JPMorgan Chase : 2Q23 Earnings Transcript

2 Q 2 3 F I N A N C I A L R E S U L T S

EARNINGS CALL TRANSCRIPT

July 14, 2023

MANAGEMENT DISCUSSION SECTION

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Operator: Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Second Quarter 2023 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go to the live presentation. Please stand by.

At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon and Chief Financial Officer, Jeremy Barnum. Mr. Barnum, please go ahead.

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Jeremy Barnum

Chief Financial Officer, JPMorgan Chase & Co.

Thanks, operator. Good morning, everyone. The presentation is available on our website, and please refer to the disclaimer in the back. Starting on page 1, the firm reported net income of $14.5 billion, EPS of $4.75 on revenue of $42.4 billion, and delivered an ROTCE of 25%. These results included the First Republic bargain purchase gain of $2.7 billion, a credit reserve build for the First Republic lending portfolio of $1.2 billion as well as $900 million of net investment securities losses in Corporate. Touching on a few highlights: CCB client investment assets were up 18% year-on-year, we had record long-term inflows in AWM, and we ranked number one in IB fee wallet share.

Before giving you more detail on the financials, let me give you a brief update on the status of the First Republic integration on page 2. The settlement process with the FDIC is on schedule with a number of key milestones being recently completed. Systems integration is also proceeding apace and we are targeting being substantially complete by mid-2024. First Republic employees have formally joined us as of July 2nd and we're pleased to have had very high acceptance rates on our offers. And although it's still early days, as we get the sales force back in the market we are happy to see that client retention is strong with about $6 billion of net deposit inflows since the acquisition.

Now turning back to this quarter's results on page 3. You'll see that in various parts of the presentation, we have specifically called out the impact of First Republic where relevant. To make things easier, I'm going to start by discussing the overall impact of First Republic on this quarter's results at the Firmwide level. Then, for the rest of the presentation, I will generally exclude the impact of First Republic in order to improve comparability with prior periods. With that in mind, in this quarter First Republic contributed $4 billion of revenue, $599 million of expense, and $2.4 billion of net income. As noted on the first page, this includes $2.7 billion of bargain purchase gain which is reflected in NIR in the Corporate segment, as well as $1.2 billion of allowance build. And remember that the deal happened on May 1st, so the First Republic numbers only represent two months of results.

You'll see in the line of business results that we are showing First Republic revenue and allowance in CCB, CB and AWM. And for the purposes of this quarter's results, all of the deposits are in CCB and substantially all of the expenses are in Corporate. As the integration continues, some of those items will get allocated across the segments. Now, turning back to Firmwide results excluding First Republic. Revenue of $38.4 billion was up $6.7 billion or 21% year-on-year. NII ex. Markets was up $7.8 billion or 57%, driven by higher rates. NIR ex. Markets was down $293 million, largely driven by the net investment securities losses I mentioned earlier, partially offset by a number of less notable items primarily in the prior year. And Markets revenue was down $772 million or 10% year-on-year. Expenses of $20.2 billion were up $1.5 billion or 8% year-on-year, primarily driven by higher compensation expense, including wage inflation and higher legal expense. And credit costs of $1.7 billion included net charge-offs of $1.4 billion, predominantly in Card.

The net reserve build included a $389 million build in the Commercial Bank, a $200 million build in Card, and a $243 million release in Corporate, all of which I will cover in more detail later. On to balance sheet and capital on page 4. We ended the quarter with a CET1 ratio of 13.8%, flat versus the prior quarter as the benefit of net income less distributions was offset by the impact of First Republic. And as you can see in the two charts on the page, we've given you some information about the impact of the transaction on both RWA and CET1 ratio. And as you know, we completed CCAR a couple of weeks ago. Our new indicative SCB is 2.9% versus our current requirement of 4% and it goes into effect in 4Q23. The new SCB also reflects the board's intention to increase the dividend to $1.05 per share in the third quarter.

On liquidity, our Bank LCR for the second quarter ended at 129%, in line with what we anticipated at Investor Day. About half of the reduction is associated with the First Republic transaction. And while we're on the balance sheet, as we previewed in the 10-K, we will be updating our Earnings at Risk model to incorporate the impact of deposit repricing lags. So when we release this quarter's 10-Q, you will see the up 100- basis point parallel shift scenario will be about positive $2.5 billion whereas in the absence of the change it would have been about negative $1.5 billion. Now let's go to our businesses starting with CCB on page 5. Both U.S. consumers and small businesses remain resilient and we haven't observed any meaningful changes to the trends in our data we discussed at Investor Day. Turning now to the financial results which I will speak to excluding the impact of First Republic for CCB, CB and AWM. CCB reported net income of $5 billion on revenue of $16.4 billion, which was up 31% year-on-year.

In Banking & Wealth Management, revenue was up 59% year-on-year, driven by higher NII on higher rates. End-of-period deposits were down 4% quarter-on-quarter, as customers continue to spend down their cash buffers, including for seasonal tax payments, and seek higher-yielding

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products. Client investment assets were up 18% year-on-year, driven by market performance and strong net inflows across our advisor and digital channels. In Home Lending, revenue was down 23% year-on-year, driven by lower NII from tighter loan spreads and lower servicing and production revenue. Originations were up quarter-on-quarter, driven by seasonality, although still down 54% year-on-year. Moving to Card Services & Auto, revenue was up 5%, largely driven by higher Card Services NII on higher revolving balances, partially offset by lower auto lease income.

Card outstandings were up 18% year-on-year, which was the result of revolve normalization and strong new account growth. And in Auto, originations were up $12 billion, up 71% year-on-year as competitors pull back and inventories continue to slowly recover. Expenses of $8.3 billion were up 8% year-on-year, driven by compensation, predominantly due to wage inflation and headcount growth as we continue to invest in our front office and technology staffing as well as marketing. In terms of credit performance this quarter, our credit costs were $1.5 billion, reflecting a reserve build of $203 million driven by loan growth in Card Services. Net charge-offs were $1.3 billion, up $640 million year-on- year, predominantly driven by Card as 30 day-plus delinquencies have returned to pre-pandemic levels, in line with our expectations.

Next, the CIB on page 6. CIB reported net income of $4.1 billion on revenue of $12.5 billion. Investment Banking revenue of $1.5 billion was up 11% year-on-year or down 7% excluding bridge book markdowns in the prior year. IB fees were down 6% year-on-year and we ranked number one with year-to-date wallet share of 8.4%. In Advisory, fees were down 19%. Underwriting fees were down 6% for debt and up 30% for equity with more positive momentum in the last month of the quarter. In terms of the second half outlook, we have seen encouraging signs of activity in Capital Markets and July should be a good indicator for the remainder of the year. However, year-to-date announced M&A is down significantly, which will be a headwind.

Moving to Markets, total revenue was $7 billion, down 10% year-on-year. Fixed Income was down 3%. As expected, the macro franchise substantially normalized from last year's elevated levels of volatility and client flows. This was largely offset by improved performance in the Securitized Products Group and Credit. Equity Markets was down 20% against a very strong prior-year quarter, particularly in derivatives. Payments revenue was $2.5 billion, up 61% year-on-year. Excluding equity investments, it was up 32%, predominantly driven by higher rates, partially offset by lower deposit balances. Securities Services revenue of $1.2 billion was up 6% year-on-year, driven by higher rates, partially offset by lower fees. Expenses of $6.9 billion were up 1% year-on-year, driven by higher non-compensation expense as well as wage inflation and headcount growth, largely offset by lower revenue-related compensation.

Moving to the Commercial Bank on page 7. Commercial Banking reported net income of $1.5 billion. Revenue of $3.8 billion was up 42% year-on-year, driven by higher deposit margins. Payments revenue of $2.2 billion was up 79% year-on-year, driven by higher rates. Gross Investment Banking and Markets revenue of $767 million was down 3% year-on-year, primarily driven by fewer large M&A deals. Expenses of $1.3 billion were up 12% year-on-year, predominantly driven by higher compensation expense, including front office hiring and technology investments, as well as higher volume-related expense. Average deposits were up 3% quarter-on-quarter, driven by inflows related to new client acquisition, partially offset by continued attrition in non-operating deposits. Loans were up 2% quarter-on-quarter. C&I loans were up 2%, reflecting stabilization in new loan demand and revolver utilization in the current economic environment, as well as pockets of growth in areas where we are investing.

CRE loans were also up 1%, reflecting funding on prior-year originations for construction loans in Real Estate Banking as well as increased affordable housing activity. Finally, credit costs were $489 million. Net charge-offs were $100 million, including $82 million in the office real estate portfolio and the net reserve build of $389 million was driven by updates to certain assumptions related to the office real estate market as well as net downgrade activity in Middle Market Banking. Then, to complete our lines of business, AWM on page 8. Asset & Wealth Management reported net income of $1.1 billion with pre-tax margin of 32%. Revenue of $4.6 billion was up 8% year-on-year, driven by higher deposit margins on lower balances and higher management fees on strong net inflows. Expenses of $3.2 billion were up 8% year-on-year, driven by higher compensation, including growth in our private banking advisor teams, higher revenue-related compensation, and the impact of Global Shares and J.P. Morgan Asset Management in China, both of which closed within the last year.

For the quarter, record net long-term inflows were $61 billion, positive across all channels, regions, and asset classes, led by Fixed Income and Equities. And in liquidity, we saw net inflows of $60 billion. AUM of $3.2 trillion was up 16% year-on-year and overall client assets of $4.6 trillion were up 20% year-on-year, driven by continued net inflows, higher market levels, and the impact of the acquisition of Global Shares. And finally, loans were down 1% quarter-on-quarter, driven by lower securities-based lending and deposits were down 6%. Turning to Corporate on page 9. As I noted upfront, we are reporting the First Republic bargain purchase gain and substantially all of the expenses in Corporate. Excluding those items, Corporate reported net income of $339 million. Revenue was $985 million, up $905 million compared to last year.

NII was $1.8 billion, up $1.4 billion year-on-year due to the impact of higher rates. NIR was a net loss of $782 million and included the net investment securities losses I mentioned upfront. Expenses of $590 million were up $384 million year-on-year, largely driven by higher legal expense. And credit costs were a net benefit of $243 million, reflecting a reserve release as the deposit placed with First Republic in the first quarter was eliminated as part of the transaction. Next, the outlook on page 10. We now expect 2023 NII and NII ex. Markets to be approximately $87 billion, with the increase driven by higher rates coupled with slower deposit reprice than previously assumed across both Consumer and Wholesale. And I should take the opportunity to remind you once again that significant sources of uncertainty remain and we do expect the NII run rate to be substantially below this quarter's run rate at some point in the future as competition for deposits plays out.

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Our expense outlook for 2023 remains approximately $84.5 billion. And on credit, we continue to expect the 2023 Card net charge-off rate to be approximately 2.6%. So to wrap up, we are proud of the exceptionally strong operating results this quarter. As we look forward, we remain focused on the significant uncertainties relating to the economic outlook, competition for deposits, and the impact on capital from the pending finalization of the Basel III rules. Nonetheless, despite the likely headwinds ahead, we remain optimistic about the company's ability to continue delivering excellent performance through a range of scenarios.

With that, operator, please open the line for Q&A.

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QUESTION AND ANSWER SECTION

Operator: Please stand by. The first question is coming from the line of Jim Mitchell from Seaport Global Securities. You may proceed.

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Jim Mitchell

Analyst, Seaport Global Securities LLC

Q

Thanks. Good morning. Hey, Jeremy, you talked about NII guidance up. Clearly, Fed Funds futures are up so it makes some sense. But maybe I guess first, could you kind of discuss - I guess comment on deposit behavior broadly around betas and mix and what you're seeing there so far? It seems to be coming in a little better than expected. And then secondly, and probably more importantly, can you help us think about the implications of higher-for-longer rates on the outlook for NII next year and beyond? I guess the intermediate term outlook that you guys had talked about?

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Jeremy Barnum

Chief Financial Officer, JPMorgan Chase & Co.

A

Yeah, sure. Thanks, Jim. So, yeah, so when we talk about the drivers of the upward revision, as I said, it's higher rates coupled with lower deposit reprice; hard to untangle the two drivers. And specifically, I think when you look at Consumer, the combination of the passage of time and the positive feedback we're getting from the field and the CD offerings in particular has meant that it's quite a kind of stable environment from that perspective. And similarly, in Wholesale we're just seeing slower internal migrations. You asked about mix. I think that obviously, we're seeing the CD mix increase and we would expect that to continue to take place probably even past the peak of the rate cycle into next year as we continue to capture money in motion. But as you say, the most important point is the fact that, as I said earlier, we don't consider this level of NII generation to be sustainable.

And we talked previously about a sort of medium-term run rate in the mid-70s. That was before First Republic, and you could argue that maybe that number should be a little higher. But whatever it is, it's a lot lower than the current number. We don't know when that's going to happen. We're not going to predict the exact moment; that's going to be a function of competitive dynamics in the marketplace. But we want to be clear that we do expect it at some point.

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Jim Mitchell

Analyst, Seaport Global Securities LLC

Q

Okay. But I guess just one follow-up on that. Just if we don't get rate cuts till middle of next year or later, does that sort of give some confidence to the outlook for next year or are you still worried about significant reprice?

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Jeremy Barnum

Chief Financial Officer, JPMorgan Chase & Co.

A

I wouldn't necessarily assume that the evolution from the current run rate into that mid-70s number is that sensitive to the rate outlook in particular. When we put that number out there, we looked at a range of different types of rate environments and the reprice that we think would be associated with that. It was really meant to capture more of what we consider to be a through-the-cycle sustainable number, so I wouldn't think of it as being particularly rate-dependent.

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Jim Mitchell

Analyst, Seaport Global Securities LLC

Okay. Great. Thanks.

Q

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Operator: Next, we'll go to the line of Erika Najarian from UBS. You may proceed.

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Erika Najarian

Analyst, UBS Securities LLC

Q

Hi. Good morning. Jeremy, I'm just laughing to myself because I said to you at Investor Day - do you have any more NII rabbits to pull out of the hat, and I guess you do. So I guess, I want to ask a broader question really here. And maybe, Jamie, I'd like to get your thoughts. So you earned 23% ROTCE on 13.8% CET1, and we hear you loud and clear that you're more normalized NII generation is not $87 billion. That being said, and fully taking into account the potential haircut from Basel III Endgame, is it possible that your natural ROTCE is maybe above that 17% through-the-cycle rate when rates aren't zero? Because when you first introduced that ROTCE target, we were in a different world from a rate scenario and everybody's talking about even if the Fed cuts, the natural sort of bottom in Fed funds is not going to be zero. So any input on that would be great.

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Jeremy Barnum

Chief Financial Officer, JPMorgan Chase & Co.

A

Yeah. Thanks, Erika. I mean, it's a good question. There's a lot in there, obviously. I guess I would start by saying that when we talked about the 17% through-the-cycle ROTCE, even though we may have introduced that in a moment when we were at the lower zero bound, it was always premised on a sort of normalized rate environment, and at some level that remains true today. Furthermore, you didn't ask this explicitly, but in the context of the proposed Basel III Endgame, one relevant question might be if you have a lot more capital in the denominator, what happens to that target? So I think as I said in my prepared remarks, we feel very confident about the company's ability to produce excellent returns through the cycle. There's a lot of moving parts right now in that; some of them could be good, some of them could be bad.

Narrowly, on the capital one, the one thing to point out is that the straight-up math of simply diluting down the ROTCE by expanding the denominator misses the possibility of reprice, repricing of products and services, which of course goes back to our point that these capital increases do have impacts on the real economy. So we're not suggesting that we can price our way out of it, but we obviously need to get the right returns on products and services, and where we have pricing power we will adjust to the higher capital. So a lot of moving parts in there, but I think the important point is that through a range of scenarios we feel good about our ability to deliver good results. And we'll see how the mix of all the various factors plays out especially after we see the Basel III proposal and then go through the comment period.

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Jamie Dimon

Chairman & Chief Executive Officer, JPMorgan Chase & Co.

A

And Erika, I would just add one thing. We do have a mix of businesses that earn from like 0% ROTCE to 100%. We have some which are very capital-intensive so we look at kind of all of them, and I think 17% is a good number and a good target. The other thing we're over-earning on is credit. We've been over-earning on credit for a substantial amount of time now, we're quite conscious about it. We know that it's going to pick up just as it normalizes, considerably more than now. Look, we would consider credit card normalizing to be closer to 3.5%.

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Erika Najarian

Analyst, UBS Securities LLC

Q

And so my follow-up question there. Maybe, Jeremy, could you remind us what unemployment rate is embedded in your ACL ratio as of the second quarter?

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Jeremy Barnum

Chief Financial Officer, JPMorgan Chase & Co.

Yeah. It's still 5.8%.

A

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Erika Najarian

Analyst, UBS Securities LLC

Q

Thank you.

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Operator: Next, we'll go to the line of John McDonald from Autonomous Research. You may proceed.

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