JPMorgan Chase & Co. (NYSE:JPM) Q1 2024 Earnings Call Transcript

JPMorgan Chase & Co. (NYSE:JPM) Q1 2024 Earnings Call Transcript April 12, 2024

JPMorgan Chase & Co. beats earnings expectations. Reported EPS is $4.63, expectations were $4.18. JPMorgan Chase & Co. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Welcome to JPMorgan Chase’s First Quarter 2024 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation, please stand by. At this time, I would like to turn the call over to JPMorgan Chase’s Chairman and CEO, Jamie Dimon; and Chief Financial Officer, Jeremy Barnum. Mr. Barnum, please go ahead.

Jeremy Barnum: Thank you very much, and 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 $13.4 billion, EPS of $4.44 on revenue of $42.5 billion, and delivered an ROTCE of 21%. These results included a $725 million increase, the special assessment resulting from the FDIC’s updated estimate of expected losses from the closures of the Silicon Valley Bank and Signature Bank. Touching on a couple of highlights, firmwide IB fees were up 18% year-on-year, reflecting particular strength in underwriting fees, and we have seen strong net inflows across AWM, as well as in the CCB Wealth Management business. On Page 2, we have some more detail.

This is the last quarter we’ll discuss results excluding First Republic, given that going forward, First Republic results will naturally be included in the prior period, making year-on-year results comparable. For this quarter, First Republic contributed $1.7 billion of revenue, $806 million of expense, and $668 million of net income. Now, focusing on the firmwide results excluding First Republic, revenue of $40.9 billion was up $1.5 billion, or 4%, year-on-year. NII ex-Markets was up $736 million, or 4%, driven by the impact of balance sheet mix and higher rates, as well as higher revolving balances in Card, largely offset by deposit margin compression and lower deposit balances in CCB. NIR ex-Markets was up $1.2 billion, or 12%, driven by higher firmwide asset management and investment banking fees, as well as lower net investment and securities losses.

And Markets revenue was down $400 million, or 5%, year-on-year. Expenses of $22 billion were up $1.8 billion, or 9%, year-on-year, driven by higher compensation, including growth in employees, and the increase to the FDIC special assessment. And credit costs were $1.9 billion, reflecting net charge-offs of $2 billion and a net reserve release of $38 million. Net charge-offs were up $116 million, predominantly driven by Card. Onto balance sheet and capital on Page 3. We ended the quarter with a CET1 ratio of 15%, relatively flat versus the prior quarter, reflecting net income which was predominantly offset by higher RWA and capital distribution. This quarter’s higher RWA is largely due to seasonal effects, including higher client activity in markets and higher risk rates on deferred tax assets partially offset by lower Card loans.

Now, let’s go to our businesses, starting with CCB on Page 4. Consumers remain financially healthy, supported by a resilient labor market. While cash buffers have largely normalized, balances are still above pre-pandemic levels and wages are keeping pace with inflation. When looking at a stable cohort of customers, overall spend is in line with the prior year. Turning now to the financial results, excluding First Republic. CCB reported net income of $4.4 billion on revenue of $16.6 billion, which was up 1% year-on-year. In Banking and Wealth Management, revenue was down 4% year-on-year, reflecting lower NII on lower deposits, with average balances down 7% as our CD mix increased. Client investment assets were up 25% year-on-year, driven by market performance and strong net inflows.

In Home Lending, revenue was up 10% year-on-year, predominantly driven by higher NII and production revenue. Originations, while still modest, were up 10%. Moving to Card Services and Auto, revenue was up 8% year-on-year, driven by higher Card Services NII on higher revolving balances, partially offset by higher Card acquisition costs from new account growth and lower Auto lease income. Card outstandings were up 13% due to strong account acquisition and the continued normalization of revolve. And in Auto, originations were $8.9 billion, down 3%, while we maintained healthy margins and market share. Expenses of $8.8 billion were up 9% year-on-year, largely driven by field compensation and continued growth in technology and marketing. In terms of credit performance this quarter, credit costs were $1.9 billion, driven by net charge-offs, which were up $825 million year-on-year, predominantly due to continued normalization in Card.

The net reserve build was $45 million, reflecting a build in Card, largely offset by a release in Home Lending. Next, the Corporate and Investment Bank on Page 5. Before reporting CIB’s results, I want to note that this will also be the last quarter we will report earnings for the CIB and CB as standalone segments. Between now and Investor Day, we will furnish an 8-K with historical results, including five quarters and two full years of history consistent, with the structure of the new Commercial and Investment Bank segment in line with the reorganization that was announced in January. Turning back to this quarter, CIB reported net income of $4.8 billion on revenue of $13.6 billion. Investment Banking revenue of $2 billion was up 27% year-on-year.

IB fees were up 21% year-on-year and we ranked number one with year-to-date wallet share of 9.1%. In advisory, fees were down 21%, driven by fewer large completed deals. Underwriting fees were up significantly, benefiting from improved market conditions, with debt up 58% and equity up 51%. In terms of the outlook, while we’re encouraged by the level of capital markets activity we saw this quarter, we need to be mindful that some meaningful portion of that is likely pulling forward from later in the year. Similarly, while it was encouraging to see some positive momentum in announced M&A in the quarter, it remains to be seen whether that will continue and the advisory business still faces structural headwinds from the regulatory environment. Payments revenue was $2.4 billion, down 1% year-on-year, as deposit margin normalization and deposit-related client credits were largely offset by higher fee-based revenue and deposit balances.

Moving to Markets, total revenue was $8 billion, down 5% year-on-year. Fixed income was down 7%, driven by lower activity in rates and commodities compared to a strong prior-year quarter, partially offset by strong results in securitized products. Equity Markets was flat. Securities Services revenue of $1.2 billion was up 3% year-on-year. Expenses of $7.2 billion were down 4% year-on-year, predominantly driven by lower legal expense. Moving to the Commercial Bank on Page 6. Commercial Banking reported net income of $1.6 billion. Revenue of $3.6 billion was up 3% year-on-year, driven by higher non-interest revenue. Gross Investment Banking and Markets revenue of $913 million was up 4% year-on-year, with increased IB fees largely offset by lower Markets revenue compared to a strong prior-year quarter.

Payments revenue of $1.9 billion was down 2% year-on-year, driven by lower deposit margins and balances largely offset by fee growth net of higher deposit-related client credits. Expenses of $1.5 billion were up 13% year-on-year, predominantly driven by higher compensation, reflecting an increase in employees, including front office and technology investments, as well as higher volume-related expense. Average deposits were down 3% year-on-year, primarily driven by lower non-operating deposits, and down 1% quarter-on-quarter, reflecting seasonally lower balances. Loans were flat quarter-on-quarter. CNI loans were down 1%, reflecting muted demand for new loans as clients remain cautious, and CRE loans were flat as higher rates continue to have an impact on originations and payoff activity.

Finally, credit costs were a net benefit of $35 million, including a net reserve release of $101 million and net charge-offs of $66 million. Then to complete our lines of business, AWM on Page 7. Asset and Wealth Management reported net income of $1 billion with pre-tax margin of 28%. Revenue of $4.7 billion was down 1% year-on-year. Excluding net investment valuation gains in the prior year, revenue was up 5% driven by higher management fees on strong net inflows and higher average market levels, partially offset by lower NII due to deposit margin compression. Expenses of $3.4 billion were up 11% year-on-year, largely driven by higher compensation, including revenue-related compensation, continued growth in our private banking advisor teams, and the impact of the J.P. Morgan Asset Management China acquisition as well as higher distribution fees.

For the quarter, long-term net inflows were $34 billion led by equities and fixed income. AUM of $3.6 trillion was up 19% year-on-year, and client assets of $5.2 trillion were up 20% year-on-year, driven by higher market levels and continued net inflows. And finally, loans were down 1% quarter-on-quarter and deposits were flat. Turning to Corporate on Page 8. Corporate reported net income of $918 million. Revenue was $2.3 billion, up $1.3 billion year-on-year. NII was $2.5 billion, up $737 million year-on-year, driven by the impact of balance sheet mix and higher rates. And NIR was a net loss of $188 million. The current quarter included net investment securities losses of $366 million compared with net securities losses of $868 million in the prior-year quarter.

Expenses of $1 billion were up $889 million year-on-year, predominantly driven by the increase to the FDIC special assessment. To finish up, we have the outlook on Page 9. We now expect NII ex-Markets to be approximately $89 billion based on a forward curve that contained three rate cuts at quarter-end. Our total NII guidance remains approximately $90 billion, which implies a decrease in our Markets NII guidance from around $2 billion to around $1 billion. The primary driver of that reduction is balance sheet growth and mix shift in the Markets business. And as a reminder, changes in Markets NII are generally revenue neutral. Our outlook for adjusted expense is now about $91 billion, reflecting the increase to the FDIC special assessment I mentioned upfront.

And on credit, we continue to expect the 2024 Card net charge-off rate to be below 3.5%. Finally, you may have noticed that our effective tax rate has increased this quarter, and it will likely stay around 23% this year, absent discrete items, which can vary quite a bit. The driver of this change is the firm’s adoption of the proportional amortization method for certain tax equity investments. Our managed rate is unchanged, and it should average about 3.5% above the effective tax rate. This is a smaller gap than we’ve previously observed, and we expect this approximate relationship to persist going forward, although the difference will continue to fluctuate as it has in the past. For the avoidance of doubt, these changes have no meaningful impact on expected annual net income.

We’re just mentioning this to help with your models. So, to wrap up, we’re pleased with another quarter of strong operating results, even as the journey towards NII normalization begins. While we remain confident in our ability to produce strong returns and manage risk across a range of scenarios, the economic, geopolitical, and regulatory uncertainties that we have been talking about for some time remain prominent, and we are focused on being prepared to navigate those challenges, as well as any others that may come our way. And with that, let’s open up the line for Q&A.

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Q&A Session

Operator: The first question is coming from the line of Betsy Graseck from Morgan Stanley. You may proceed.

Betsy Graseck: Hi, good morning.

Jeremy Barnum: Good morning.

Betsy Graseck: So, a couple of questions here. Just, one, Jamie, could you talk through the decision to raise the dividend kind of mid-cycle it felt like, pre-CCAR? And also help us understand how you’re thinking about where that payout ratio, that dividend payout ratio range should be, because over the past several years, it’s been somewhere between 24% and 32%. And so, is this suggesting we could be towards the higher end of that range or even expanding above that? And then I also just wanted to understand the buyback and the keeping of the CET1 at 15% here, the minimum is 11.9%. I know it’s — we have to wait for Basel III endgame reproposal to come through and all that. But are we — should we be expecting that, “Hey, we’re going to hold 15% CET1 until we know all these rules?” Thanks.

Jamie Dimon: Yeah. So, Betsy, before I answer the question, I want to say something on behalf of all of us at JPMorgan and me personally. Thrilled to have you on this call. For those who don’t know, Betsy has been through a terrible medical episode, and it’s a reminder to all of us how lucky we are to be here. But Betsy, in particular, the amount of respect we have, not just in your work, but your character over the last 20-plus years has been exceptional. So, on behalf of all of us, I just want to welcome you back. I’m thrilled to have you here. And so, you’re asking a pertinent question. So, we’re earning a lot of money, our capital cup runneth over, and that’s why we increased the dividend. And if you ask me, what we’d like to do is to pay off something like a third, a third of normalized earnings.

Of course, it’s hard to calculate always what normalized earnings are, but we don’t mind being a little bit ahead of that sometimes, a little bit behind that sometimes. If I could give people kind of consistent dividend guidance, et cetera, I think the far more important question is the 15%. So, look at the 15%. I’m going to oversimplify it. That basically would prepare us for the total Basel endgame today, roughly, and the specifics don’t matter that much. Remember, we can do a lot of things to change that in the short run or the long run. But it looks like Basel III endgame may not be the worst case. It’ll be something less than that. So, obviously, when and if that happens, it would free up a lot of capital. And I’m going to say on the order of $20 billion or something like that.

And yes, we’ve always had the capital hierarchy the same way, which is, we’re going to use capital to build our business first, pay the dividend, steady dividend, build the business, and if we think it’s appropriate to buy back stock. We’re continuing to buy back stock at $2 billion a year. I personally do not want to buy back a lot more than that at these current prices. I think you’ve all heard me talk about the world, things like that. So, waiting in preparation for Basel, hopefully, we’ll know something later, and then we can be much more specific with you all. But in the meantime, it’s also — it’s very important to put in mind, there are short-term uses for capital that are good for shareholders that could reduce our CET1, too. So, you may see us do things in the short run that will increase earnings, increase capital, that are using up that capital.

Jeremy mentioned on the — on one of the things that we know, the balance sheet, how we use the balance sheet for credit and trading, we could do things now. So, it’s a great position to be in. We’re going to be very, very patient. I urge all the analysts to keep in mind, excess capital is not wasted capital. It’s earnings in store. We will deploy it in a very good way for shareholders in due course.

Betsy Graseck: Excellent. Thank you so much.

Jeremy Barnum: Betsy, I just wanted to add my welcome back thoughts as well. And just a very minor edit to Jamie’s answer. I think he just misspoke when he said $2 billion a year in buybacks, the trajectory is $2 billion…

Jamie Dimon: I’m sorry, $2 billion a quarter.

Jeremy Barnum: $2 billion a quarter. Otherwise, I have nothing to add to Jamie’s very complete answer, but welcome back, Betsy.

Betsy Graseck: Okay. Thank you so much, and I appreciate it. Looking forward to seeing you at Investor Day on May 20th.

Jeremy Barnum: Excellent. Us too.

Betsy Graseck: All right.

Operator: Thank you. Our next question comes from Jim Mitchell with Seaport Global. You may proceed.

Jim Mitchell: Hey, good morning. Jeremy, can you speak to the trends you’re seeing with respect to deposit migration in the quarter, if there’s been any change? Have you seen that migration start to slow or not?

Jeremy Barnum: Yeah. A good question, Jim. I think the simplest and best answer to that is not really. So, as we’ve been saying for a while, migration from checking and savings to CDs is sort of the dominant trend that is driving the increase in weighted average rate paid in the consumer deposit franchise, that continues. We continue to capture that money in motion at a very high rate. We’re very happy about what that means about the consumer franchise and level of engagement that we’re seeing. I’m aware that there is a little bit of a narrative out there about are we seeing the end of what people sometimes refer to as cash sorting. We’ve looked at that data. We see some evidence that maybe it’s slowing a little bit. We’re quite cautious on that.

We really sort of don’t think it makes sense to assume that in a world where checking and savings is paying effectively zero and the policy rate is about 5% that you’re not going to see ongoing migration. And frankly, we expect to see that even in a world where — even if the current yield curve environment were to change and meaningful cuts were to get reintroduced and we would actually start to see those, we would still expect to see ongoing migration and yield-seeking behavior. So, it’s quite conceivable, and this is actually on the yield curve that we had in the fourth quarter that had six cuts in it, we were still nonetheless expecting an increase in weighted average rate paid as that migration continues. So, I would say no meaningful change in the trends, and the expectation for ongoing migration is very much still there.

Jim Mitchell: Okay. And just a follow-up on that and just sort of bigger picture on NII. Is that sort of the biggest driver of your outlook? Is it migration? Is it the forward curve? Is it balances? It sounds like it’s migration, but just be curious to hear your thoughts on the biggest drivers of upside or downside.

Jeremy Barnum: Yes. So, I mean, I think the drivers of, let’s say, what’s embedded in the current guidance is actually not meaningfully different from what it was in the fourth quarter, meaning it’s the current yield curve, which is a little bit stale now, but the snap from quarter-end had roughly three cuts in it. So, it’s the current yield curve. It’s what I just said, the expectation of ongoing internal migration. There is some meaningful offset from Card revolve growth, which while it’s a little bit less than it was in prior years is still a tailwind there. We expect deposit balances to be sort of flat to modestly down. So, that’s a little bit of a headwind at the margin. And then there’s obviously the wild card of potential product level reprice, which we always say we’re going to make those decisions situationally as a function of competitive conditions in the marketplace.

And you know this obviously, but in a world where we’ve got something like $900 billion of deposits paying effectively zero, relatively small changes in the product level reprice can change the NII run rate by a lot. So, the error bands here are pretty wide. And we’re always going to stick with our mantra, which has been not losing primary bank relationships and thinking about the long-term health of the franchise when we think about deposit pricing.

Jim Mitchell: Right. Okay, great. Thanks for the color.

Jeremy Barnum: Thanks.

Operator: Thank you. Our next question comes from John McDonald with Autonomous Research. You may proceed.

John McDonald: Thanks. Jeremy, you had mentioned at a conference earlier this year that the Street might need to build in more reserve growth for the Card growth. You’ve had more reserve build. We didn’t see that this quarter. Is that just kind of seasonal, and would you still expect the kind of growth math to play out in terms of Card growth and reserve build needs?

Jeremy Barnum: Yeah, John. So in short, yes to both questions. So yes, the relative lack of build this quarter is a function of the normal seasonal patterns of Card. Yes, we still expect 12% Card loan growth for the full year. And yes, that still means that all else equal, we think the consensus for the allowance build for the back three quarters is still a little too low if you map it to that expected Card loan growth. Obviously, there’s the wild card of what happens with our probabilities and our parameters and the output of our internal process of assessing the SKU and the CECL distribution and so on. And we’re not speaking to that one way or the other. So, if you guys have your own opinions about that, that’s fine. But we’re narrowly just saying that based on the Card loan growth that we expect and normal coverage ratios for that, we do expect build in the back half of the year.

John McDonald: Okay. Got it. And then just to follow up to make it super clear on the idea of the Markets NII, that outlook being revised down by $1 billion, but revenue neutral. I guess the obvious thing is there’s typically an offset in fee income, and you don’t guide to that. But the idea would be the way you’re structuring trades, the way the balance sheet is evolving, there’s some offset that you’d expect in Markets fees from the lower Markets NII, correct?

Jeremy Barnum: That is exactly right. And specifically, what’s going on here is this shift between the on-balance sheet and off-balance sheet in the financing businesses and prime and so on within Markets, and you can actually see a little bit of a pop of the Markets balance sheet in the supplement, and these things are all related. So fundamentally, you can think of it as like we either hold equities on the balance sheet, non-interest bearing, high funding expense, negative for NII, or we receive that in total return form through derivatives, exactly the same economics, no impact on NII. So, that shifts as a function of the sort of borrower relationships in the marketplace in ways that are bottom-line effectively neutral, it’s second order effects, but they change the geography quite a bit.

And that’s what happened this quarter. And that’s why we’ve been emphasizing for some time that the NII ex-Markets is the better number to focus on in terms of an indicator of how the core banking franchise is performing.

John McDonald: Got it. Thank you.

Jeremy Barnum: Thank you.

Operator: Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. You may proceed.

Ebrahim Poonawala: Hey, good morning. I guess just in terms of, Jeremy, when you think about the outlook for the economy, we’d appreciate your thoughts on the health of the customer base, both commercial and consumer. And when we think about higher for longer, maybe the economy is too strong, so we don’t get any rate cuts, are you seeing that when you talk to your customers and the feedback you are getting from your bankers where the momentum is picking up? And I appreciate all the macro risks Jamie has pointed out, but I’m just getting — trying to get to a sense of what your view is in terms of the most likely outcome based on what you’re seeing today from the customers.

Jamie Dimon: So, I would say consumer customers are fine. The unemployment is very low. Home prices are up, stock prices are up. The amount of income they need to service their debt is still kind of low. But the extra money of the lower income folks is running out — not running out, but normalizing. And you see credit normalizing a little bit. And of course, higher-income folks still have more money. They’re still spending it. So whatever happens, the customer is in pretty good shape. And if you go to a recession, they’re in pretty good shape. Businesses are in good shape. If you look at it today, their confidence is up, their order books are up, their profits are up. But I caution people, these are all the same results of a lot of fiscal spending, a lot of QE, et cetera.

And so, we don’t really know what’s going to happen. And I also want to look at the year. Look at two years or three years, all the geopolitical effects and oil and gas, and how much fiscal spending will actually take place, our elections, et cetera. So, we’re in good — we’re okay right now. It does not mean we’re okay down the road. And if you look at any inflection point, being okay in the current time is always true. That was true in ’72, it was true in any time we’ve had it. So, I’m just on the more cautious side. How people feel and confidence levels and all that, that doesn’t necessarily stop you from having an inflection point. And so, everything’s okay today, but you’ve got to be prepared for a range of outcomes, which we are. And the other thing I want to point out, because all of these questions about interest rates and yield curves and NII and credit losses, it’s one thing to project it today based on what — not what we think in economic scenarios, but the generally accepted economic scenario, which is the generally accepted rate cuts of the Fed.

But these numbers have always been wrong. You have to ask the question, what if other things happen, like higher rates with this modest recession, et cetera, then all these numbers change. I just don’t think any of us should be surprised if and when that happens. And I just think the chance of happening is higher than other people. I don’t know the outcome. We don’t want to guess the outcome. I’ve never seen anyone actually positively predict big inflection points in the economy, literally in my life or in history.