JPMorgan Chase & Co. (NYSE:JPM) Q2 2023 Earnings Call Transcript

JPMorgan Chase & Co. (NYSE:JPM) Q2 2023 Earnings Call Transcript July 14, 2023

JPMorgan Chase & Co. misses on earnings expectations. Reported EPS is $2.76 EPS, expectations were $3.99.

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.

Jeremy Barnum: Thanks, operator. Good morning, everyone. Presentation is available on our website and please refer to the disclaimer on 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 and credit reserve build for the First Republic lending portfolio $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 financials, let me give you a brief updates on the status of the First Republic integration on Page 2.

The settlement process with the FDIC is on schedule, the number of key milestone being recently completed. Systems integration is also proceeding at pace and we are targeting being substantially complete by mid-2024. First Republic employees have formally joined us as of July 2, 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 the client retention is strong with about a $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 firm-wide 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 1, 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 as 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 firm-wide 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 and $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 at 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 the CET1 ratio. And as you know, we completed CCAR a couple of weeks ago. Our new indicative SCB is 2.9% versus our current requirements of 4% and it goes into effect in 4Q ’23.

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 released 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 remained 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 products. Client investment assets were up 18% year-on year, driven by market performance and strong net inflows across our adviser and digital channels.

In Home Lending, revenue was down 23% year-on-year, driven by lower NII and higher 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 pulled 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, credit costs were $1.5 billion, reflecting the 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 past 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.

Security 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 fun 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 and 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 pretax 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 JPMorgan Asset Management 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 reserve release of 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, the increase driven by higher rates coupled with slower deposit repricing than previously assumed across both consumer and wholesale. And I should take the opportunity to remind you once again that significant sources of uncertainty remained 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.

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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Q&A Session

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

Jim Mitchell: Thanks. Good morning. Hey Jeremy, you talked about NII guidance. 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 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 have talked about.

Jeremy Barnum: Yes, sure. Thanks, Jim. So — yes, 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. 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 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 continue to expect — we would continue to — 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 the medium-term run-rate in the mid-70s that was before First Republic and you know 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.

Jim Mitchell: Okay. But, I guess I just one to follow-up on that, just if we don’t get rate cuts until 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?

Jeremy Barnum: 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.

Jim Mitchell: Okay, great. Thanks.

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

Erika Najarian: Hi, good morning, Jeremy. And 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 your more normalized NII generation is not $87 billion. That being said and fully taking into account the potential haircut from Basel III end game, 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 role from a rate scenario and everybody is 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.