JPMorgan Chase & Co. (NYSE:JPM) Q4 2022 Earnings Call Transcript

JPMorgan Chase & Co. (NYSE:JPM) Q4 2022 Earnings Call Transcript January 13, 2023

Operator: Good morning, ladies and gentlemen. Welcome to JPMorgan Chase’s Fourth Quarter 2022 Earnings Call. This call is being recorded. We will now go live to the presentation. Please standby. 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. Good morning, everyone. The 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 $11 billion, EPS of $3.57, on revenue of $35.6 billion and delivered an ROTCE of 20%. This quarter, we had two significant items in corporate, a $914 million gain on the sale of Visa B shares, offset by $874 million of net investment securities loss. Touching on a few highlights. Combined credit and debit spend is up 9% year-on-year, with growth in both discretionary and non-discretionary spending. We ended the year ranked at #1 for global IB fees with a wallet share of 8% and credit continues to normalize, but actual performance remains strong across the company.

On Page 2, we have more on our fourth quarter results. Revenue of $35.6 billion was up $5.2 billion or 17% year-on-year. NII ex Markets was up $8.4 billion or 72% driven by higher rates. NIR ex Markets was down $3.5 billion or 26%, predominantly driven by lower IB fees as well as management and performance fees in AWM, lower auto lease income and Home Lending production revenue. And Markets revenue was up $382 million or 7% year-on-year. Expenses of $19 billion were up $1.1 billion or 6% year-on-year, primarily driven by higher structural expense and investments. And credit costs of $2.3 billion included net charge-offs of $887 million. The net reserve build of $1.4 billion was driven by updates to the firm’s macroeconomic outlook, which now reflects a mild recession in the central case as well as loan growth in card services, partially offset by a reduction in pandemic-related uncertainty.

Looking at the full year results on Page 3, the firm reported net income of $37.7 billion, EPS of $12.09 and record revenue of $132.3 billion and we delivered an ROTCE of 18%. On the balance sheet and capital on Page 4, we ended the quarter with a CET1 ratio of 13.2%, up 70 basis points, primarily driven by the benefit of net income, including the sale of Visa B shares less distributions, AOCI gains and lower RWA. RWA declined approximately $20 billion quarter-on-quarter, reflecting lower RWA in the Markets business, which was partially offset by an increase in lending, primarily in card services. Recall that we had a 13% CET1 target for the first quarter of 2023, which we have now reached one quarter early. So given that, we expect to resume share repurchases this quarter.

Now, let’s go to our businesses, starting on Page 5. Starting with a quick update on the health of U.S. consumers and small businesses based on our data. They are generally on solid footing, although sentiment for both reflects recessionary concerns not yet fully reflected in our data. Combined debit and credit spend is up 9% year-on-year. Both discretionary and non-discretionary spend are up year-on-year, the strongest growth in discretionary being travel. Retail spend is up 4% on the back of a particularly strong fourth quarter last year. E-commerce spend was up 7%, while in-person spend was roughly flat. Cash buffers for both consumers and small businesses continue to slowly normalize, with lower income segments and smaller businesses normalizing faster.

Consumer cash buffers for the lower income segments are expected to be back to pre-pandemic levels by the third quarter of this year. Now moving to financial results. This quarter, CCB reported net income of $4.5 billion on revenue of $15.8 billion, which was up 29% year-on-year. You will notice in our presentation that we renamed Consumer & Business Banking to Banking & Wealth Management. Starting there, revenue was up 56% year-on-year, driven by higher NII on higher rates. Deposits were down 3% quarter-on-quarter as spend remains strong and the rate cycle plays out, with outflows being partially offset by new relationships. Client investment assets were down 10% year-on-year, driven by market performance, partially offset by net inflows where we are seeing good momentum, including from our deposit customers.

Home Lending revenue was down 46% year-on-year, largely driven by lower production revenue. Moving to Card Services & Auto, revenue was up 12% year-on-year, predominantly driven by higher card services NII on higher revolving balances, partially offset by lower Auto lease income. Card outstandings were up 19%. Total revolving balances were up 20% and we are now back to pre-pandemic levels. However, revolving balances per account are still below pre-pandemic levels, which should be a tailwind in 2023. And then auto originations were $7.5 billion, down 12%. Expenses of $8 billion were up 3% year-on-year, primarily driven by investments as well as higher compensation, largely offset by auto lease depreciation from lower volumes. In terms of credit performance this quarter, credit costs were $1.8 billion, reflecting reserve builds of $800 million in Card and $200 million in Home Lending and net charge-offs of $845 million, up $330 million year-on-year.

Next, the CIB on Page 6. CIB reported net income of $3.3 billion on revenue of $10.5 billion for the fourth quarter. Investment Banking revenue of $1.4 billion was down 57% year-on-year. IB fees were down 58%, in line with the market. In Advisory, fees were down 53%, reflecting lower announced activity earlier in the year. Our underwriting businesses were affected by market conditions, resulting in fees down 58% for debt and down 69% for equity. In terms of the outlook, the dynamics remain the same. Pipeline is relatively robust, but conversion is very sensitive to market conditions and sentiment about the economic outlook. Also note that it will be a difficult compare against last year’s first quarter. Moving to Markets, revenue was $5.7 billion, up 7% year-on-year, driven by the strength in our macro franchise.

Fixed Income was up 12% as elevated volatility drove strong client activity, particularly in rates and currencies in emerging markets, while securitized products continue to be challenged by the market environment. Equity markets was relatively flat against a strong fourth quarter last year. Payments revenue was $2.1 billion, up 15% year-on-year. Excluding the net impact of equity investments, it was up 56% and the year-on-year growth was driven by higher rates. Security Services revenue of $1.2 billion was up 9% year-on-year, predominantly driven by higher rates, largely offset by lower deposits and market levels. Expenses of $6.4 billion were up 10% year-on-year, predominantly driven by the timing of revenue-related compensation. On a full year basis, expenses of $27.1 billion were up 7% year-on-year, primarily driven by higher structural expense and investments, partially offset by lower revenue-related compensation.

Moving to the Commercial Bank on Page 7. Commercial Banking reported net income of $1.4 billion. Record revenue of $3.4 billion was up 30% year-on-year, driven by higher deposit margins, partially offset by lower investment banking revenue and deposit-related fees. Gross Investment Banking revenue of $700 million was down 52% year-on-year, driven by reduced capital markets activity. Expenses of $1.3 billion were up 18% year-on-year. Deposits were down 14% year-on-year and 1% quarter-on-quarter, primarily reflecting attrition of non-operating deposits. Loans were up 14% year-on-year and 3% sequentially. C&I loans were up 4% quarter-on-quarter, reflecting continued strength in originations and revolver utilization. CRE loans were up 2% quarter-on-quarter, reflecting a slower pace of growth from earlier in the year due to higher rates, which impacts both originations and prepayment activity.

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 33%. Revenue of $4.6 billion was up 3% year-on-year driven by higher deposit margins on lower balances, predominantly offset by reductions in management and performance and placement fees linked to this year’s market declines. Expenses of $3 billion were up 1% year-on-year, predominantly driven by growth in our Private Banking Advisory teams, largely offset by lower performance-related compensation. For the quarter, net long-term inflows were $10 billion, positive across equities and fixed income and $47 billion for the full year. And in liquidity, we saw net inflows of $33 billion for the quarter and net outflows of $55 billion for the full year.

AUM of $2.8 trillion and overall client assets of $4 trillion were down 11% and 6% year-on-year respectively driven by lower market levels. Finally, loans were down 1% quarter-on-quarter, driven by lower securities-based lending, while deposits were down 6% sequentially driven by the rising rate environment, resulting in migration to investments and other cash alternatives. Turning to Corporate on Page 9. Corporate reported a net gain of $581 million. Revenue of $1.2 billion was up $1.7 billion year-on-year. NII was $1.3 billion, up $2 billion year-on-year due to the impact of higher rates. NIR was a loss of $115 million and reflects the two significant items I mentioned earlier. And expenses of $339 million were up $88 million year-on-year.

With that, let’s pivot to the outlook for 2023, which I will cover over the next few pages, starting with NII on Page 10. I will take a sip of water. Okay. We expect total NII to be approximately $73 billion and NII ex Markets to be approximately $74 billion. On the page, we show how the significant increases in quarterly NII throughout 2022 culminated in the $81 billion run-rate for the fourth quarter and how we expect that to evolve for 2023. Going through the drivers. The outlook assumes that rates follow the forward curve. The combination of the annualization of the hike in late December, the hikes expected early in the year and the cuts expected later in the year should be a nice tailwind. Offsetting that tailwind is the impact of deposit repricing, which includes our best guess of rate paid in both wholesale and consumers.

In addition, looking at balance sheet growth and mix, we expect solid overall card spend growth as well as further normalization of revolving balances per account and modest loan growth across the rest of the company. We expect that this tailwind will be offset by lower deposit balances given modest attrition in both consumer and wholesale. But it’s very important to note that this NII outlook is particularly uncertain. Specifically, Fed funds could deviate from forwards, balance attrition and migration assumptions could be meaningfully different and deposit product and pricing decisions will be determined by customer behavior and competitive dynamics as we focus on maintaining and growing primary bank relationships and maybe quite different from what this outlook assumes.

And further, the timing of all these factors could significantly affect the sequential trajectory of NII throughout the year. That said, as we continue executing our strategy of investing to acquire new customers as well as deepen relationships with existing ones and as we see the impact of loan growth, we would expect sequential NII growth to return, all else being equal. And just to finish up on NII. As the guidance indicates, we expect Markets NII for the year to be slightly negative as a result of higher rates, but remember, this is offset in Markets NIR. Now turning to expenses on Page 11, we expect 2023 adjusted expense to be about $81 billion, which includes approximately $500 million from the higher FDIC assessment. Going through some of the other drivers, we expect increases from labor inflation, which, while it seems to be abating on a forward-looking basis, is effectively in the run-rate for 2023.

An additional labor-related driver is the annualization of 2022 headcount growth as well as our plans from a modest headcount increase in the year, all of which are primarily in connection with executing our investments. And on investments, while we are continuing to invest consistent with what we told you at Investor Day, it’s a more modest increase than last year. The themes remain consistent and we will continue to give you more detail throughout the year, including at Investor Day in May. Of course, as is always true, this outlook includes continuing to generate efficiencies across the company. And finally, while volume and revenue-related expense was ultimately a tailwind for 2022, we are expecting it to be close to flat in 2023, which will be completely market dependent as always.

Moving to credit on Page 12, on the page, you can see how exceptionally benign the credit environment was in 2022 for the company across wholesale, card and the rest of consumer. Turning to the 2023 outlook, for card net charge-off rates specifically, Marianne gave quite a bit of detail about this at our recent conference and our outlook hasn’t really changed. So to recap that story, the entry to delinquency rate is the leading indicator of future charge-offs. And it is currently around 80% of pre-pandemic levels. We expect that to normalize around the middle of the year, with the associated charge-offs following about 6 months later. As a result, loss rates in 2023 will still be normalizing. So while we anticipate exiting the year around normalized levels, we expect the 2023 card net charge-off rate to be approximately 2.6%, up from the historically low rate of 147 basis points in 2022, but still well below fully normalized levels.

So let’s turn to Page 13 for a brief wrap up before going to Q&A. We are very proud of the 2022 results, producing an 18% ROTCE and record revenue in what was a quite dynamic environment. Throughout my discussion of the outlook, I have emphasized the uncertainty in many of the key drivers of 2023 results. And while we are ready for a range of scenarios, our expectation is for another strong performance. So as we look forward, we expect to continue to produce strong returns in the near-term and we remain confident in our ability to deliver on our through-the-cycle target of 17% ROTCE. And with that, operator, let’s open up the line for Q&A.

Operator: is coming from the line of John McDonald from Autonomous Research. You may proceed.

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John McDonald: Hi. Good morning, Jeremy. I wanted to ask about the NII outlook, Slide 10. The range of outcomes on deposit costs is quite wide. As you mentioned, it looks like 1.5% to 2% demonstrated there. Does the $74 billion NII line up with kind of the midpoint of that? Maybe you could give some color about kind of the drivers of the $74 billion and where that lines up on this range of deposit cost outcomes?

Jeremy Barnum: Sure, John. I mean I wouldn’t take the chart on the bottom left too literally. That’s just supposed to give a stylized indication of the fact that relatively small changes in deposit rate paid for the company on average, as we all know, can produce quite significant impacts on the NII and also that there is €“ as we have already talked about, a meaningful . The outlook is our best guess, as Jamie says. And the drivers within that are the usual drivers in wholesale. We would expect to see a little bit of continued attrition, especially of the non-operating type balances. And you are going to see some internal migration there out of non-interest-bearing into interest-bearing over time. In consumer, CDs are flowing right now and we are seeing good new CD production.

We have got a 4% CD in the market as of this morning. And so continued CD production and internal migration there will be a driver. And the rest of it is €“ well, of course, as I said in the prepared remarks, we do expect across the company modest deposit attrition as we look forward as a function of QT in the rate cycle and so on. So we have got the best guesses for all of those in the outlook. And of course, the actual outcome will be different in one way or another and we will just run the business this year.

Q&A Session

John McDonald: Okay. Thanks. And on buybacks, how will you think about approaching buybacks and putting it in that mix of capital decisions that you have and any thoughts on kind of the size or quantifying the potential buybacks?

Jeremy Barnum: Yes, sure. So sort of in the mode of like helping you guys out to put a number in the model. If you sort of look at the way we are seeing things, obviously, we have got another GSIB stuff coming next year. So say, 13.5% target and the sort of using your estimates, organic capital generation, minus dividends, etcetera and all of the elements of uncertainty there, I think a good number to use is something like $12 billion of buybacks for this year for 2023. But you know, of course, that buybacks are always at the end of our capital hierarchy. So if we have better uses for the money, those will come first and the timing and the conditions of how much we do when is entirely at our discretion and also noting that we are potentially going to see a Basel III NPR sometime in the first quarter or maybe the second quarter.

And while that will be an NPR and it will only cover part of the surface area and it won’t be final, so it’s unlikely that it meaningfully shapes short-term decision-making. There will be some information content of that release that could shape our decisions as well.

John McDonald: Got it. Thank you.

Operator: The next question is coming from the line of Erika Najarian from UBS. You may proceed.

Erika Najarian: Hi, good morning. Jeremy, my first question is just, as you can imagine, following up on the NII line of questioning, I appreciate that there is a significant amount of uncertainty in this year’s NII forecast in particular. But to follow-up with John’s question, I’m wondering if you could give a sort of more specific guardrails with regards to what you’re expecting for deposit attrition and deposit beta in terms of the terminal deposit beta. I think the feedback I’m getting very early from investors is that they appreciate the headwinds that’s occurring for NII this year. At the same time, you have been consistently beating what seems like conservative NII expectations for 2022, including printing a giant $20.3 billion number in the fourth quarter. So that’s why I think the more specific guardrails could be very helpful as investors try to figure out what their own expectations are versus that?

Jeremy Barnum: Thanks, Erika. So look, I totally appreciate the desire for more specific guardrails. I would want that too, if I were you. I do think that we’re trying to be quite helpful by giving you a full year number which, if we’re honest, involves a lot of guessing about how things will evolve throughout the year. I think once you start giving guardrails, you implicitly assume that outcomes outside of the guardrails are very unlikely. And that’s just a level of precision that we’re just not prepared to get into, especially because in the end, as I said, a lot of the repricing decisions that we will be faced with as a company or respond to data in the moment at a granular level in connection with the strategy, which is about growing and maintaining primary bank relationships rather than chasing every dollar of balances at any cost. So in that context, we do expect modest balance attrition across the company for deposits, as I said. Jamie, on