payout to shareholders of around 50% with record dividends in 2014. We believe that strong dividends are important and with the right approvals, we would look to increase dividend payout as a percentage of core sustainable earnings over time. The chart on the right hand side uses our own internal RWA projections and it uses analyst estimates for earnings and payouts over the next 3 years. And it simply illustrates that we can easily achieve that compliance of 12% well before the required date also allowing us to continue with strong net payouts. On the next page, moving on to page 28, we have our risk weighted asset projections over the next several years under both the standardized and the advanced approach.
So we will continue to optimize to advance RWA and we still expect to reduce it to a little over $1,500,000,000,000 by the end of 2015. And we will always continue to look for opportunities to become more efficient. However, the lower hanging fruit in terms of models will be largely behind us by the end of this year and portfolio runoff will be less of a tailwind. So beyond 2015, we expect advanced RWA to level off some around that 1,500,000,000,000 dollars Given we are expecting standardized to become our binding constraint by a small margin over the next couple of years, a combination of model benefits for market risk, SACCR benefits and additional actions that we will take will drive down that risk weighted asset to $1,500,000,000,000 plus or minus. Moving on to page 29 and the competitive dynamic from a capital perspective.
So while we are in the highest G SIB surcharge bucket, we expect CCAR will level the playing field for the majority of U. S. Peers. This chart just illustrates that point. What we used here was stress sensitivities for each peer from the last disclosed DFAST results, so based upon the Fed's numbers.
And we use analyst estimates for the next 9 quarters of net income. And you can see that with JPMorgan, on the left hand side, if CCAR stress our binding constraints, we would have sufficient capital to withstand our stress losses and return 100% of net income at a launch point capital level of 10 point 7%. You can see in the size of the relative relative size of the green bars that most of our peers they face significantly higher losses than us under stress. Our lower CCAR stress is another example of the benefit of diversification in our model. So therefore regardless of what the G SIB bucket is, our peers we think will likely congregate around our forward target of 12% over the next couple of years.
And as such the capital corridor in which we will operate will likely be narrower than that implied by GSIB and so the competitive disadvantage if any lower. We think the same position will apply globally as despite differences in rules, we're already seeing convergence in absolute levels of capital. So the last thing before I move off this page, the final question is what would happen if the G SIB surcharge were partially or completely included in the CCAR minimum? And you can see that for us we have 130 basis points up to our target of 12%. So our peers would fill the 1st basis point of increase in the minimum and we would have 130 basis points before we would.
None of this, however, diminishes the critical importance of relentlessly managing GSIB. So moving on to page 30 and turning your attention to GSIB. So there are 3 dimensions to how we think about the score. First, our actual exposures, many of which can be managed over time and we will aggressively manage them. 2nd is market dynamics, which includes the change in overall market size, but also includes the impact of currency movements.
And 3rd time, time is an important dimension when thinking about optimizing. We have 3 years before we'll be bound by GSIB. And obviously when we talk about the implications of GSIB, they're most pronounced in the CIB and that's where most of the strategic but he will show you that while we will do whatever is necessary, the actions we take will not fundamentally change what the CIB is, a profitable, complete, global business at scale. So let me tell you what we're doing. I talked before.
We've introduced an SBA framework. We're allocating capital charges to activities based upon their marginal G SIB contribution. And then we're looking at those. We're looking them transaction by transaction. We're looking at the product level.
We're looking at the sub line of business and then with a client lens. And we'll reshape our business over time by shrinking certain exposures as well as leveraging the framework to limit or require repricing for bucket and we are looking at additional actions to potentially reduce our surcharge by an incremental 50 basis points. With respect to market dynamics, we will aggressively manage our exposures, but we fully expect others will do the same thing. So that will be a headwind to progress. And we will not overreact to the impact currency movements have had on our relative market share, which may not be permanent and feels like an unintended outcome.
So we would like to see how that aspect is addressed in the final rule. So moving on to page 31 and looking at our current G SIB score. So if you exclude the impact of FX and changes in market size which we don't know, pro form a we reduced our absolute exposure at the end of 2014 versus 2013. However, more than offsetting that, the estimated impact of U. S.
Dollar strengthening in 2014 would leave our surcharge on the cusp of 5%. We know exactly what we need to do to solidify our position in the 4.5% bucket and we are doing that right now. And we also know how we would reduce it to 4% and we're also willing to take those actions if they are accretive. But it is an economic decision as a trade off between those actions and returns. In total, you can see on the page, both through the non operating deposits, I'm going to talk about in a minute and also the and also the list on the bottom, we've identified up to 140 basis points of opportunity to date.
So I'm going to walk you through the most obvious example non operating deposits on page 32. As you know, it's commonplace for activities to impact our score in multiple buckets. So this makes some immediate actions very clear from an economic perspective. And this is the most obvious example, especially non operating deposits from international financial institutions. In total cost business, you see on the page we have $390,000,000,000 of deposits from financial institutions and $200,000,000,000 of those are non operating.
Historically, providing our balance sheet to our clients was in part an accommodation and we had the capacity to do it as we weren't GCIB or leverage constrained. But these deposits impact our score in size, cross jurisdictional interconnectedness and short term wholesale funding. Earn minimal net income on them. We earn about 10 to 15 basis points net and they provide no liquidity value under U. S.
LCR. So they're significantly negative SEA under the U. S. Proposal. But it's also an example of a product where the client lens is critically important.
So we've tiered our clients and we are working with them to find potential alternatives including sweep to money funds. But in the short term, there may be finite capacity there. So it's going to likely be the case that for some under the new capital rules, the relationship can no longer work for both parties given that the rate is sufficient to provide an adequate return under GSIB would be very significant potentially as high as 100 basis points from 0 today. We're in the process of executing this strategy right now. We'll try to ensure a smooth transition for our clients, but we will require these deposits to shrink significantly in the near term and by up to $100,000,000,000 by year end.
And that would deliver the 44 basis points or up to 44 basis points reduction in our score that you saw on the prior page. So as I said before, Daniel is going to spend some more time talking about the implications of G SIB on the CIB, But I want to leave you with a confidence that we will do whatever it takes to ensure we stay in the 4.5% bucket and are considering actions to take up 50 basis points below that. So the penultimate page of the presentation on page 34 is the simulation. At the top of the page, we've put some of the things you need to believe to support the simulation over the next 3 years. I think that you'll agree none of them are overly aggressive and most of them I've been through in the presentation.
So if you take reported net income to start on the left, if you adjust it for 3 primary things, adjust it for elevated legal expense, adjust it for significant net tax benefits that we had and consumer reserve releases. That leaves you with an adjusted performance for 20.14 of about $21,000,000,000 And remember that the cost of liquidity compliance and the cost of control are in that run rate. Adding $3,000,000,000 for the benefit of incremental earnings from a combination of our investments as well as organic growth and the growth in underlying drivers that support that number are consistent with the growth we've seen over the last several years and I showed you earlier. Further add $2,000,000,000 for the CCB and CIB expense commitments and deduct about $500,000,000 for forward looking regulatory costs being TLAC compliant and any remaining impacts of market reform. So finally, you include the impact of rising rates and this is a 3 year horizon versus the NII simulation earlier which was a longer period, which is why we have here $7,500,000,000 pre tax or 4.5 included.
So all of that adds to approximately $30,000,000,000 of net income market dependent and is consistent with that 15% return on tangible common equity on 12% capital and an overhead ratio of 55%. It's also consistent with the target ROEs, which you see for each of the businesses here on the top right of the page and which each of the CEOs will go through later. And you see that the simulation assumes that we're operating in that 4.5% bucket. So it assumes we're operating at 12% finally on the wrap up page on page 35, it's our earnings power, our scale and our diversity, our leadership positions in everything we do and our unique iconic brands that give us the most durable banking franchise in the world, one that has the greatest ability to realize on the opportunities that are only afforded to the leaders. We will accomplish it by being there for our clients and earning their trust day in and day out.
And we have the right business model to do that. Clients are voting with their feet. The management team are the stewards of your investment and we're building the company for the long run and not a moment in time. We've always adhered to Fortress principles. We have successfully adapted.
We've delivered on our strategies and on the commitments we've made. But we are taking appropriate action right now both on capital and expenses to solidify and deliver strong and stable financial performance and we're confident we can get to a 15% return on tangible common equity, all of which will ultimately translate into higher valuation for shareholders. So that's the presentation. I have a few minutes for Q and A. Mike?
Sorry, go ahead Mike. Do you need a mic for the mic?
Just taking it's Mike May with CLSA. Just taking some of your opening data. If you take out the revenue synergies of $15,000,000,000 and you take out the expense synergies of $3,000,000,000 your core efficiency ratio instead of being 60% is closer to 70%. So that implies you aren't as efficient as you need to be in the underlying businesses. Is that one key reason you now expect $4,800,000,000 of expense savings ahead?
Or can you reconcile my logic there?
So we would agree that we can do more, which is one of the reasons why we have a target. Gordon's target has been out there now for a couple of years. And Daniel has been working with his business to sit to look at what the forward looking cost structure for the CIB should be. But if you look back at the page with the core expense trend, so we've had $3,000,000,000 reduction in our expenses over the course of the last several years and you could articulate that as being largely driven by business simplification. But we've also grown our cost of controls by £3,000,000,000 which means our core expenses have reduced by £3,000,000,000 And those core expenses reducing by £3,000,000,000 have funded more than $2,000,000,000 of growth in asset management in CV growth in all the underlying drivers none of which is free.
So our efficiency ratio now at 60 percent ex legal, we're expecting to drive it down to 55% and we're expecting to do that both by continuing with the core expenses efficiencies we've been delivering and then more in CIB. Betsy? Betsy?
Hi. Thanks, Marion. Betsy Graphic, Maureen Stanley. So the question is on something that you spent a little bit of time on, which is the G SIB buffer and does that potentially become part of the minimum? And you articulated why you're in a better spot than peers, but maybe you could give us a sense as to how you're thinking through those probabilities?
And is there any other low hanging fruit on the table that you're not talking about today that's in your back pocket in the event that that comes through?
So, look, I mean, it's very difficult to handicap what's going to happen. And I think we're all going to know more when the rules come out at the end of the year or when the guidance comes out at the end of the year. Personally, it doesn't make a huge amounts of sense to include the GCIB buffer completely in the minimum. And the point on that page honestly was intended to say it won't be a competitive disadvantage, not to say that it would be a good thing for anyone. So we have 130 basis points before we would start to feel that increase in the minimum where others would already be bound by CCAR.
So I don't know whether it will happen. We don't have low hanging fruit that we're not talking about, but we will obviously adapt and we will obviously be determined to continue to be competitive and to continue to deliver strong returns. So the point of the slide is it won't be a relative competitive disadvantage, but it will be Hi. Hi.
Aurora Evercore ISI. So I think we all appreciate the optimization that you're going through. The numbers are actually pretty good. The question I have are we missing the forest of the trees a little bit in terms of with no material RWA reduction over the next couple of years and hanging out in the same ish 4.50 basis point buffer, is that just you're optimizing, but is the Fed going to look at that and say, I don't get how
many ways do we need to
tell you, you need to shrink both in size and complexity. And I appreciate the optimization that maybe if you explain the cost of 50 basis point reduction, we'd understand the trade off you're looking at earnings versus buffer.
Okay. So 50 basis points of capital about $8,000,000,000 So 10% return on $8,000,000,000 $800,000,000 to breakeven, 15% return on $8,000,000,000 would be $1,200,000,000 to not be dilutive assuming that we get to our 15% return. So when we think about moving down the G SIB that's big math obviously. So but when you think about moving down the G SIB buffer, so you need to look then at the actions you're taking and these are very nuanced decisions. This isn't typically looking at exiting 1 product necessarily.
You have to look at it through multiple lenses and importantly at the clients. For some clients, we would want to be doing a full breadth of things for them. For others, we may not be able to continue to do that. So when you think about moving down the G SIP bucket you need to think about it in the context of returns and you also need to think about it's sort of binary. You either get below 4.5% and you're in 4% or you don't.
And so it's very easy decision when you're 1 basis point above. It's a much harder decision when you're 75 basis points above.
John?
Hi, Mary Anne. Couple of
questions on the simulations. On the NII simulation, is there any way to give an attribution of how much of that 50 basis point margin is due to the rate impact versus the mix changes you're assuming?
Yes. So of the $10,000,000,000 so of the longer term improvement, there are a lot of things going on net and some of them are big. And we talked before Mike about time deposits and the significant costs associated with that. But net the most significant impact is rate and drives of that 10 plus probably $9,000,000,000 of it. But there are big puts and takes going on in loans to deposits growing, but in non interest bearing to interest bearing deposits and time deposits going the other
way. Okay. And on
the net income simulation the 30,000,000,000 dollars is assuming the same charge offs that you had in 2014 is the first question. And the second, does that assume any preferred dividends come out? Or is that kind of just net income the €30,000,000,000
€30,000,000,000 is net income. So when we do obviously when we do our calculation on the returns on NIACC. And then in terms of credit, so one of the assumptions that is on the top of the which is one of the reasons. So when for those of you who are looking to compare year over year our simulation, we had feedback from you about a few things. One of them was that we had a semi dynamic but not entirely dynamic point of view in that simulation.
And so we included fully all of the organic growth in it this year. And the other was that we had assumed full reversion through the cycle to certain things including credit where actually we're expecting it to be low for long.
Brennan?
Hi, Marianne. Brennan Hawken, UBS. Thinking about the non core loan runoff, what kind of decline should we look out? I know that most of it's in mortgage still, so I don't want to steal Gordon's thunder or anything, but it didn't look like we had a projection in his deck. So how should we think about that?
I don't have the balances for you, but
they continue to run off about 50% a year. I don't have the balances for you, but they continue to run off about 50% a year. Obviously as they decline the dollar value impact of that is less. But I think our 10% plus core loan growth would be reported I don't know we'll have to get back to you.
Low single digit.
Okay. And then has there been any regulatory feedback on the currency impact from the G SIB buffer and what the rising dollar could mean? There been any preliminary indications there?
No preliminary indications, but it is a key part of the dialogue and you should expect it would be a key feature in the comment letters. Again, we can't begin to imagine necessarily what exactly was or wasn't intended, but it doesn't feel like this is something that may have been fully expected or fully intended to be the outcome. And so we'll see how that evolves. And when we have time, it may not be permanent. But as I said, we're not naive to the fact that things will probably remain similar to the way they are right now.
And so we're managing it with that in mind and we're managing it to get back to a 4.5% bucket regardless of currency and hopefully we'll see some positive news.
Thank you. You pointed out that you're at 15% for TLAC and that the range is 16% to 20%. I was wondering within your 15% ROTCE expectation, what were you using 16% or 20%? And then the other question is on the net interest margin range that you gave, which was very similar to last year's. You've made a change in terms of how you allocate preferred.
And the way you used to do it, it would actually impact net interest margin. And I'm just wondering whether there's any change there or whether it's the same basis versus what we were looking at last year?
So on the just on the first question on TLAC, we have no special insights. So please don't read anything into anything. So we split the baby and went in the middle. And arguably we could have done differently, but that's what we did. With respect to the NIM, we did it on a consistent basis.
Thank you.
And remember that when we actually do all of the work on our NII and our forward looking projections and our interest rate risk management we do it very granular multiple rate paths all through our models. This is a sort of very crude, but directional way of articulating that using the 2,005 through 20 10 cycle as a starting point articulating the things that we think will adjust on inbound sort of permanently going forward estimating that and showing you the number and we get to the same pace both ways.
10.
Thanks, Marion. I was just wondering if you can walk us through a little bit more on the good loan core loan growth expectation 10%. And then also you have the 17% of the book that's still in run off mode. So you can compare and contrast like where you're seeing that improvement in the core? And then is the pace of runoff changing as you think through total loan growth?
The pace of runoff is broadly consistent around 15% or 16% estimated. In terms of core loan growth, we continue to see the things that were growing strongly in the second half of twenty fourteen continuing to grow strongly. You've got we've got sort of high to grow strongly. You've got we've got sort of high expectations about portfolioing mortgage loans this year. We did a fair amount of that particularly in the second half of last year, so we expect that to continue.
And those are remember those the jumbo and commercial conforming loans that we like. Strong growth in asset management, strong growth in commercial term lending, solid continuous growth in auto, a little bit of growth in card and then some growth in C and I, but not stellar.
And just a quick follow-up just then. So from an overall balance sheet when you talked about the long term remixing and there's still building towards LCR NSFR etcetera. Just philosophically in terms of the mix of assets loans versus securities dealing with the current rate environment as opposed to the expected, has the philosophy changed at all in terms of what you're reinvesting in as far as the other buckets outside of loans?
So first of all, I just in case I misunderstood. So we're compliant right now with LCR and SFR our own internal stress. So we are where we need to be. The costs of all of that are in our run rate. So obviously our balance sheet will continue to be dynamic and dynamic as we move up the rate cycle.
And we're reinvesting with our position for rising rates now and where we want duration to be at the end of the cycle. So So no philosophical change. One more question.
Page 28, within the 1,500,000,000,000 dollars 2017 RWA target, there's some mix shift away from CIB to other lines of businesses. And I was wondering if maybe you could give us something on the potential magnitude of that mix shift that you envision?
Right. So I mean that's one of the things just to sort of illustrate the point. So that's one of the things that we talked about when said, we're not looking at each business and having to bind them by the most binding constraint. And if you were, you wouldn't necessarily be have the same point of view about growing these very, very pristine loans we're growing right now that take a new mortgage origination a new 7 70 FICO 65 LTV, I'm going to get this almost right but not quite right, would attract 50% RWA standardized and 20 plus or minus advance. But we like that business.
We like that return. We like that risk profile. So we want to keep growing that. And in order to do it, we're looking to shrink in other areas and manage the place predominantly with an advanced lens. So I'm not going to talk about them order of magnitude, but we expect to continue the growth that I just talked about the growth in the commercial bank, the growth in the consumer bank, the growth that we've been seeing.
We want to continue to provide the capacity to do that through time. Okay. Thanks very much. Daniel?
Okay. So good morning, everyone. So we are going to spend the next hour talking about the Corporate and Investment Bank. I am going to cover 4 topics. So financial performance, strategy and areas of focus of the different lines of businesses, the expenses and our return on equity targets.
So before we go to the presentation, I want to make few comments. So this is a fantastic franchise. It has produced best in class return over a number of years including in 2014 in a challenged market environment. We have a unique scale, a complete range of products and an unparalleled global client franchise. So fundamentally, our strategy is not going to change.
We have a very good track record to adjusting to multiple constraints and now we have one more which is a GC buffer. We will do whatever it takes in order to achieve the target of the company in the bucket that we decided to operate. We have a proven track record of managing our expenses and but it is more than we can do. So we are committed to move our expense base to $19,000,000,000 by 20 17, dollars 2,800,000,000 lower than in 2014. And finally, we are targeting 13% return on equity on a common equity Tier 1 ratio of 12.5%.
So now going into performance. So the CIB is 51,000 people operating in 60 countries around the world, covering thousands of clients, the most important companies, financial institutions, governments and nonprofits. So top left of the page, revenues. Last year $34,600,000,000 an average for the last 5 years of $34,700,000,000 really very low volatility in our top line. Net income $8,700,000,000 an average of 8.9 dollars This is excluding the elevated cost of legal expenses for last year.
So return on equity, 13% last year, an average of 17% over the last 5 years with capital moving from $46,500,000,000 to $61,000,000,000 We have the number 1 global investment banking franchise, the number 1 global market franchise and best in class research platform. We have delivered very well and we are in a good place to deliver for the future. So now going more into the lines of business, I mentioned that the top line mainly driven by scale and diversification has a very low volatility over the last 4 years 5 years at overall 4%. But when most important when you look at inside of each of the lines of business, you will see that the same phenomenon happen. Scale and completeness of products and diversity creates very little volatility even for the lines of business.
And it's even more noticeable in our markets revenues. Average of $19,800,000,000 over the last 5 years with a volatility of 4%, which equal to the volatility of the whole corporate and investment bank. So why is that? It's relatively simple. We have such a big and deep client franchise that we need to take the rate that is necessary to provide liquidity to those clients, but we don't need to take risk in order to find our path to profitability.
In fact, all the opposite. If we were to take excessive risk and we get it wrong and we lose money, not only you are fighting with the position from the clients and try to provide it, but you're also going to fight with your own position. So essentially, if our ability in that environment to monetize the client franchise, it will be by far tougher. So clearly a good performance, low volatility when you compare with the rest of the peers. So we are in a good place from there.
So now when we go into comparing our business with some of the with the rest of the competitors. So Investment Banking, these are the logic numbers. Our growth 25% over the last 5 years, the rest of the industry 17%. We've been consistently number 1 for the last 5 years. Fixed income, the business that has been challenging on the last few years.
The wallet of the top 10 players have gone from $110,000,000,000 to $74,000,000 over a period of 4 or 5 years. Our reduction was 9% and it was sold in 2014 because I think then we were growing, while the rest of the industry was going down by 36%. Number 1 10 years ago, it's still number 1 now. Equity markets an area of focus for us. I talk about that in the past.
We grew 70%, the rest of the top 10 went down by 2%. So overall, no matter how you look at it, the performance in comparison with the competitors has been very good. So moving into the next page, that is a page that you are familiar with. So the only thing that we have done here is we add 2014 to do a mark to market of what we did or didn't do And look at page of a reason of this page is now what is here that all this green is in each box behind it there is San Yell and San Red. When you look at all these lines of products and we are very focused.
That's the way that we run our business. We are very focused in really looking at various business, investing to improve going forward. So page 7, international, key part of our strategy in the past and it will be a key part of our strategy going forward. We have as you remember, we invested in developing the global corporate bank few years ago and all that is growing. So it's doing very well.
So revenues from 2012 10, sorry, grew up by 12%. And let's see this, if I would ask you to vote 4 or 5 years ago where the growth was going to come from, probably everyone in this room would have said emerging markets and it's exactly what didn't happen. Emerging markets are relatively flat and all the growth is coming from Europe and mainly Continental Europe and the U. K. So why is that?
Jamie mentioned many times that we are not fair weather friends that when we are in a place, we are committed to that place and we are there to stay. We are very disciplined in the way that we manage our exposures and our risk. And we're always prepared in a good position when the hard times come to support our clients. And if you are there at that time, your clients will reward you with a bigger and that's exactly what has happened. So we really did very well throughout the whole European crisis.
So and that is reflected in our IV fee line for Europe. We grew our wallet share for 6.2% in 2012 to 7.5% in 2014, moving from number 2 to number 1. And there are almost this is just one example, almost across our lines of business, we see we saw growth and increase of market share. So emerging markets, obviously, if you look at the bricks and how we feel about them 4, 5 years ago and how people feel now about it. Probably 4 or 5 years ago, it wasn't as good as we thought.
Neither now it's as bad as we think. So I think that the growth in emerging markets will come at some point. It just didn't happen in these few years. So we are going to we are still obviously knowing where it come from, we are still committed to those markets. We think that they are going to be important for our strategy going forward.
It's just going to a rough patch. So now changing into what happened with our return on equity from 2013 to 2014. So this is where it is. In 2013, 17.2% return once you exclude the effect of the adjustment for SBA and DVA. So how do we explain that?
160 basis points is lower revenues, mainly in the fixed income line. That is partially offset by a decrease in comp of 40 basis points. Control and regulatory fees took 70 basis points and the increase in capital from 50 $6,500,000,000 to $61,000,000,000 took 180 basis points. And then we have a few other components there that are mainly related to the sale of the write off related to the sale of the commodity business that took about 50 basis points. Altogether, we came out at 13%.
Legal expenses took 300 basis points than we got to the reported number of 10.1%. So let's now move to market, which is the driver of the revenue underperformance, top left. So that is an internal representation of the client activity. It was a bit weaker in the first half of the year and sort of picked up in the second half, altogether up 1%, 10% up on equities and marginally down in income. So that's the good news.
The client fund shares didn't suffer. 2nd, let's go and try to explain the couple of $1,000,000,000 lower revenues. And I think that is mainly explained by 2 things. First, lower revenues in our legacy assets, because the positions are lower and the revaluation of these assets is coming to an end. But most important is what we call the market making inventories that in an environment of very low volatility, it was a bit difficult to monetize.
So if you look at the graphs on the bottom of the page and you were familiar because we showed last year on the left is $13,000,000 on the right is $14,000,000 The difference between the two explains over $1,000,000,000 It was just a bit different. And still all these numbers in all these graph or the representation of that graph in a well run market making operations, fault driven business as ours, over a long period of time, it will be either close to 0 or marginally positive. And that is roughly what we're experiencing here. So we said that there was a lot of debate in the past. This is the fixed income issue is a cyclical issue.
I think that I still believe that it's mainly to a large extent is a cyclical issue. And you see on the right of the page at the top, so volatility really coming down. And the story of volumes for last year, year on year is kind of mix. San Jose classes have higher volumes, San Jose classes have lower volumes. But altogether is no matter what volumes are, if there is no volatility, it's very difficult to monetize.
So it really doesn't matter the volumes. So and now we go to October 15 and what has happened there, because I think that it will be relevant for the future. So there is today less a bit less liquidity in the market. There is less capital to facilitate intermediation process. And overall, there is less risk appetite.
So every time that there is an event in the market, it's likely that the market move will be a lot of more abrupt than it would have been in the And for sure, really it will hurt, because these sort of big moves without transactions is really it hurt the clients, it hurt us. And for sure in the long run, it will hurt the economy as companies will have to pay more and more in spread terms in order to finance their portfolio. So this is something that to an extent probably it could have been you could argue that what has happened with the massive reaction in the movement of the Swiss franc revaluation when they removed the cap, so a 40% drop in few minutes. Well, I don't know if that explains it or not. It is probably a portion of the same story in my view.
And then when you walk through the rest of the quarter, the volumes stay high, the volatility is kind of normalized, the market is still was a bit choppy. And that take us into the Q1 of 20 15, where that higher volumes that is still remaining there and the client activity is there and level of volatilities are a bit higher. So the quarter has started very strong, particularly January. As a result, we expect that the full quarter to be up year on year. Even including the headwind of simplification, business that we have last year and revenues that we have last year that we don't have anymore.
Obviously, there is still 5 weeks ago, things might change. But for now, it's looking good. Just to finalize this first segment, I want to talk about business simplification, a key priority for 2014. Over these days, really you want to focus your energy or restore to the franchise. And you don't want to be distracted at all in things that they are in the periphery of that, no matter what the returns are.
So we have there is there are a bunch of business that we exit. So the global special opportunities, good business, it's a principal investment business, good business, good returns, good track record, really no core to the franchise. If we do it or we don't, the clients don't care. Physical commodities, we build a good franchise over a number of years, very balanced between the 2. The physical side, a bank is a wrong house, at least our bank.
So we decided bolting, is precious metals and bolting and the financing part of the business is increasing because some of those clients don't feel that we are a competitor anymore. So they are feeling more comfortable in doing more business with us. So I'm very happy how the commodity what is left of the commodity business is performing. And then we also exit some few small business because they are not core of the risk attached to them. It was a bit too high.
Also, we were very focused in rationalizing some of the business like correspondent banking. We need to operate today to a different standard as we were in the past. And we went into that business look at around 500 relationships. It doesn't mean that we reduced 500 clients, but we exit 500 relationship in that business to simplify the business and make it more manageable. So we're very focused in cutting accounts that they've been inactive for a number of years because of the burden that that caused to the KYC process.
And we are transferring the client base of our the bulk of the client base of our broker dealer services to Fidelity. Overall, this is what we have done and we will continue doing it, if we feel that any of the business that we have, they are not core to a franchise or the risk that they bring along is outside of our risk boundaries. So that finalizes the first part of the presentation. Let's go to strategy. So the strategy I said the strategy fundamentally hasn't changed and that's how we think.
So we believe that to have the business that is operated at scale, that we have a complete set of products and operate globally is the key to achieve the returns that we achieved. And we still believe that. So we are going to do whatever it takes in order to maintain that strategy within the constraints. So we've been very good and optimizing businesses and looking at areas of weaknesses and optimizing investments and we continue to do that. It is very important that we keep adjusting our market business to the new market reality.
So the structure of the market is changing. We have a best in class business. We want to keep it that way going forward. And we have a good we'll talk a lot about expenses in the next few pages, but we have a good track record on expenses and we'll keep working on that. And in terms of optimizing, what we have done so far, that's what we do in the investment bank.
We look at all the constraints that we have and look at adjusting our business model to maximize the return based on the constraints. And we have done it because of the profitability of some of the business, some regulatory issues, capital rules, liquidity rules, etcetera, etcetera. G SIP is the next one and we are going to do it too. We will do and we will be 100% focused in deliver what every single action to guarantee that the company operates at a 4.5 percent target level or lower if it makes commercial sense and is accretive to our shareholders. All this, it will be done keeping the interest of the client at the forefront.
What does it mean for growth? Well, clearly in the activities and we will see in a couple of pages, the activities relate that they have a very GC fitness attachment. So we may have to constraint growth and we may have to grow in line with the industry. So, but there are plenty of areas that they are not related to G SIF where we are weak and we can do better. So, altogether, there is a path to grow.
It may be a bit different than what it was, but there is a path to growth. Let's go now and dig down a bit more into the GSEF challenge. Here from left to right, first pie chart. This is the contribution on each of the factors to the score of the CIB. A bit more of 1 third is complexity.
And just to remind the complexity is the OTC notional, level 3 assets, trading assets and asset sale for sale assets. The rest is more or less evenly distributed. Then if you look at the contribution on each of the lines of business to the CIB score, 62% is coming from markets, 13% from banking and 24% from Investor Services. So let's go which are the let's go and see which are the activities that contribute the most. In Investor Services, we have OTC clearing and I a page on that, so hold for a second.
Intermediation, intermediation is the following product. For OTC derivatives that they are not clear, we play the role for some of the clients that the clearinghouses play for OTC cleared derivatives, which is essentially we help the clients to face us and we face all their counter parties and we help them to optimize their credit and collateral. So this business as price is profitable and is fine. But when you look at to the length of the GSEF impact, it will require high single digit multiple of capital from where it is today. So unless that the structure of the business changes or there is working with clients, we find a way to massively compress the exposures, the notional exposures coming from that business.
There's very little risk. It's pure notional. We may not be able to stay in that business. Then non operating deposits for both affecting the Investor Services business and the Banking business. Marianne set a target of $100,000,000,000 Our contribution is around is quite big.
This is a big percentage of that. So we already have a very clear plan client by client how we are going to manage relations. It's a product that is important to the clients. It's not manager's lie there. So we will do it in a way that really reduces the impact to the clients, but we need to do what we need to do and we will do it.
So, brand brokerage and let me mix that with the bottom of the markets, which is securities financing, a very important product for the clients. Clients do care about the liquidity of their position and they do care about how to finance their position. Clearly, we are going to obviously, we are not going to exit that business. What we are going to do is maximize it to the market that we're going to operate. So into banking, we already talked about non operating deposits, lending and unfunded commitments.
So we have a very good process to really the lending activities and it's a low return on equity activity. But we have a very good process to decide how much resources to apply financial resources and balance sheet we give to our client and what do we need to do in order to optimize that and have good return with that client, we will put the GCP impact into that calculation too. In the case of markets, OTC delivery is notional. It is a big component. We have a very detailed plan of how to deal with it.
We are going to compress roughly if you look at our portfolio of notional $60,000,000,000 $65,000,000,000,000 whatever it is. So roughly half is facing clear and half is bilateral. So we have a very clear plan on what we need to do in order to really compress our portfolio to reduce the amount of notional. But more important is how we are going to make sure that without disturbing the franchise, we are efficient and we minimize the accumulation of notional going forward. Level 3 assets, I already asked one of the members of my management team, look at the whole portfolio, look at the returns in the eyes of the GSEF impact and what we are going to do.
Some we will exit, some we will keep. But also most important, we're going to have very clear rules for the business that accumulate Level 3 assets like the equity portions of the equity business or the securitized product business that will allow us to optimize and live within the constraints. So those are the areas of focus of focus and roughly what we are going to do about. And now I want to explain in the next page 14 a couple of minutes on OTC clearing.
As you
remember, the OTC the clearing derivatives, it was a priority or it is a priority for the G20. We have invested and we think that altogether it's a very good thing for the market. In terms of risk management, capitalization and liquidity. But overall, I think that reduces systemic risk to the market. So based on that, we invested quite a lot of money in building that business and we have a very good market share.
As you remember, when I mentioned in the past areas where we saw it could be growth going forward, this one was one of those. And we build the business to stand on itself excluding the halo effect of anything else. So that's what we did. The business at the moment is not is operating below the scale level. So therefore, the returns are low.
They are not really at scale, but we think that if when it gets rolled around the well, it will be profitable. It would have been profitable. So then if you look at on the bottom left of the page, so we build an example just to illustrate. And we think there are roughly 6 big clearers around the world. And we assume that this theoretical clear has a 10% market share.
If you are constrained by GSIF, you will have to depending the size of the RWA of that business between 3 to 6 times. Remember, keep in mind that the business with the capital that it has today is not profitable at this scale, pretty much for anyone I think. And if you were constrained by SLR, so the increase of capital will be between 5 to 6 times. So at the moment there is a decoupling between the economics of the business and the capital rules. So what could happen?
Well, it's very simple what it could happen. It could happen that some non bank entity managed to get into that space. That is expensive infrastructure to build. It requires capital. It requires a lot of overnight liquidity and a lot of intraday liquidity.
So it may be we don't know. It may be that smaller banks get into that space. It may be that market reprises. That is a bit of a stretch of imagination, because today as it stands is really when you look at the relation between bid offer spread and the cost of clearing is not an irrelevant number. So it's hard to see that someone could be able to pay at this level of volatility at the price as they are and pay like 5 or 6 times for that and it still be in the business.
So the other possibility is that the capital rules align. So there is an economic reality and a profitability business that overall allow us to stay in the business. And the next is that probably banks that they are constrained by SLR or for GC fee, we are not in that business anymore and we move on, which having really and if we have to do that, we will do it if we have to, but at the end of the road we will do it in a way that affects our clients the list, but it is a possibility overall. So now moving into page 15 and this has been like 2 seconds on this one. These are all the constraints on the left, all the activities on the left.
And you can see, as you can see, affects pretty much to an extent every type of clients that we have some more than others, but it does. But we will work with our clients to do what is right. But we have to do what we have to do in order to get to the target that Marianne have described and we will. So now going into the lines of business and we start with Investment Banking. On the top right, we have 2014.
So $80,000,000,000 overall, we are number 1 overall, number 1 in Europe and in EMEA and EMEA and the U. S. Count for 80% of the total revenues. We are not where we want to be in Asia or in Latin America, but we are working on it. So what independently what this graph describes, we are what we are doing here is very simple.
We are going sector by sector, product by product and region by region and looking at why we have areas of weakness. If it is a matter of talent, if it is a matter of resources, financial resources, what is it? And overall, the conclusion is that there is a better way. We don't need to put more balance sheet in order to grow here. It's more about relocating the balance sheet in a more effective way, because we may be over supporting one sector to the detriment of others.
So linking this to GSiP, so there is a lot of more than we can do with the balance sheet that we have and really address the areas of weakness that we have. For sure, when you look at the right of the graph, in Asia and Latin America, probably, if you want to look at it in a positive way, So we have 2 good things there. 1st, even if the market doesn't grow at all, we have some potential as we move to a better place and the market may grow at some point. So we like it. So we'll see what we do there.
So the second point, and looking at the bottom graph, lending to the segment of clients that we lend is being very low return ROE business for a number of years and it's still kind of moving in the same way. The important message here is that by being complete and operating in scale allow us to have a broad relationship with those clients that allow us to the overall relationship with that client including the low return of the loans becomes profitable. And we are focusing in doing that. And that's even the way that we're organizing ourselves, our banking organization. 3rd point and last point on this page is the partnership with Doug and the commercial bank.
1 third of the IV fees in North America are coming from clients of the commercial bank. Gradually more and more of our market revenues are driven by clients of the commercial bank. Also in the grace of treasury service that I will talk about in the next page, the commercial bank help us to get a scale to make the business more efficient. So it's a great partnership and you will see when Doug makes his presentation, there is a lot of upside from there too. Now Treasury Services, page 17.
So we have been historically a bank of banks. We invested in the corporate banks to balance our financial institution business with our corporate and multinationals. And if you look at in the top right graph, it's been successful. From 2012, revenue with corporates has grown by 9%, free financial institution revenues by 4% and the overall cost of the business has gone down by 4%. Then and also when you look at the following graph below that, so we are selling more and more products to those corporates.
The number of corporates, international corporates that they are using out of the corporate bank. Deposits. Deposits have been growing. From 2012, they grew 17%. But most important most importantly, operating deposits have grown 28%.
And if you have that in mind with interest rates hopefully at some point will start going up, it will be a big lift on profitability of this business. So we feel very good about this business. There is more than we can do in the there is growth in the top line, but it's also more than we can do in the bottom line. And we are by doing several things, so bringing clients to our enhanced electronic platforms, simplification. So this business as I see it, there is upside in the top line, but more important or more of that there is more upside in the bottom line.
So markets, we are the number one fixed income house and we've been as I mentioned for the last 5 years. We are going a period of change. We want to embrace and change and come out on the other side as strong as we are now. And we are doing that. There is no doubt that we are doing that.
There is very little weakness in our business. When you look around the world, there is not an obvious area where we are not where we should be. There are a few things mainly in Asia that we're addressing. But overall, we have a very good platform. In equities, we have done quite well.
It's an area of focus and we gradually it's a very competitive place. Gradually, we are growing. Our low touch business is growing. Last year, just an example, in North America and in EMEA, our low touch volumes have grown 3 times the volume of the market. So we are getting market share there.
We lost some ground in Asia and we are focusing in correcting that. The other area where there is potential it is not related at all, in fact the opposite to the G6 is the ratio between revenues that we get in the prime brokerage business and revenues that we get for the same client in the equity business. Let's call that the multiplier. And that multiplier is not at the level of best in class. So as we are enhancing and improving our equity offering and enhancing our proven our prime brokerage business that multiplier will grow without increasing exposures.
So one comment here on higher rates. Higher rates is good news for us. It's good not just for the rates business, but it's good for the overall markets business. So we welcome rates and it will be accretive to our returns. So this page, I'm not going to go through the details.
But in the way I think about it is the following. The fixed income business, all these market business, fixed income in particular, they are not cheap business to run. It takes the cost base is high and you need a scale and a relatively high market share in order to make them profitable. So as we are going through this process of change, we don't know how the mark how the clients will decide to operate. What I do know is that we need to hold on to our market share of GrowIt in order to be able to be profitable going forward.
And the only way they are going to hold on to that market share is by embracing change. So in whatever way the clients choose to operate to us, voice, electronic on a principal basis or an agency basis, if they need direct market assets, if they want to direct their orders or they want us to direct or where orders with us whatever it is, whatever it is. That needs to be there. And then the other thing that we need to do in order to maintain our leadership position is to keep adjusting our talent pool and our growth and our cost as we see more and more how the wallet will be available to the business. If you don't embrace change and you lose your market share, you are dead on arrival.
It doesn't matter what you do with your cost. It will not work. So we are very committed to that. Myself, the management team, we know that feeling good about where we are is not going to take us anywhere. This is a point where you really need to embrace change, you wrap your model and do what it takes in order to maintain the leadership dollars 51,500,000,000 in 20 12, dollars 32,000,000,000 wallet in 2014.
So why is that? It's very simple. Low volumes driven by low volatility and low overall level of rates. Also the change in capital rules that really affecting us heavily the capital allocated to legacy positions mainly on collateralized derivatives. So if you look at the bottom graph on the left hand side of it is 20 14.
The core business excluding legacy positions, it was very close even in a weak environment to get to our get close to our target returns. But clearly, the legacy positions bring them down and really was a very low ROE business in 2014. Let's see what I think is going to happen to that business. Once interest rate normalizes volatility at a higher level of rates more goes more towards normal. The regulation gets more or less harmonized around the world, including the impact of GC and compressions that we need to do.
I think that and the burden of legacy positions, RWA related to legacy position goes down as you look in the middle of the page is going down by 24% in the next 2 years. I think that that business, the core business will clearly go produce a higher return than our target. And even with the effect of legacy position, we'll have a better return than our target. So and the other piece that is very important is the rail business is a very, very core and important piece to the clients and very related to our concept of being complete as a way to stay profitable as we did in the past. So it looks good.
It's just the low end of the cycle. I don't think that we should be too concerned about it. So custody and fund services very quickly. Asset under custody is growing very well. Revenues up 10 percent from 2012 goes down 2% from 2012.
And this is a business where the main focus will be to keep growing, but also to find scalable solutions for clients that make the overall efficiency ratio of the business better than it is today. It's a good business. It's profitable. But if we see what we can do here, I think that we can move more towards profitability. And another comment on this, the way that we're organizing our sales teams in markets is now markets and investor services.
I think that what it does allow us as in banking to have very holistic and broad dialogue with our clients and move this product and a higher level of importance in the dialogue with the clients, because this product is very profitable. But in the past, we have 2 groups hitting the clients knowing one what one was doing versus the other. So now it's a totally complete thing. And really the clients are rewarding us with Hager business by having a more cohesive approach to them. So prime brokerage and financing.
Prime brokerage, we've been working on this for a number of years. We were number 9 in 2,006. We are now number 2. Our balances have grown from $70,000,000,000 to $170,000,000 And as I mentioned before, this is a key problem for our clients. Every client, when you go and have a meeting with a client, everyone is concerned about their ability to finance their positions either equities or fixed income.
So when you look at the bottom graph, which is fixed income in the U. S, it tells you a good picture why a good story of why the clients are very concerned, because the amount of balance sheet available for that activity has been coming down a lot. Clearly and we I strongly believe by being aggressive in that product it creates a great halo effect in the rest. So this is a product that does hit our G Suite buffer. So obviously we need to optimize it within the to the 4.5% or whatever we decide to operate.
But I think that is still at the levels that we have and we are one of the biggest in the world on this. So there is plenty that we can do including the multiplier that I mentioned before in order to really optimize resource that it will become more and more scarce as time goes by. So this ends the second session and now we'll start going into the expenses. So I will do 3 things here. 1st talk about what we have done.
What are the actions that we're going to take in Technology and Operations and then explain how we're going to get to that $18,000,000,000 that I mentioned before. 2010, so we have $22,900,000,000 of expenses. The front office reduction has been $2,400,000,000 And that is this is a combination of fewer people,
change in
the talent mix as business get more simple and more flow driven and compensation decline as we are absorbing more and more costs and capital and liquidity. So the second element, the second green bar is technology and operations. You remember that we talked in the past about SRP. SRP, the strategic reengineering program that has reduced to our running rate our running rate in technology operation around $300,000,000 Some of that is being reinvested in few other things, but overall technology and operations in the last 5 years red part of the page. 1st, controls.
So this is finance, compliance, the operations related to that, legal, all this stuff. So it has gone up 1,000,000,000 dollars or 54%. 2nd, regulatory fees, they're going up by a multiple of 6 or 800 $1,000,000 in the last 5 years. Legal, you may be a bit surprised that it looks like $500,000,000 That is because obviously and as we have a very elevated legal cost in legal expense in 2014, but it's also in 2010 was also relatively elevated. That's the difference is $500,000,000 And then it's a one time items of simplification that I mentioned before.
So we have really worked hard all across unfortunately to get where we were 5 years ago. Obviously, it could have been worse if we would have not have the green part of the page, but we are where we are. So now looking at technology and operations. What are we doing? Business unit specific actions, What we are doing is going line by line of business and looking specifically at how the clients interact with us.
And when you start looking into this, you will see how inefficiently some of the clients are in the way they interact with us. And we are going to go back to them and help them to become more efficient. And this is not just the amount of operational burden they create, also in the way that we cover them, it makes no difference for them, but it require a higher cost coverage. So we are looking line by line of business. Then we go to the operating model.
If I look at our cost per ticket, it's more or less in line with the industry. But considering our scale, it should be a lot better than it is. And when I started looking into the components on that and why is that, there are a bunch of things. One is, for example, the number of middle office that we have that as we kept restructuring the front office, the middle office really didn't sort of exactly match that and there are efficiencies by combining the multi middle office in a smaller and finding efficiencies The second thing is about internal utilities. There are plenty of activities that we could do that it could be more efficient like for example tax processing, client on boarding, regulatory reporting and having utilities across the whole business rather than having components pretty much all over the place.
The third item is we are very supportive in some industry utilities to really cause of processes that are totally at no value in doing it ourselves as for example components of the KYC process. We will have to do portion for ourselves, but there is certain things that every bank doing it by themselves and calling every client to ask the same information times and times over is really both of the clients that doesn't add any value to any of us. So we have very supported a bunch of industry initiatives to get there. And also we have done in my view a very good job in picking our location strategy. There is more than we can do there.
That's that. And then technology infrastructure is the 3rd area and it's some is being already done through SRP. We are doing a lot of more. And most important, a lot of the investment that we were making in the last few years, they're now coming to an end. Our Athena platform access net generation, derivatives processing platform, front office features and options reengineering process, FX front to back all those things that were cost of the past, they are now coming relatively to an end that it will obviously, we'll have to it will reduce our investment in those issues and in those processes in those systems, but also we'll find efficiencies going forward.
But this is just to be clear, this is not myself and Sanuk who is the Head of Technology and Operations looking into this. It's a commitment of the whole management team across every line of business to be 100% committed to these spend targets that we have. So look at now how we are going to get. So we go remember from the previous page $23,300,000,000 Let's assume that the first legal expenses go down to historical normalized levels. The business simplification, dollars 1,500,000,000 we lost the top line.
We're going to lose substantial portion of the bottom line. Then we go to front office. We are planning an extra $300,000,000 after the $2,400,000,000 I'll give you a couple of numbers that are interesting. If you remember for the previous page, we saw that contour revenue in 2010 was 37%. Of that 37%, 26% percent was front office and 25 percent was front office and 12 percent was the rest of the operation.
In 2014, we went to 30%, but now front office is 18%. And the rest is being relatively flat. So we have done really very good job with the front office adjusting as you can see in the 2.4%. So when we go through this process of really finding efficiencies, the very specific actions 1 by 1 what which are the actions that we're going to take in order to achieve each of these numbers in this page and to get to the $19,000,000,000 Two comments two additional comments on that. So first, if we find that in the future, it makes sense to invest beyond our expense target in businesses that will be accretive, we will do it and we'll come to you and tell you that we have done it, because it's accretive to the shareholders that it makes sense.
The second issue, we have a culture. Even though we've been very disciplined in how we manage our front office expense, we want to pay for performance. And we have been paying for performance and we are committed to stay that way. So obviously, if the top line improves, we will have to pay more and the €19,000,000,000 may be a bigger number. But the overall costincome ratio will go down and the returns will go higher.
So this is a good way to meet the expense target. So now as we are wrapping up, so we go to page 28. And this represents how do we get to our target 13%. We start with 10.1%. Legal expenses normalizing, you saw the number in the previous page is 2 50 basis points.
Net growth, this is a series where I was talking about finding areas of weakness and really correcting that. And those are in banking, our effects with corporate, as far as growth in equities, is Asia. There are a few things. Net of the impact of GSIF that 4.5% is very marginal, so it will give us an uplift of 90 basis points. The expense initiative that I just described is 130 basis points and raise normalization is 70 basis points.
Credit cost normalization is 20 basis points and the increase in capital from the current capitalization of 11% to 12.5% takes away 200 basis points to take us to the 13%. So clearly, things this is as is considering the well as we see it today. The wallet may grow. Emerging markets will go back into growth at some point. There is no doubt in my mind that European Capital Markets have to grow, because it's absolutely necessary to finance economy as banks are deleveraging.
We may see some repricing in some areas. We may see that growth grows faster, so therefore interest rates go higher than what the futures are showing. So there is upside to this number, but this is what we think in the next 2 or 3 years, so we see how we see it today. So before I wrap up, I want to address a point that I consider extremely important. We made mistakes and Marianne mentioned it too.
We made mistakes in the past related to the conduct of some of our employees that have cost us 1,000,000 of dollars and most importantly damage the reposition of the company and the confidence of the public in the integrity of the global markets. Everyone at JPMorgan is focused in doing the right thing for our clients, for the market, for our stakeholders. We are rolling out the best in class culture and conduct program across the entire CIB to make sure that every employee at all levels everywhere in the world operates our highest standards in line with the values of the company. It is a top priority and it will continue to be a top priority in the years to come. So let me wrap up with few thoughts.
And I want to the main one will be the first thing that I said today. This is a fantastic franchise. It has produced best in class returns for a number of years and is based on the scale that is unique in our product, They've been in the company for a long period of time and work They've been in the company for a long period of time. And working for us, we have an amazing pool of talent across every rank in the Corporate Investment Bank. We are market leaders in all the products that they are relevant to our clients.
The market business is going through a massive profound process of transformation and we are 100% committed to embrace change to be as successful or more in the future as we are now. We are very focused in addressing areas of weakness as we discussed and our returns allow us to make the necessary investments to close those gaps. GCP buffer, the company will operate at 4.5 percent or lower if it makes commercial sense and is accretive. We will make 100% sure that every action that we need to take in order to achieve that goal and that objective will be done. And our expense program, it is we are fully committed in delivery.
We know that unless you are in an environment that we are of course capital liquidity, unless you are very close to perfection in your efficiency, it's really very difficult to be profitable in this business. So before I go to Q and A, I just want to reiterate that the management team and I will continue to work hard to deliver best in class returns, observe our clients and then stop here and we go to Q and A. We have a few minutes.
Hi. Jim Mitchell from Buckingham Research. Just maybe a big picture on FICC. You're implying 13% returns targets. I would assume FICC if you exclude higher return areas like security servicing, banking that the implied target return for FIC is lower at least in the next couple of years.
What's the big picture long term endgame here? I think if you think about FICC it raises your cost firm wide cost of capital, it raises your GSIB charge pretty significantly. Yet it's one of your lowest return businesses. Yet as you point out, you're a top tier player. How do you think
of is the end game here
that there's a much higher ROE in the long term and that you're willing to stick with it in the short term? Or is it just the cost of doing business because there's a lot of synergies with the rest of your business? How do we think about the ROEs long term?
It is a combination of all the above. If I look at in the long term, so you
as I mentioned, you will have growth in Europe in the capital market.
The emerging you as I mentioned, you will have growth in Europe in the capital market. The emerging market, if they want to have a path to growth, they may have to develop their markets in general and the fixed income business in particular. The business at the moment is marginally in our target marginally below the target, but it's not miles ahead away. So altogether, yes, it's a challenged business. But if we work on the cost, we maintain our scale and our market share and the market growth at some point, clearly the return will be better than what we are including in our 13% target.
At the moment, that's why this 13% target it has upside. Some of the upside maybe for the it is from a potential better fixed income business. And it's definitively is important to the rest of the franchise. I really don't believe in the model where you start cutting products and products. I think that very quick as you go to the point where clients feel that you are irrelevant.
And one more point on that. In your relationship with the clients, you say today, I'm going to cut every single product that is unprofitable. And then you think that well, I will retain our market share or grow the market share in the ones that they are profitable, so then I will bet it off. I really don't believe on that. I really don't believe on that.
I think that if you start cutting that, because unless you find the group of banks that they are willing to do what is only unprofitable, the clients will have to be extremely careful because they need those products. So that's why completeness is important, because the relationship that we have with the clients is a bunch of products, some profitable, some non profitable, the overall relationship profitable and we serve the clients well. I think that that model is a sustainable model in the future. When you start shopping, I think that you will continue that way until it is relevant.
Matt?
Matt O'Connor, Deutsche Bank. If I could follow-up on the $2,800,000,000 of cost savings you outlined. I guess the first question is how far into the process are you in terms of identifying those costs? I know it's something that you've just announced today, but you've been working on to think about for some time.
It's totally identified. Action by action over the next 3 years, action by actions are identified. And I still believe that it may be more. So this is as we see it today. So it's the cost management and becoming more efficiency is a constant process.
As we dig more and more and more into the businesses and the circumstances change, you keep optimizing all the time. Every single number that is here is attached to a name and to a particular action. So this is not aspirational at all just to be clear.
And then I guess a follow-up in terms of the timing you've given us by 2017. Should we think of it as straight lined or more front ended this year?
I think that in order to achieve these efficiencies, you need some investments. So I think that you will have probably the bigger part in 2016.
Chris?
Chris Kotowski from Oppenheimer. You talked before about not cutting products that are unprofitable, that dramatic. But you also talked about cutting non operational deposits by 50%. And that's the most dramatic thing we've ever I think heard you do in a short or in an announcement. And presumably every other big bank is doing the same math.
So it had seems like it has the potential for some dramatic consequences. So can you help us think through the next couple of steps in the chess game? I mean, what are the natural places for that money to flow? Is everybody else going to do the same thing? Is there a way for JPMorgan to capture some of that?
And what are the potential for disruption from that?
So there are a series of actions on how we're going to do it, I'll tell you right now. So first, we will keep we've been working with the clients to transform non operational deposits in operational deposits by changing the mix. And as you saw in the graph, we've been quite successful at that. So that's number 1. Number 2, so we will work with the clients and say, well, if someone has, let's say, dollars 5,000,000,000 of non operating deposits, it's not that we're going to go straight to 0.
We will give them a limit and the rest we will help them out to find ways to move the money. For example, sweeping into money market funds for central banks going directly into the Fed. So we are not going to damage the client relationships. We will work with the client to find the best way with less disruption to solve these problems. But we have to do it.
There is no doubt. We are committed and we will do it. We will find the best way to do it. But there is outcome. There may be some of the deposit goes to banks that they are not constrained by any of these banks, so smaller banks.
So it's not we are not the only bank in the world. So I'm sure we will find by working with clients the right outcome. At the moment, I'm not expecting a significant impact into the rest of the franchise, but we will see along how it plays out. I think that this one the clients do want to do business with us and would understand that it makes all the sense for the world to do what we are doing if we do it carefully and socially.
We need the mic.
Thank you. Paul Miller, FBR. You talk about on the fixed income side that you are positioned for when rates go back to normal and when volatility goes back to normal. But we haven't really seen normal on any of these things since 2008, 2009 during the crisis, right? So it's been almost 5 years.
So why do you think we're going to see increased volatility given where the Fed has been really keeping rates probably lower than anybody thought they were going to? I know they're talking about it, but there's also a lot of talk that they're not going to raise rates this year. So how much so if we continue to stay at this level, when you start adjusting those fixed income debts or other parts of the business?
So at the moment, we think that interest rates will go up in the U. S. Around midyear or Q3. Probably the last few numbers that we've seen, it made me think that it may not be the case and it may be delayed. The U.
S. Economy is doing very well. So you look at the wages pressure start right building up. So at some point the fact that it's not that at all that the Fed will start moving rates. Obviously, the normal will be the new normal.
It will not be what it was. It will be at a lower level. What is more challenging in my view is in Europe. I think that interest rate will stay low for a sustainable period of time. But overall, the main business that gets affected by the rate, the level absolute level of interest rate is the rate business.
And what happens is you have 2 components of that business. You have the trading on the back end of the curve and the trading in the front end of the curve. When the interest rates are about 0, no matter how volatile they are, it's still kind of 0. So even when interest rate normalizing, even if it is a bit, the front end start becoming relevant again. So I have no doubt that assume that interest rate it start moving, so the rate business will go back to profitability.
Mike?
Can you comment on pricing in the custody business? I'm still not recovered from you eliminating this as a business line and some of the information. I mean your competitor State Street tomorrow have 2 hours on their business and today you have 2 slides. So if you could give us some insight into your margin in that business and the way pricing is going because this could be
pricing is getting tighter and tighter, Revenues coming from the composite the asset under custody is growing are growing in line with the size of assets. And the business that is being underperforming is securities lending. So margins securities lending were a high tighter than they were. Overall, it's a very profitable business and we're absolutely fine. But every time, at least for now, every time that we go to a new RSP, it's tougher and margins are going down and and may continue to go down.
But that's why in that business, I'm quite optimistic about that business and John Horner who runs this here is not so much about hoping that in order to maintain profitability margins needs to go up or not going down. So my main focus in that business is looking at the bottom line and find operational efficiencies. Clearly, it's not related to the retail business, but some of the custody business is coming from some of the commercial banks. Obviously, we compete for Meri's business as to the end with anyone else, but they are a big client of us. So overall, it's sort of part of the fabric.
And overall also help us the overall synergies across the company help us also with the cost base. So it is as I mentioned, it is a good business. I think that there is plenty of upside in the bottom line. John is very focused in getting it. Probably in the past, we were a bit too much top line driven in the way that we grow with business.
And now we are sort of more balanced and looking at efficiencies and solving them.
Brennan Hawken, UBS. Daniel, I just wanted to touch on the revenue. So you guys were at $34,600,000 We've got $1,500,000,000 in simplification coming out this year. So that takes us $33,000,000 Your target for $13,000,000 has $34,000,000 But there's another 1.3% of expense cuts that you're doing which is probably going to have some impact. And you're also there was a lot of talk of cutting the non operating deposits, which I get you're going to manage, but it's not going to be 0.
So can you give us a sense of how you're expecting revenue growth given those headwinds?
Yes. So as we mentioned, I think that Marian mentioned this several times. The overall impact of simplification into return into ROE was totally marginal or very close to 0. So what are we doing? By looking at areas of weakness, we are replacing that revenue for revenue that will produce a good return on equity.
That's why it's banking, it's equities, it's all this kind of stuff. So we are going to where we were, but at a lower cost, the simplification cost as you can see is not coming investing, so we are trying investing. So we are trying to really get areas of weakness into strength. So overall from banking, from equities, something from the Investor Services, all these things are going to contribute to get back to 34 percent and really improve their return even though the top line is very similar.
And last one, Betsy?
Hi. Thanks. So a couple of quick questions. 1 on deposits, you're looking to shrink those obviously, right? You mentioned deposit shrinkage, the non operational accounts that you're shrinking.
I just wanted to get a sense of how much you've done in work with customers to assess whether or not they're going walk down the path with you? Because we've had some peers look to shrink deposits through charging obviously in the EU and you haven't seen the outcome that was desired. You haven't seen the deposit shrinkage appears? And then I just have a follow-up.
Yes. So depending we are this is not for the type of clients that we cover in the Corporate and Investment Bank, we are not going to have that one size fits all. And reprice it may be a solution for some of the clients, but we need to get notionally to the number that we need to get. So in some cases, it will be repricing and that will drive balances down. In some cases, it will be no repricing at all and put a As I mentioned, you have $5,000,000,000 now you can have 1 and we will work with you to help you with the 4 that you have to put somewhere else.
We have some communication with clients, but not a lot yet. And then we will see in the next few months in the next few quarters, how do we progress. So there is no doubt that we will do what we have to do. And I think that in my experience from past things that we did with clients in the past, because of the type of relationship we have with the clients, they know that we are doing this because we have no choice. And they will sort of in my view, they will sort of help us out.
So then and you're outlining RWA is coming down overall in the organization, revenues going up. It sounds like there's an uplift in pricing that you're expecting you're going to be able to achieve. Is that a fair conclusion?
RWA is remember our glide path of last year. We are pretty much walking towards that in all the actions that they are related to us. And then we have model approvals. There is a substantial drop in RWA once we get there. In our projections, repricing is that what you are talking about?
We are not really considering a lot too much of that, because we have seen some is is incoming down and down and down. Even the whole well is kind of deleveraged. Some way or the other, the money some way or the other gets to the company. So I wouldn't really base my expectation of getting to 13% on hoping that some product reprice or not. So it's not in my assumptions.
And then just lastly on market share, because the regulators look at GSIB, obviously, as you all know in part as a function of market share of total global wallet of the G SIBs. So how do you think about managing your business when getting too much market share could potentially be a bad thing as it could trip you into the next bucket?
Yes. So let's be careful here. In the areas where the regulators have concern because of our complexity or size or whatever it is, as you know, we are very focused in correcting it. But I don't know, I'll just speak around them. If we are a bit bigger and a bit smaller in the pharma business or we are a bit bigger and a bit smaller in the technology sector or whatever it is, I don't think that that is related to regulatory concern.
So we will see. So at the moment, our target is to be at 4.5%. We are at 4 point 5%. If it makes sense to go to 4%, because commercial sense, we'll go to commercial sense, but to go to 4%. But keep something in mind that you start rolling back and drifting into lower targets that model, we have seen it all around and we know that that model is kind of not profitable.
So we want to as much as we can to defend our business models.
Ladies and gentlemen, today's JPMorgan Investor Day 2015 will resume after the break. Until that time, your lines will again be placed on music hold. Thank you for your patience.
All right, All right, everybody. Welcome back. I'm Mary Erdos, CEO of JPMorgan Asset Management. We went through a lot this morning. Now we're going to turn to a little shorter time on 2 of the relatively smaller businesses within the firm mine being asset management, which is a combination of a world class private bank as well as a very strong leading investment manager and a very important growth story within the JPMorgan Chase franchise.
So I'm going to take you through the next several pages just to re remind you of what this business is and how we've been doing. Asset Management is based 1st and foremost on a strong investment culture. And this relentless focus on client centric fiduciary natured business is the foundation that allows us to deliver such strong investment returns. But these investment returns are as you know past performance is no indication of future returns not the only reason why clients trust you with your assets. They trust you with your assets because of both past performance as well as what they expect in the future.
And that is what we've done. Over the past 200 years, we have engendered the trust of many clients to the point where we are now at another record year of assets. But this sustainable competitive advantage that we have is something that struck me when I was going through the Alibaba IPO process. Jimmy Lee, who's Vice Chairman of JPMorgan Chase, who led the IPO for the firm introduced me to Jack Ma and he said something that struck me very interesting. He said that his definition of success of a sustainable competitive advantage for his company to survive would be that if he lasted 102 years in order to do that.
And when he said that, I said, well, that's great because our company has been spanning 4 centuries. We were started in 17/99 by the Manhattan Bank. But I think what's even more interesting is when I look at this business in asset management, we have had families that have spanned 3 centuries of being clients of our bank. And that is the sustainable competitive advantage of this firm and this part of the firm, which is very, very difficult to replicate. And so the job of leading this investment franchise is to continue this relentless focus on the investment performance, continue to invest in the best people, the market leading products and create continued efficiencies in each of our processes and then to make sure that we have the world class infrastructure that we need to be the gold standard in this business so that clients will continue to entrust their assets with us.
So how have we been doing for shareholders on this front? We lay out a number of different guidelines that we intend to hit year in year out over business cycles. And the 4 main ones here are on the page for us. The first and foremost is client assets, which is clients voting with their feet. Our target is 7% to 10 percent of our asset base and we have been continuing to grow at that pace over the last 3 years with an 8% compounded annual growth rate and record number of long term asset management inflows per quarter.
We think it's the longest standing track record of anybody in our space. Revenues and pre tax income this year were balanced with a heavy focus on the controls agenda. So a little bit slower pace than what we have laid out to be over business cycle, but still within target on a 3 year average basis And during the year an incredibly strong partnership with each of our regulators around the world to make sure that we are setting the gold standard and we're happy to sacrifice some pre tax income along the way to make sure that that is there for the many, many years ahead. And that is still with all of that delivering an ROE of 23% this past year with a target of 25% plus.
So I want to just take
a few more statistics and go through 2014, which was in a nutshell another record year. All the green circles are records. I would just draw your attention to three numbers. Number 1, client assets now up to $2,400,000,000,000 7 percent CAGR over the past 5 years. Number 2, revenues of $12,000,000,000 8 percent CAGR and net income of 2.2 $1,000,000,000 I will also just draw your eye to the middle of that page where it talks about the banking that we do in Global Wealth Management, that being deposits, loans and mortgages, each of them making us a sizable bank on our own in the private banking space and all of them having double digit compounded annual growth rates.
But I think the best story and the story of leverage and where we're headed for the future is really the bottom. If you look at the bottom, this is where we invest in what we believe is the best talent. The talent we hire, we train, we cultivate and we bring them on the JPMorgan platform to do business in the JPMorgan way. And so not only are each of those growth rates private banking client advisors, institutional salespeople as well as our fund wholesalers, you can look at all those compound annual growth rates and say, well that's great. But you can't tell if they are great.
Each one of those numbers right under it is associated with an increased productivity over that same time period. And I think that those are the numbers that are worth pointing out and thinking about as you think about the leverage for the future. None of this, however, happens unless you have that strong investment performance that I talked about. And our franchise is built off of that. If you just look at things like equities, over franchise is built off of that.
If you just look at things like equities, over the past 5 years, 87% of our mutual fund assets have outperformed the average peers. And it gets notable that the U. S. Equity platform, 98% of what we've done what we've done has outperformed the peer average. Things like multi asset solutions, that is the place where you need all the building blocks to be working in order to then piece it together from an asset allocation standpoint for clients, continues to have tremendous performance.
Our target date 5 star funds have 100% of leading peer averages. And then of course our alternative and absolute return platform being one of the largest in the industry having a very broad set of returns especially in the hedge fund space. And so those products in and of themselves give you a very wide range of things that you can go out to clients with. And that will afford you the ability to have a very sizable sales force. So I've shown you this chart in the past.
I've done it a little more granularly this year. So not only have I shown you each of the different product lines fixed income equities alternatives etcetera, but I've also shown you each of the years and each of the sub segments within Global Wealth Management and Global Investment Management. And what this page tells you forget about all of the individual boxes. What it tells you is you don't need to be firing on all cylinders at all times for this business business to continue to be a high growth business. Just look at the middle of the page 2013.
Everybody knows that the fixed income industry had a tough go, lots of outflows in the industry and we had a bit of it ourselves. But our equity platform ended up being the number one active equity inflows for the year globally. The same is true in 2014. Latin America and even a little bit of Asia after having some strong inflows over the past years prior to that had some net outflows. EMEA had the number we had the number one record in active inflows in EMEA and that also caused us to be number 1 globally in active flows.
And so this is the page that shows you how you can get to $100,000,000,000 in flows per year and not be reliant on any one product area or any one region. So let's see how that stacks up against the competition. We look at this versus our peers. We don't need to focus on who is who here. But you will see this is just like those periodic tables you look at as investors to see whether which segment of the markets is doing well in any one year.
We are not number 1 in any of those years, But we are the top 5 in all of those years. We are in the top 5 in all of those years. And so cumulatively just like a properly diversified portfolio, we are number 1 on a percentage of asset growth across these different competitors who are the publicly traded reported managers out there. The same is true if you look at that on a dollar basis. Same chart, just different statistics on an absolute dollar basis.
Here we are in the top 3 over each of those 5 years. But again, you do not need to be number 1 in all of those years to be number 1 cumulatively. So cumulatively this is the page that this is the stat that Mary Anne had on one of her first pages. That is from leading investment performance leads to leading investment flows and those leading investment flows should hopefully give you very strong financial performance. So let's just take a look at that.
If we go to the combined Asset Management and Chase Wealth Management page, we have in order to have like to like comparisons with our competitors who include their retail wealth management, we have a In a publicly reported space, this makes us number 3 in assets, number 4 in revenues, but very importantly and the line that's most important for shareholders, number 2 in pre tax income. With a 29% margin which is healthy, but there's certainly room to grow. And I think that that's a very important thing to know that as I go through the next couple of pages and take a deep dive, you will see that there is plenty of room to grow across lots of what we do. And that's because of us being part of this great firm. Now I just want to take one second on this next page here for a moment.
Mary Anne's gone through the synergies of the of the firm. We talk about the number of referrals from here to there. And I'm not sure that it ever resonates with any of you. So I'm going to try a different tack here this year. I'm going to give you a real life example of something that just happened in December, okay?
We have a commercial bank client. It's been a client of Doug Petna for a very long period of time. It's had basic lending, some small business lending and basic lending to the company and basic banking for the company. It's had wild success recently. So the founder continues to talk to the commercial banker and says, I don't know whether I should be going public, whether I should stay private longer.
I'm not sure exactly what to do. And that commercial banker immediately brings in Jeremy and Noah. Everybody goes by the first name out on the West Coast, because everybody knows them like stars. Jeremy and Noah join the commercial banking coverage person and they all go visit the client to talk about what? They don't know what.
They don't know if they're going to talk about the personal balance sheet of the client or the company balance sheet of the client. So together they come and explore what are the opportunities to help this client. And they discuss whether if they kept the company private for a little bit longer, he needs liquidity. So how do you get liquidity? Well, you do a second round of finance.
We'll help you. We'll bring the debt capital markets people and Noah calls. Them from New York, they fly out. And then they just try to figure out how much should I sell of my shares in that second round. Well, there are small business initiatives that if you're a private banker, you know this quite well that if you do a if you only sell a certain amount of shares, you can have a different capital gains rate tax and you can maintain much more of the company that way.
So we go and we work on structuring a lot of that from the private banking side in order for them to continue to keep that company going and staying public longer. Now the founder and a couple of the senior executives are getting liquidity. They get a lot of liquidity and it's the first time they've gotten liquidity. So now they want to buy a house. Well guess what?
Mortgages require you to have cash flow. So you go to JP Morgan Morgan and they help you with very sophisticated jumbo market structuring jumbo mortgage structuring where you are able to figure out your balance sheet plus you want to keep it very confidential as to who you are so we structure it in a way that's not transparent to the marketplace. And we are ensuring that we're also helping you think about when you might go public. So we set up a Delaware trust structure for you. We think about graphs for your kids.
We think about all of those very important pre IPO planning structures so that you become a client of the bank for life. And that is just what happens day in and day out. Now let me just tell you, it doesn't happen because we pay Noah to go pitch with Jeremy or we give Jeremy credit to go bring Noah to meeting. It's just the fabric of this firm. We don't pay people commission to do those things.
We pay them to do the right thing for the clients and the right thing for the shareholder. And I just can't express to you that whether you walked into our Paris office and it's happening with Kirill and his team or whether you walked in to Sao Paulo or whether you walked into Austin, Texas, you would see that happen day in and day out. And by the way, I would mention that those clients who are in the very highly sophisticated tech part of Silicon Valley think that Gordon's apps are the best in the banking world. So we use them as tests. So let's just take a little bit of a deeper dive into Investment Management, the two sides of the business.
Global Investment Management for a moment. Global Investment Management, the title says it all. This is where you have to have the foundation of investment capabilities. Not only is this the place where we serve some of the largest pension fund, sovereign wealth funds and central banks of the world, but it is also where we are the largest fastest growing mutual funds manager now today. You can't do that without having great investment talent.
The two numbers that are most important on this page is a network of 600 portfolio managers, but they need to stay to deliver you long term track records. You can't have them come and go. So the retention rate of 96%, 95% is our target and has been 95% since I have been measuring this number is the most important thing that Daniel touched paying our people for top performance. It's never more true than in this area where you need to pay people to make sure that they stay and continue to want to deliver you rents which they have. If you do that well, you can double your assets over the course of the past several years and continue to reinvest across the space, not only in places like technology, but also in the last section, which is really the research component.
We spent $250,000,000 a year just on research in investment management. That helps us to give clients more than just their investment returns, the things that help them with their overall asset allocation thinking. There was a mention on one of Mary Anne's slides, we didn't get into it in much detail, about the Market Insights app. This is an app that we provide to each of the financial advisors, thousands of them around the world where they can use our insights and expertise out and those pages they use with millions of their clients, end clients around the world. It's a very powerful multiplier of getting our research and help to those FAs to be able to help their clients with overall asset allocation.
You can't do that without strong investment performance. I'll just take equities as an example, because this is near and dear to everyone's heart. Active management, does it work? Or this room better hope? It has been a troubled space in the U.
S. Market. And in fact, only 23% of active managers in the U. S. Over the past 1 year or 28% over the past 3 years have outperformed the benchmark.
There's just a lot of people that have either older models or things that don't work. The story is very much the opposite of JPMorgan. 70% over the past 1 year, 81% over the past 3 years. That is why we have been number 1, 2 or 3 in active management flows over the past 3 years and why we've gone from number 8 to number 6 with still a great deal of room to grow. Same story is true on the fixed income side.
If you've heard me for the past several years that I've been up here, I've talked about the fixed income turnaround. That has continued to work. Our market share has gone from 7 to 5 and our flows continue to be in the top 4 for the past several years. These are very important building blocks and where I think the industry is going, which is much more in the solution space. So yes, some clients still come to us for things that need to beat a particular benchmark, but more and more clients come to us for goals based investing, help me with income, help me with retirement, help me with my college savings, all of those sorts of things.
Very few firms have the demonstrated expertise in each of those building block components to be able to say that I'm the right one to then help you put it all together asset allocation over many years. That's embodied in something like what's on the middle of the page there smart retirement. Smart retirement pulls all of those things together. This is our suite of 5 star funds where we generate anywhere from 100 to 200 basis points of excess performance. And just a week and a half ago, we won Morningstar's Allocation Fund Manager of the Year in the U.
S, which we are all incredibly proud of Anne Lester and her team for doing. But I just want to point one little thing out on this page just keep in the back of your mind. You see those little circles up there? These are great funds. We're very proud of them.
They're all quite sizable. They're nowhere near the largest competitor in their space. So there's tremendous room for growth if we continue to live deliver on our investment performance numbers. The institutional market is no different. So the institutional market when people think about this, you think about the second to last set of bars there, the defined benefit segment.
And you say, well, it hasn't been growing that much because this includes market growth. If you can deliver each of those building blocks and be able to put them together from a solutions based standpoint, you will be able to gain market share in each and every one of those segments. So not only have we gained market share within the defined benefit segment, but we have also done it in what we think are the more exciting higher growth areas like the energy and effort we've been putting with Matt Molloy and his team on the insurance side or with the Endowments and Foundations Group where they continue to have really outstanding growth. Now we still have only a 2% market share out of this 20 $8,000,000,000,000 market. And so each 10 basis points worth of additional market share is the potential for an extra $100,000,000 in revenues and we are doing a great job of trying to go after that.
The funds business is a very similar story. So 5 years ago, I asked George Gatch to take what were a bunch of disparate funds businesses regionally around the world and create for the first time at JPMorgan a global funds business. Since he has done that, he's taken our sales force from senior sales force from 188 to 284 and increased productivity. We have become number 1 in flows over the past 2 years. You can see that under the orange bars growing asset 1 120% over those 5 years.
And our market share has gone globally from 1.7% to 2.5%. Again, still a relatively low number that has a lot of room for growth. And again, every 10 basis points here also equals $100,000,000 in potential revenue. And so a very, very impressive story and the teams that we have on the ground do just a fabulous job everywhere around the world with the investment performance that they have to deliver. Now they also both benefit from our leading alternatives platform.
Just to take a minute on this, we are the one of the largest and very importantly one of the most diverse alternative managers around. Just last year, we had 35 different launches across Global Wealth Management and Global Investment Management in this space, everything from pre IPO tech funds run by Larry Unrein and team all the way through to what lots of people are talking about, which is the liquid alts market. And I would just make 3 points on the liquid alts market. Liquid alts in and of itself is challenging to put those two words together. So you need to do it very carefully and very cautiously.
And I would suggest you have 3 necessary requirements to do this well. 1, you need to have been able to pick good hedge fund managers over the years of which we have been doing for 2 decades in our hedge fund fund space. Number 2, you need to be a mutual funds manager to know how to provide liquid things into the marketplace, which we have been doing for many decades. And number 3, it would also be really helpful if you've ever run a hedge fund, of which we do. All three of those things combined to set us up to be one of the leading growers of of the liquid alt space and we're very excited about the future there.
That takes me to the second area that I just want to spend some moments on which is global wealth management. And I just pause for one second on the numbers on the top of this page. For the past 5 years, client assets have grown 60%, revenues have grown 50% and pre tax income has grown 40%. That is while growing our front office headcount by 25% and very importantly 75% internationally. And I want to drop you down to the 3rd section.
The revenue per senior banker is 50% higher than the average of our peers. So we have also increased productivity quite significantly over that time. We do that because we do it for some of the largest clients in the world who make us highly efficient, who make us at the top of our game every day. And we 2 weeks ago just won best global private bank from Euromoney. That may or may not sound impressive to you except for that it is the leading, judge of private banks in the world and it is a first time a U.
S. Domiciled bank has won that award. I would also point out that our CEO, Phil DiOrio won CEO of the Year, which just shows you the depth of talent in this place of people that you probably don't even get to spend a lot of time on. So how do we do that? The private banking model is worth just spending a moment on because it is very different than what you might have come to know and think about in the wealth management space.
So we run the gamut of covering clients here. Everything from the mass affluent through the Chase branches, you've seen them out there in the top up branch out there. If you haven't take a moment at lunch all the way through to the billionaires in the global private banking space. But it's team based. What we do in the private bank is team based.
The team goes out to talk to a client just like I told you the story of Jeremy and Noah and everybody who go out. The team brings the client to the firm, not to the person going to pitch them. The client becomes a client of the firm. And the client needs the firm, because generally they don't just need one thing. They're complicated.
They have a lot of stuff in their life. They need a capital advisor to help them with lending. They need a wealth advisor to help them with structuring. They need an investor to help them with investing and they need a banker to be the quarterback overall. And so what that does is when you look at the bottom left and you look at the revenues by product, we do a lot with these clients and each and every one of them have a high growth component to them.
And altogether, 90 percent of what it is, is relatively annuity based. Very little of it is the traditional brokerage basis that you would think about, which does a very important thing on the bottom right, which is when we have lost a person on a team somewhere along the way, which happens from time to time, we don't have the clients leaving with the person the same way it would in a model where the client has come for the person. They come for the firm. And that's also very important to the client. The client needs to know that a team will be there not just for them, but for their several generations to come.
And that's a very important reason why they continue to give us so many assets. I just want to point out this chart on the upper left hand side of this next page. The private banking space likes to look at the percentage of clients' dollars 10,000,000 is big for the industry. We have 86% of our clients coming from clients who have $10,000,000 with us or more where the industry has anywhere in the 20s, 30s 40s. We're very, very strong competitors.
Within that number 50% of the client assets come from clients who have $100,000,000 or more with us. We are the absolute undisputed leader in the ultra high net worth space, which then takes you over to the right hand side. The right hand side is the market share for the entire private banking space where we're only 4% in the U. S, we're only 1% in Latin America and less than 1% in EMEA. That is where the growth potential is.
The growth potential for every 10 basis points just in the international markets is 150,000,000 dollars Imagine if you just grew it 0.5 percent, you would have an extra $750,000,000 of revenue potential just in Global Wealth Management, just in International Private Banking. So how does this happen? Let me just give you one little more feel of a microcosm of what it feels like to be a client of the private bank. This is just an example of our alternatives platform where we think about doing exclusive customized things for our clients depending on what's happening in the market cycle. And I just want you to focus on a couple of things here.
Number 1, we've been in this space for many, many years with Doug Wirth and Dave Frame running a great franchise that Jimmy Lee has helped us with over the decades introducing us to a lot of these outside managers who have helped our clients to manage money. But with those relationships, when you come out of the crisis of 2,008 and you say, gee, the mortgage market looks really depressed and I really want to get back into it. How do I think about it? You don't know whether you might just be ending up owning those buildings and managing those buildings yourself. You don't know how it's going to end up.
You can't necessarily go to a traditional asset manager. So we went to Jonathan Gray with our relationship with Blackstone asked him to build something very customized for our clients, short tenured, high credit quality and was a great CMBS recovery story for us and the client. When the markets got a little better, we thought that the China story was recovering. How do you do that? Well, the China consumer is a very easy story for people to understand and something that we think is very exciting.
We went to LVMH. We asked to partner with the L Capital Private Partnership Group within LVMH and we created a customized fund to be able to have our clients invest in the consumer in China. If you just look at all those examples, those are 28 examples since the crisis. Half of them were customized for our clients. 2 thirds of them we put our clients put over $500,000,000 in each of them and 80% of them were for JPMorgan Private Bank clients only.
So this is just a smattering of what it feels like to be a private client and not and be able to experience the kind of things we think. It doesn't even include things like Ben Hess who after the last Investor Day said maybe he would like to go on to the buy side. And since July, we have raised him a $1,370,000,000 fund which he is managing quite successfully for our clients. Bravo. So lots of different and interesting things that we offer to our clients and I just thought that that was an important part of bringing that to life.
But also equally important is that in the private client space we manage both sides of the balance sheet. And the lending side is a very, very important component of that. We are not constrained by a loan to deposit ratio within the private bank. We are part of this great global bank, which allows us to be a leader in the lending space and to do it with very, very strong credit focus. Fortress balance sheet is on the mind of every capital advisor and credit officer within the private bank, which is why even with 25% in the mortgage book and 17% CAGR in the loan book, you see the net charge off rates at such a low level with 95% of what we do secured by collateral.
Every 10% that we grow that loan book is an extra $70,000,000,000 worth of revenue potential. I don't want to end without spending a moment on expenses at the asset management level. I bucket them into 3 different sections and they are very different for us. And so just want to make note of each of the 3. Number 1, technology.
So technology continues to grow as a stays as a relative steady percentage of revenues, but grows as a CAGR. Within there, there are 100 of 1,000,000 of dollars of BAU efficiencies we take out every year in order to then reinvest in things like cyber, automation, digital, etcetera. So under the covers, it's hard to see all of that, but it's a very important part of our growth trajectory, which will not change. We will continue to invest as much as we can digest in the technology space. The second is people.
Where and when we can great talent, we will invest in them. We are not constrained to not invest in them, but we won't also just hire for hiring sake. We need to hire the right people who will do JPMorgan business, 1st class business in a 1st class way. That takes a long time to find those people, train them, cultivate them and make sure that they are fit for purpose in front of our clients. And the last one is the control agenda.
We have been clients continue to give us money as stewards of their wealth, they expect us to have the highest gold standard of a controls agenda whether that's within AML KYC space or whether that's everything that we do to protect their assets. And I believe that that is a moat for us for other competitors to be able to compete when you look at this amount of time, energy and effort that we continue to put within this space. And I think it gives us a great competitive advantage. That number will probably peak as we get to the end of 2015. It will not shrink.
It will continue to be a very important investment capability that we are incredibly proud of and our clients require. So if I bring that all together and I want to sum this up within how we reiterate what we do in this business. Again, it starts and stops every morning and every evening with investment performance. That's on the forefront of everything that we do. And because of that, our clients continue to vote with their feet and give us a record amount of assets.
They do that and we have to continue to invest in this business. And when we do all of those things together, this becomes a highly predictable business and a very nice part of the growth story of the broader JPMorgan Chase. Last year, I stood up here and I said in 3 years from now, I will deliver you $15,000,000,000 in revenues, dollars 5,000,000,000 in pretax and $3,000,000,000,000 in client assets. I am reaffirming that in 2 years plus from now I will deliver those numbers to you. This is a great business with great people.
It is a invaluable franchise to the firm and I think has a very, very great chance of capitalizing on a lot of the growth opportunities that I talked about. And with that, I will take
So margins in the business 29%. They're below your long term target. And we've seen a lot of the asset management peers, the pure plays report margins that have grown really substantially especially over the last couple of years viewed as almost peak. Obviously, control expenses are a part of that. Is there anything else going on?
And how can you bridge that gap? And if it's control expenses and that's just because you're in a SIFI, doesn't that put you at a competitive disadvantage?
No. It has nothing to do with the last part of your question. So the 29% margin is not where we want to be. It's not where we think we can be, but we don't manage the business to a margin. That's a byproduct of all the things that we think are important to do for the term investing.
And don't forget it's both a pure play investment manager and a private bank. That was embedded in Maryann's numbers where she talked about best in class margin. She had I think BlackRock and UBS Wealth Management up there as 2 comparable. So the margin itself should naturally fall into the 30% to 35% range. We're very comfortable about getting there relatively soon.
And all of the investments that we're making, we believe are the right ones to set us up for growth. The control agenda is for us. It's for our clients to feel very comfortable with it. They entrust us with their assets. We are stewards of their wealth.
Suitability for the newer clients that come on in the different jurisdictions that we are around the world and to set us up for proper growth not growth at any cost is really part of the focus. So we're very comfortable with where the margin is falling out and I reaffirm those margin targets for you.
Okay. One other one. The fiduciary standards for brokers, it's gotten a lot of attention recently. Is this a particular risk for sales force where the focus is on a proprietary product offering or no?
No. There's new rules that have just been announced yesterday by Washington that talked about whether there would be a fiduciary standard. And right now it's focused just to ERISA like IRA accounts and the like. We don't know what the rules will be. We'll see how it falls out.
But I think if anyone is set up to deal with the fiduciary standards it would be JPMorgan Chase who's been in the business for several centuries. So we're in good shape.
Gerard?
Thank you. Gerard Cassidy, RBC Capital Markets. Mary, can you share with us when you look at the Global Wealth Management business, what percentage of the earnings and revenues come from the high net worth side versus the mass affluent? And then second, what percentage of your mass affluent customers eventually migrate into the high net worth area?
Depends on how they do in life. I think the statistic well, it depends on which range you take, but it's probably 30% to 40% high net worth and the rest ultra high net worth.
That's based on their overall balance sheet, whether
they have it with you
or not. That's based on their overall balance sheet, whether they have it with you or not. We don't count to clients until the amount of assets are with us. And so we segment them in different buckets depending on how much they give us and quite a sizable amount of us of them give us quite a sizable amount of their wealth. And that's why we happen to be the leader in the ultra high net worth space.
The movement is just a movement of the model. So, first there's within private bank. It just depends on how many people you need, how complex your life is, whether you have lending needs, credit needs. And so it doesn't really matter for your wealth. It matters about the complexity of yourself, but also the partnership between Barry and Phil within the Chase Wealth Management platform within Barry's world and how clients move back and forth.
First, there are clients that moved from just being a branch into the Chase Wealth Management space within a branch. And then within there, if they become
more complicated, they can move into the
private bank or back and forth. It's a very important part of the partnership across the firm and something that we spend a lot of time making sure is as seamless as it can be.
Rich?
Larry?
Hi, thanks. Larry Vitale, Moore Capital. I'm looking at the momentum numbers in 2014 and then also on a 5 year basis and specifically revenues relative to both overall client asset flows and long term asset flows. The 5 year numbers look a little bit better than 20 14, but it appears that revenues lag long term flows and 2014 appears to have been particularly challenging in that regard. What's going on with the revenues?
Is it a price issue? Because it's just revenue, it doesn't look investment in technology and things like that that might affect the operating margin. Can you talk about this Mary? Thanks. Sure.
So flows are a leading indicator of what you should have in future. So those are very important for us to watch. And when flows come in, they don't necessarily monetize themselves in the 1st year. So that's very important to note. And the second thing is that revenues and pre tax income, they were just a little bit lighter than what they would have been.
People spent a lot of time focusing on existing clients and helping to remediate anything that would happen to have needed to need extra help as we went through the controls environment this year. So thinking about taking everything that's in your brain in terms of a client history and no longer leaving it there, trying to get it automated in a system so that should anything happen to you the person, we have that history for as long as possible. And it's something that's very important in the private banking space, very important for the sustainability of a business and something that we have happened to manage because we have team based approach, but it will be even better when it's all in automated form. So that's very much what we focused on a lot of last year. And again, we're happy to do all of those things because this isn't about a quarter or a year.
It's about many, many decades of managing these clients' money. I think that's it. Okay. With that, I am going to turn it over to my partner, Dun Petna.
So it's a tough act to follow. I will tell you the client So welcome everybody. Let me add my thanks to all of you for being here today to hear our story. Really appreciate you being here. So thank you very much.
I know most of you are very familiar with the Commercial Banking story. And if you are, it's absolutely terrific franchise. You also know that the drivers of our success have remained exactly the same over time. And for us, it really just it starts with a complete focus on our clients. The business is aligned in segmented to best serve our customers.
We have absolutely terrific bankers and underwriters in our markets. Those bankers are very seasoned. They have over 20 years of experience. And we have real competitive advantages and I'm going to spend some time on that this morning. We our clients rely on our industry leading broad based capabilities that other commercial banks just don't have.
We can have deeper relationships with our customers in the commercial bank. We also take a patient long term through the cycle view and for us it starts with picking only the best clients. And we have a strong credit and control culture in the business. It's very much a common language across the franchise. And lastly, we have a clear sustainable disciplined organic growth strategy in the commercial bank.
In fact, since the time of the Bank One merger, we have tripled our loan portfolio over the last 10 years that maintained excellent and industry leading credit performance over that same period of time. So through all market environments, we've continued to invest. We've added bankers, we've added clients and we've delivered strong earnings and strong returns. So hopefully, you can tell we're incredibly excited, we're incredibly confident about the business prospects. So it's great to be here today to talk about it.
If we look at the business, if you first look at C and I, our C and I business is neatly tucked in between Business Banking in Gordon CCB and the Global Corporate Bank in Daniels in CIB. Middle Market Banking is run by John Simmons. John is here today. So if you have a chance to meet John over lunch, please do. It's great stuff happening in our middle market business.
Middle market targets small, midsize companies, typically revenues between $20,000,000 500,000,000 dollars We are active in 59 of the top 100 MSAs, a tremendous client franchise over 17,000 customers nationally and it's growing. We added close to 6 100 new clients last year. Our Corporate Client Banking business, tremendous franchise, our typical client uses over 12 products and services with us, typically more complicated capital structures, more sophisticated corporate finance requirements, revenues in excess of $500,000,000 And as such, this business is very well connected with our investment bank. Both the middle market and corporate client banking teams are delivered are set up connected with each other. They're very well connected with our partners in the CCB and the CIB.
Both businesses have outstanding client relationships and both businesses have tremendous room and runway to grow. If you look at our commercial real estate businesses, we serve our clients through 3 distinct, but closely coordinated segments. Commercial term lending, remember we're the number 1 multifamily lender with $54,000,000,000 in outstandings. We have over 35,000 long term real estate investor clients. This business focuses on stabilized properties in markets where we really like the underlying fundamentals.
And since acquiring the business from Washington Mutual, we've continued to invest in our credit delivery, our customer experience and the results have been fantastic for us. Our Real Estate Banking team, to remind everybody, focuses on top tier proven developers and sponsors, dollars 23,000,000,000 in credit commitments. We significantly increased our efforts and focus in building and ramping up our exposure coming through and out of the financial crisis. The portfolio has grown 34% since 2,008. Lastly and importantly, Community Development Banking, this business is focused on focuses on specialized lending for affordable housing.
And last year alone in 2014, we originated $1,000,000,000 in construction loans to build over 9,000 units of affordable housing across 90 communities in our markets. So together, our real estate businesses are unique, they're focused and we believe they're designed to help us manage the cyclical risks in the market. We have a very seasoned team and we're only targeting markets and underlying assets where we like the fundamentals. So hopefully, it's clear to you that we have a tremendous client franchise, over 21,000 C and I customers, over 36,000 CRE clients, but perhaps more important than the overall scale and scope of our customer franchise is the quality of our clients. Client selection for us is so important.
We actually train our bankers to pick the best clients, look for the best management teams, look for individuals that are reputable in their local markets, look for teams that share the same risk philosophy with us, they're in targeted or preferred industries with transparent operations. We believe this will lead to not just lower credit risk, but lower reputational and operational risk and as such a defined lower cost to serve, less onboarding, less compliance, less complexity, less monitoring expense. So in some cases, we've made the hard decision to step away from certain clients, certain industries that did not meet our standards or where we really couldn't understand their overall operations. So absolutely no regrets move for us. We think it will make the franchise much simpler and much more valuable over time.
So I ask all of you as you think about our client base, our customer franchise and our performance relative to our peers, please know that we're not trying to be all things to all people. We're taking a very narrow focus of the overall addressable market opportunity. So as part of JPMorgan Chase, we believe that there's no other commercial bank that has such a tremendous client franchise and the ability to deliver the number one investment bank, leading asset management business, comprehensive proprietary payments capabilities and an extensive national branch footprint. Over half of our clients use our branches, 18,000,000 transactions last year. They read our research.
We hedge their rate risk, their commodity risk, their foreign exchange risk. We take them public. We follow them into international markets and we bank them personally. Moreover, for the commercial bank as part of JPMorgan Chase, we gained significant operating efficiency due to overall scale of the entire company. In fact, in 2014, our overhead ratio was 39%.
Mary Anne alluded to that being among the industry's lowest. It is absolutely the case that our broad base of product capabilities and our substantial expense benefits by virtue of being a part of JPMorgan Chase drove this efficiency. But if you put all that aside, the real reason and the real way I see absolute value in our operating model and our overall franchise model is that our clients and our customers tell me that they see it. So literally every day clients are picking us because of our overall value proposition and because of the quality of the people. The other reason clients are choosing us is that with a presence in 118 U.
S. Cities, we bring a local level of autonomy and decision making in a very decentralized way. We have over 1400 bankers across our markets and they're deeply rooted in their communities. A great example of this is in the city of Detroit. For us, within Commercial Bank, we have 60 commercial bankers there.
It goes our presence goes back before the National Bank of Detroit in 1933. We've been doing a lot in the community there as you know. Our market manager is one of our best. He's been with the company for 35 years. Detroit is emblematic of our community focus.
Great clients, great community and real opportunities and Michigan and Detroit in general are one of our best markets. Let's take a step back and look at how the overall businesses performed. So picking up where we left off in 2013, 2014, we continue to see strong underlying business drivers. We added clients, we grew loans, we grew deposits, we grew revenues all and we grew our product revenues all to record highs. All the while, while our credit performance continued to remain very, very strong, last year we had 0 net charge offs.
The combination of all of these things led us to earn about $2,600,000,000 and achieve our 18 very material headwinds both market and regulatory. And the some very material headwinds both market and regulatory. And the reality of those included not just higher capital, higher control expenses, higher liquidity costs, changing deposit economics and investments we've made in infrastructure, but we've also continued to invest in the growth in the future of the franchise. And so while we still believe we have much work to do there, I'm completely confident we've adjusted the business to the new financial architecture and we're actually even stronger for it. Much more disciplined on pricing and margins, even more focused on expenses and operating efficiencies and we very much value every single dollar of capital that we're deploying in the business.
As Mary Anne pointed out in her presentation on deposits, we have tremendous earnings power embedded in deposit franchise. This is enabled by the long term sticky resilient relationships we have with our clients. A typical commercial banking client uses 9 products and services with us. They trust us to collect their receivables, pay their vendors, make their payroll. We have over 1200 Treasury Services sales and support professionals around the country.
Mary Anne did point out our focus on reducing non operated FI deposits. We have our share of those and but we have our plan as Daniel described, we have our version of that plan in place to manage around those and optimize around those. But when all is said and done, we'll have a tremendous deposit gathering business, a tremendous deposit franchise with enormous potential to rising rates. Let's take a deeper look into the loan portfolios, starting with C and I. So last year, we grew our C and I loan portfolio $4,000,000,000 or about 5%, the 5th consecutive year of loan growth in middle market.
Corporate client banking loans were up 8%. Our asset based lending team had a record year. Originations were up 28% or $4,000,000,000 For us, much like in the prior year, very broad based demand for loans. We did see some market share capture in our expansion markets. But overall, we're still not seeing sustained revolver utilization.
Our revolver our average revolver is still about 32% funded. We really don't see that changing in the near term as our clients remain very liquid and they're actually still very dependent on the long term debt markets terming out some of the revolver fundings. There is definitely a lot of pressure on covenants and structure, but we're actively monitoring our new originations and actively avoiding some of the riskier financings that we're seeing in the market. So think small LBOs, which is a significant part of the market activity in C and I right now. There's obviously a lot of pressure on price, but I'll tell you I don't think it's a total race to the bottom.
We've seen spreads compress. That has stabilized certainly in recent quarters. And we believe that our people, our brand, our overall value proposition decommoditized our loan business for us, which is exactly what we're seeing. So we've sustained very low client turnover in spite of our competitors' best efforts to compete with us just on price.
If you look
at our CRE businesses, they continue to be a growth engine for us, very strong performance across all segments. CTL originations last year, so commercial term lending originated $13,000,000,000 for the year, had a record 4th quarter and outstandings increased $5,000,000,000 Our Real Estate Banking team 8th consecutive quarter of loan growth, record $10,000,000,000 of originations. Much of this growth is coming from taking share. So in fact in CTL 60% of the financings were new financings for the business. And as we start 2015, activity levels remain robust.
Our pipelines are full. In fact, commercial term lending had a record January, February feels equally strong. I will say importantly across all of these businesses, we're monitoring originations very carefully and credit terms are continue to be very constructive, very strong, in line and better with our overall portfolio. So we are watching the market carefully. Real estate is always going to be a cyclical industry, but we believe we have a model and a strategy that will prove to be less so
for us over time. As we think about
our overall credit performance, we're very proud to show this slide. We're going to show this slide forever and we've showed it in the past for several years. It's core to the culture of the business. It speaks to the long term discipline in the business and it's a significant driver for our returns and the earnings in the business. So what you will see is a substantial outperformance of our credit portfolio relative to our peer average through the crisis.
Over this period of time, our net charge offs were 62 basis points better than our peer average. And in its darkest days and during the financial crisis in 2,009 at our lowest point, our net charge offs were a little more than 100 basis points and less than half of our peer average. So right now net charge offs in the business have stabilized in the low single digits. As I said last year they were 0 and our overall portfolio remains in terrific shape and we ended the year with very little stress in our book. Even with the credit environment as benign as it is, we continue to monitor the market closely.
We look at our portfolio from all different vantage points, test for accelerating interest rates, Eurozone exposure, government sequestration among other things. As we are a leading bank to the energy sector, I did feel like we should speak to that this morning. So first of all, the firm has a long, long history of lending to the energy sector. I personally ran our Energy Investment Banking business for many years. We've been through a number of cycles.
Remember oil hit low teens in 90 8. In 2008 oil fell hard from about 140 a barrel to the low 30s. And through all that time we've stood by our clients and our portfolio has performed very, very well. We have a very seasoned team. We have a full team of petroleum engineers that are involved very much involved in all of our underwriting.
We have about $6,000,000,000 in our outstandings, 70% of which is to upstream E and P and that is almost all secured borrowing based financing and those loans are very, very well structured and the performance history there has been excellent through all market environments. And we're are going to continue to monitor the portfolio on an ongoing basis on a name by name basis as well. We've also looked at our real estate our related real estate exposures and our exposures to markets that are affected to oil price and feel very confident in our underwriting and the credit outlook across the board. Another part of the market that we're watching very carefully is leverage lending. We're obviously paying close attention to the multi agency guidance on leverage lending.
I will say we don't believe that guidance will alter our operating model in any material way. We're not actively or intentionally trying to originate any non pass credits. But I will say some of the riskiest activity that we are seeing are in small LBOs and private equity driven recaps and specifically the smaller end of the market. So think middle market. So the best way we felt we could exhibit to you our relative level of activity in that sector was just to simply show you the Thomson Reuters lead tables for middle market syndications.
And if you look at the lead table on the bottom right, what you'll see is that Chase was number 1 arranger of non sponsor owned credit for non sponsor owned companies and we were the number 21 arranger for sponsor owned companies. So it's not often you'll come to one of these events and see somebody celebrating being number 21. And I can't even tell you if I can name 21 banks that are ahead of us there, but it's a directional indicator for you of who's in the market participating in these types of financings. And it's clear it should be clear that we're actively avoiding some of the riskier financings in the market. So we turn the page, talk about growth.
For us the strategy of growing the business is really simple. We want to add great clients and we want to deepen those relationships over time. So since beginning our expansion effort in 2,009, we've grown into 20 new high impact markets around the country. We've added a presence in 7 of the top 15 MSAs, 20 of the top 50 MSAs in places like San Francisco, Miami, LA, Nashville, Washington, Boston. And following the Washington Mutual acquisition, we set a $1,000,000,000 revenue target across these markets and we feel like we're well on our way to achieving that.
So all in all, we're targeting 16,000 prospective clients. We continue to add bankers, clients, grow loans, grow deposits. In fact, 45% of our loan growth in the middle market last year came from our expansion markets. And we're continuing to deepen these relationships over As an indicator, if you looked at our vintage 2010 client base, in 2010 those customers were earning about $140,000 per year per client. That same set of clients is earning 3 times that.
So we're winning the business from the best clients. We're hiring the best bankers. We're building brick by brick, market by market. We're going to take our time and be patient. But we think over time this will continue to be a significant revenue driver the company and for the commercial bank.
Beyond expanding into these new geographies, these new markets, we are adding great clients through developing targeted and specialized coverage across several key industry segments. And JPMorgan Chase has been a leader sometimes for centuries covering certain industries in the economy, but the commercial bank is actively investing to build out our specialized coverage models for technology, healthcare, food and agriculture among many others. And over the last 2 years, we've made significant investments and hired significant number of new bankers and product specialists across these industry segments. The fundamentals in these industry segments are powerful and dynamic and they're going to drive incredible value for these clients and for us alongside them. So for instance, in Technology and Life Sciences, there were more there was more venture capital raised last year than since 2007.
In Healthcare, so far this year, half of the companies taken public have been healthcare companies. Our clients are going to need advice. They're going to need capital. They're going to need specialized industry expertise. And we believe as a part of JPMorgan Chase overall, we're best placed and have the broad based capabilities to best serve our clients.
So what's great about the relationships that we're adding in the business is that they're deepening over time. And so what you can see on slide 18 is that we're doing this in 2 ways. It starts by having the best bankers in our markets and it starts by having the most robust product capabilities. Our results have been impressive. Investment Banking, Card Services and International, we've seen strong revenue growth and all three products hit records last year.
And if you look at the bottom half of the slide, the big graph there, what's notable is there's substantial room to deepen these relationships. The graph at the bottom shows our market penetration across a select set of product groups. And remember many of our clients use 15 and over 20 of our products and services. And we're also it's interesting to point out a lot of these products are long term sticky resilient revenues that will augment the returns on capital deployed in our lending business. If you look specifically at commercial card and merchant services where our market penetration or client penetration is in the 20s, we absolutely believe we can double that, for example.
We think we can add over 500 clients in each of those products every year and we have lots of initiatives underway to do that. What really excites me on this page is if you look at the bottom part of the graph on the far right corporate finance, our client penetration is 7%. So for Investment Banking, even at that client penetration rate, it's one of our big success stories and one of our biggest opportunities. So by increasing investment banking coverage and Daniel spoke to this earlier, we've been increasing IB coverage and we've delivered CB only focused resources. We have elevated the standard of dialogue.
We've elevated the quality of our coverage across our client franchise and this has driven top line IB fee revenue growth of 13% per year since 2008. Just last year alone, we grew IV fees 18%. This was amongst the shrinking industry wallet and the commercial bank now provides over 35% of the IB fees North American IB fees for CIB. We have a rapidly growing advisory practice advised on 75 strategic transactions last year and we led over 800 syndicated loans in capital markets financings last year. And as was mentioned, we hit our $2,000,000,000 target that we set in 2010, which means we've tripled our investment banking revenues since the time of the BankOne merger 10 years ago.
So let that wash over everybody. It's a hyper competitive industry. These fees are heavily competed for. And please don't expect us always work in increments of $1,000,000,000 but we're going to we've decided to increase our target yet again to $3,000,000,000 And even with all the progress we've made, we think there's much more work we can do. We have lots of initiatives to get there.
It's all about expanded coverage, focused coverage. Another significant opportunity for us is in commercial real estate just to continue to pick great assets and finance great quality properties. We expect the underlying fundamentals to remain strong as you see continued recovery in the labor markets continued strengthening in the U. S. Economy.
We also think the overall market is going to present us with tremendous opportunity $1,000,000,000,000 of real estate maturities over the next 3 years. And our clients value our speed to respond. They value the fact that we're going to portfolio their loan and we're going to hold their loan through the life of their loan and they appreciate our full set of capabilities and that's why we've been winning business. So right now in real estate, we like where the transactions the transaction terms are in the market. We love the overall market fundamentals and we have room to add to our portfolio.
So as we think about our business model overall and our ability to continue to generate strong returns, our ability to continue to compete even with higher capital, I will tell you that I very much love the hand we've been dealt. And if you ask why, it all comes down to our platform and our model. Starting with our revenue prospects, we have deeper relationships. Hopefully, that's clear. We have more products, more services.
We simply have more ways to do things for our clients. We also have a tremendous deposit gathering franchise that drives real value and real earnings and it will sell even more when rates correct and normalize over time. In terms of our expense base, we've always had tremendous expense discipline. It's part of our DNA. I've said before on this stage that it's like sit ups.
Don't wake up one day and do 10,000 and think we're good for the next 2 years. We do them every single day. It's part of our franchise discipline. And at our current overhead ratio, we're 600 basis points better than our peer average. In terms of credit discipline, I've spoken to that as well, significantly lower credit costs relative to our peers.
So if you just simply run down that P and L, it be clear how we have the capacity to absorb incremental capital, continue to invest and to continue to deliver strong earnings and strong returns in the business. What does this mean then overall for our financial targets going forward? We've continued to make great progress, as I mentioned, on our growth initiatives and that momentum is carrying into 2015. Our market expansion, we're standing by our $1,000,000,000 revenue target. We've grown our expansion market revenues 57% on a compounded basis since 2010.
But I want to underscore that we're going to be very patient. We're going to be disciplined. There's no time limit set on this. We're not going to be dictated by the market. We're going to do things on our terms.
But over time, we believe that's a very significant revenue driver for us. Investment Banking, as I discussed, we're putting out a new $1,000,000,000 target. It's big, but doable, just continuing the hard work and good coverage. International, we have much work to do to get to our 500 $1,000,000 target. Year over year growth for us last year was 15%.
The macro drivers behind this remain very, very powerful. Our clients are telling us that they're moving overseas in search of revenue opportunities. They're moving overseas following their customers. Half of our middle market clients think there'll be at least a 20% of their revenues will be international over the next 5 years. And we believe we're the best placed commercial bank to serve those clients.
In terms of expenses, we're standing by our overhead ratio target of 35%. It's going to be challenged near term as the revenue environment is challenging as the interest rate environment is where it is, we have increased regulatory and control expenses. But it's the right long term cost structure for the business. We're confident we can be there through the cycle. In terms of credit, credit fundamentals are as benign as we've all seen in some time.
You can't expect them to stay this way forever. But we remain incredibly confident in our credit model and you should expect us to have net charge offs of less than 50 basis points through the cycle. They were significantly below that through the last cycle. Hopefully, we don't ever see a cycle that looks like that again. And then finally, we're standing by our ROE target of 18% for the business.
And I'll leave you to go to the last page before I take Q and A, just to wrap up, I'll leave you why we all come to work every day. Our goal is to build the best commercial bank by helping our customers succeed, making a positive difference to our communities, starts with having a fortress control and compliance framework. You've heard that a lot this morning. We're obviously going to be relentless around optimizing returns, expense discipline, operating efficiency, margin discipline, pricing discipline. We want to be the easiest bank to do business with.
In terms of our people, 100% of our success depends on our people we want the best. That's going to continue for us. And we are always here to help our clients succeed, be there with ideas, with capital, advice, stand by them through tough times. We believe if we do all of these things well, we'll deliver the same strong performance we have for all of you over the last several years. So that's the Commercial Banking story.
I'd be delighted to take any questions if you have them.
Mike?
The CEO of U. S. Bancorp, Richard Davis says that he can price loans 30 to 35 basis points cheaper than the largest banks due to the capital difference. And I heard what you said that JPMorgan has good relationships. We sell a lot of products.
We have a decommoditized offering. I think using U. S. Bancorp as one of maybe several examples, I think other banks might be able to say that too. So how do you compete when others say they have a pricing advantage?
Just had a full page on that. It's that's the simple math. You have to look at loan returns versus line of business returns. So he's right relative to the capital that they have compared to us. It all comes down to our expense base, our credit costs and the broad range of products and capabilities that we have.
We have very clear loan pricing tools for our clients for our bankers. When one of our bankers prices a loan, it's fully capitalized at 10.5% capital. He knows exactly what the return is. He knows exactly what the incremental revenue and earnings he needs to achieve our return targets, our SBA targets. And he also knows what the value of those deposits in that relationship are worth on a long term through the cycle way.
So we've operationalized that. You can see that in our returns. Those returns have been sustained over time and we're putting our market down and reinforcing that target going forward. So he is right explicitly at the loan level. I would argue the difference emerges as you look at the overall value and the ways we can help our clients and augment our returns.
Guy?
Thanks. Guy Moskhaus Autonomous Research. The way you described the CB, CIB partnership, it sounds like there's actually a very significant organizational infrastructure in terms of dedicated personnel from with capital markets and advisory expertise. Is that right? Could you help us understand how you differentiate yourself from Wells,
DofA? Really excited to answer that. And it really comes down to client coverage. If you look at the graph I showed, we've increased client coverage we added coverage on 1,000 clients over that period of time. We leveraged Daniel's infrastructure completely.
We do have a dedicated advisory team for the commercial bank. We do have some mid cap bankers scattered across the country. But day in and day out a lot of that core activity is happening amongst his industry bankers. And we're running all of that through his capital markets team, his debt capital markets teams, loan syndication teams. So it's pure operating leverage for both of us really.
Daniel has no loans and no capital against those clients. And I don't really have the full infrastructure that Daniel brings to bear globally in Investment Banking. And it's so great to have the JP Morgan business card and the market presence and the market dominance we have across a lot of these key products, a lot of these key industries. This is all about just getting that business card in front of more and more of our clients. The best thing it does, but aside all the fees, the best thing it does for me is a differentiated coverage.
There's no other regional community or even national bank that can have that kind of intellectual the kind of trusted advisor, industry content, full capital structure discussion with a commercial banking client and we're doing that day in and day out. And you can sort of see it in the revenue opportunity that's presented itself.
Last question, Gerald.
Thank you. Could you share with us your outlook for you weren't too concerned about the energy portfolio, which is great. What kind of energy outlook would really give you some concern aside from oil going to $20 a barrel or something like that, but what would make you get a little more nervous about that portfolio?
I mean, we've stress test the portfolio. We look at sustained low oil and gas prices. Remember gas has been at a low level for some time. So there's a lot of offsetting mitigants. There are very few pure oil producers.
A lot of these companies have diversified in natural gas and oil. Many of the companies are hedged. As I mentioned, a large part of our exposures to the upstream segment, these are very well secured borrowing base financings. The borrowing bases are reset every months up based off a forward price deck that reflects the current reality in prices. So you're sort of ratcheting your exposure down over time as commodity prices are changing in the market.
And those loans have performed exceptionally well over the last several decades. So I think think the service I think the service industry would have to contract dramatically. But what this industry has proven is it's highly fragmented. There's always ways multiple ways out. I think it would promote a tremendous amount of consolidation.
The other factor in support of the banks in the energy sector and you've all read about the enormous amount of high yield credit that's been issued in energy. There's a lot of junior capital sitting underneath the banks right now, 1,000,000,000 and 1,000,000,000 of dollars of junior capital. So we're well secured, well secured, well structured loans, lots of junior capital and a formula around a lot of our lending is really helps us lets us reset our exposure over time as commodity prices reach out. Guys, thank you very much. Enjoy lunch.
So we're going to ask actually go directly to lunch at 12 15. You have an e mail that has 2 parts. The first one is which room and which table number you're at. The second part is what we call a Chase digital experience. So you will have the ability to experience our Automated Rewards platform and specialized offers that we can do that are relevant to you and to where you are.
So in this case, it's going to be 5,000 points that you can actually convert to a cup of coffee in case you are not caffeinated enough here. And so you can use that at Starbucks. It will work in the 1st floor in this building later today. So 12:15 until 1:15 lunch and then back here. Thanks.
Excuse me, ladies
Everybody, we're
All right, everyone. Welcome back. Good afternoon. If I could just ask us to close the doors at the back there. Thank you so much.
Could we close the door up at the top there too? John, come on in. Grab a seat. I get to ask you a question, John. Well, welcome, everyone.
Gordon Smith, CEO of Consumer and Community Banking. We were fortunate enough this year to secure the penultimate slot of the day, the after lunch slot. I had to battle with all of my teammates to make sure that we were able to secure this prime speaking location. So those of you who stayed, I think it looks like most of you, thank you very much and we'll go through the consumer businesses. We're going to do them in the same way that we did them actually over the last number of years.
Kevin Waters will join me, talk about the mortgage company, Barry Summers, retail banking, and Eileen Serra, the credit card company. And what we'll do is we'll just kind of rotate up here at the podium, then we'll all come up and do questions. So if you can kind of hunker down, grab yourself a beverage and we're going to go on for about the next hour and 20 minutes roughly and then we'll hand over to Jamie for his closing. All right. So first of all, let's start with the strategy.
We've tried to lay out the strategy for the businesses within CCV as under kind of 6 key areas. 1, of course, is to continue to really focus intently on the customer experience. Our customers have choices. We want that choice to be with Chase. Reduce expenses, I laid out some expense targets for you when we first put when Jamie asked us to put together the group of businesses under CCB in January of 2013.
So we'll update on where we are with those expense initiatives. To continue to simplify the business and I reiterate at this point that our simplification efforts as they relate to revenue are largely complete. So this will stay as a key point of our strategy for the next number of years as we continue to simplify as we continue to simplify processes, drive down our costs and improve quality. But largely anything that affects revenue is, as I say, largely complete. To maintain a strong control environment, which we've been doing over the last number of years, making I think some significant progress, a lot more work to do and now we're moving into a cycle of investment in automation for all of those controls.
You'll see what we're doing with the digital strategy and I'll give you some examples of that. But I think it's significant opportunity for all of our businesses to improve customer engagement, improve the customer experience and drive down costs through the plans that we have in place for digital. And Eileen will talk a little bit about kind of payments information, innovation. So I think it's and I won't go through the entire list, but if you just look through this list, I think it's an incredibly powerful franchise that we've been able to amass under the Chase brand within Consumer and Community Banking. And if you just run your eyes through them, we're in we have a relationship with almost half of all U.
S. Households. We're an incredibly strong player in the payments industry, number 1 credit, number 1 debit card issuer, a strong, strong player in the national lending space. If we look at the retail bank, our retail branches are in the highest growth most affluent segments of the U. S.
So an incredibly strong franchise that would just be almost impossible to replicate I think in today's world. So let's take a moment or 2 and talk a little bit about kind of the performance targets and how we've done since this time last year. For Consumer and Business Banking, we're going to raise the return on equity targets to 35. We gave guidance last year to 30. We came in at 31 in 2014.
We're raising that basically driven on 2 factors. 1 is continuing to drive costs out of the business and the second is we would expect to see some rates over time. Just to remind you for this page, when we talked about when Marianne talked about actually medium term guidance, that's kind 15 through 17. And then the target on the far right is our longer term targets for the business. In terms of mortgage banking, Kevin will talk in much more detail about mortgage in a moment or 2.
Charge offs at 40 one basis points not yet at our target of 0.15. That was 0.25 if you look at the small call out box on the far right hand side. We just see absolutely terrific quality in terms of the book really strong performance from a loss perspective on the mortgage company. Return on equity is at 9%, clearly not where we want to be. We think we can get over time with a great deal more work to be done, we can get to 15%.
And so I would just say that if you look at the mortgage business, these businesses take time when they have issues. It's a tough industry and we have a great deal of work to do. But we'll get it done when we'll build a really strong mortgage business. If we go back to kind of 2,008, 2009, we had really difficult challenges in the mortgage business. Jamie will remind me on occasion that that business lost about $2,500,000,000 as it went through the cycle.
We repositioned it, took it up market, launched new products and got it positioned for a successful long term future. We're doing exactly the same thing with the mortgage company today. Card services revenue margin was at 12%, the low end of our range. Net charge offs this year at 2.75% through the medium term guidance at 3%, but expect 2015 to be a little less than 250 basis points of losses. So continuing to see very, very strong performance there.
The auto finance business continues to perform well. A tough environment there in terms of pricing. We've remained disciplined and I think continue to build a good book there. I'll talk a little bit more about auto in a moment or 2. Marianne also mentioned the overhead ratio 2014.
We're setting ourselves a new target again based on the expense initiatives that we put in place and expectations of rates moving upwards. But we set the target of 50 percent. And to reiterate the guidance that I gave you actually in February of 20 13 that will reduce expenses by $2,000,000,000 from the close from the full year 2014 through the exit of 2016. So the entry into 2017 which is consistent again with the numbers Marianne had for you. So as we've been doing these things, we've been I think aggressively growing the businesses.
So on the left hand side of the chart, for those of you who are following on the Internet, I'm on page 5. So Consumer and Community Banking average deposits up 8% compound annual growth rate, 2010 through 2014. And on the right hand side of the page a little bit of an inflection year for us last year as we began to see some slight growth in the overall lending portfolio. So core lending as you see in the call out box up 11%, the total up 1% as we began to see the impact of the runoff book of business having less of an effect on the overall portfolio. So I think an important inflection point there.
In terms of turning to Page 6, where we were on expenses. So starting at the top left hand quadrant, we said expense reductions of £1,800,000,000 in 2014. We actually achieved $2,200,000,000 We said we would reduce headcount by around 8,000. We were just over 11.5 because of the challenges that we saw on the revenue side of that business. But the most important thing is kind of the overall guidance that we gave at the top of the page.
And since 2012, we've reduced expenses by about 3,200,000,000 dollars And if you look at the headcount since we formulated CCV in the Q1 in January of 2013, we are down almost 30,000 people, so pretty how are we going after the expense savings? And Daniel made the point, how are we going after the expense savings and Daniel made the point earlier today that each of these initiatives have kind of people assigned to them, projects, follow-up and discipline. So we've arrayed our efforts around kind of 6 major areas. The firstly and if you think about branch banking, roughly 70 percent of the expense of the branch is in the people. And so we have looked at kind of how we're going to deal with the staffing model, what's the most efficient and effective way to start a branch and of course deliver the service that customers need?
Secondly, how do we drive automation? So if you didn't have a chance to stop in at the we call it the pop up branch because it's not there all the time. Pretty ingenious, I think you'd agree. And so the pop up branch you'll see some of the automation, some of the use of cash recyclers and so on and so forth. Digital servicing really is accelerating quickly.
I'm going to show you some numbers on that in a moment or 2. Control and process automation, so how do we just kind of relentlessly look at every process that we have across the business? How do we figure out how to take the handoffs out and so on and so forth. I'll show you in a moment or 2 the real estate strategy that we have ex branch. Barry will give some guidance on branch size in his section.
And across all of the vendors that serve us, we are consolidating those vendor relationships that we have fewer, much more strategic, larger relationships. So those I would think of as kind of like 6, if you like, major strategic themes that we have had in place now for the last roughly 18 months. They're building momentum. We're self funding all of the investments that are required to make these things happen. But we're also just focusing very much on the day to day, the discipline I think of as running the company.
So over the course of the last two years, travel and entertainment expense is down about 30%. We have we even go through and we look at every single phone line and we look at who's actually using the phone, what type of volume is there. And so we've taken out about 20,000 phone lines that were being billed for that weren't being fully used. As part of the T and E, we put for people who travel frequently, we put telepresence screens, video conferencing screens on their desktop and then we measure as to whether they're being used or not. If they don't get used, then we take them out.
But we use that to drive down by the way, hotel nights are down 20 I'll get to you in a minute. We've taken about 25% fewer hotel nights for CCB employees. And we do have actually one employee who does travel frequently, does stay at lots of hotel nights and doesn't use his telepresence system very much. Let's just in the interest of confidentiality call him employee number 1. But we're watching him.
And while we're talking about him actually, black car usage since January of 2013 is down 40%. So I think you could argue that I have now become the black car patrol, although I am somewhat skeptical that perhaps Jamie has just given me that task on Park Avenue during the winter months that I think we'll expect to see him back in the spring. But anyway, all humorous side, I mean, I think the key behind all of the expense targets is just meticulously going through any waste, driving it out of a company of this size and then having the major strategic themes of focus, if that's the way I would think about it, kind of non branch based real estate, to non branch based real estate, as we entered 13, we're in about 3 25 facilities. We'll drop that down to about 200 facilities plus or minus by the end of 2016. And that's roughly about 6,000,000 square feet that Matt Zanes and his team are helping us to drive that cost out.
It'll also just help us to have better efficiency with fewer buildings to manage and I think it will improve communication and effectiveness more broadly. So I'm turning to Page 9 and looking at some of the key unit costs. What we've also done as part of the expense initiative is to take kind of key unit cost data and then drive targets down for people whether they're running call centers or whether they're running components of the branch infrastructure. And you'll see you can read them, but the kind of key unit costs each have targets. And as we exit 2016, these are the savings that we'd expect to see in terms of percentage reductions in kind of absolute costs in terms of those key unit costs.
Turning to Page 10 on the simplification. We've substantially reduced the number of partners that we had in the credit card companies so that we could focus on the large strategically important and areas that we can invest and partnerships that we can invest heavily in. We've cut the number of mortgage products that we have almost in half, almost in half, almost cut in half. And those products that we still have will represent about 98% of customer demand. So think about that 50% of the products that we had historically meeting about 2% to 3% of customer demand.
And when it gets to Zanes runs technology for the company, gets to technology folks, they have to build the all these just very specific examples of how you drive So all these just very specific examples of how you drive cost and you see an example from business banking on deposit products on the far right hand side of the page. Turning to Page 11, obviously every year over the last number of years we've talked extensively about the control agenda. We obviously have more work to do in that regard, but I think we have some really significant momentum. We have dedicated resources, organization structures in place to drive all the work that needed to get done, whether it was on consent orders or on business as usual activities. We've taken a whole set of steps and you can see some of them there.
These are just by way of example to kind of de risk the business. There's nothing wrong with these business segments. Other people may choose to be in them. As we looked at them, we thought that they were very expensive for us to be able to manage them. They were going to be large drains on our infrastructure.
And so these are the segments that we decided to exit very small in terms of the overall magnitude of our customer base, but took a significant amount of work particularly for Barry Summers and his team to manage. And I talked a little about automating and simplification. And it should all lead to the right hand side of the page with a simpler product set with lower operating costs that we can see today and constantly to reinforce a superior customer experience. So leading to that on Page 12, we've tried to stay intently focused despite all of the other change going through the business on the customer. And you can see that we've been making steady progress across every business.
And it isn't just on Net Promoter Score. Net Promoter Score is, for those of you who aren't familiar with it, is would you recommend to a friend, but also in areas like J. D. Power, and you'll see some of that in the CEO presentations as they come up. As I move to the right of the page, if you look at the key businesses, all showing between 1014 substantial improvements in attrition.
And I know from your models that's a hard thing to put in. But to give you a sense of it, if we had had to acquire the additional customers that we saved from these improved attrition rates, it's about $250,000,000 So $250,000,000 we're able to put to work on other things or deliver as expense savings. And as we look at the quality of the relationships that we're building on page 13. If we took the check start on the left hand side, new checking accounts in 2010 compared to the 20 14 vintage of checking accounts, almost twice the dollars in those checking accounts. A much higher overall quality of new customer acquisition.
And on the credit card company, we use a proprietary scoring model to size wallet, about a 6 percentage point improvement in wallet size. We also continue on, as I say on page 14, in 20 fully a third of those cards from the retail branch network. And if you look at Chase Paymentech, and I'll come back to this business kind of in a moment or 2, 70% of our new customer acquisitions come either from the branch or from Doug Pettenau's sales force in the commercial bank or from Daniel's team in Treasury Services. So very powerful franchise there. If we turn to page 15 and we're going to look at digital logins on the left hand side of the page, this really is major change that's permeating all of the businesses.
So number of logins up 26% and this is at the household level, okay? So this is at the household level. If we look at the Tele
transactions
are down 3%. And tele transactions are down 3% and to the left hand side bar chart customers are self serving. So if you look at the middle chart, when we first launched Ultimate Rewards, actually we had a pretty good split between kind of online and phone redemptions for that business of roughly seventythirty. But you can see what's happened from 2010 is that the 30%
of customers who called
us to redeem has now
actually roughly been cut in side of the page, just to give you a little bit of a sense of kind of magnitude on unit cost, it's about $0.65 for a teller to handle a deposit, about $0.08 for us to do it through an ATM and it's actually a little less than $0.03 for us to do it via quick deposit. So these trends are giving us, I think, enormous leverage as we focus on both the expense and on the customer experience side. But if I think about bringing the digital strategy together, there's really 4 pillars if you like. Improve the customer experience, that's going to be a foundation stone of everything that we do. Simplify originations of new customers, so as we bring new customers in to the franchise, can we do that onboarding in an online and digital way?
A great deal of work underway in that as we speak. Develop simple, safe and secure payment alternatives. Eileen will talk a little bit about more about that in a second. And of course, help drive down the structure. So I'm turning to page 17 for those of you following online.
Merchant processing volumes, Chase Paymentech, we go back to 2010 at just shy of $470,000,000,000 worth of merchant processing volume that's up 80% as we exit 2014, up 80%. And if you think a little bit about we had a joint venture with First Data Corp. In 2,007 and we had the opportunity to separate. We owned 51% of that enterprise. They owned 49.
And so we took the opportunity to split that business apart, leave First Data with their component and to effectively go our own way. And we're now as you see in the call out box actually 18% larger than the combined business was back in 2007. And through that period, we've invested heavily to get down to one platform. And Marianne had these statistics in terms of our growth relative to the industry that you see kind of on the right hand side of the page. I said I would touch on auto finance a little bit on page 18.
So end of period loans up about 13%. Loan to values, our loan to values are a little bit better, a little stronger than the industry. So we're trying to stay very disciplined there. Bottom left hand side of the chart, you'll see we are significantly stronger in terms of higher FICO than the industry. You will have read a lot.
The regulators have focused and are focusing quite heavily on subprime auto lending. We go through our business reviews that we perform every month, we've seen in late Q4 of 2012 some deterioration in the roll rates of our subprime auto business. So we started to pull back on lending to that segment, started to do that in the Q1 of 2013. Since the Q1 of 2013, we've lost about 100 basis points of share in the subprime segment. And that's been picked up by competitors, 1 large European bank and they have suffered some consequences as a result of growing so rapidly in sub prime.
So I use this as an example of which we'll look constantly at where we see the returns, what trends we're seeing. And if we think it's appropriate, we're just going to dial back in certain segments for certain periods of time. And it doesn't mean that at some point in the future, we may not go back into this in a little bit more deep with a little bit more energy, but we'll pull back where we see risk. So on my last slide, before I hand over to Barry, I think that as we look at the metrics for the business and you can run down the right hand margin, just very strong growth. So we've been repositioning the business for the future.
We've been driving out expenses. We've been focusing on the regulatory environment and still growing some very strong metrics. Deposits up 8%, compliant client investments up 13%, deposits in business banking up 12%. And just to point out in mortgage, 57% improvement in net charge offs. Again, you'll hear more on that from Kevin.
And just a very tough environment in terms of originations kind of almost cut in half. Card service volumes growth still growing at 11%, terrific credit quality and the merchant processing business growing at 13%. So I think it's a page that just shows really strong momentum across the key business drivers. So with that, I'm going to hand over to Barry and then I'll come back at the end and we'll do Q and A. Barry?
Sure. Thank you very much. I won't go off with a clicker.
Okay. Good afternoon everybody. Thank you Gordon. My name is Barry Summers. I'm the CEO of Consumer Banking.
Last year we talked to you about a balanced approach.
We were going to continue to
invest in the business, acquire relationships and deepen relationships with our customers. At the same time, we see our customers changing, right? A rapid adoption of both mobile and digital capabilities are going to give us the opportunity to run a more efficient business and drive down expenses. So very pleased with the results of both of those last year. Here are some of the numbers, right?
Continue to grow households, 3% growth last year. Those households are giving us more of their money, both deposits and investments and we've been able to achieve those results with by being more efficient, less headcount in the branches. Due to this, in a very challenging rate environment, we saw revenue in the consumer bank increase by 5% and net income increased by 70%, so solid results. So it all starts here with the customer. Without the customers, we don't have a business and we're reminded that every single day.
The chart on the left Mary Anne showed it, but we like it so much I wanted to show it twice. It just shows that we've had a transformational change in how we run our business. And you could see that that big, big blue line is Chase. That's exactly what you want to see with this line, just continuing momentum over the last 4 years. We're being recognized by
We're being recognized by 3rd parties
and being the best in class as far as large banks, but
we're actually being recognized by being just one of the best in the industry regardless of size. So we're incredibly proud of the results around the customer experience. I think more importantly is not the results, but how we actually did this. Listening post 750,000 surveys, focus groups, listening to customers, listening to employees, The result of all that effort was 1800 changes to our systems, 1800 changes across the board. And so the process is, as I think someone said, I think Doug said, this is not this was not a project.
It's now in the fabric. It's in the DNA of this culture. So really pleased with the results. The chart on the right actually highlights what happens when you deliver a great experience. Gordon showed this.
Attrition in the consumer bank at all time lows down 4 points. And while that number 4 may seem small, it has a massive impact. Four points in the consumer bank is equivalent to 1,000,000 customers and a little over $15,000,000,000 in deposits. So, the customers are sticking around longer. And as you can see, we've done an exceptional job of growing balances.
On the deposit side, for the last 4 years on the D and I side, we raised almost $200,000,000,000 2.5 times the industry rate. And for the last 3 years, no other large bank has grown deposits faster than Chase. The way you're able to deliver those results, you got to do it 2 ways. 1, you have to be really good at acquisition added over 2,000,000 households in the last 4 years. The households that are coming in actually look a little different than they have in the past.
Balances are about 2 times larger. And I also remind you that a significant part of the deposits that we're bringing in over the last couple of years have come from the branches that we've built over the last 5 or 6 years. This is important because about 30% of our branches are still in their high growth phase. So we expect these balances to continue. I think equally important is how we did not bring in these deposits, just very good price discipline.
As you can see, our core deposit rate is 8 basis points and that's down from 15 basis points last year. The other way you're able to get this kind of growth is you have to be really good at deepening relationships with your customers and that's exactly what's happened. Most of the money that we have brought in to Chase has come from our existing customers. On this journey to become their primary bank, we're turning accounts into relationships. So core relationships means stable balances.
So I want to talk about the core relationships for a second because from my perspective it starts here, is the investment side. We've last year, we talked to you about taking the Chase Wealth Management business, putting it inside the consumer bank because our customers didn't look at deposits and investments differently and we shouldn't. And that's really created really interesting results. We've built a world class investment platform and similar to the deposit growth, the way you get this kind of growth is acquisition and 60% of the money that we're seeing come in net new money in investments are coming from people who had never invested with us before. It's a really good sign.
And when they do invest with us for the first time, a couple of things happen. 1, they give us more money, not just investments, but they decide to consolidate their balance, make us their primary bank. So, we see a lift in the total balances per customer. And not surprising, they stick around longer. More important though is how we're doing this.
Mary talked about advisors sitting down with customers, talking about a plan, retirement, college planning. That's exactly percent of putting plans together. So, what you see is about 70% of all investment flows are not going into transaction based accounts. They're actually going to advisory accounts. And the chart on the right actually shows this journey that we've been on, 30 point increase as far as managed fee revenue inside the consumer bank, so stable balances.
A huge driver of this growth, huge is Chase Private Client. We've talked to you about this for years. About three and a half years ago, it was actually a pilot in 16 branches and we sit here today, it's actually the core driver of the revenue growth inside the consumer bank. From my perspective, no better example of the power of JPMorgan Chase and Chase Private Client. I mean, just incredible partnership with Mary and her team on really us developing an incredible platform for our customers.
And look what's happening. We have it in over 2,500 of our branches, which covers about 80% of the opportunity with affluent customers. And the real number that you should focus on is not the number of branches we're in, but the chart in the right. What happens to customers when they become part of Chase Private Client? And look at that growth, over $43,000,000,000 of incremental assets from existing customers.
So, that's what happens when you listen to customers and put them in the right type of product. It's not just investments. Change Private Clients, the full value proposition, we manage both sides of the balance sheet. Eileen and her team have done an incredible job of making sure we get the right cards into our customers' hands. And Kevin is going to come up here and share just incredible success stories of when you take when you step back and we develop a different mortgage proposition for affluent customers, different underwriting, different experience and it's achieving great results.
As far as the opportunity, there's a huge opportunity that remains here. For the customers that are in Chase Private Client, we have about 35% of their assets. For the ones that aren't, we have less than 5%. So, a massive opportunity ahead of us with Chase Private Client. Okay.
So the results have been strong. I want to shift gears a little bit and just talk to you about our customers. They're changing. They are taking routine transactions that they used to do in branches and they're moving that towards digital and mobile. And that's a good thing.
They're also using our branches and they're using our branches for advice, right? Take a look at some of these numbers and Gordon had some of these up there. It's just amazing what we're seeing. Mobile is becoming a very, very important channel, right? We're seeing app users up.
But what's really important to focus on mobile is we've seen this over the last couple of years but they were using their mobile phone really to check balances. What you should really focus on is what people are doing with their mobile device. We've developed a world class app deposits of 25 percent, dollars 45,000,000 transaction that's over 10% of our total deposits at Chase now happen on a mobile phone. It's not just deposits, it's payments through QuickPay and pay to person to person as well as paying your bills. So, just dramatic numbers on mobile.
When customers use digital technology, it's a good thing for two reasons. 1, it helps you with their relationship, right? The chart on the left is really important. When customers engage digitally, right, they're much more likely for you to come their primary bank. And it's really important, right?
We looked at a control group from branch only, digital only. The key is to actually engaging customers in both channels and that's exactly what we're doing. When you do that, they give you more balances and nutrition rates go down materially, right? The chart on the right, is an interesting chart. It's so powerful what we've seen.
This migration from people who used to come into branches and do transactions with tellers in 2007, the shift that we've seen through last year. And as you can see, ATM deposits way up and mobile deposits becoming a significant part. And this is real cost. We were able to lower our total cost by about 50% since 2007 on deposits alone. So, it's really good for our customers and it's driving efficiencies.
So, we're going to do a lot more. We're going to continue to innovate. That means Gordon pointed out our pop up branch outside. I really appreciate if you go by there. It's just a perfect example of some of the stuff we're working on.
ATMs used to be literally cash dispensers. Now they're actually fully functional banking machines. We'll put more of these machines in our branches. But the most important thing is these machines will be able to do a lot more. Today, they do about 50% of what a teller can do.
We're on a way to making that number 90%, full functionality on our ATM machines, which is really important. And not just ATM, obviously, I talked to you about our customers using our mobile functionality, continued investment in this area. We just raised the quick deposit limits and Chase Private Client saw an diligently focused on making changes around mobile. One of the most exciting things in the pop up branch is you could use your mobile phone now as a way to authenticate yourself at an ATM. So make sure you try that on your way out.
We just think that there's endless opportunities with the mobile phone. Our goal is come into the branch, get that mobile app, be fully digital when you leave there, view your statements, print your statements, do transactions on a mobile phone, not just limited to deposits, QuickPay is a really important part. I mean, on the payment side, the peer to peer payments are a very important part of the banking platform. We're really excited about some of the changes we're making in our QuickPay product that our customers are looking for. So, as customers change their behavior, it's natural that our branch operating model is going to change.
And that's exactly what's happened. Branches will look different. They'll operate different. In certain areas, you'll see less people. And in certain areas, you'll see less branches.
So, I want to talk about all three. First, the lovely picture of the branch on the right. I remind people, the branch is the epicenter of the relationship. It's an incredibly important part of the value proposition for our customers. 90% of our customers visit branches, 70% of those customers actually come 4 times a quarter.
But really what's really more important is what happens in there. You're right, transactions are migrating from the branches to machines, but advice is not. And so what you're seeing is, you walk into a branch, there'll be less tellers and there'll be multifunctional machines that can help you with a routine transaction in private offices where you can get the advice of a financial advisor, a business banker, a mortgage specialist, credit specialist across the board. So they're looking different, they're changing different. Branches are incredibly important not only for the consumer bank.
I thought Doug talked a little bit about the visits that his customers make. I think more important than the visits, Doug will tell you, is we're in the communities. It's incredibly important not just to have a branch there, but just to be there. We're in almost all the communities Doug is in and we're part of those communities. I think Mary would also tell you that the branches are an incredibly important part for her customers in the private bank.
This chart is very important. Gordon talked about, on the expense side, 2 thirds of the expense in the consumer bank in the branches are actually the people. So, you really have to do this right. As a management team, we've shown you we know how to do this. We've taken staff down from 60,000 to 46,000, right?
And you could expect to see more of this. As customer behaviors change and they move towards digital technologies, we're going to be able to do more of this and that's a very big part of the $2,000,000,000 that Gordon talks about, right? So you'll see less transaction volumes, so you'll see less tellers, less assistant branch managers. What you won't see is less private client bankers, less relationship bankers. There'll be bankers in there to work with our customers to help them with their complex needs.
So, the branch count, here's a picture of our branch count. We told you it would be stable, relatively flat this year and that's exactly what it was. But on the chart on the left, look at the new builds. Over the last 3 years, we've built 3 50 branches. Those are really important branches.
They actually were really designed most of them were in California and Florida to fill in for the WAMU after the WAMU acquisition. And they're doing incredibly well. We're watching these closely. The breakeven is better than before and it's just incredibly important part of our franchise. What's also increased is our rate of consolidations.
As customers' behaviors change in certain markets, we're going to be closing more year. I want to talk to you about how we think about this. It's the easy part is actually taking a branch to consolidate. I want to talk to you about our process here, because it's really important. Take a look on the left side of what's happened in certain markets where we have significant market share.
In New York, Chicago and Phoenix, we were able to close almost 80 branches and gain market share in these important areas, right? Able to close certain branches that were based were transaction based and migrate them. But much more importantly is not is how we execute this playbook. We spend a lot of time on this region by region, market by market, district by district, branch by branch thinking about the customer, right? Thinking about the people.
We take we spend a lot of time on thinking about what's the customer experience when you close a branch on the corner. And because we're so diligent around this, our results when we close branches is outstanding and we feel comfortable with this process. This is also very important. You never could lose that muscle on the ground to constantly open new branches, constantly refresh branches. New markets are constantly opening, markets are changing.
We have a full group of people who do this all the time. I don't think there's a better example like if you take a look at San Jose, it's a market that's changed a lot over the last couple of years because we people who do this for a living in the market and talking to bankers every day. This is an area where we increased our branches by 20 branches over the last couple of years and growing faster than anywhere in the country and doing better than anybody else. So really important that we'll constantly think about from an opportunistic perspective open up branches as markets change. So, where does it leave us?
It leaves us with a world class multi channel platform, incredibly well positioned footprint. We're in areas that are growing faster than national average and that are more affluent in the perfect areas, right? Couple that with this world class innovation and technology, right? World class footprint with world class technology gives you this omni channel that's delivering exactly what customers want, branches for advice and the ability to bank where exactly what customers want, branches for advice and the ability to bank where, when, how they want. So, in summary, we delivered great results inside the consumer bank and we'll continue to focus on what we did last year, invest in this business, acquire customers and deepen relationships with them.
And as this behavior changes, as customers' behaviors change, we believe that we'll continue to be able to take advantage of that and become a more efficient bank. Thank you for your time. And with that, I'm going to hand to my partner, my friend, Mr. Kevin Waters. Thanks, Barry.
All right. Kevin Waters,
for the people on the phone, I'm on Page 40. We're going to go through mortgage banking now before I turn it over to Eileen and Sarah to
talk about credit cards. So if you
look at Page 40, we laid out the strategic objectives for mortgage on the left hand side, deliver a great customer experience, maximize our share of high quality originations, improve the quality of our servicing book and drive efficiencies. Then you can see we laid out the column for 2014. This is basically what we showed you in Investor Day last year and we told you this is how we're going to do this, Simplify our product set and Gordon highlighted this, we cut the number of mortgage products from 37 to 18, maximize our share of high quality originations and I'll give you a little bit more detail on this in a few slides. But you can see we increased the use of our balance sheet in about in 2013, we put about 10% of our originations in our balance sheet. 2014, it was over 30% and we did I'm going to focus a little bit in a few slides also.
I mentioned we were going to make sure that we are risk based pricing appropriately. And you'll see the impact that had in some
of our share across different product sets.
Improve the quality of our servicing portfolio, our foreclosure inventory is down significantly. You can see that went from about 170,000 down to about 93,000 delinquencies down 130 basis points, which is good news and drive efficiencies. In the mortgage business last year, we took out $2,300,000,000 of expenses. I think we've given you guidance last year of $2,000,000,000 so we over delivered by about $300,000,000 About $700,000,000 of that came through our servicing business and we continue to invest in technology to improve controls and operations there. If you look at 2014 results, you can see that revenue was down significantly.
Remember, 2013, the size of the origination market was about $1,900,000,000,000 that dropped to about $1,200,000,000,000 last year, had a significant impact on revenue. I also just want to highlight something for you. We had about $1,000,000,000 in things in 2014 that ran through the revenue line that we don't think will occur in 2015, okay? So as you're updating your different models, make sure you account for that. You see expenses I touched on already.
You go down the page, some of the key drivers. Let me just highlight a couple of them. Originations volume down significantly, obviously, as the market was cut from $1,900,000,000,000 to 1,200,000,000,000 And then from a credit perspective, this is good news as credit losses went from about $1,100,000,000 to under 500,000,000 dollars So when you get this kind of dramatic change in the business where the origination market dropped so dramatically, where we've got good news in the servicing side that the service portfolio is getting healthier. We want to make sure we're rightsizing our business. You can see in the last 2 years, we've taken about $3,800,000,000 of expenses out of the mortgage business, headcount down during that same time around $19,000 but we didn't lose sight of the customer.
If you go back to some
of those key strategies for the mortgage business, the first one is to make sure we deliver great customer experience. You can see this is J. D. Power originations on one side of the page, servicing is on the other. So on the originations, we were up to number 3 in J.
D. Power. You can see we've got a 2010 just as a benchmark. We were back at number 12. And on the servicing side, we made a bigger jump than anyone else out there, all the way up to number 2 from the servicing side from 13th before.
So even though we made these all these reductions in expenses, we've improved our customer service in the mortgage business, especially when looking at our affluent clients. And so you saw from the slides that Barry came up here and showed in the consumer banking, we've had tremendous growth around Chase Private Client, okay? And you can see this from a mortgage standpoint. So the slide on the left shows of the our penetration of the people who got a mortgage. So this is consumer bank customers who got a mortgage versus Chase private client customers who got a mortgage and our penetration of the Chase private client customers is 4x.
Then on the right, just talk to you a little bit about how we've been able to build our brand, went out and asked affluent customers, I think people make about $150,000 a year of assets of $500,000 We laid out these different brands and said, who would you consider for our mortgage? And Chase was the top choice. So we've got a strong brand that we're continuing to build, especially amongst the affluent clients. Now as we transition from 20 14 to 2015, this is similar to a slide I showed last year. There's still a lot of regulatory change going on in the mortgage business.
So we started 2014 by introducing the new CFPB, the Consumer Financial Protection Bureau rules into the business. This year, we've got new CFPB rules in RESPE and TELA, that's the Truth in Lending Act that go in in August. CFPB has also just put out some thoughts and some new rules that are still in the comment period. You can read through here Treasury is still making hand changes. The question around of the GSEs is still unknown.
Only point here is there's still a lot of change ongoing in the mortgage business. And so we talk about things getting through the cycle for the mortgage business. We're going to have to make sure we answer some of these questions. And there's some additional headwinds in the origination space. So we're just going to highlight a few of them for you here.
So student loan, I think that one's been pretty well chronicled. You've got student loan debt over $1,200,000,000,000 The average student coming out now has about $27,000 of student loan debt that he or she is trying to tackle. And you can see first time homebuyers is at the lowest rate in 27 years and the percentage of cash buyers are still high. So we've got some headwinds in the origination market. And so when you look at what does that mean for the market going forward, we just took the average of the Fannie, Freddie and the NBA's prediction in the mortgage market.
And you can see it looks like it's about $1,200,000,000,000 in 2015 and staying around that size. You can see on the bottom clearly the refinance business will shrink and the purchase market really needs to come back strong in order for us to reach the $1,200,000,000,000 level and stay there.
Our focus, if I just go back to
kind of the key tenants in the mortgage business around maximizing our share of high quality originations, this chart shows you our share change. So this is not an absolute level share. It's our share change. So clearly, we've been growing the jumbo business. Okay?
Tied in its part is our relationship with the consumer bank and getting those synergies to grow that Chase Private Client and Appluent business. You can see our share of the government business is way down. I mentioned risk based pricing. So clearly, we priced this business, think of this as primarily the FHA business, based on the risk that we perceive from both originations and servicing. Because remember when you price a mortgage inherent in your originations price is the value that you place in that servicing.
And default servicing continues to be very expensive, okay? And you can see our share has dropped significantly in the government business. As part of the jumbo growth, we're leveraging our balance sheet more, okay? And I think Mary Anne talked this morning about where is the growth in loans coming from and this is one of the areas. So we put over 33% of our originations in 2014 on the balance sheet.
And what's maybe even more important than that is
look at the quality of
what we're putting in our balance sheet. So the upper right chart talks about FICO. So 2005 to 2,008, the FICO scores were around 739. Look, 2014, that's around 771. Maybe more importantly, because it's the tails that get you in trouble in lending businesses, 17% of the FICO's were less than 1700 in 2005 through 2008 and that's less than 1% in 2014.
And then CLTV, that's combined LTV, so think mortgage and home equity, okay, 36% of the stuff that we originated in the money on the balance sheet from 2005 to 2008 had a CLTV greater than 80. And here again, it's de minimis as we look into 2013. And as a result, the real estate portfolio has hit the inflection point. You can see that non core and I think this was a question somebody asked earlier this morning, has come down. Notice this is we gave you an average growth rate 2010 through 2014 for non core and core.
Obviously, if you look at the core business between 2013 2014, that's growing closer to 27% to 28%. So you've got the core business growing nicely while the non core continues to run off. So there are some origination headwinds. The good news is we've got some tailwinds on the servicing side. The number of underwater homes in the U.
S. Continues to decline. So just go 2010 to 2014, that's down about 58%. Trough the current HPI, so home price increase is up 29%. I think the Moody's forecast for 2015 is that it will increase another 4% to 6% this year.
Months of inventory and I know Association of Realtors I think just updated their numbers this morning, it's at about 4.8 months.
So the
good news is that continues to be low. If you were to go back and look over history, that's probably closer to 9 months. And clearly, this is a watch item for us to make sure all of a sudden we don't see a surge of inventory, but we have not seen that. And 30 day delinquencies across the industry continue to come down. When you look at our books specifically, you can see non credit impaired Q1 of 'thirteen, this was about 460 basis points, okay, down to 2.7%.
On the right, charge offs here again 160 basis points in the Q1 of 'thirteen, down about 41 basis points in the Q4 of 'fourteen. And then our PCI book, remember, this is primarily the Washington Mutual loans that we acquired. That continues to improve also. I think we've given some guidance you would expect reserve releases over time through the NCI book. We think we're adequately reserved in the PCI book.
A little bit of the quality of our servicing book, okay? So foreclosure inventory then has come down significantly. You see 167,000 93,000 30 day delinquency rate, we're below the industry from that standpoint. And not surprisingly then, you can see our servicing expenses starting to come down. So in the Q4 of 'twelve, it was about $873,000 This was 4Q 'twelve.
If you look at that 4Q of 'fourteen, excuse me, dollars 560,000,000 873,000,000 down to $560,000,000 Now we had given guidance, we thought that'd be closer to $500,000,000 We did some additional servicing enhancements in our control and operational environments. We'll be at the $500,000,000 range by Q2 of this year. So how does this all come together? Clearly, production is feeding our servicing business. We're improving the quality of our servicing book.
We think we've got a great brand, great distribution, a cost of fund advantage, especially in the servicing side versus the non bank servicers, and we can leverage our balance sheet to help grow our portfolio business. I'm just going to remind everybody, we've got some work to do as Gordon said to improve the ROE of the mortgage business. Expenses will continue to come down. We'll continue to stay focused on the customer and deliver a great customer experience and continue to drive
Good afternoon, everyone. It's great to
be here today and talk
to you about card services. We have a great franchise and I'd like to share with you the progress we've made over the last year. We've had a very consistent strategy since we repositioned the business many years ago and the strategy continues to be quite effective. This page highlights some of the commitments we made last year in Investor Day just to give you a snapshot of the progress we've made in 2014. We talked about business execution, obviously, in our business that's so, so critical.
2014, we did grow our loan balances 3%. We maintained a very strong efficiency ratio and excellent credit. In terms of delivering rewards, that is important part of the proposition that drives growth overall for us and we've made very good progress in the revamp of the reimagine rewards experience through ultimate rewards as well as strong continued growth in our co brand partners. Digital engagement as Gordon mentioned super important higher customer satisfaction, better engagement and lower costs. We continue to drive digital engagement and acquisitions and rewards redemption and we really plow those savings back into our business we can self fund our investments.
And then lastly on payments innovation, we did launch ChaseNet. I'll give you an update on that today, but it's exceeding our initial expectations and we did pilot a Chase proprietary wallet in the Q4. So really good progress against our commitments last year. So first turning to the numbers. We see continued strong engagement on End of period loans, as I mentioned, up 3%, our sales growth up 11% and merchant processing volume up 13%.
We had a strong ROE 23% above our target range. The decline from 2013 was driven by the difference in our loan loss reserve releases in 2014. We had fewer releases as well as higher equity allocations that Mary Anne talked about earlier today. Charge offs very strong down 12% and we delivered 5,500,000,000 dollars of operating profit. The one number that you see there that's down is revenue and I thought I would give you a bit more detail on what's causing that on the next page.
So if you look at our revenue, we have had some revenue drags that at this point are largely out of our business. But I wanted to you a sense of what those components are. So if you look at and I'm on page 60 for those on the phone. In terms of the headwinds, we have been on a very explicit business simplification effort. We've exited some non core products and we also took a write down on some non strategic portfolios that we expect to exit in 2015.
So those have been a drag on our revenue. They're in our run rates at this point. But in addition to that, we've seen very meaningful opportunities to increase our acquisition and new customers. And the premiums that we pay the customers as an offer get amortized through our revenue line. And so that is another component that you see in that kind of A bucket there.
I do expect stabilization now in the level of ongoing customer acquisition. So we're happy with the levels we're at today. We do see also some yield compression and that's a function of the runoff of some of our higher rate balances as well as some compression from our change in mix. But when I take a step back and what you can see in the revenue growth bar, the green bar, we are seeing revenue growth from increasing sales, increasing balances from the new accounts that we've acquired as well as increasing share of wallet of our existing book. And we're at a place now where I think the forward looking value that we'll get from that multiyear investment strategy will really help us create sustainable growth.
And the other piece I would add to it is, it's not just the revenue growth, but the quality of the revenue that we brought on to our books through the last several years will make it much more resilient through the cycle. Turning to our spend numbers. We have very strong performance consistently on spend. Our sales were up 11% in 14 to $466,000,000,000 And it's been 28 consecutive quarters where we've outpaced the industry overall in sales growth. So if you look back during that time, we gained 500 basis points of market share in a $2,200,000,000,000 market.
So for us, each basis point of market share is very, very meaningful. If you add debit, our sales over in 2014 would have been over 7 $100,000,000,000 making us the number one issuer for credit and debit share. 2014 was also a real turning point in terms of our portfolio growth. Despite meaningful growth in our core balances that you can see here in that blue bar, we have had a fairly large runoff of legacy balances non core that had been a real drag on our growth. We're at a place in 2014 where the growth in the core now has outpaced the legacy, generating about $3,000,000,000 of additional loan growth in 2014.
And this growth comes from the strong value propositions we have in our branded and partner products as well as the consistent investment that we've made in acquisition and rewards. So at this point, I think as you can see, the drag that we've had in that non core portfolio is largely behind us. We have a tight focus on expenses in card and we maintain a very competitive efficiency ratio. Our total expense declined by 1% in 2014 even with significant investment in marketing and digital and controls. Our operating expenses were flat despite significant growth in sales, 11% growth in sales, 3% growth in loan balances and 20 percent growth in new accounts.
And the way we do that is by maniacally focusing on reducing our per unit costs. And as you can see, our efficiency ratio remains low and our scale is a competitive advantage. So as we look ahead, we're very focused on creating positive operating leverage, while maintaining the investments that we need to make to grow the business. Page 64, a little bit more detail on our marketing dollars. We do continue to invest heavily in marketing.
It's an important part of the card business overall. And if you look just in the year that we acquired a new account, the accounts that we acquired in 2014 generated 41% more sales and 51% more balances than the accounts that we acquired in 2012. This did not happen just because we spent more money. We did spend a little bit more money, but we also are seeing much more efficiency from every dollar of our marketing investment. So we feel really good about the quality that we're bringing on and the efficiency that we get from that spending.
Credit remains excellent. Our losses remain at very low levels Our losses remain at very low levels and the rate of improvement while slowing, we still see improvement year over year. Our full year net charge off rate was 2.75 and our 4Q exit rate, the adjusted rate was 2.48, down 37 basis points from 2013. As Gordon mentioned, we expect the net charge off rate in 2015 to be less than 2.50 than 3%. We are also really focused on security.
One of the issues I think for consumers and merchants and issuers is security and fraud in the card industry overall.
This is to give you
a sense of both what we see from a gross fraud and a net fraud perspective. The net fraud is what actually hits our P and L. And we have a very holistic approach to tackling this. In card present fraud, which is the vast majority of our expense, we have embraced DMV. We have more than 15,000,000 cards today that are enabled with Chip.
And by the October 15 liability shift over 90% of spending for Chase will be on cards enabled with EMV. So we're well positioned, well prepared for that change. In terms of cards not present, the merchants incur more of that expense. That said, that doesn't change our desire and interest to work with merchants to secure those transactions and to remove that fraud from our ecosystem. We believe tokenization is the right approach here and we've been working both for example with Apple Pay which are tokenized secure transactions as well as Chase Pay which I'll get into a minute are also tokenized transactions.
And so we're very focused on ensuring that we're prepared there to really mitigate card not present fraud. And then lastly, identity fraud, which is a small part of our expense, but an enormous concern for multichannel authentication. How do we use smartphones? How do we use information about what device you're logging in from? How do we look at biometrics?
But what are all the things that we have the new tools and new technologies today that will help us eliminate and mitigate identity fraud. So turning to rewards. Rewards are critical to driving customer engagement. Today that are on today that are on the Ultimate Rewards platform and that's the platform that supports our proprietary Chase branded products. We relaunched Ultimate Rewards in November.
It's a much more intuitive experience. We're using data from
the
that no matter what device the consumer wants to access, the site will render and they can do what they want to do in a great experience. We do continue to see wallet share increases for those customers that redeem versus those that don't. So we do continually look for ways to make redemption easy and simple for consumers. The benefit also that we're seeing is the increase in digital redemptions, because again it drives higher customer satisfaction, but it also drives lower costs. So it's really a win win.
Digital acquisition still is our biggest channel and is growing year over year. If you look at the chart on the left, just to give you a sense of how fast mobile channels are growing, we're seeing both mobile meaning tablet and phone are very are becoming very, very significant in terms of how customers are acquiring new cards. And it's the reason why we are investing so much to build out best in class mobile capabilities. Our leadership position in our branded and partner products as long as our as well as our strong presence in digital channels has enabled us to capture to capture over 40% share of all Prime online applications last year. So that's a very meaningful number for us and it just these statements e statements, it's not just about customer engagement.
We are also looking at ways to drive more efficiencies. And obviously, if you can do things to drive paper out of the system like these statements that helps us drive better cost efficiencies. So turning to our payment strategy. As the industry evolves, we're uniquely positioned to deliver these innovative payment solutions to consumers and merchants. ChaseNet is the underpinning of this strategy for us.
It's our own network powered by Visa that processes Chase Visa transactions. And what's so important about it is it enables us to have a direct simplified pricing and an ability to look at the end to end experience between the consumer and the merchant and create value add for the merchant has really resonated. The second part of our strategy is around wallet. And while this is very important, it's still very wallet market is very fragmented today, we believe we need to be in everywhere. We don't want a Chase customer not to be able to use their card in any wallet.
So we're not so we're supporting wallets that are out there. We're also building out our own capabilities as well. Because again what's most important to us is that consumers have choice and they're the ones that make the decision on where they want to use their cards. And then Barry talked a bit about what we're doing on the P2P space, so I won't get into that anymore here. In terms of ChaseNet, last year we were in the pilot mode at Investor Day.
Since then we are rolling out. We have over 60,000 merchants on the platform, doing over $16,000,000,000 in sales on a run rate basis. I think as you can see from this page, we have some great merchants that are engaged with us on ChaseNet and the teams are continuing to get great traction as they talk about this proposition out in the marketplace. The other piece that we talked about last year was really our own proprietary platform. How do we think about a wallet and make it easy for a Chase consumer because we have 50,000,000 of them to shop online, to use a mobile device with all they need to have is their Chase login credentials.
We did a pilot in the Q4 with 1 merchant and we've got really great results in terms of learning. What we found was the ability to use your login credentials not to have to go through a whole separate step to kind of get this put onto your phone really made a big difference. People liked the seamless way to purchase and merchants also liked the fact that the consumer never left the merchant site. So unlike other wallets where when you click on the wallet you move away from the merchant and then you come This all happens within the merchant site. So easy checkout, streamlined purchasing, secure transactions through tokenization and good merchant appeal.
So we're excited about the pilot. We had a lot of learning and we'll be talking a little bit more about that later in the year as we think through how do we roll it out. But as I mentioned, we do want our consumers to use our products in any wallet they want. So we were an early participant in Apple Pay. It's early days.
It's having it's only been a few months since Apple Pay was launched in the market. But we do continue to see good growth in the number of consumers that are provisioning Chase cards in their Apple Pay wallet. And as you might expect consumers that are using Apple Pay are younger, have higher income, tends to be more debit more I'm sorry, the transactions tend to be more credit oriented and we see really good share of wallet there. So early days, still very much in the learning mode, but we've been excited about the feedback we've gotten in terms of the great customer experience. And we'll look to see as more merchants adopt, I would expect to see more traction here as well.
So when I put the pieces together, we are looking at creating a very robust digital platform, leveraging the scale of our acquiring business as well as the scale of issuing business linked together with ChaseNet to think differently about how to integrate payments and loyalty in payments overall. So when we look at the friction, provide better rewards integration. So how do we friction provide better rewards integration. So how do we make payments and loyalty much more integrated in terms of the purchase experience? Very simple redemption, because we know redemption drives share of wallet.
We know it drives high levels of satisfaction and more tailored offers. And as we build out this digital platform, the key, key backbone for it is ChaseNet. Without the ability of having this direct connection and this integrated platform, it would be very challenging
for us to do this.
So I think we're really uniquely positioned to deliver this type of benefit to merchants and consumers. So in summary, we have a high quality franchise. We continue to deliver very strong results and have great momentum as we go into 2015. The strategy that we've laid out continues to work. We're always looking at ways to fine tune, but we're very focused on the execution piece and ensure that we're well positioned as consumer preferences change to innovate in spaces particularly around digital.
So as I step back and look at we've accomplished, I feel really good about the size and scale of our franchise, the ability to look at the 50,000,000 plus consumers that we have in our programs, the great scale we've got with ChaseNet. And I believe we're distinctly positioned to innovate in this space. So very proud about what we've accomplished in 14 and very excited about the opportunities we have looking ahead. So thank you. I'd like to open it up for Q and A.
Excellent. Are you going to do the Qs then Adi? Thank you, guys. All right. So we have well, actually we are out of time, but we're going to use some time for questions anyway.
Steve Chubak here.
Hi, Kevin. This might be a question for you. One slide which I saw is noticeably absent was the breakdown of pretax income targets through the cycle across mortgage banking production and real estate portfolios. And just wanted to get a sense as to whether you're still committed to delivering on those targets or whether you're managing now to an ROE target exclusively?
Yes. I think we're going to focus going forward on managing through an ROE target. The only thing I'd say and Gordon had this. So we've given you near term guidance of 9%. We've given you expense guidance on servicing that will be down to $500,000,000 in the second quarter.
I think pretty clear revenue guidance as we walk back the one time items for the $1,000,000,000 So we're going to really focus on overall ROE, especially given the interaction between production, servicing and the portfolio as you just work through those different businesses.
And just to add to that, I think we gave pretax income guidance as a one time event. We don't do that for the other businesses. And so we'll try and have mortgage be much more consistent with how we disclose each of the other businesses, give you the pieces.
John?
What's happening with the ATM network? I saw the
number of ATMs down 11%.
We did exit relationship with a 3rd party provider called Cardtronics. We had ATMs in certain areas as we filled in our branch network that we needed that we've exited this year. So those are the 3rd party networks that you saw the reduction in.
Thanks, Dan.
And just one thing to add to Barry's point there is those devices tend to be very basic cash dispensers type of thing you might see on the exit from a much more sophisticated ones you're seeing outside can recycle cash, can take in checks and be kind of much more of a banking kiosk than an ATM?
Mike? Sorry, Sarah.
Mike, that's great.
Should we keep my eye on you?
You're reducing branches by about 3% per year, but then you also have these pop up branches and you're downsizing with the usage of digital. So do you have one all encompassing figure that says you're reducing square footage and branches by X? Yes. And what is that?
Look, we only have one pop up branch and it's that one out there. It's just Mary said to me, I don't know where I'm at, she said there was a Brink's truck outside 2.70 at the weekend. Why was that? We were delivering cash to the pop up. So that's just for you, Mike.
That's your branch. So if you look at the footprint's been relatively static over the last number of years having grown quickly. If you look at the savings, the reductions that Barry described about 150 reduction that will be about 1,700,000 square feet over the course of the next couple of years. In terms of a little bit more detail in terms of branches, if you think about kind of our larger branches in the more affluent footprints, where we do much more of the wealth management work, those have been about 5,000, 5,500 square feet. They're down to probably 4,000, 4,500 with the new ones that we're building.
And in the geographies where we are doing just kind of much more kind of transaction oriented activity, we've been piloting a branch that's closer to 1200 square feet and that's worked well for us. No, I would just I would use the number of 1,700,000 square feet over the course of the next couple of years. We'll give you roughly the number. And think about overall as having 27, 28,000,000 square feet right now. And then you'd add to that and Matt had to leave.
If you add to that like the 6,000,000 square feet that will take out of the non branch infrastructure of the company. So just shy of 8.
Hey, Gordon. Two questions. 1, you're running ahead on your expense saves. So just wondering is that a pull forward from 2015 into 2014 or is that an add on?
I knew I'd get that question. So we exceeded our target by about $400,000,000 So we could have said today we've got $1,600,000 left to do of the 2. Sure I thought about that momentarily before I walked up the hallway to employee number 1. But we said no, we'll keep it at 2,000,000,000 dollars So effectively we'll overshoot the guidance, we'll exceed the guidance that we gave you last year.
Right. And And
will we do more is your follow-up question?
Yes, because you did 4 100 last year, so why not this year too?
Yes. What have you done for me lately, Betsy? Listen, the way I like to think about those things is go back to the strategy. It's rooted around doing the right thing for our customers. And so we'll do that.
We'll continue to drive out waste. We'll drive the more strategic areas. And if we see an opportunity this time next year, we'll tell you and we'll adjust the guidance, right? And so I would much rather be in a position where we give you numbers, you saw the Marianne called them tick marks, you saw the check marks that we had on the slide. I think we've consistently delivered to you what we said we do.
I'd much rather do that than give you another number before we deliver the one that we just described. So more to come. Paul?
Yes. It's question for Kevin I guess. On the servicing book, I think you guys talked about last year shrinking your servicing book by $200,000,000,000 mostly in the high touch default stuff. It hasn't gone down by that much. Is that still discussions that shrink that portfolio?
Yes. You would still servicing book was down for 3rd party servicing down about 8%. You can see that in the slide. You do expect the servicing book to continue to come down as that non core portfolio continues to shrink. And then the performing part will grow as originations grow and some of that will be dependent on the size of the market.
But we always are discussing ways if there's opportunities to also sell default servicing. We have sold some default servicing. We'll continue to look to do that in the marketplace.
Erica?
Some of the new regulations on liquidity and funding have clearly placed a lot more value deposits? Competition for retail deposits? Or do you think that getting as many clause as possible in the retail consumer is going to be enough and more meaningful than actual pricing?
Yes. I'll make a couple of comments and I'll hand over to Barry. So our primary is to be the customer's primary bank and the deposits end up being an outcome of that. So we haven't chased deposits with price. We've tried to chase deposits by delivering a really great customer experience and becoming the customer's primary bank.
I would expect to see as rates rise that the growth in deposits will slow, but really none of us know. And honestly, if you'd asked me 4 years ago, if equity markets were roughly going to double, would we have expected to see the type of momentum that we've continued to see in gathering branch deposits in Barry's business, I'm surprised honestly that we haven't seen money diverted. So I don't really know the answer to it, but we're going to continue to really kind of focus on the core of banking. And as I say, I expect growth would slow, but I wouldn't expect it to go negative. Barry?
The only
thing I'd add is to your point about deepening relationships. About 45% of the deposits these are core checking account customers. And then if you take a look at the savings part, I mean these are customers that over the that have been here for many years. And then if you've seen from some of the charts that we've talked about and to Gordon's point as far as becoming their primary bank, it's not just an account anymore. I mean it really is a full relationship on the lending and investment side.
Keith, do you have it?
Hey, Gordon. So it's very impressive on the consumer bank on the mortgage bank and on the card. Do you ever envision a point where
you start to look at
the consumer holistically like Doug does in terms of rewarding the customer across all different products?
Yes. We've we actually when going back many years now and Eileen and I were together in the card company and we built Ultimate Rewards. We initially designed it with a view that we might well start to offer ultimate rewards points more broadly. So it's certainly an alternative. We've got a good platform there.
And it's something we're thinking about, but I've got no kind of immediate plans to announce, but it's an interesting thought.
A restriction from the systems perspective, could you do it today or you just to make a lot of investments in the systems to be able to see the whole customer relationship?
Yes. We would have to make some investments, not a huge investment, but we would have to make some investments in the systems to do that. Yes. But I do think you're raising a broader question, which is given the size of the businesses, there is a big opportunity for us to continue to drive cross sell and accelerated price across all of these businesses. So I think that's something for the future.
Okay.
Thank you. I just have
a question about the new mortgage origination platform.
First of all, just what's driving it? Is it cost driven? Is it compliance driven? Or is it something else? And then is it something that you develop internally or using an outside vendor?
Yes. So the question for those who
didn't hear it a little bit about the new mortgage origination system. So actually we turned it on to internal friends and family yesterday. So a couple of people going through it. It will be launched in the Q2 in our consumer business. We'll continue to roll it out across consumer direct and retail through the balance of the year and then retire our legacy platform in 2016.
I think we had mentioned it last year, it was actually part of the system that we bought. It was part of Quicken system. And then we customized it to JPMorgan Chase. It should drive both efficiency and customer experience for the 2 big drivers. We will get as a result of this being very automated, a better control and compliance is the output, we'll also achieve.
But it's really focused on being more efficient and delivering a better customer experience. Great. Thank you.
Jim? Just one last point that I would add to what Kevin said. One of the real challenges in the mortgage business is these surges in refinance volume that we see, which makes it really difficult for Kevin and his team to ratchet up people quickly. This will give a whole new set of workflows that will give him the capability to bring in many more people much more quickly on a temporary basis as we deal with refinance booms and then let those bleed back out the system in a much more efficient way.
Yes. Hi. Jim Mitchell from Buckingham. Just on the Chase Net excuse me, sorry.
Oh, sorry.
You've had some success on the ChaseNet already. It seems like there's real tangible benefits for the merchant in lower costs and other ways to drive consumer activity. It seems like to me that would be a natural extension to if the merchants enjoy it to get into the partner card business in a bigger way. Yet you've shrunk that business over time. Does this change the way you think about it?
Or am I not thinking about that the right way?
In terms of the private label business?
Natural extension to go into private label with your Chase Net business?
It's definitely possible. Typically and Eileen please augment here, but typically as we looked at that business it's been very transactional in nature. So kind of almost a one and done from the customer's point of view. It typically carries very high interest rates in order to be economic for the card issuer. And so we just really didn't feel like it fit well with our relationship strategy.
But with the right merchant and the right product absolutely we could think about that. Eileen, do you
The only thing I
would add is I think the value of ChaseMed it would enable us to do something different. Just the straight up type of private label product as Gordon mentioned is just not a great product given the customer dynamics. But if you can imagine that as just creating something very differentiated and just different that would be something that we would definitely be interested in doing. Right now that's not on our immediate radar screen because we've just been very focused on executing and ramping up ChaseNet and also looking at Chase Pay as a way to create more value, but that would be something we would
put on our radar screen. Gerald?
Thank you. Gordon, you indicated that the average customer comes to the branch 4 times a month. It's about 17% of your customers. What is the typical reason that they come to the branch? And then second, have you guys tried to optimize profitability?
Have you tried to calibrate what is the right amount of times they should be coming into the branch?
Well, Barry, I think Barry, this is Mike quickly. The way I think about and I'll hand it across to Barry is, yes, we'll try and offer great products and service and guide customers to the way we'd like to serve them. But the most important thing is that we serve them the way they want to be served. So if they want to come into the branch, we want to be there, we want to have a branch, the right people, the right training, so we can do a great job from them or they'll just go somewhere else. So I think of that it's a very delicate balance.
And I'm actually incredibly pleased that the uptake that we've taken that we've seen that customers take on our kind of mobile and digital capabilities. It's really been astounding. And someone, Betsy, it may have been you, had in one of the questions before, could you go in and kind of bank with no branches? Well, other than onboarding brand new customers where we've got more work to do, we largely have the infrastructure to do that. But that's people still open accounts in branches and we're not there yet, but we are building the capabilities to make all these things possible.
The only thing I'd add is just to Craig is not 4 times a month, it's 4 times a quarter. And to add to Gordon's point, we've been incredibly pleasantly surprised. We don't force this on any customer. We've actually like are trying a bunch of different stuff including having our tellers who are just incredibly valuable employees help us think about this because we have a comfort level with our customers and helping customers understand these machines. We've made a bunch of different changes to the machines based on their experience.
So again to Gordon's point, it's just like we actually find that customers are find that these mobile technology and digital technology is making their lives easier. So from us our perspective, it's customers like it and it's given us a chance to drive down the cost of transactions. The other thing I would focus on is to answer your question of what's happening there. The investment revenue inside the consumer bank is now more than the debit revenue. I mean that's a complete change over the last couple of years.
So I think this concept of when you walk into one of our branches and to sit down and to be able to speak to someone about your complex need or financial advice or a loan officer is an incredibly important value proposition for our customers.
Just one, I guess, kind of almost surprised in the data, if you like, certainly the data versus the anecdotes. When you talk to people, I mean, I'm sure many people in this room, they'll say, oh, I never go to a branch. I don't know anyone who's ever been to a branch. My kids don't go to a branch. My dog doesn't go to a branch.
Nobody goes to a branch. And so you look at it and you say, well, and Barry and I look at this pretty closely, it must be just like a tiny number of people who are camped out outside the population and you look at kind of who's actually going it is definitely true and my own children are 26 and 22 is they don't go to the branch, but they don't have any money. And my guess is as they have a little money themselves that they might go as well. But it's just interesting to see what the data shows you in terms of branch usage. You're kicking us off Mr.
Diamond? Okay. All right. So thanks very much indeed. Thank you for the team.
I hope we gave you guys a good sense of the momentum we've got in the consumer businesses. And I can see it's like the Oscars, he's going to push me off. But just one last thing is that I think of all the things that we laid out, we have momentum on all of those activities. There's a great deal more work to do. But there's nothing that's entirely new that we have to get started.
Over to you. Thank you to my wife. Great.
We always make jokes because everyone says the millennials don't use branches, the millennials don't use branches. The millennials don't have money. And when they get a job, what's one of the first things they do? And what do they love about Chase when they open that account? Digital.
And talk about these branches, go sit at a branch one day, okay? People bring it literally around country they bring in their dogs. We give little doggy bones to people. They sit around for almost sometimes for social reasons. And so the branches are still a great thing.
They're getting smaller, they're getting more efficient, they're getting more advice and all that. And look, I hope that you all felt what I feel when I see these 5 magnificent presentations the customer and satisfaction and it's just pretty exceptional. I just want to the customer and satisfaction and it's just pretty exceptional. I just want to make some very basic points open the floor to any additional questions you have. We are here consistently to build a great company, for the benefit of shareholders, clients, employees and communities around the world and we're going to do it without fail.
We're not financial engineering every day. We're not thinking about my God can we pull out or make a little bit more money. We can't be rapacious. The bank has to be there consistent. I do remind people that this bank in the worst times in 2009 and stuff like that was rolling over middle market loans and revolvers for large corporations including a lot of you in this room and we didn't double or triple the price.
You could say mark to market. And so it's very important to us. And you heard it from every single person up here, we're here. We have to build that trust and earn that trust in every community, wherever we operate and being steadfast is one of those things. And it's the history of JPMorgan Chase.
We've had good financial results through very tough times. I mean, we've been through a crisis. We've been through we've had a lot of regulations. We're going back to the card act and Mary Anne did some of those numbers and litigation about half of which those numbers came out of Turn and Wambu. And we've done okay.
For our 5 year record results, financial returns have been good. We had a tough I mean we handed the mortgage folks the worst at the worst possible time and you need to say about this Mortgage Express product, but remember we put Bear Stearns, WAMU and Chase mortgage altogether in 'nine or something like that all three were terrible. And all 3 had terrible production platforms and terrible servicing platforms. And so we handed them legal problems and a whole bunch of other things and we're still doing a great job at cleaning up. And we never all this time stopped doing other stuff, which is investing.
So you saw that little chart about the marketing money in 2010 in card and we lost if I remember correctly $2,000,000,000 in card in 2,009. But that marketing money and that innovation which Eileen and Gordon did was freedom. It was ultimate rewards. It was sapphire. It was that's what it was.
So in the worst time losing money, I didn't we didn't see and say what are the margins going to be in the business this year. We said how are you going to build the best possible business going forward and it works over time and sometimes you're right and sometimes you're wrong. Each of these businesses is great. You've already heard it. I don't want to repeat each one.
I think it's very important to focus on the underlying stuff not just the financial results sometimes. And we're also building this whole time period the critical we call it forces controls now. We've extended that fortress concept to controls and regulatory things. And we want to be the best possible out there under the heightened standards, which we want the rest look at JPMorgan and say they are the standard out there whatever it is we do. So it could be cyber, it could be controls, it could be how we treat clients and all these businesses gain pretty much regain share.
The business mix, they're very important to me. Again, the way you should look at a business, the way you should always look at a business is not from the standpoint of the company, but from the standpoint of the client. And so clients bow with their feet. You gain share, you get business satisfaction because you're good. That's true for every restaurant, it's true for every branch.
So we always try to say where's the client? So our mix obviously works with the client. We're gaining share in almost everything up there. That is the best judge about whether you're running a good company or not. And obviously, you want to earn a fair profit all the time.
We always ask the questions, are you in the right businesses and is the mix right and do you bring value, can you be special in that, do they have a moat? A lot of these businesses have very strong moats around them. Some don't and I don't need to go through those and you heard some of those folks talking about today. I also want to point out the average regional bank does everything we do except Global Investment Banking. Because when that client walks in the door and Mary had a great chart.
When that client walks in the door, they say I want I need financial products. I need service. So it could be investments. It could be deposits. It could be kind of my company.
Small businesses have to visit branches. They get a drop of currency and coin and pick up official documents etcetera. But the average regional bank does most of those things. They don't do Global Investment Banking, but we also bring Global Investment Banking. How many middle market companies do Global Bank overseas now?
2,500. So very few people can do that. These are companies if you go to Grand Rapids Day and have a and sit down with 100 middle market clients, a large percentage and this wasn't true 10 years ago do business overseas China, India, Brazil and it's either they manufacture, buy or sell. I mean and so they need checking accounts and foreign exchange and surprisingly FX derivative sometimes and things like that. And the size and scope of our global business is fabulous.
Asset Management and CIB is exceptional. And that business, I mean, I think there's a chance and it's going through the biggest change, it should be CIB, but someone's going to look back in 5 or 7 years and say that business could be there are very few very strong players in it. And it will be valuable because the underlying business and McKinsey does a great report, should never forget, the underlying fuel of the business assets under management are going to double. Thank God for you all too. The equity, debt, trade, finance, multinational companies, McKinsey estimates the number of companies doing over $1,000,000,000 worth of business is going to double in next 12 years.
Okay, that's our client set. And this is not going to go away unless you speculate somehow that there's going to be a reversal in global trade. And So there are we have a very So there are we have a very complex ecosystem out there economic ecosystem out there and we play multiple roles in it. And these mix of businesses do lead to efficiencies. But again think of the efficiencies not for us, but for the client.
In a capitalist world, you better be giving the client more, better, faster, quicker or you lose. And so to me, we bring these efficiencies to bear for the client you see in market share gains. So ChaseNet maybe will provide something cheaper, but we also might buy something better like data, which Eileen mentioned, which is so we can go and have a simpler relationship and give them lot of data to help them deal with their client better over time. And a lot of the competitive advantages we have are unique. They are not you can't find them elsewhere.
And I'm not going to go through them all because I think they're up there. And our balance sheet is extraordinary of $2,500,000,000,000 $800,000,000,000 is cash or marketable securities. Cash is stuff held at the Fed or the ECB or something like that. Markable securities AA plus on average a couple of year average duration. There's the 300,000,000,000 we've got a new repo book.
Remember the repo book both sides can wind down if you had to. So it's very liquid, very secured stuff like that. That's $1,100,000,000,000 And most of the trading book is pretty liquid. So I look at this balance sheet, you can't find a if you had a regional bank that obviously would be 100 of 1,000,000,000 as opposed to 1,000,000,000,000,000 but you'd say, well, my God, why they that balance sheet is as good as they come. And we build for the long run.
So we I mentioned the McKinsey stuff, but we are always going to be looking at not just next year, but 3 years, 5 years, 10 years country by country who are the clients and we're going to be prepared for tough times. There will be tough times again. I don't want them. I'm not saying it has I used to say every 5 or 7 years, but it doesn't have to. The past is not necessarily always prologue, but there will be tough times again and this company will be prepared again.
And that is important to us that we actually when it's through the cycle thinking here over and over that is very important to us, because we know there are cycles. In the best of times, we're not geniuses and the worst of times we're not necessarily terrible. And we want to be that poor at the safety in the storm, because that makes all the difference in the world obviously for survival. My predecessors if they were standing here and we actually had a conference once and we had Sandy Warner and Bill Harrison and John V. McCoy and Walter Shipley and all that.
They fought for 30 years to try to be a winner in these businesses. And they saw most of the other companies stale, okay, or be bought out or merged out because they couldn't survive both in Investment Banking and Commercial Banking. And they would say, my God, look at this company, which they helped build. I mean, look at this company and be very thoughtful about making sure you're going to be here in another 100 years, in another 200 years. I do want to comment on PE ratios, because it's obviously clear to me and other people that PE ratio is low.
So I've always asked and why is that? It's a legitimate question to ask. It's lower than some other people. And this is my personal opinion, okay? I don't know this.
I also think it's temporary. So I'm not going to overreact to a PE ratio. PE ratios have always been wrong just like cost of equity has always been wrong. It's like the market's always been wrong. So when people tell me the market says X that means almost nothing to me almost 0, okay?
Because the market was wrong time and it's wrong right now. And the question you got to ask is why and what are you going to do about it and how are you going to improve and stuff like that? I think and again I got this I heard a lot of this in the table I had at lunch. Huge legal and regulatory costs, but those are costs. Those are in the numbers.
They've been fairly large and it's our job to get them down and make regulators happier and all that. But also just what I was called huge legal and regulatory uncertainty, which is more on us than other people, because of our size and scope and things like that. And it's a hell of a thing you sit around and you're trying to figure out what is your ability to return capital? What is your ability to grow? What is your ability to do these things?
How much is it going to cost before it's over? And that doesn't stop us from building the customer franchise. I do believe one day those things will lift. Now it may take another 2 years or so, but I do believe that some days that uncertainty will subside over time. I know we very well may have a premium PE.
So I may be standing here in 4 years explaining why we have a premium PE, because it is unbelievable franchises. They're better than most. People know it. Capital is down. Risk is down.
There will still be a banking system. The banking system will be stronger not weaker. So I always want to make sure we do the right things for the right reasons and not the wrong things for short term reasons. And I think you heard a lot here disciplined management is more has always been more important than the financial engineer. We always had more capital than our competitors and always had more liquidity than our competitors.
And yes, there was always a disadvantage in terms of ROE. But I remember also being questioned why we're doing more in CDOs and why we're doing more in subprime and why we're doing more of all the people making money. Oliver Wyman has done a report for JPMorgan right before or sometime I got here saying the reason we are so short in fixed income is because we haven't done some of those things including SIBs and which we just didn't do. And so again to me I'm not we're not going to follow lemmings off the table all the time. And we are navigating the new global financial architecture.
We're delivering to our regulators left and right. Obviously, we have consent orders. We have issues like this. It is critical to us. I think the beautiful thing to me is the management team is able to do that, redirect huge resources, not just that $3,000,000,000 we talked about.
It's huge resources in risk, technology, comp, cyber to get that stuff done and do it in a way kind of the no whining, just get it done, let's deliver, let's set the highest standards, let's meet our regulatory commitments. And let's not make excuses about why we're filling in the business, because I've seen a lot of companies and they get distracted. They forget some of their businesses there. And G SIB is the new one. We will adjust to it over time.
I want to point out one of the big questions I got at lunch too was, is it enough? You guys you might be at 5, you can go to 4 back to 4, 5 maybe 4, is that enough? The regulators want more. So here's what I say is, we can navigate GSIPS. And they were talking pretty much a year or 2.
And we will do it with the client in mind, okay? We cannot not treat clients respectfully and politely and explain it and give them a little bit of time and stuff like that. If the regulators want more, if there's a secret hidden message that it's got to be more than 4, we could do that too. And so we have the capability. And it may change our strategy a little bit, but it isn't going to change the fundamental building a great company a long period of time.
And I also think they would probably want to make sure we did it carefully. So it wouldn't be like a rush because if we start pushing that down too much, we have to stop doing a lot of things. And so we would want to make sure we do it carefully in the right way. I'm convinced we can do more if we had to, have very good returns and grow a very good company. Think of it very simply, okay?
G SIB unlike RWA is a multivariate type of thing. It cuts across products and clients and we're going to push it down to products and clients and stuff like that be very thoughtful try to get a return in that capital too. But we have the ability to do more. If we had to do more, my view is our ROEs will stay high. Maybe growth will slow down a little bit and you might change your some other strategies, but that we would probably do fine.
There are a lot of non G SIB things you just saw, merchant services, credit card, certain products, ECM, DCM. So a lot of you said just build non GSAT businesses and I'll give you one example. We inherited a Bankers Bank. JPMorgan has been banking banks around the world for 100 years. So if you look at a lot of our overseas business, corporate banking businesses, they are I think the numbers are like 70% financial institutions, 30% corporate, even though we're growing corporate much faster now, okay?
Well, in 7 years we could probably make that 70% corporate 30% financial. I wouldn't want to try to do that in 6 months. But over a long period of time, you obviously can redirect and change how you run the business. And I also want to point out GSEB is not a risk measure. So take that deposit issue.
And a lot of it comes from you all. Your funds and stuff like that and companies will give us on usually quarter ends. So our deposit of quarter end go about $50,000,000,000 but dump it does because you're changing securities buying repo or doing stuff, but you might put $1,000,000,000 of deposits or $5,000,000,000 that money immediately goes into the Fed. We know it's short term and temporary. We don't invest it long.
We don't take any risk with it. There's no risk to us. But now the use account for SLR, but now accounts in multiple carriers for G SIB. So we obviously have to modify how we're going to do that. G SIB is credit insensitive, it's risk insensitive.
It really goes against the cross border financial institutions. I don't even think the complexity category that's not risky. They are slightly more complex assets, but you have to separate risk and complexity. So we are I would say low risk. Look at our earnings volatility, our profit margins, our growth, our ability to sustain things over a long period of time.
I do think ultimately these rules and regulations will make it for a better industry. So I am looking forward to some of these things eventually being finalized and that the banking is going to be very strong, a lot of the problems behind it and we'll be back into a normal course of kind of serving clients, growing businesses and people no longer questioning the safety of the industry. Capital management strategies will change. I think it's possible. I don't know this.
It's not a commitment. It's Board level decision that you will see dividend payouts go up. So instead of people doing 30% maybe targeting 50%, 50% are normalized not 50% of peak earnings. And I think it might be a better way to manage capital. I think people should not be caught where they have to buy back stock.
I'm going to use the word indiscriminate like regardless of price. I think that's a bad way to manage your balance sheet. And so paying out regular dividends kind of reduces that burden a little bit. I like our stock at this price personally. And also in the last 2 weeks that PE turn has changed by one turn already just overnight pretty much or something like that.
And then I'd like to mention a few other things that hopefully would be important to you. We have a fully engaged Board. The Board is 11 people. They are engaged in the agenda setting for the whole company. They generally see this kind of presentation of bulks of it.
They know all the senior people here. They know them well including not just the people who report to me, but I'd say later down. They're deeply engaged in strategy, CEO succession, CEO comp and risk, major risk items. They've picked up the baton to say they want us to be the best in the world in the heightened standards that the regular setting we're going to do that and they're doing their part. They spent a tremendous amount of time with regulators and shareholders to worse than they ever used to do before.
And I think it actually has been a plus. We have a very strong corporate culture, but we also are going to improve. You've heard a lot of people talk about today about new leadership training, conducting culture, stricter regulation, tougher surveillance of certain trading areas. And we've taken action, okay? We have asked a lot of people to leave when they think they're bad performers or bad behavior.
And so this is not a company that kind of turns the other eyes and I think we have to just do more of this and get it right. We'll never be perfect, but I do think there's a lot of benefit just to that everyone knows that you're trying to do everything right and no one's ever turning away from some bad taking place out there. And we always believe in learning from our mistakes over time, because I think knitting your mistakes and fixing them is the best way to be a very strong company. And so we are I think you heard that among the people here. So we I'll just let me just end by saying that the you saw several people present here today.
A lot of the people from JPMorgan here today who are exceptional. I do and I just don't want to introduce everyone because I can't. I just want to introduce real quickly bunch of people from the operating committee who did not present today, but equally important to the company. So Ashley Bacon, another Brit who runs risk diligently really diligently for the company Steve Cutler, who's our superb General Counsel Matt Zanes, who we're lucky to have him in corporate, who implies intelligence across cyber and technology and ops and balance sheet and obviously runs CIO and has done an exceptional job. He had to go to I think a regulatory thing.
And John Donnelly, who is our deeply trusted and trusted by all the management team of HR to help us do the right things there. And then I'm going to just mention one other person because they kind of exemplify a little bit of JPMorgan and what people at JPMorgan do, which is Jimmy Lee over there, who when Mary put up her chart, I just pointed Jimmy Lee, he still like opens checking accounts in addition to dealing with obviously some of the bank's largest clients, the private bank, the commercial bank, helping Gordon whenever he needs help. So I think it exemplifies what the company does. When someone walks in, you obviously help them whoever they are personal relationships, corporate relationships etcetera. So I feel lucky to have that team.
That team by the way, while I was a little occupied this summer, I did go to work every day just so you all know and Miriam was quoted somewhere saying, Jamie's been working more than us because you guys all went on vacation in August and I couldn't go on vacation. I didn't work particularly hard, but I just show up when I could. And but the management team had a strategic off-site without me. They got a lot of stuff done. They performed if you saw the party that takes place here, a lot of you work in corporations that are full of disastrous politics and people we wouldn't want to work for and all the this management team is really exceptional.
And I hope you saw that today. So my thanks to not just the operating committee, but all the management team. The other thing about the operating committee, we meet every week and go through stuff every week for an hour or 2. Every month with an agenda that's set by everybody, so it's not my agenda. What do we need to talk about?
And it could be risk controls, credit systems, tech ops, cross selling, marketing, could be anything, the real agenda and always trying to figure out what we could do better as a company, pressuring ourselves to do better and think things through and very often at a very detailed level, which would probably surprise you. So, let me stop there and open the floor to any questions you might have.
Mike?
2 small capital questions and one big one. First, the dividend payout ratio going from 30% to 50% is that wishful thinking? Is that something you think is possible in the next 2 or 3 years? What?
I don't know because it's up to the regulators. I think that they've maintained this 30% kind of guideline for people. It's not hard and fast. You saw a couple of people last year go over it. I believe that over time when people get to where they need to be when the rules get finalized and all that when the conservation buffer is the thing you're going to once you pass CCAR, you have that conservation buffer that they will allow people to pay higher dividends and that that will be a more rational thing.
The Sys will be stabler, revenues will be a little bit more stable, cost of equity will probably be down a little bit. It will be a rational way to deal with shareholders. So I do believe it's going to allow that over time and hopefully that will be true. So I'm not guessing it's going to be for JPMorgan. I'm simply saying, I believe it's the right way to do it and they'll probably happen over time and we'll figure it out as we see the final rules.
And then the second question, you like the stock at this price. Does that mean a bias toward buybacks? Is there a way to sell off an appreciated asset and use the proceeds to buy back stock?
The way CCAR runs and stuff like that is that's all gets baked. So even if we sold something again or something like that it would not change the permission we get on the CCAR. Maybe down the road that will change, but no. And CCAR comes out in March and then effectively
yes. And then lastly, the main question is just you mentioned the inexpensive stock price below PE. It seems to be due to 2 factors. 1 is the financial conglomerate discount that some corporations have. How do you eliminate that financial conglomerate discount?
It's like a lot of people say, well, if you go to the next recession, you'll get rewarded and you went through the last recession and did fine and you're not being rewarded now. And then the second reason might be for the regulatory discount. And I think Glenn asked the question earlier to Mary Anne saying, if you can get a 15% ROE on 12% capital fantastic, but are you getting the message from the regulators which want the largest banks to downsize more than you've already done.
Yes. So I said at Kim at lunch that their GSIFI is quite clear what they want to accomplish and we're going to accomplish that for them. If it's more than we said then we'll do more than we said. I know it's ever called up and said you got to do more than that. We want to see no one over this bucket or something like that.
Got increasingly higher buckets. So clearly they're trying to put our capital into something like that. And we're not a conglomerate. So I when you say conglomerate, I always look at conglomerate. It generally means a bunch of unrelated businesses under the same roof.
Nothing wrong with that by the way. People run quite good healthy conglomerates. These are not unrelated businesses. Most of what we do the average regional bank does compete. And then you set up your organization.
We could set up differently. We could set it up a whole different organizational structures. So it's not a and I don't think what you're seeing is a financial conglomerate discount. I think you've seen is that JPMorgan has been on a stress and strain a lot of legal regulatory issues more than most. And that's kind of a burden we're bearing and we've got to get out of that by performing, by fixing the regulatory stuff.
And in 2 years, I do think the final rules most of the regulatory rules will be final. They're always going to be tougher. They're always going to be changing them, but the ones that we all worry about. And a lot of legal stuff will be over. And we're trying to be vigilant to make sure we don't create any additional new ones.
Renan?
So when we look at CIB and the returns sort of dilutive to the firm returns overall, It's been a big focus for investors and there's really been a frustration about the industry overall and the changes in the investment banking business especially in FICC. You guys are huge in FICC. We've heard over and over about pricing. We've heard several years ago that pricing has already been adjusted and now we're starting to actually see it in the market. So how sure are you that the changes that have been made within FICC are sufficient?
And how is it that how confident can we be that moving towards a place where returns can actually stop being dilutive to the firm overall? And then finally, if you get a lot of side benefit to other businesses from your FICC presence, can it be reflected in transfer pricing or some more sophisticated way to have that come through that we can see?
Let me ask the first one first. We don't we do a lot of transfer pricing and pricing and what you don't want to do is start a war zone between people saying, okay, you're going to get 20%, you're going to get 70%. A lot of these businesses help each other and they don't get being served by both. If one side starts saying, I gave you a client, you want me a client, can you give me a client, can you give me a client, can you give me a client, can you give me a client? Yes, I'm being served by both.
If one side starts saying, I gave you a client, you want me a client, give me $1,000 it will be a disaster. So we're very careful. We don't mind having transfer pricing when it drives economic decisions, but we're not going to have it when you can create a problem like that. And CIB, first of all, I would mention the 13%, because I think it was an honest assessment and if you listen to Daniel he said, it's where we are based upon today's pricing, we're not assuming repricing and based upon we don't know what's going to happen necessarily the market share. We don't know all these different things.
That's based on where we are today. We have a preeminent business, okay? Again, I'm looking at 3, 5, 10 years out. If we keep it preeminent, it would be a very valuable business. I don't look at the 13 and say, oh, woe is me, it's dragging down the rest of the company.
It doesn't take away if the value of this is X and the value of this is Y, it doesn't take away from this one. It just doesn't, okay? So artificial content reduces the average, but it doesn't change the value of why at all. And so my attitude is I think things will reprice. I think market shares will change.
I think we've seen a little bit. We see it in Exact Ritters. We see it in Trade Finance. We see it in a little bit in Deposit Price. We start to see little piece.
I think you will see repricing. So I think when we're sitting here in a year or 2, we'll be explaining to you a bunch of changes that we went through, but I still want that preeminent position. We're not going to give that up for anyone including Richard Ramsden, okay? We work long and hard for that. And again look FICC earns a return on capital.
But we've gone we had the most volatile lowest share. It was up and down all the time and now it's the most consistent. I mean, shocking number, the volatility is like 4% or whatever it is for markets and very broad based across the products and geographies. It's a critical service for clients. We're building the electronics side reducing the cost.
It's uncomfortable this can be a good business. And we showed you the one that gets criticized the most is rates. He showed you a chart that rates ex legacy mostly uncollateralized receivables derivatives which probably isn't bad just is what it is, but it's huge charges against it that other than that and that's going to run off we earn an adequate return, because our share has gone way up and you kind of have a lot of that the cost of running the business is fixed. And we're very and I forgot the number for rates, but FX like 95% of transactions are electronic. For rates, the number is going way up because of our QMM or whatever the numbers are in electronics.
So we're driving the cost down and there will be a business there. You don't have to change the spread a lot on
some products to make
it more profitable. Marty? Jamie, I want to take the angle here a little different. You said that 7% capital you're going to earn 15%. Yes.
10% capital you earn 15%. Yes. 12% capital, you earn 15%.
This has all kind
of happened since the financial crisis. So we get distracted a lot by all the headwinds, all the changes in regulatory pressure. There has to be something behind the scenes that's working very positively that's helping you overcome all those regulatory expenses, increased capital. What in the industry is working right now? And what has changed since we went through the financial crisis for the better?
So, I think when we were at 7% capital, 7% Tier 1 comp, we were talking about more like 20%, but I forgot the exact number now. The banking system in America has completely recovered, much stronger around the rest of the world, which is why Europe is still going through deleveraging and things like that. Everything is conservative here RWA, operational capital, liquidity. I think those are good things. The stability of the system is good.
America is strong, which I think is benefiting our U. S. Businesses. So take CIB in Europe. It's doing quite well.
And so like actually Jimmy sent me a note and said just remind the folks that there were certain years that CIB was carrying the load, while we were stuck in wind in card and mortgage. And it's hard to remember today. And I always and I tell Daniel and all the guys, all the folks in the Investment Bank, it's really weird to feel sorry for the Investment Bank, isn't it? You have to confess. And I think market shares have changed a little bit.
We haven't again, we haven't seen a lot in pricing. There has been some consolidation. So, but it's hard to answer that question over the long period of time. I know what we've done. I know what we've built.
The Chase card business has been exceptional. Private bank has added so people. And I know that remember everything we do at the margin, you get into marginal profitability. There's a lot more of the average profitability. So there's a lot of that taking place across our whole company.
Just one follow-up to that. If you look at the market share gains we saw today, a lot of that's looking past over the last 3 to 4 years since the financial crisis and all the disruption. Is it going to be harder to continue those market share gains now that we're getting to a more stable financial system and players and competitors.
Here's one thing I like kind of that may be peculiar for me to say since I was involved in so many mergers and acquisitions in my career. Most of what we're doing now is organic. Organic growth is harder, but it's better, okay, because it's deepening relationships, it's deepening communities, it's cross selling in a way that works for clients. We don't like the word cross selling because it sounds like doing it for us. We're doing it because they get something better faster or quicker or something like that.
And so we are we have to do organic growth. We can't do a FDIC insured institution in the United States. We can maybe do some overseas, but it's quite obvious that regulators don't want us to be bigger. But organic growth is great. I think you can if we do it well and think of the best companies out there that have done organic growth consistently for a decade and we're doing it really well in a lot of places, organic growth is consolidating, cutting, cost cutting.
That's hard and it's hard and it also stops organic growth. It hurts customer service. It does all those things that you don't want. So to me, we're in a good shape just to keep on doing organic growth. It costs money sometimes to pay for the marketing and
the new banking kiosks
and to redo branches, but it is
far more valuable a long period of
Jamie, I think you guys gave a convincing argument why you're a low risk company, how you've done great through the cycle. Is there any way I don't know how you can answer this, but in terms of the bid ask between how you view the company as low risk versus your regulators, could you kind of give some clarity in terms of where there might be some differences of opinion? Is it just simply size? Or is there something else in terms of that can help people understand in terms of how you can kind of narrow the bid ask in terms of regulators feel is high risk versus
I don't know that they have said we're high risk, okay? Because G SIB, they don't say that G SIB is a risk measure. They say that G SIB is stuff they want to change, interconnectedness between financial companies, certain cross border transactions, notional amount of derivatives. Some of those may be related to risk and some are not directly related to risk. And people say, oh, if you're the largest systemic bank, it's because you're the riskiest.
Those are not necessarily the same thing. We're the largest systemic bank under one thing. Under CCAR, which Mary Anne showed you and take that chart out, our capital loss under CCAR is 2.8% of our capital, okay? The other institutions and you can name them all up there, it was more like 4%. So by that measure of risk, which is a very tough measure of risk by the way, we have less risk than other people as a percent of capital.
And like I mentioned, we showed you the balance sheet, okay, dollars 800,000,000,000 of cash and cash basically marketable securities. That's an unbelievable number. And I remember in the old days when a bank was considered conservative when it lent out 90% of its deposits and put the other 10% in marketable securities. We're lending out with a 60 5% of our deposits and huge amounts of marketable securities and cash at LCR. And I also think that they've set very tough standards for liquidity and capital stuff like that, which makes all banks safer.
I think they would say that too.
Matt?
This might be a bit
of an obvious question, but clearly there's a focus increased focus on expenses that I think came through today as well as last year. And in terms of maybe what the driver was, again, here's kind of maybe it's an obvious question, but is it kind of acknowledging that rates are going to stay low? Is it that you've had more regulatory hits than maybe you thought? Is it that now is the right time because more of the regulation is known? Or is it where JPMorgan's out that it's the right time to get more cost cost?
I don't think it's got any subdue in that stuff. We do this every year. Every year we go line by line, budget by budget, LOB by LOB, what's the right thing to do, where should we invest, where should we are we wasting money, where should we consolidate, how can we every year. I think the one so it wasn't to make up for instance. We want to be efficient.
We don't need to be told by the people to be efficient. We know that being efficient is like a critical part of running a successful company over a long period of time. The one exception I'd say is that when it came to the regulatory things, okay, so the $3,000,000,000 that we put up there, we said and we said it to you, we said to the Board, we said to the regulators that we are going to do whatever we need to do to get this done as fast as we can do it. That's what we said. And like for one of the rare times in my life expenses be damned, because we owed it to them, we want to get it done, we wanted the resources, we want to be clear, We don't want to have 6 months of budget debates about it.
We made a commitment to the regulators and we're going to meet that commitment. So that was the one exception. But it didn't stop us from trying to be very efficient elsewhere. We try to do it all the time. The management team wants to be very efficient and we always come up with ways to think about how can we test ourselves.
Gordon gave you the black cars and the T and E and but we circulate to everybody. And everybody kind of looks at that and why are we doing these things we're doing and why don't we consolidate this. So I think we've been fairly prudent around expenses. I don't think we've changed other than that one thing.
And then just separately a clarification question. The $30,000,000,000 of net income that Mary Anne showed I think that compares to $27,000,000,000 last year, although I think this might be a target now as a simulation. Is this really just rolling out 1 year? Is it from the cost saves? What drove the increase?
Or are they not exactly comparable? Yes.
So a few things drove it. Primarily last year we got some feedback that we had only we've been quite limited in the things that we included in terms of growth. So we included only those that were delivered by the investments that we had put in the presentation. So about $1,500,000,000 of it is to do with looking across all of our businesses, looking at just the BAU underlying growth and drivers, looking at that in a way that is somewhat modest in comparison to what we've been experiencing and building that into the equation. Some of it is the incremental expense efficiencies that Daniel's committed to this year, which is part of the regular way that we manage the company.
But nevertheless, that wasn't a target out there last year, so that wasn't fully embedded. Credit is a little better, because we had assumed we would have fully through the cycle normalized credit over that 3 to 5 years year. So this year it's 3 years.
How much was that one difference?
Like 700 net income. And then rates is a little less. So three good things more expense efficiency in CIB, more BAU growth, very, very hinged on the existing underlying driver growth, a little bit discounted, a little bit less credit cost because we're looking at 2017 and so we expect that to be low, a few more reserve releases stuff that. But fundamentally against that we took rate down because in 3 years it's going to be what it's going to be in 3 years. We think it's going to start to rise if not in June with the risk of September, but nevertheless and we'll have what we have in 2017.
And from there you'll continue to accrete the incremental NII that I showed and then you'll start to see normalization of credit. So there's the difference there.
I would say also on because this question around deposits. I think we've been fairly conservative on how we look at deposit beta, the change in the mix, competitive pricing, money market funds in a rising rate environment. We've kind of tried to scrub that and be probably on the slightly more conservative side than that. Thank you. Jamie, you mentioned that a bunch of your businesses are regional bank like businesses.
So in those business lines when you compete against a U. S. Bancorp or P and C where the products are apples to apples, so you don't have a global advantage because those customers may not want that advantage. How do you compete when your capital levels are up to 300 basis points more than theirs in the terms of a return on equity on that type
of product?
So first I'd remind you historically we always had more capital and we never had a problem competing. So I think it was too much that maybe changed it. So if you you're going to compete in the marketplace the price the marketplace sets. That's what you're going to do, okay? JPMorgan can't set the price for credit when the credit is going to be set in certain markets at certain price.
But our mix of business is up to us. And whether we do business at client is up to us. So Doug was quite clear that some people do credit only. Like he showed you a thing where we do a lot more cash management than credit like 47% of the accounts had credit and 80% of cash management. Cash management is not credit sensitive.
So if you have a cash management account, custody account and a credit account, the relationship makes sense. So we just have to find clients that make sense for us. It doesn't matter whether they make sense for somebody else. And 25% do get things that we have merchant processing, international, some investment banking that other people can't do. So we do have a unique competitive advantage that other some of the banks simply don't have.
So we do bring something different when we go to those towns. Again, I could say that's normal capitalism by the way. I don't think that's special for us. I think that other companies, others have exactly the same
thing.
A philosophical question, I guess, but you've made the case many times and very eloquently that very large multinational companies American and not need very large sophisticated banks that can bank them globally. As I said, you make that case to us very eloquently. I assume that you have made that case to the regulators that place a lot of obstacles in front of that type of business model? Do you sense that it resonates with them? And if so how can you tell?
Look, I can't you can't lump them all together. And again, it works because the clients are doing it like ECM and DCM and Bridge Finance. They're large clients. They went through cash management for certain clients in 10, 20, 30 different countries and sweep all their currencies into 1 overnight. And so people do need and require the services.
Some will move. The regulators have been clear. They don't want banks to be too risky. They don't want banks to create a systemic risk. They want banks to be resolvable.
They want more capital. They want more liquidity. And they're doing all that. So that's what they're pushing.
I don't disagree with them.
They should be doing all those different things. That's going to stop us from serving our clients. They're not saying that some of our clients don't need services in 20 countries. They're simply saying if you're going to do it, you're not going to do it in a risky way. And we're going to make you and other banks a lot less risky than you were in the past.
I think they're accomplishing that and they should take credit that
at one point.
Mike?
Are capital markets off to the races? Are we in the process of normalizing now? Your guidance from Daniel was that you're up year over year and so that's a big delta from the Q4 to the Q1 just based on data.
I was listening carefully at his words too, though I get the daily trading reports. And I'm sure he spent a lot of time thinking about it. You said it was a strong start to the quarter. That means it will be up year over year, but there are 5 weeks left.
But do
you are there more? Just remember there's 5 weeks up year over year, I mean or whatever it's 7 weeks whatever and there are 5 weeks to go, which we don't know what that's going to be.
But is there
is it simply a function of more volatility or are there more
There is substantial increase in client activity, mainly in January and also in a more volatile environment with continuous market really we're monetizing it better than we did last year.
And do you think that's sustainable? Are we at an inflection point where you say we're going to move resources?
So clearly when you look at January, January was a strong month that sort of tail down a bit, but it's still coming quite strong. All right. Thanks.
We've exhausted all of your questions. Listen, let me just end by thanking you all for coming and spending so much time with us. And for those who stayed, I think there are are cocktails out here? I know it's only like 3:30 or something like that. But you're welcome to start drinking.
Thank you. See you all soon.