JPMorgan Chase & Co. JPM Q3 FY20 Earnings Call Transcript

Operator: (00:00) Good morning, ladies and gentlemen, welcome to JP Morgan Chase's third quarter 2020 earnings call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation. Please stand by. At this time, I would like to turn the call over to JP Morgan Chase's Chairman and CEO, Jamie Dimon and Chief Financial Officer Jennifer Piepszak. Ms. Piepszak, please go ahead. Jennifer Piepszak: (00:28) Thank you operator. Good morning, everyone. I'll take you through the presentation, which as always is available on our website and we ask that you please refer to disclaimer at the back. Starting on page one, the firm reported net income of $9.4 billion, EPS of $2.92 and revenue of $29.9 million with a return on tangible common equity of 19%. Included in these results are 524 million of legal expenses primarily related to the resolution of legal matters announced last month. Overall for the quarter, while we're still in a very uncertain environment, our underlying business fundamentals performed quite well. So I'll just touch on a few highlights here before getting into the line of business results. The CIB continued its strong performance with IB fees of 9% and markets revenue up 30% year on year. And we had record revenue in AWM, up 5% year on year. Jennifer Piepszak: (01:28) On deposits while we expected to see some normalization in our balances, instead we saw another quarter of growth with average deposits up 5% sequentially and notably we moved into the number one spot in US retail deposits with 9.8% market share, gaining 50 basis points of share year on year. On the other hand, average loans were down 4% quarter on quarter, primarily on revolver paydowns from our wholesale clients. With that, let's turn to page two for more detail on the third quarter results. We reported revenue of $29.9 billion, which was flat year on year. Net interest income was down approximately 1.2 billion or 9% on lower rates, partly offset by higher markets, NII and balance sheet growth. And non-interest revenue was at 1.2 billion or 7%, primarily driven by CIB, including higher banking and markets revenues as well as net security gains in corporate. Expenses of 16.9 billion were up approximately 500 million or 3% year on year, on the higher legal expenses that I already mentioned. Jennifer Piepszak: (02:38) This quarter, credit costs of approximately 600 million were down 900 million year on year, primarily driven by modest reserve releases, which you can see in more detail on page three. We released approximately 600 million of reserves this quarter, primarily on runoff and home lending and changes in wholesale loan exposure. Charge offs across our portfolios remain relatively low and in fact were down slightly year on year and quarter on quarter. While we could see an uptick in charge off over the next few quarters given payment relief and government stimulus already provided, we don't expect any meaningful increases in charge offs until the second half of 2021. As you can see at the bottom of the page, our updated base case reflect some improvement from last quarter. However, the medium to longer term is still highly uncertain in particular as it relates to future stimulus. And so we remain heavily weighted to our downside scenarios and with reserves of 33.8 billion, we're prepared for something worse than the base case. And now turning to page four, I'll provide a quick update on what we're seeing in our customer assistance programs. Jennifer Piepszak: (03:49) You can see here that the vast majority of car and auto customers have exited relief. And so what's left in deferral is primarily in home lending, including 11 billion of owned loans and 17 billion in our service portfolio. And in terms of what we're seeing with our customers that have exited relief, approximately 90% of accounts remain current. Now turning to balance sheet and capital on page five. We ended the quarter with a CET1 ratio of 13%, up 60 basis points versus last quarter on earnings generation and lower RWA partially offset by dividends of 2.8 billion. And it's worth noting that we have over 1.3 trillion of liquidity sources available to us across HQLA and unencumbered securities. Now let's go to our businesses starting with consumer and community banking on page six. CCB reported net income of $3.9 billion and an ROE of 29%. Revenue of 12.8 billion was down 9% year on year driven by deposit margin compression and lower card nri on lower balances, partially offset by deposit growth and strong home lending production margins. Jennifer Piepszak: (05:05) Deposit growth was 28% year on year, up over 190 billion, largely on lower spending and higher cash buffers across both our consumer and small business customers as well as organic growth. Find investment assets were up 11% year on year driven by both net inflows and market performance. Overall, consumer customers are holding up well. They have built savings relative to pre COVID levels and at the same time, lowered debt balances. With regard to digital adoption, early signs suggest the increased customer migration to digital will persist. In fact, nearly 69% of our customers are digitally active and that's up three percentage points year on year and accelerating. And quick deposit now represents more than 40% of all check deposits versus 30% pre COVID. Jennifer Piepszak: (05:57) Moving on to consumer lending, starting with home lending. Total originations were down 10% year on year driven by correspondent. However, consumer volumes were up 46% year on year and notably more than half of consumer applications were completed digitally, twice the level of the first quarter. In cars, while net sales were down 8% year on year, then continued to improve throughout the quarter. And in the month of September, sales were down only 3% year on year, reflecting the lowest decline since March. Retail, which is a significant portion of overall spend was the bright spot reaching double digit year on year growth in the third quarter, largely driven by card, not present transactions. Jennifer Piepszak: (06:42) And then in auto, record originations for the quarter of 11.4 billion or up 25% year on year. Total CCD loans were down 7% year on year, with home lending down 15% due to portfolio runoff and cars down 11% on lower spend offset by business banking up 83% due to PPP loans. Expenses of 6.8 billion were down 4%, predominantly due to lower marketing investments. And lastly, credit cost is 794 million included a $300 million reserve release in home lending and net charge offs of 1.1 billion driven by cars. Now turning to the corporate and investment bank on page seven. BID reported net income of $4.3 billion and an ROE of 21% on revenue of 11.5 billion. Investment banking revenue of 2.1 billion was up 12% year on year and down sequentially off an all time record quarter, and we maintained our number one rank in ID fees year to date. Jennifer Piepszak: (07:49) The quarter's performance was largely driven by our equity capital markets business, which saw an uptick in IPO issuance driven by a strong equity backdrop with stocks trading at or near all time highs. In advisory, we were down 15% year on year, largely impacted by the muted M&A announced volumes in the first half of the year. However, we saw a surge in M&A activity this quarter with announced volumes returning to pre COVID levels as companies began to shift their focus from day-to-day operations, more strategic and opportunistic thinking. Jennifer Piepszak: (08:23) Debt underwriting fees were up 5% year on year, but down 21% sequentially as we saw investment grade activity return to more normalized levels from the record volumes we saw in the second quarter. The leveraged finance market continued to recover with high yield spreads approaching the pre COVID levels and some notable acquisition financing deals closing. Jennifer Piepszak: (08:44) We maintained our number one rank in overall wallet, and we're the leaders in leave left across leverage [inaudible 00:08:49]. In equity underwriting, fees were up 42% year on year, resulting in the best third quarter ever, primarily driven by our strong performance in IPO's and [inaudible 00:00:09:00]. In terms of the outlook, we expect fourth quarter IDPs to be roughly flat versus a strong quarter last year and down sequentially. However, if evaluations remain elevated, we could continue to see momentum in capital markets. Jennifer Piepszak: (09:18) Moving to markets, total revenue was 6.6 billion, up 30% year on year. While activity continued to normalize with spread volumes and volatility reducing from the elevated levels of the first half of the year, the performance was strong throughout the quarter and across products, reflecting the resilience and earnings power of this franchise through a broad range of market conditions. Fixed income was up 29% year on year against a strong third quarter last year, driven by a favorable trading environment across products, notably in commodities, as well as elevated client activity in credit and securitized products. Jennifer Piepszak: (09:56) Equities was up 32% year on year on continued robust client activity and equity derivatives as well as their recovery in prime balances and a solid performance in cash. Looking forward, it's important to remember that 4/2/19 performance was very strong making for a difficult year on your comparison and obviously forecasting market's performance remains challenging in this environment. Jennifer Piepszak: (10:20) Wholesale payments revenue of 1.3 billion was down 5% year on year, driven by deposit margin compression, largely offset by balance growth as well as the reporting reclassification in merchant services. Security services revenue of a billion dollars was flat year on year where higher deposit balances were offset by deposit margin compression. Expenses of 5.8 billion were up 5% compared to the prior year, largely due to higher legal expense, partially offset by lower structural and volume and revenue related expenses. Jennifer Piepszak: (10:53) Now moving on to commercial banking on page eight. Commercial banking reported net income of $1.1 billion and an ROE of 19%. Revenue of 2.3 billion was flat year on year driven by deposit margin compression, offset by higher balances and fees and higher lending revenue. Gross investment banking revenue of 840 million was up 20% year on year on increased debt and equity underwriting activity. Expenses of 966 million were up 3% year on year. Average loans were up 5% year on year, but down 7% quarter on quarter due to declines in revolver utilization by CNI clients and lower origination volume in CRA. Deposits of 248 billion were up 44% year on year and 5% quarter on quarter as client balances remain elevated. Jennifer Piepszak: (11:48) Finally, credit costs were a net benefit of 147 million, including a $207 million reserve release and net charge off of 60 million. Now on to asset and wealth management on page nine. Asset and wealth management reported net income of 877 million with pretax margin of 31% and ROE of 32%. record revenue of 3.7 billion for the quarter was up 5% year on year as growth in deposit and loan balances along with higher management fees and brokerage activity were largely offset by deposit margin compression. Expenses of 2.6 billion were flat year on year and credit costs were a net benefit of 51 million primarily due to reserve releases. For the quarter, net long-term inflows of 34 billion were positive across all channels and driven by fixed income and equity. At the same time, we saw net liquidity outflows of 33 billion, AUM of 2.6 trillion and overall client assets of 3.5 trillion, up 16 and 15% year on year respectively, were driven by net inflows into liquidity and long- term products as well as higher market levels. Jennifer Piepszak: (13:03) And finally, deposits were up 23% year on year and loans were up 13% with strengths in both wholesale and mortgage lending. Now onto corporate on page 10. Corporate reported a net loss of approximately 700 million. Revenue was a loss of 339 million, down a billion dollars year over year, driven by lower net interest income on lower rates, including the impact of factor prepays on mortgage securities, partially offset by 466 million of net securities gains in the quarter. And expenses of 719 million were up 438 million year on year, primarily due to an impairment on a legacy investment. Jennifer Piepszak: (13:46) Now let's turn to page 11 for the outlook. You'll see here that our full year outlook for 2020 remains in line with what I said at Barclays. We expect net interest income to be approximately 55 billion and adjusted expenses to be approximately 66 billion. And while we don't have anything on the page for 2021, and we're not planning to do invest today, we'll share more color with you on the outlook in the first quarter of next year. So to wrap up, even though recent economic data has been more constructive than we would've expected earlier this year, there remains a significant amount of uncertainty. And so we continue to prepare for a broad range of outcomes while focusing on serving our customers, clients and communities through this time. With that, operator please open the line for Q and A. Operator: (14:40) If you would like to ask a question, please press star, then the number one on your telephone keypad. We kindly request that you ask one question and only one related follow-up. If you would like to ask additional questions, please press star one to be reentered into the queue. Our first question comes from Matthew O'Connor of Deutsche Bank. Matthew O'Connor: (15:10) Good morning. Jennifer Piepszak: (15:11) Hello. Matthew O'Connor: (15:13) So I think one of the key questions on investor's minds right now is how will banks grow revenue kind of medium term here, as you think about lower for longer rates. And I was hoping you could just talk about how you think about managing a company, you're afraid to stay very low for a long time and how you can grow revenue and obviously year to date the revenue has been very good, up 4%. And if you could just weave in the branch expansion that you alluded to in the comments as part of that answer, that'd be helpful. Thank you. Jennifer Piepszak: (15:44) Sure. So in terms of how we think about the revenue outlook for 2021, first of all, it's early and we'll come back to you in the first quarter with more details. But it is true that if we think about the NII outlook, that that will be under pressure relative to 2020. Jen: (16:03) ... look, that that will be under pressure relative to 2020 and I can't give more detail on that. But also, we are on pace for record revenue in markets and investment banking, and so that will be a tough compare. Having said that, we're not going to change the way we run the company because of what might be temporary rate headwinds, and we see significant franchise value in the growth that we're seeing in the deposit base. And with that on branch expansion, we are continuing on our plans in branch expansion. We have I think almost 120 branches open in our expansion markets. We'll do more than another 150. So far this year, we got approval to enter 10 additional states, which we'll ultimately put up in all lower 48. So we continue with the branch expansion and remain very excited about it with those new branches, in most cases, performing well above the original business case. Jamie: (17:07) Can I just add to that to give you a little bit of longer-term view? There's not one single business or not any bankers, countries, products, digital. We're growing securities services and cash management services. We're adding, we're growing the Chase wealth management business. We're adding private bankers. We're adding products in Asset Management. And we kind of look through all the things. I kind of call them the weather. We just keep on growing. The branch expansion is one example of that. We never stopped doing that. We never stopped gaining credit card products. We never stopped growing digital Home Lending products, and we'll be doing that for the next decade. And of course, you have all these ins and out from what I call the weather: NII, spreads, margins, markets, etc., but the goal is always the same. You grow the business to serve your clients around the world. Speaker 1: (17:54) And then as a follow-up, Jen, you'd said that you'd elaborate on the net interest income. I don't know if you meant now or you're going to wait until January for that in terms of the outlook for next year, just some puts and takes. Jen: (18:05) Sure. So there, I had said at Barclays that the current run rate was a good place to start. So $13 billion is a good place to start and for 2021 reflects the impact of the rate environment and some normalization in market's NII. But from there, balance sheet growth and mix should be supportive throughout the year, and so for the full year of 2021, my best view at this point would be $53 billion, plus or minus. But yeah, we'll sharpen our pencils on that and continue to provide updates, but right now, full year, $53 billion. Speaker 2: (18:43) Our next question is from Glenn Schorr of Evercore ISI. Glenn Schorr: (18:50) Hello there. Jen: (18:51) Hi, Glenn. Glenn Schorr: (18:52) Good morning. So I guess the reserve release was definitely driven by mortgage prepay and run-offs, and I get that. But NPAs were still up 18% quarter on quarter. I wonder if you could talk about what drove that. Maybe comment on commercial real estate specifically. It'd be appreciated. Thanks. Jen: (19:16) Sure. So the reserve release, as you said, was largely on portfolio run-off and changes in exposure in Wholesale, so not a reflection of a change in our outlook. And then the increase in nonaccrual loans on the consumer side is mortgage, and it represents the customers that have come out of forbearance and are not paying. And so as you saw on that slide, the payment deferral slide, about 90% are still current. The other 10% has now been reflected in the nonaccrual exposure. So that is all mortgage, and then the increase in nonaccrual on the wholesale side was just a few name- specific downgrades, which are in sectors you would expect, as you just said, retail-related real estate and oil and gas. And then more broadly on commercial real estate, I'll just share that we feel adequate reserve for what we're facing, but if you look at rent collection as an example overall, with the exception of retail, between 85% and 95%. And then even retail in the month of September was about 80%, has recovered to about 80%. So still a lot of uncertainty there, but we feel adequately reserved. Glenn Schorr: (20:39) Okay. I appreciate that. Maybe one on asset management. You have been doing great. I don't need to ask on your specific business. But in the past, you've spoken about potential interest in participating in industry consolidation. We saw some of that happening lately. Can you just talk, remind us about the parameters of what you would and might not be interested in doing in asset and wealth management? Jamie: (21:05) Well, since we have you all on the line, our doors and our telephone lines are wide open. We would be very interested, and we do think you will see consolidation in the business but we're not going to be more specific than that. [inaudible 00:21:16] product-sensitive, the systems, the technology, the business projects, the ability to execute. There are a lot of issues that will determine whether something makes sense for us in there. Speaker 2: (21:30) Our next question is from Mike Mayo of Wells Fargo Securities. Mike Mayo: (21:36) Hi. Hey, Jen and Jamie, that was some comment. You said you do not expect much higher charge-offs until the second half of next year, and that's even with the higher NPAs. So what are your assumptions behind that, Jen, as far as specifically when the forbearance actions run their course, and, Jamie, policy actions that might be embedded in that expectation? Jen: (22:06) Okay. So I'll just start, Mike, with, first of all, the increase in nonaccrual was on mortgage, and when you look at the LTV, the loan to value on those loans, that's what is embedded into how we're thinking about what charge-offs will look like in the near term. There's still very healthy LTVs on those loans. So really, when we talk about losses really emerging in a significant way, not until the back half of '21, we're talking about cards. And just given the amount of stimulus and payment relief and just support in the system, we haven't seen the delinquency buckets begin to fill up, and we charge 180 days past due in cards. So that is primarily just a timing issue as it relates to cards. We could see increases in charge-offs in the next few quarters on the wholesale side or maybe here and there on the consumer side. It's just that the meaningful change in charge-offs we don't expect until the second half of 2021. Jamie: (23:07) Yes. And, Mike, about policy, first of all, I wouldn't say that policy is determinative here because this is unprecedented times. And what we're saying is that policy will matter and will skew the odds of having a better outcome. So I think the policy, obviously, the Fed is doing what it can to keep markets open, but the policy on the fiscal side is just some kind of continuation of unemployment insurance and PPP. So those are the two most vulnerable areas to just maximize the chance that we'll have better outcomes, and I do think that over time, intelligent return to work. I caution people remember, 100 million people go to work every day. So the complete focus is on the 50 million who don't go to work. But the 100 million who go to work, it's rather safe. Jamie: (23:54) There's a lot of examples where you do the social distancing and the cleaning and all the various things like that that it may be safer than being home in your community, but the getting back to work is a little bit important because you look at cities and travel and a whole bunch of stuff. There are a lot of people who are under a lot of stress and strain who won't be able to survive another year of complete closedown. So the other policy is numerous, rational, thoughtful return to the office, done properly, which will help all those businesses support the big office towers and buildings and stuff like that, and those two things will maximize the chance of good outcome. They don't guarantee the chance of a good outcome. Mike Mayo: (24:39) And I know this is a tough question, but you're in the middle of the stress test part two. When all is said and done, Jamie or Jen, where do you think these charge-offs go as a percentage of the global financial crisis? I know you have scenarios, but where should we think? Is it like half the GFC level, same as GFC level, twice the GFC level? What are you guys thinking at the back of your mind? Jen: (25:08) It's a very difficult question to answer. It's very different, of course, because the GFC was heavily mortgage-related, and this will probably be less so. We also, our portfolios are in significantly better shape coming into this, whether it's mortgage or card. But just given the amount of uncertainty about where this could go, we still have 12 million people unemployed, I think it's very difficult. I don't know, Jamie, whether you would add. Jamie: (25:42) It's very hard. I agree with you, Jen. It's very hard to say. And, Mike, it depends on the outcome. Again, we look at the good case, the medium case, the relative adverse case and the extreme adverse case, and there, the answers are completely different, and we don't know the future, so it's hard to predict what it's going to be. But our reserves are prepared relative to the adverse case, which is equal to, roughly equivalent to CCAR extreme adverse case that we just got, roughly. Again, very hard to compare apples to apples in these things. Speaker 2: (26:16) Our next question is from Erika Najarian of Bank of America. Erika Najarian: (26:21) Hi. Good morning. I'm going to ask the two questions that I often get from investors that are hesitant to dip their toe back into bank stocks. And the first is, and Jen, this goes back to your earlier comment. The one question I get on credit quality is did stimulus and policy redefine cumulative credit losses lower for this cycle? In other words, I think Jamie said changed the outcome or do you think it just delayed the realization of these losses? Jen: (26:56) So I think it's difficult to know. I think the purpose of it was to change the outcome, not just delay the losses, but it's difficult to know. People sort of described it as a bridge, and the question is whether the bridge will be long enough and strong enough to bridge people back to employment and bridge small businesses back to normalcy, so I think it remains to be seen. As Jamie said, we're obviously preparing for it to not necessarily change the outcome, obviously, because we built significant reserves. So we're prepared for it to be a delay rather than change the outcome. Erika Najarian: (27:37) Got it. And my follow-up question, and perhaps if I could direct this to Jamie. This is a bit of a follow-up to Matt's earlier question but investors are essentially worried on the other side of the credit recovery about what the interest rate environment may imply for "normalized ROTCE." And as you think about what you mentioned to be " weather considerations," what prevents JP Morgan from going back to that 17%, 19% ROTCE that you posted in '18 and '19? Jamie: (28:14) Well, you guys know that's a forecast of the future. It's hard to tell. I think negative interest rates are a bad idea and will probably force, over time, the banking industry to strength, which means they'd be buying back stock and doing other things with their capital. But we're able to handle low rates, and we can have decent returns at low rates. I think it's a bad long-term strategy. I also think it's a bad idea for you all to assume they're going to continue like that forever. I mean we had massive global QE in the last go around, and we didn't have inflation. So I remind people, a lot of that QE was around Fed. The Fed and the central banks support securities so that would create deposits to banks. The banks support to put deposits in the central banks. So it was not new inflationary fiscal stimulus. Jamie: (29:02) Fiscal stimulus, which has been extraordinary around the world is, by its nature, inflationary, and so we don't really know the outcome of that. But my view, and what I tell investors, we're going to build our businesses day in and day out regardless of interest rate environments, et cetera, and we have plans to adjust interest rate environments. We can not do certain things. We can charge for certain things. We can do a whole bunch of different stuff, but the services is still required, moving money around the world, trading for people, underwriting securities, helping manage their money, and we'll be okay. We'll work through it. Speaker 2: (29:37) Our next question is from Betsy Graseck of Morgan Stanley. Betsy Graseck: (29:42) Hi. Good morning. Can you hear me? Jen: (29:44) Yes. Hi, Betsy. Betsy Graseck: (29:46) Hi. I had two questions. One was I'd be interested in understanding how you are threading the needle between your outlook here for reserve and the potential to buy back stock. You've got the reserve level high with a base case outlook for unemployment that's above where we are today for the next six months, it looks like or even longer, and your capital build is obviously continuing to increase here. So how should we think about that? Could we imagine that your buyback could kick off before reserve release happens, and would you release reserves before the net charge-offs start to come through, like you mentioned, in second half '21? Jen: (30:38) Sure. So first of all, on stock buybacks, obviously, we are restricted here in the fourth quarter. We are hopeful that the Fed will see what they need and get what they need in the resubmission to give them the confidence to revert to a more normal distribution framework under SCB in the first quarter, so that's obviously the most important hurdle for us. And then if we have excess capital, and the reserve division and the buyback division are not related to one another. We are always going to make sure that we have our best estimate of losses that we're facing considering the uncertainty as well. And then, of course, our capital hierarchy would always look to grow our businesses, first and foremost. But if we have excess capital and if we do not have regulatory restrictions, you could see us buy back stock as early as the first quarter. Jen: (31:41) And like I said, that wouldn't necessarily be related to a reserve release. The other thing on potential reserve releases, we obviously need to see the economy continue to deliver on the base case to give us the confidence that that is what we're dealing with. But I would just say that, remember there was a capital release, a partial ... Jen: (32:03) ... that, remember there was a capital release, a partial capital release on CECL builds. So when you release reserves, only about half of that actually falls through to capital. Betsy Graseck: (32:14) And Jen, could you talk a little bit about the slide three, where you've got the base case outlook for unemployment? And just give us a sense as to what's driving this base case outlook for unemployment in 4Q '20 at 9.5% and then 2Q '21 at 8.5%? They're obviously above where we are today, and could you help us understand how you're thinking about flexing that going forward? What would change those assumptions? Jen: (32:43) Yes. That's like largely, Betsy, a timing issue with when we actually run the models for the reserve. That's not necessarily, as you rightly point out, reflective of our autonomous latest outlook. So we would, as we progress through the fourth quarter, use the latest outlook for the base case. But then again, as Jamie said, we look at a number of different scenarios, and depending upon what we think we're dealing with in terms of the uncertainty, then we may continue to heavily weight the downside scenarios or maybe even more heavily weight the downside scenarios. We have to see. So if you look at the weighted outcome of all of the scenarios that we use to derive the reserves, and we are prepared for a double-digit unemployment, peak unemployment level, but it would now start with the revised base case, shall I say, from our comments. Jamie: (33:38) Yeah. Kind of just put into perspective just a little bit, the capital. I mean we have extraordinary amounts of capital, $200 billion. We've got $1.3 trillion of liquid assets and securities, and the way you should look at it is the $200 billion in just next eight quarters will earn PPNR like pre-tax, pre-provision earnings of roughly $80 billion, give or take. We don't know exactly what that's going to be. So with that $80 billion, if things get better, it will be more than that, and we take down reserves. If it didn't get worse, it may be about that. All the worse than that, we have to put up $20 billion. Even if you put up the $20 billion, in my view, that won't emerge in a quarter. Jamie: (34:15) That will emerge over several quarters, which also means you can pay the dividend, buy back stock, have plenty of capital and still be very conservatively capitalized, and that's the reality of it, okay? Forget all the other stuff you read. And we're conservative. We like to be conservative regarding loan loss reserves and capital. So we'll be patient, but we have tremendous amount of wherewithal to do both when the time comes, and I hope we're allowed to do it. I hope we're allowed to do it before the stock is much higher. Jen: (34:48) And the $20 billion that Jamie referenced, as we talked about the extreme adverse scenario last quarter, so you can think that that's the $20 billion that Jamie is referencing, if that is what ... Jamie: (35:00) Yeah, and that $20 billion is unemployment of 12%, 13% that goes off into the better part of six quarters. I mean it's really extremely adverse. It's far worse than the CCAR case we just got. Speaker 3: (35:14) Our next question is from John McDonald of Autonomous Research. John McDonald: (35:18) Good morning. Jen, you mentioned that next year, you have some tough revenue comps. Can you talk about the notion of expense flexibility at JP Morgan? Underneath the surface of flattish expenses, where are you on saving money from digitization and structural change, and how does that give you flexibility against where you'd like to be investing? Jen: (35:39) Sure. So first of all, it's early. We're still working through next year. So I will certainly refine the guidance in the first quarter. But as it relates to expenses, we will, and you mentioned digital, that's one. We will continue to deliver on our structural expense efficiencies as we have been for the last several years. As we do expect the world to normalize a bit, there will be opportunity in volume and revenue-related expenses. But we're going to continue to invest, and so there will be puts and takes, and we'll just provide you more detailed guidance in the first quarter. John McDonald: (36:19) Okay. And as a follow-up, on capital, can you talk about the notion of reducing your SCB and maybe your GSIB surcharge footprint over time? I think you had commented that there's potential to do that, but what is the path and the route to doing that? And how do you feel about the prospects for those two things getting better over time? Jen: (36:39) Sure. So I'll start with GSIB, which is that we do expect to be in the 4% bucket at the end of this year, but it is not effective immediately, and so we will have 2021 to manage that back down. What I would say there is that with the Fed balance sheet at these levels possibly expanding, that makes managing the GSIB back down quite challenging. So in the absence of recalibration, which we remain hopeful about, managing that back down will certainly be challenging but not impossible, but we'll really certainly think about any impact on our client franchise before we do anything. So we have some time there. We could see recalibration, that would help, but no doubt that that's a challenge. Jen: (37:26) On SCB, I'd start by saying it's scenario-dependent, of course. So all else equal, we do think that we have opportunities to manage down the SCB, and so that can include transferring securities from AFS to held to maturity and then some other mechanical issues on our side that we're confident will now, all things equal, reduce our SCB. But again, it's scenario-dependent. So all that being said, John, I would just say that our expectation at this point over time is that our target capital level of 11.5% to 12% should be unchanged over time. John McDonald: (38:08) Got it. Thanks. Speaker 3: (38:10) Our next question is from Ken Usdin of Jefferies. Ken Usdin: (38:15) Thanks. Good morning. Jen, Jamie, you mentioned earlier that you've got $1.3 trillion of cash and securities. It didn't look like you really changed the size of the investments portfolio this quarter, but you did make a bunch of moves into held to maturity from available for sale, and I'm just wondering, you guys have talked about expectation that deposits might settle down, but they're continuing to grow. And so what can you do at this point and going forward with starting to move some of that cash into things that might at least earn some more to protect the NII going forward? Thanks. Jen: (38:47) Sure. So I'll talk- Jamie: (38:49) So, Jen, I just want to say that we're not going to do anything to protect the NII. We have $300 billion of cash we can invest today, and that becomes $400 billion. We're not going to invest it in stuff making 50, 60 or 70 basis points, so we get to see a teeny little bit more of NII. But we're going to make long-term decisions for the company, and if your NII gets squeezed a little bit, so be it. But we don't want to be in a position where we lose a lot of money because you may invest in some five- or 10-year securities, which you'll lose a lot if rates go up. So we're not protecting NII. Jen: (39:23) Yes. So as a principal matter, it's important to remember that we manage the portfolio across multiple dimensions, not just optimizing NII, as Jamie said. And we're thinking about capital protection at these levels, but just in terms of the activity that you saw in the securities portfolio, we've been very active. We added about $160 billion through now the end of Q2. In Q3, we were active buyers and sellers because in Q3, we saw attractive selling opportunities, which made economic sense for us. So just to Jamie's point, so you give up some NII, but it just made economic sense for us, but we were also buying in the third quarter. We also focused on optimizing liabilities with the excess liquidity, so you'll see that our debt is down nearly $40 billion from last quarter. So then just in terms of the transfer to held to maturity with the significant growth in securities portfolio, it just made sense from a capital protection perspective, and it's also helpful for SCB as I mentioned, and these were high-quality core holdings. Ken Usdin: (40:29) Yeah. I fully agree on that duration point, Jamie. A follow-up just on if you think about the fee businesses and some of the- Jamie: (40:37) You guys should also be raising the question about why moving some of the held to maturity, reducing SCB. Like is that a rational thing, which I don't think it is. But that's what it is and that's what we're going to deal with. It's why we can drive down SCB. Jen: (40:52) On duration, with 10-year has backed up a bit over the last couple of weeks, and so we have been -- we'll remain opportunistic, but we have added at these levels. Ken Usdin: (41:03) Great. And then just one follow-up on just fees in general. You've got the consumer fee businesses that are still trying to get back to where they were a year ago. And then last quarter, Jamie had made this comment about cut it in half and trading, and it wasn't anywhere close to that, which was positive. It's still quite, quite good. And how you think through just the pushes and pulls between fees as you look forward, right, in terms of how much better do you think the consumer can get from where it is? So, how much, if any, are the institutional businesses over-earning relative to where they posted in the first half? Thanks. Jen: (41:37) Sure. So on consumer fees, you'll see that consumer fees recovered a bit in the third quarter. The decline there was both release actions that we took, but also because of the higher cash buffers that consumers are experiencing that also impacts fees, and that's a good thing, so we'll take that. So that did recover a bit in the third quarter, but that will take time to get back to what you might consider normalized levels. And then on the institutional side, we did expect to see markets normalize in the third quarter, and we did also that that a bit, but not as much as we had thought when we were at second quarter earnings. And IB fees also continued to be very strong in the third quarter, exceeding our expectations for what we might have thought in the second quarter. Jen: (42:26) Looking forward, though, the fourth quarter is a tough compare, and we do expect markets to continue to normalize. And then on the IB fee side, our pipeline is flattish to what it was last year. It's just still down a bit in M&A, but we did see M&A recover in the third quarter, and it's up in ECM. So as I said, flattish in the fourth quarter feels about right at this point. Speaker 3: (42:54) Our next question is from Steve Chubak of Wolfe Research. Steve Chubak: (42:59) Hi. Good morning. So, Jen, I was hoping you could speak to the expectations for loan growth across both the institutional and consumer channels. When do you anticipate we could begin to see balances quite positively? And separately, just what level of loan growth is contemplated in the $53 billion NII guide that you provided for '21? Jen: (43:21) Sure. So loan growth will be challenged, I think, in the short term. On the wholesale side, I think we'll probably tread water at these levels, but increasing CEO confidence with M&A activity and capital investment should be supportive of more normalized loan growth, but that may take some time. On the consumer side, we are seeing cards continue to revert to more normal levels, and so that will continue into 2021, but that could be offset by continued prepays in the mortgage. So there will be puts and takes there, and then asset management, I think we'll continue to see solid growth. So net-net, not significant loan growth, but the mix will be helpful because of the card growth is supportive of a mix benefit on NII. Steve Chubak: (44:18) Thanks for that. And maybe a question for you, Jamie. You had alluded to potential for charging for additional products and services to offset rate pressures. And I was hoping you could speak to some of the areas where you might look to potentially charge clients. So just philosophically, how you're handicapping the risk of client attrition if competitors ultimately don't follow suit. Jamie: (44:42) First of all, I don't think it's going to happen, so I don't spend too much time worrying about it. But we have, as a company matter, gone through everything we do and how we do it and how we respond to negative rates. I'm not going through account by account. But like I said, while these are necessary services, all the competitors, it's a competitive world, I agree with you. If competitors don't do stuff, you have a hard time doing it. But I think that you will see a lot of competitors respond to negative rates in a lot of different ways, so there will be an opportunity, and something like that. Speaker 3: (45:14) Our next question is from Jim Mitchell of Seaport Global. Jim Mitchell: (45:18) Hey. Good morning. Maybe just a question on deposit growth. I think we've all been surprised at the continued growth. Can you just kind of talk to what you're seeing? It looked like we had further growth in September. Are you expecting this to continue? Is it sort of moving out of money markets into deposits? What do you think is driving the growth? And do you expect it to continue? Jen: (45:40) Sure. So there's no doubt that with the Fed being this active that there is significant excess liquidity in the system. We did think that we would see deposits normalized in the third quarter, both on consumer spending on the consumer side and then on just the wholesale side in places like security services, with asset managers hold cash on the sidelines. We didn't see what we thought we would, so yes, we did continue to see deposit growth here in the third quarter. Going forward, I think that normalization is still just very much a part of our outlook, except for that given that the normalization is a bit deferred here, it will likely be offset by the continued organic growth, perhaps more than offset by continued organic growth. Jim Mitchell: (46:25) Right. Makes sense. And then maybe a follow-up on credit. I mean, I appreciate that we're not going to see charge-offs given where delinquencies are today. But how do we think about delinquencies and what triggers you to either release or build reserves? I would imagine that we'll see it, you would be making those decisions before charge-offs. Where do we see delinquencies? You've had very good experience so far in your core book as well as the deferrals acting well. I mean, it just seems very surprising that we haven't seen delinquencies tick up yet in any material way. When do you expect that or is it really all dependent on sort of the goodwill of the government? Jen: (47:05) Well, I think one of the reasons we haven't seen delinquencies tick up is because of the payment relief, but also the extraordinary support that has been provided through stimulus. So we'll probably see delinquencies tick up in the early part of 2021. We're not assuming further stimulus beyond the end of this year in how we think about reserves, so we do think you'll start to see delinquencies tick up early 2021 and then charge-offs in the back half of 2021. I think future stimulus would give us more confidence in the economy delivering on the base case. There's just a lot of factors that we'll be looking at as we think about the right level of our reserves over the coming quarters, and delinquencies will be just one part of that. Speaker 3: (47:59) Our next question is from Gerard Cassidy of RBC. Facilitator: (48:02) Our next question is from Gerard Cassidy of RBC. Gerard Cassidy: (48:05) Thank you. Good morning, Jennifer. Jen: (48:07) Hi, Gerard. Gerard Cassidy: (48:09) I may have missed this. I had to jump off for a minute on the call, but can you give us some color? You've spoken very well about what's going on in the consumer credit area, but when you go into the commercial side of the business, can you share with us the sectors that you're seeing the biggest challenges? And can you give us some color on the re-rating process that you're going through on those credits that are troubled today, and what kind of deterioration you're seeing in those specific credits in terms of possibly write-downs or reevaluations of if it's collateral, like on a commercial real estate loan? Jen: (48:45) Sure. The sectors, I think, are, are ones that you would expect: airlines, lodging, restaurants, other T&E, real estate, oil and gas. Those continue to be the sectors under the most pressure. When you look at downgrades in the third quarter, we saw downgrades slow a bit because, in the second quarter, we saw significant downgrades just on the increased level of debt that companies were taking on. We saw downgrades slow a bit in the third quarter, but we do expect downgrades to continue, particularly in real estate. Jen: (49:24) Then elsewhere in wholesale, I would say CEO sentiment is guarded, but constructive. Gerard Cassidy: (49:31) Very good. Then as a follow-up, I know Jamie touched on interest rates and how you're very focused in growing your business in any rate environment. Could you give us some color? Inflation, if it does pick up and we get a steepening in the curve, obviously Chairman Powell has indicated he's not going to move on rates for quite some time. But if we're looking in your third quarter of, let's say, '21, and the 10-year government bond yield is, let's say, 125 basis points. Can you just give us some color? I know that's not your prediction, but what would that do for the margin and revenues if we were fortunate enough to see a steeper curve due to higher inflation? Jen: (50:13) It's a great number. I don't have the sensitivity to hand. It would- Go ahead, [inaudible 00:00:50:19]. Gerard Cassidy: (50:21) There's a disclosure we make in the 10Q. It shows what would happen if rates go up 100 basis points. I forgot the number, Jen. It's something like, I'm going to say, a billion and a half dollars a year with the long end is a piece of that with a smaller piece. That rolls in and compounds over time, but that's not the right way to look at it. You have to ask the why. If you have an active environment, rates are going up, we're going to have more volume and more NII. If you have stagflation [inaudible 00:50:50] that's a really bad idea. The why is more important than just the what, here. Facilitator: (50:57) Our next question is from Saul Martinez of UBS. Saul, your line is open. Please proceed. Saul Martinez: (51:11) Hello. Sorry about that. I was on mute. Saul Martinez: (51:14) I wanted to follow up on an earlier question. I think it was from Ken, partly on sales and trading, but you're tracking this year in sales and trading to a revenue of close to $30 billion. If we go back to 2010 shortly after the crisis, it's been pretty consistently the annual revenues in the $18-21 billion range. There was obviously a lot of volatility on a quarterly basis, but it's generally been in that range. How do we think about or frame the range of outcomes as market conditions normalize? Do you feel like there have been changes in terms of either share or market structure that allow you to have a larger revenue base and more revenues from those businesses than you have had historically, even as market conditions normalize? Or is it too hard to tell? I'm just trying to think through, because it obviously has a pretty big impact on your overall PPNR and revenue forecast going forward. Jen: (52:27) As you know, we're on pace for a record year, so I think any compares are going to be challenging, and we do expect the market to continue to normalize. That could be partially offset by share games as you mentioned, but it is never a good idea to try to forecast market even early in a quarter, nevermind the year before. Jen: (52:55) Jamie, do you want to add anything? Jamie: (53:01) This is a ground war game. We've got lots of tough competitors and we're all building systems, and stuff like that, that could do a better job for them. It's almost impossible to forecast short-term numbers in that. Saul Martinez: (53:14) Yeah, and I understand. I totally get that and appreciate that. It's just that you're tracking to a revenue that's about 50% higher than what you've done here in the post-crisis environment, or somewhere to that effect. That delta between the current run rating with what has been a more normalized run rate is pretty sizeable. Just trying to get any color in terms of thinking through a range of outcomes for where that could settle in at. Not necessarily in a given quarter per se, but more on a normalized basis, you think about the business as a whole. Jamie: (53:55) I just want to say our trader did an exceptional job, but I would say the second quarter will not be typical, and the third quarter probably won't. Hopefully, it might be better than it's been in the past couple of years, but we don't know. But remember, the market itself, total bonds, total assets under management, total credit approx, total [inaudible 00:54:13] approx, total global approx, that's growing over time. There is an underlying growth. They spread themselves around as competition moves around. Facilitator: (54:25) Our next question is from Andrew Lim of Society General. Andrew Lim: (54:31) Hi. Good morning. Thanks for taking my questions. The first one, you've got 33.8 billion of reserves. I guess that's in line with an extreme adverse scenario. I know you can't tell what's going to happen going forward, given many different variables, but we've already seen some of that being released. I was wondering if we had the base case scenario pan out over the coming years, how much of that 33.8 billion should we expect to be released back through the P and L, and over what time period? Jen: (55:10) I'll start by saying we're not reserved for the extreme adverse scenario. We are reserved for something worse than the base case, because we have put heavy weights on scenarios that are worse than the base case, but we are not reserved for the extreme adverse scenario. Jen: (55:25) The release this quarter was, first of all, very small in the grand scheme of things, and was almost exclusively related to portfolio runoff or exposure changes, not anything to do with a change in our outlook. Jen: (55:40) Then if the economy delivers the base case, you will see reserve releases from us in the coming quarters, but it is very difficult to try to tell you how much and when. Andrew Lim: (55:56) Surely you can make an estimate of your reserves if you did assume the base case going forward. I guess it's the difference between what [crosstalk 00:08:06]. Jamie: (56:07) I've already said that if the said base case happens, we're probably something like $10 billion over reserve. Andrew Lim: (56:17) 10 billion over reserve, or 10 billion [crosstalk 00:08:28]? Jamie: (56:19) Over reserve, [crosstalk 00:56:21]. No, no. 10 billion over reserve. Andrew Lim: (56:25) Got it. Understood. Jen: (56:28) And I mentioned it earlier, it's just important to remember that there were capital modifications to CSO, so only about half of that ends up in capital because as you release, you release the [crosstalk 00:56:42]? Andrew Lim: (56:44) Yes, of course. Got it. Understood. Thanks for that. Andrew Lim: (56:47) Then just a follow-up question on your [inaudible 00:56:50] ratio. You had a nice pickup there this quarter. Obviously, you've had strong earnings, but you've also had a near 2% reduction in mis-rated assets. I was just wondering if you could give a bit more color on the moving parts there, and how you expect that to pan out in the coming quarters? Jen: (57:10) The RWA reduction was largely on revolver paydowns, so I wouldn't expect that kind of pace to continue. We will continue to build if we're not allowed to buy back stock, but we will continue to build capital on earnings, but probably less so on RWA reduction. Our next question is from Charles Peabody of Portellis Partners. Charles Peabody: (57:35) Yeah, good morning. Question about your rate sensitivity to the long end. If I look at a time series going back to the second quarter of last year, your rate sensitivity has increased every single quarter to a steepening yield curve. In other words, your NII would improve the more the yield curve steepens at the long end. My question is, was that an intended action or residual effect? Because I did notice that you've been adding fairly significantly to your MBS portfolio. Jen: (58:11) Charles, I don't know precisely the answer to that, but it's largely going to be, I'm assuming, on the growth in our deposit base, which then has supported the growth in the securities portfolio. Charles Peabody: (58:25) Okay. It's substantial. If you go back to the second quarter of last year, you had a $600 million potential increase, and the second quarter of this year was one 1.7 billion. Charles Peabody: (58:36) Anyway, my second question is related to the legacy impairment charge. Can you give us some color around that? What sort of asset class that was in, and is it over a half a billion, under half a billion? Jen: (58:49) Under a half a billion of what remains, and it was a legacy investment that we took an impairment on. It's not meaningful in the grand scheme of things. Facilitator: (59:04) Our next question is from Brian Kleinhansel of KBW. Brian Kleinhansel: (59:09) Great. Thanks. Just a quick question to start with, maybe as you think about what you've been doing for our customer accommodation as it relates to the pandemic. I know there would have been a few waivers first quarter, second quarter of this year, but what kind of customer accommodation was happening in the third quarter? Is it a clean number from a fees perspective in the third quarter, or is there still a certain level of accommodation going on? Jen: (59:35) I don't actually know. Jason and team can get you the details. It's less than what it was in the second quarter, and it's more what [inaudible 00:59:45] means in terms of the reduction in fees is more a function of cash buffers. Brian Kleinhansel: (59:51) Okay. Then is there a way that you can give an update on the IB pipeline, but on a geographic basis? As you've seen negative [inaudible 00:59:59] around COVID around the world, is there different pipelines building in different regions? Thanks. Jen: (01:00:07) There's less of a regional story, but from a product perspective, overall we're flat-ish to last year, but M and A is a little bit lower. Importantly, though, we're covered quite nicely in the third quarter, and ECM is a little bit higher, but overall flat-ish. Facilitator: (01:00:27) We have no further questions at this time. Jen: (01:00:31) Okay. Thanks, everyone. Facilitator: (01:00:35) Thank you for participating in today's call. You may now disconnect.