Q4 2019 Earnings Call
Please standby we're about to begin.
Good morning, ladies and gentlemen, welcome to JP Morgan Chase. This fourth quarter 2019 earnings call. This call is being recorded.
Well be muted for the duration of the call.
No go live to the presentation. Please standby.
At this time I would like to turn the call over to JP Morgan Chase is chairman and CEO , Jamie Diamond and Chief Financial Officer, Jennifer Peeps [laughter].
Please go ahead.
Thank you operator, and 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.
From reported net income of $8.5 billion.
That's a $2.57.
Revenue of 29.2 billion when the return on tangible common equity of 17%.
Underlying performance continues to be strong.
Deposit growth accelerated in the fourth quarter cost consumer and wholesale <unk>, the average balances up 7% year on year.
We saw solid loan growth would card.
I am being the bright spots as average across the company was 3% year on year, excluding the impact depending on sales from prior quarters.
Kind investment affecting consumer business banking were up 27% and asset in wealth management.
19%, reflecting stronger market performance versus the prior year as well as organic rate.
We ranked number one for the full year in global Ibcs, 9% wallet share.
And gross revenue in the commercial bank with a record $2.7 billion.
It's the IB markets, we were up 56% year on year compared to a weak fourth quarter last year. However, it's important to note. The corner was very strong in absolute terms in fact, a record fourth quarter.
And credit performance continues to be strong across the company.
To teach you add some more detail about or fourth quarter results.
Revenue of $29.2 billion.
Was that 2.4 billion or 9% year on year.
Net interest income down to wander in 20 million or 2% on lower rates.
Finally, offset by balance sheet growth in net and higher see I'd be markets and I are.
Noninterest revenue was up 2.6 billion EUR, 21% on higher revenue and see I'd markets and he W.M. and continued strong performance in home lending in auto.
Expenses, and 16.3 billion were up 4% on volume and revenue related costs.
Credit remains favorable with credit cost of 1.4 billion down 121 million or 8% year on year, reflecting modest net reserve releases and net charge offs inline with expectations.
Turning to the full year results on page three.
The from reported net income of $36.4 billion <unk> of $2.72 in revenue of 118.7 billion All records.
Lindbergh and return on tangible common equity of 19%.
Revenue was up 7.2 billion or 6% year on year net interest income of 2.1 billion or 4% on balance sheet growth in mix as well as higher average short term rates, partially offset by higher deposit pay rates.
Noninterest revenue was up 5.1 billion or 9% driven by growth across consumer and higher CRT markets revenue.
And expenses 65.5 billion were up 3% year on year, driven by continued investments as well and volume and revenue related costs, partially offset by lower FDIC charges.
Revenue growth and our continued expense discipline generated positive operating leverage for the full year and.
No credit performance remained strong throughout 2019 credit costs were 5.6 billion.
In consumer credit costs were up 210 million, reflecting an increase in card balance girls, largely offset by lower credit costs in home lending.
And in wholesale we were at 504 million largely due to reserve releases in higher recovery both in 2018.
Moving to balance sheet and capital on page four.
We ended the fourth quarter with a C.T. one ratio at 12.4% up slightly versus last quarter.
The from distributed 9.5 billion of capital to shareholders in the corner, including 6.7 million, if not be purchases and a common dividend of 90 cents per share.
And while on the topic of capital was worth noting give any actions we've taken before we expect it learning and a 3.5% you should bucket.
Before we moved into the business results I'll spend a moment talking about c. so on each side.
As you know the transition to diesel was effective on January 1st and therefore, there is no impact for 2019 financials.
On the page in the seasonal adoption impact and overall net increase to the allowance for credit losses of 4.3 billion, which is at the lower end of the range we provided.
It was driven by increasing consumer a 5.7 billion, mostly coming from part partially offset by a decrease in wholesale a 1.4 billion.
It's hard to increase as a result, and moving to lifetime loss coverage versus the shorter loss emergence period under the incurred model.
As in wholesale modeling changes like using specific macro economic forecast versus through the cycle Wall Street, Thundering herd adult and a decrease especially given the forecasted credit environment.
Recognition of the allowance increased has resulted in a 2.7 billion dollar aftertax decrease retained earnings as you can see on the page.
Oh, so important to note we have elected to use the transition approach to recognize the impact on capital.
And now turning to businesses will start with consumer community banking on page.
In the fourth quarter CCT generated net income of 4.2 billion in our we have 31%.
I was reading deposit growth at 5% client investment assets up 27% and total loans down 6%.
For the full year results is TCV were strong with 16.6 billion of net income up 12% and in our we have 31% on revenue of 55.9 billion up 7%.
Fourth quarter revenue was 14 billion up 3% year on year.
In consumer and business banking revenue was down 2% driven by deposit margin compression largely offset by strong deposit growth and higher non interest revenue on increasing client investment assets as well as accountant transaction growth.
Oh lending revenue was down 5% driven by lower an eye on lower balances, which were down 17%, reflecting prior long sales and lower net servicing revenue predominantly offset by higher net production revenue, reflecting at 94% increase in originations.
And in cars merchant services in auto revenue was up 9% driven by higher card and eye on loan growth as well as the impact is higher auto these volumes.
Card loan growth was 8% held up 10%, reflecting a strong in company consumer during holiday season.
Expenses of 7.2 billion, what about 2% driven by revenue related costs from higher volumes as well as continued investments in the business, including market expansion largely offset by expense efficiencies.
On credit this quarter CCB had a net reserve release at 150 million. This included a relief in the home lending purchase credit impaired portfolio of 250 million, reflecting improvements in delinquencies at home prices, which was partially offset by reserve building card and 100 million driven by growth.
Net charge offs for 1.4 billion, largely driven by card and consistent with expectations.
Now turning to the corporate and investment bank on page seven.
[noise] fourth quarter CRD reported net income of $2.9 billion and or are we a 14% on revenue of 9.5 billion a strong finish Didier.
For the full year see I'd delivered record revenue of 38 million and an army of 14%.
In investment banking Ibcs reached an all time record for the full year, we maintained our number one ranking global IB fees agreed share to its highest level any becky.
For the quarter I'd revenue of 1.8 billion was up 6% year on year outperforming the market, which was flat.
Advisory fees were down 3% following a record performance last year.
On a sequential quarter basis fees were up meaningfully as we benefited from the closing of some large transactions and for the year, we ranked number two and gain share.
Debt underwriting fees were up 11% year on year due to higher bond issuance activity as clients accelerated their funding to take advantage of attractive pricing conditions to strengthen their balance sheets.
And for the year, we maintained our number one rank overall I mean, we're number one for me back positions in both high yield bonds and leverage loans.
Equity underwriting fees were up 10% year on year, reflecting strong performance in the U.S. and Latin America.
The new issuance market continued to be asking and for the year. We ranked number one in equity underwriting as low as ideas.
Our overall pipeline continues to be healthy a strategic dialogue with clients was constructed equity markets remains subject to new issuance and the rate environment is favorable for debt issuance.
Moving to markets.
Total revenue was 5 billion at 56% year on year, driven by record fourth quarter revenue in both fixed income and equity markets.
Fixed income markets was up 86% benefiting from a favorable comparison against a challenging fourth quarter last year, but also reflecting strength across businesses, notably in securitized products in rates driven by strong client activity and monetizing flows.
Equity markets was up 15% driven by strength across cash in prime.
Treasury services revenue was 1.2 billion down 3% year on year, primarily due to the target margin compression, which was largely offset by organic growth well security services revenue was 1.2 billion up 3%.
Expenses of 5.2 billion were up 12% compared to the prior year with higher legal volume and revenue related expenses as well and continued investments.
Now moving on to commercial banking on pages.
Commercial banking reported net income of $938 million, an early 16% for the fourth quarter.
And for the year $3.9 billion net income and in our we have 17%.
Fourth quarter revenue of 2.2 billion was down 3% year on year, lower deposit and eye on lower margins, largely offset by higher deposit fees and a gain on the strategic investments.
Gross investment banking revenues were 634 million up 5% year on year, driven by increased large deal activity.
Full year I'd revenue was a record 2.7 billion up 10% on strong activity across segments with record results for both middle market and corporate client banking.
Expenses of 882 million, what 4% year on year, driven by continued investment banker coverage and technology.
Deposit balances were up 8% year on year as we continue to see strong fine flows.
Loan balances were up 1% year on year.
And I loans were up 2% driven by growth and specialized industries and expansion markets, partially offset by the runoff in our tax exempt portfolio.
CRT bonds were up 1%, where we continue to see higher origination be commercial term lending driven by the low rate environment offset by declines in real estate banking and remain selective given where we are in the cycle.
Finally credit costs were 110 million with an NCL rate of 17 basis points, largely driven by single name, which was reserved for in prior quarters underlying credit performance continues to be strong.
Now and asset management on page nine.
I think most management reported net income of $785 million pre tax margin of 20% and Arlene, 29% for the fourth square.
And for the year AAMC generated net income of 2.8 billion with both pre tax margin in our we have 26%.
Revenue of 3.7 billion for the quarter was up 8% year on year at the impact of higher investment valuations average market levels as well as deposit and loan growth were partially offset by deposit margin compression.
<unk> expenses were 2.7 billion were up 1% year on year.
For the quarter you saw net long term inflows of 14 billion driven by fixed income and multi asset and we had net liquidity inflows of 37 billion.
Hey, you I'm, a 2.4 trillion and overall client assets of 3.2 trillion, Oh records were up 19% and 18%, respectively, driven by higher market levels as well as continued net inflows into long terms in the city products.
Deposits were up 8% year on year, driven by growth in interest bearing products.
Finally, we had record loan balances up 8% with strength in both wholesale and mortgage lending.
Now, it's a corporation on page 10.
[laughter].
Corporate reported a net loss of $361 million.
Revenue was a loss of 228 million for the current corner driven by approximately 190 million of net markdowns on certain legacy private equity investments.
Sequentially revenue was down 920 million due to lower rates the benefit recorded in the prior quarter related to loan sales as well as the P. losses I just mentioned.
Year on year revenue was down also primarily driven by lower rates.
Expenses 343 million were down 165 million year on year due to timing of her contributions to the foundation in the prior year.
And turning to page 11 for the outlook.
[noise] I didn't yesterday you go away, we'll give you more information on the full year outlook. However for now I'll provide some color and reminders about the first quarter.
We expect and <unk> to be approximately 14 billion market dependent.
Adjusted expenses to be about 17 billion.
As a reminder, effective tax rate in the first quarter is typically impacted by stock compensation adjustments and as a result is currently estimated to be approximately 17%, we manage tax rate about five to 700 basis points higher.
So to wrap up.
[noise] 2019 was a year of record financial performance across revenue and net income and if yes.
Outlook heading into 2020 is constructed underpinned by the strength of the U.S. consumer and despite expected slower global growth and the backdrop of geopolitical uncertainties, we remain well positioned as we continue to build our scale and benefit from the diversification of our business model and.
And with that operator, please open the line for QNX.
Yes.
First question comes from.
Ken is didn't of Jefferies.
Hi, Ken Thanks, Good morning, Hi, John how are you.
But just wondering if done on terms of the anti outlook you talked about the 14 billion level, obviously getting to a point of stability can can you help us [laughter] outside of day count can you help us understand just where we are in terms of repricing of the balance sheet. What happens if rates generally we stay flat from here just in terms of.
Right side to the accretion freehold volume aside.
Sure as as we look at rate paid I know retail side, you know, we didnt, obviously have a re price on the way up and so there's little to do on the way down in fact, there from a rate paid perspective, we continued in the fourth quarter to see rate paid tick up a little bit I might creep on migration from savings to CD.
And then on the wholesale side, we did see a rate paid come down a as you would expect than we did see betas accelerate after the second caught a lot. So there we saw a more more of a decline in see Ivy than we did see D or eight W.M. as you might expect a importantly, though as we always say on the wholesale side we price.
Its client by client and so we're not going to lose any valuable client relationships over a few checks of beat up and then I would you say in terms of the outlook or with the fed on hold a implied you still had one caught later in 2020 and based on the latest implied well give you more detail at industry as we always do.
You bet I would say and <unk> for the full year of 2020, you know flat she did slightly down a as headwinds from rates will be offset with bounce from.
Yep got it and just one question on just the volume side of things I, you know ex the mortgage loans.
Sales last year, you're still one not like 3% core growth.
Obviously talk a lot about definitely environment that held there's been some settling out thought at a lower level just what's the status of just corporate I'm commercial customers now that we're closer to phase one getting finalize U M series on the table just what's the you know what's the backdrop of just economic activity as you guys see it.
Sure. So the fourth quarter definitely I would say stabilized seems trade certainly stabilize things broadly speaking has stopped getting worse and so we saw sentiment improves a bit which I think contributed to the overall success into fourth quarter and then I'm certainly there are some puts and takes I mean the U.S.
Tumor remains and a very strong shape, both from a credit perspective sentiment spending obviously labor markets very strong and got and you know the fat and easy be on hold and then you know capital spending is still a bit solved but sadly sentiment is at least certainly better than it was six months.
So we have a broadly speaking constructed outlook headed and you know as we're heading into 2020 here.
Our next question is from so Martinez of yes.
Hi, Good morning, I've a question on on credit and see so and you guys had been pretty clear that your business decisions are based on economic outcome or economic outcomes and not counting outcomes and but so does materially change the way in which tiny that did that change the tightening in which.
Earnings Accrete to book value in capital, obviously with a higher upfront hit.
But you guys have also been shifting your loan book pretty materially towards cars with which have a much higher loss content. Then your total book. So I guess you know twofold question. One is how do we think about provisioning in this context. It should we think provisioning is gonna be well above charge off says your reserve ratio.
Moves up because I would think your your age well ratio post diesel adoption, which I think it's about 21 nine it should move up is cards, which have a much higher loss content that that continue to grow in the mix. So just know how do we think about provisioning in the context of the makeshift in cecil's adoption and then I guess secondly.
If there is a change in the macro environment and in the credit environment does get worse and you have Cecil that that inflection goes through your reserves and your provisioning or is there a point, where she still actually does change the way you think about pricing and underwriting in that environment.
Sure. So I'll start with the provisioning. So you don't look I think it's fair to say understood. So you could have a incremental volatility given that reserves are more dependent on specific macro economic forecast there that would depend of course on our ability to have foresight into that.
Timing and extensive those downturns in card specifically.
Hi, a in any one period of growth for a downturn you could see an increase in Missouri.
We're taking life of loan first is the next nine or 12 months. So that's true and then on the wholesale side you could see some differences of course, because there are modeling differences between specific macro economic forecasts and through the cycle I'm, having said that [laughter] incremental volatility would be.
Eat material for us and of course net charge offs are not changing and then right snack did you don't foresee a in the near term any pricing changes and cash flows with the customer have not changed and so we don't see any but it's true as you rightly pointed out that there is anything feed cost of equity.
In a sense that we're taking reserves upfront.
Versus through time, so overtime, you could see that we're not expecting it in the near term.
Got it I guess one the first on the provisioning. So my question is more just on ongoing basis is is the mix changes more towards higher loss content lending, which which obviously has higher margins higher profitability through the course of alone [laughter] theory, but like in that context. So is it fair to say your provisioning levels also.
You know could be materially above your charge offs. Because you would think that your your reserve ratios are h. blow ratios do have to move up is that mix changes on your balance sheet.
It could be could be down. So that's that's just timing, particularly on the card side, it's just timing.
But it's difficult to know again, because it relies on our ability to have perfect foresight into the timing and extend to the downturn.
Got it no that's fair thanks, a lot I appreciate it sure.
Our next question comes from Erika Najarian of Bank of America.
Hi, good morning.
Okay [laughter] up so I was hoping to get a little bit more credit Oh, and what happened in the quarter to produce a stellar results [laughter] understand that obviously the fourth quarter 18 comp was light and the 3.4 billion. There. So you know a pretty heavy number for a fourth quarter for J P. Morgan So any color you.
Could provide would be very helpful. Jennifer.
Sure so you're talking about markets Erica.
Okay. Thank you yeah, Okay sure. So there I you know at Goldman in early December I didn't say, we expected to be up meaningfully I'm, saying that performance was broad based in rates, we call out securitized products I'm, sorry, fixed incoming calls securitized products and rates, which are bright spots, but broadly speaking.
King, obviously equities had a very strong corner as well so its really across the franchise and we saw very strong client flow and we had success monetizing those flows. So just a very healthy environment for us and really strong performance.
Got it my follow up question is that you know a quarter ago, we're starting two quarters ago, the revenue backdrop for banks in general.
Well the outlook, we're starting to deteriorate and I think management had got got gave us some color that you'll continue to invest or fishing season initiative no matter what the check changes are in the revenue environment [laughter] you could cut back on certain expenses, if revenue environment was changing [laughter] that being said youre revenue.
The production seems to always Oh for fall into the upside. So do you think about 2020, it's the best way to think about expenses just that 55% overhead ratio.
So on the efficiency ratio, yeah, I would say that like we run the company with great discipline, whether its relentlessly pursuing expense efficiencies or investing with discipline through the cycle, but because the efficiency ratio is an outcome not anymore and it's about expenses and revenue.
I'm going to give a target for any one year, we think about operating leverage over time and a as we always say, we're not going to change the way we run the company and what could be temporary revenue headwind and expenses you know I would you say that at Investor Day last year. Marianne told you that we expected to cost curve to flatten.
Post 2019 in 2019 adjusted expenses were up 3% 2020, we expect them to be up less than that.
Our next question is from Mike Mayo of Wells Fargo Securities.
Oh hi.
Jamie on the call.
Yes.
I'm sorry.
It's okay. So I just a question for Jamie because then you're the first paragraph you mentioned a easing trade issues helped market activity and I noticed a very simple question, but can you talk about the connection between easing trade issues and better trading and you said that was better.
Toward the end of the year or is this something that you expect to remain or is this a one off quarter.
That's of course, it's Mike so they.
Obviously tree cooling water conservation has eased off a little bit I don't think he's going to completely go away.
I'm going trade issues in China, and Europe , and stuff like that I think because that settlement got better trained got better.
Well I want to continue we don't know.
And then a Jennifer you mentioned expense growth was 3% it should be less than that.
This year you.
You guys had also mentioned that your technology spending might be leveling off.
So as that levels off maybe see paybacks from prior investment any sense of where tech spending will be this year versus the prior year in and how you think about that I know well get more at Investor Day sure of course. So I think you can think about tech spending on a fully loaded bases being in line with what I described for the company.
And you know we continue to realize efficiencies from investments in tech.
But as you will know it's you know we continuously invest in tech and so there's a fair amount of velocity in the investment portfolio there as investments roll off a and you know we're investing in new technology and innovation. So you can think about sex spending is being broadly in line with how I described the company in terms of trend.
Our next question is from Betsy Graseck of Morgan Stanley .
Hi, good morning, I didn't see.
Two questions one on asset growth I'm in last couple of years fourth quarter you have to go through this exercise of trying to squeeze down to hit the G. SIB target and then in addition, this year. Thank you fulsome residential mortgage loans to investors or at least the investors.
Taking the risk of it and then you're requesting to have a you know regulatory capital reflects that transfer of risk to an investor pool, while you're keeping the customer relationship when I see these things I'm wondering.
How you're thinking about how much room, you have for asset growth as we go into 2020.
And is there an opportunity to potentially do more of this residential mortgage loan trade to free up space for growth, maybe could you speak to that.
Sure. So I mean, we're bound by standardized capital and so of course, you know that is a consideration for us and one other reasons that we're looking to structure as long sales as you described in the mortgage business.
Theres more we can do bear and then.
He said you know we remain hopeful that we will see the refinements there and recalibration at the fed has been talking about for some time because that will become increasingly difficult. So you know both are at the margin constraints for us, but broadly speaking you know I wouldn't say that Ah that were constrained.
And where we are on our capital ratios.
And as I think about C.. So you know I appreciate the commentary you had earlier on the call I'm just wondering I'm a couple of things one why do you think you ended up towards the low end of your four to 6 billion dollar increase in reserves that you outlined earlier and what kind of estimates you have for B.
Economic outlook, you've got the assumption for the economic outlook in a reasonable portable period et cetera. So I'm just trying to understand what kind of forecast you have in your model so that I understand.
You know what what's embedded in your scenarios and then your L.R. ratio.
Sure. So Ah you know we I think we ended up at the low end as we you know through the year continue to get more certainty around what the macro economic forecasts, we're going to look like and so I think that's really what's driving it obviously portfolio mix as well continue to be.
You know very strong in terms of performance of the portfolio and then on the estimates for the economic outlook as you rightly say there is that reasonable and supportable period, which for US is two years and so we do use multiple weighted scenarios. There. So we wait a multiple scenarios with one most likely getting degrade its weight and that's.
Where are you end up with you know what looks like a reasonably benign outlook for the reasonable insupportable period, which also obviously would contribute you us hitting the low end of the range.
The agenda, we're going to disclose some of those variables.
<unk> overtime, that's a great point you know she said that yes, we I mean, there won't be more disclosure about seats. All at once you finish older. He's older bags are showing is ridiculous forecasting going forward. The differences, what's been pod sort of does an excellent business right well disclose the need to know that make it clear what we're doing what we're doing it that's right so you'll see more.
In the keys.
Our next question is from Matt O'connor of Deutsche Bank.
Good morning, or two quick follow ups, if some things have been talked about I guess first of all expenses for your outlook.
It's pretty clear less than 3% growth, but the first quarter.
It seems a little bit higher than that maybe I would've thought about 4% year over year and I don't know if that's just rounding at them gotten too obsessed over 100 million here or there or if you're up funding some investment spend and if so what that's for.
Sure. So the first quarter tends to be higher for asked if you. If you look three history and so there you can think about it comparing it year over year, we have a volume and revenue related expenses, increasing a bit of an increase on investments, but both are being partially offset by a expense efficiencies.
Okay and observe follow question is I'm just on capital allocation you know obviously, it's a good problem to have but the ratios keep going up the capital generation keeps going up the stock keeps going up.
You're obviously buying back a lot of star <unk>. The goal is to get the dividend I think higher over time, but maybe just talk about how you think about buying back stock at these levels. If there was other color creative uses of capital like I always think about all the money spent on technology and does it make sense to buy technology first do it or.
Panic, so just maybe address some of those things like you.
Sure so on that on that ratio well just reminds you that of course, we have our our capital distribution plan approved once a year and so since our last E car filing we had a realized some aren't anyway efficiency and weve out earns relative to the assumptions in busy car filings and so.
Oh, that's part of the reason why we've seen the ratios slowed up there on stock buybacks you know as as you rightly pointed out our first priority is always going to be to invest for organic growth and so we're always looking to do that first and foremost a and then to have a competitive and sustainable dividend and only then you district.
<unk> excess capital to shareholders through buybacks and we've said that it makes sense to continue to do that at or above two times tangible book, which is about where we are now we will obviously you know when distributing excess capital always be looking at the alternatives, but at a 17% ROTC.
Two or 3% dividend payout ratio, there's a high bar for the alternative.
Our next question.
Actually write about acquisitions, we didn't do there's demand this year would share looks up because we're trying to since it looks up providers and consumers of healthier life is good number 80 or 90% until the merger. So there are opportunities like that we absolutely would be on one for them, that's right and we pay last year yeah.
We better your before.
Our next question is from Gerard Cassidy of RBC.
Hi, Jennifer.
Question on credit you, obviously put up some really good numbers once again on credit quality and I notice that.
You had a nice material decline into wholesale nonperforming assets quarter to quarter can you give us any color on what brought that down and could you tell you can also any concerns that you may have about the energy portfolio I know, it's not material, but there is some concerns out there about energy credits.
Sure. So on wholesale nonperforming loans in the T.I.B. that was some name specific upgrades that we had and to see I'd and then in the commercial bank that was related to charge offs, taking in the quarter and then on energy you don't really nothing there see medically I would say like any sector we have.
Upgrades and downgrades and this quarter was no exception, but I wouldn't say anything thematic Lee in our portfolio that were concerned about.
Very good and then I don't know if I heard you correctly in the last answer to the stock repurchase program I understand of course, it's driven by your see CCAR results, but if it if the price of the stock and it's a good problem to have gets to a level that you consider to be too high I think you may have said two times tangible book value.
What I haven't happened.
If the price if it gets to a point where are you guys think it's just too high to buy back what do you do with the excess capital at that point have you given that much and again, that's a good problem to have I understand that but have you given any thought to that.
Sure, we give a lot of stock to it and I agree. It is a high class problem and Oh, we said that at or above two times tangible book makes sense. If it continues to go out we're going to continue to look at alternatives I'm. Most importantly, a you know within the company in terms of you know how we should view, we think about E.
Return on buying our stock back at a higher level versus perhaps thinking about the returns of it differently in terms of organic growth.
Jamie.
You want add.
So at all.
Our next question is from Stephen to back of Wolfe Research Hi, Good morning.
So Jennifer I wanted to start with a question on capital our portal as indicated in a recent interview that he plans to implement the bulk of the FCB and 2020. She car. So also alluded to the possibility of deploying a countercyclical buffer as part of that I'm. Just wondering if the countercyclical buffer is actually deployed or incorporated within the test that's all.
Thats underwritten as part of your 12% T. One target and are you anticipating changes to the G. SIB coefficient calculations that you alluded to earlier in the call as part of the coming cycle as well.
Thanks, Steven So I mean, you touched on a number of things that are all important and I think what's most important to US is that we end up we say cohesive framework across all of them. The you know the comments from last year have been constructive a you know in a sense that he always reiterates that he thinks that level.
Capital Mis system is about right and so yeah, we'll have a firmer view when we see you final rule as you say, we do expect to see something in 2020 based upon the comments that we have heard just like you have and a and we expect that you know our 12% target well not be impacted because we do construct.
As we hear eat I share say over and over that the amount of capital in a system is about right and then you have at from you until we see no final rule and then on GCIB. You know we remain hopeful that we're going to see it refinements that the fed has been talking about perhaps not phone recalibration until Bob before.
Just want to buy share recently said, but certainly there are a number of refinements that we've been talking out and if that has been talking out four years and not we remain hopeful that we'll see them very soon.
Thanks for that color, Jennifer and just one final one for me are we still really strong FIC results as well is really strong institutional deposit growth.
Hoping you could speak to what impact the fed balance sheet growth is actually having on all of your different businesses or how that's manifesting because it seems to be providing a pretty nice tailwind whether it's some increased activity as well as some benefit in terms of deposit growth that you're seeing across the overall franchise, but institutional in particular.
Sure. So so you're absolutely right on the wholesale side. The sat down sheet extension was you know for sure a tailwind for us, although I would say more meaningful portion of our deposit growth on the wholesale side in the corner was from strong organic growth in client acquisition.
And she was a tailwind and elsewhere I you know I would say obviously it was the right thing to do and a and provide instability in the retail markets around the corner.
Our next question is from Brian Kleinhanzl of KBW.
Hi, good morning.
Quick question on the deposit costs can you just break down maybe by segment, where the big drivers for the sorry, so have the big reduction of deposit costs linked quarter was that in security services was the wealth management.
Sure sure, Brian So I'm that I'll start with retail, where we saw right p. tick up a bit and that's on migration from savings to Cds, we have seen CD pricing come off its peak I thought continued migration from savings the Cds and then on the wholesale side that you see bigger declines in rates paid.
In Treasury services asked for sure and then a little bit less so in the commercial bank, an eight W.M. and again as we always say these are named specific client by client decisions and why we feel good about where we are these are decisions, we make a client by client and we're certainly careful and had a lot of discipline not going to lose.
Now I know relationships over a few takes a beta.
And then a separate question and the commercial bank I mean, you've seen loans come down quarter on quarter for end of period and fairly modest growth year over year, I mean, what's the sense, but now in the middle market in the.
Corporate client that effect of an issue is it just timing issue there for seem better loan growth.
Sure. So there are obviously, some puts and takes which I'll run through but broadly speaking I would say what we're seeing is more a function of our own discipline. A then it is a function of demand and interested I. We feel good about the girls that we're seeing in the areas, where we're focused in specialized industries and and Mark.
Good expansion the of course, that's offset partially by the tax exempt portfolio, that's running off and then in CRT. Good growth in commercial term lending as we continued to have opportunities there given the rate environment and then that is offset by real estate banking, where we are very disciplined given where we are in the cycle.
Or just.
Were terrible exposure has come down all things being equal.
All things equal you'll see a production. So I'm wondering as companies you guys might have had receivables and inventory appointment equipment.
Our next question is from Glenn Schorr of Evercore ISI [noise].
Hi grandfather <unk>.
Quick question on open.
<unk> is and what the big picture is here and how it impacts you and the rest of the banking industry, meaning there's this concerns over data security and things like that but JP Morgan has some.
Many of agreements with some of the bigger providers. So I'm just curious to get your big picture thoughts on.
What level concerns we had what's a good in the bad.
Yeah, I I mean, you know there I would say Glenn our customers data privacy and security is of utmost importance to us and we think over time, the best way for us to do that as securely as we can is to have third party apps only access dina through our eight guys and so.
We are working you know name by name to get those agreements in place that we hold through time that is exclusively the only way that sat third party can access our customers data. We think that's the most secure way to do it.
But very importantly is that that data is the data as a customer agrees to give them.
Basis, they agree to give it youre just not unlimited access to a customer data and the cost will have the ability to turn it off.
As opposed to today do you think that's supposed to someone they're taking the data every day.
No no back to you forgot.
It's a great point, we're going to make it super easy for customers to be able to do that.
So you will can you will give them the tools to control that.
Yes, you can imagine a dashboard, where they will have.
The full said yeah.
Right.
And then just curious if you've seen any.
Any follow on impacts you know that you've seen some repricing on parts of the illiquid markets.
Yeah.
For specifically some of the unprofitable parts of those companies and is that just the repricing and you know.
Everybody that owns them will take some hits a little bit slower progress on banking front and that's it or is there anything bigger there to worry about with what's going on in the illiquid side.
The Companys, yes, I am sorry.
Yeah look you know there's there's there's.
A lot of water companies a lot of wells Fargo wholesale.
I don't have access to capital now they would have access to capital in a downturn, but it's not a systemic issue.
The other capital markets are a lot of private companies and.
So I don't think it's Doug just like an adjustment access to capital I wrote a group.
Our next question is from Marty most <unk> Vining Sparks.
Thank you.
If you were a kind of foreshadowing.
Lower tax rate as you kind of move into the first quarter and then the tax rate here in the fourth quarter was a little bit lower than what we expect that is there anything that's a permanent here or there are some things that are just kind of rolling through at least two quarters.
Yeah, there there I wouldn't I wouldn't say, there's anything permanent there. The first quarter is typically lower and for US Marty you can think about full year 20 has being 20% plus or minus and of course that would depend on you know on any nonrecurring items, we might have or any change in regulation, but by 20% plus or minus and then of course that manage tax rate.
It is typically five to 700 basis points higher than that.
No fair question when we came into 28 team the networks margin was around 2.5% on.
And then I'll as we're you know coming out of 29 seen a the networks margin has fallen below 2.4%. So if rates went up 100 basis points to the down 75, and we've noted that negative 10 basis points. So I would just curious about path.
It's either the way the fed kind of inflected very quickly that created a little bit more pressure and the net between deposit pricing loan pricing.
Nor do we think that this is probably just some of the competition that came in after the tax reform and maybe this is just the evidence of some of that competition with the increased profitability that we got from the benefit from the taxes.
Yes. So they are I would say Murray and that's sort of the last several hikes.
There was some catch up there because you know we had some lags on reprice a in a rising rate environment certainly just looking at the last few highlights the betas would certainly be higher than what we're seeing a in terms of the first three eases here, but broadly speaking on NIM I mean, we don't NIM is it and then as an hour.
Come for I'm, not an input and as you think about you know looking forward certainly the environment is very competitive it always has been and Ah you know Eni the outlook for 2020 is at this point based upon the implied that flat to slightly down and we do expect balance sheet growth.
Our next question is from Andrew Lim of Society General.
Hi, good morning, Thanks for taking my questions. So wondering if you can give a bit more color on your markets performance. The awfully has done very well I'm sure graffiti.
Watchful waiting on the U.S. fences Europe .
No you Pike.
I would say Andrew that it was broad based we can have Jason and he follow up specifically on a geographic breakdown, but Ah, but I didn't was it was a it was largely broad based.
Right and would you say, we're confident that you'll you'll get any market share both territories the.
Again, I don't I don't have the.
Split on market share by region, but Jason team can certainly follow up on that.
I'm not sure rewards start disclosing that regularly.
Maybe the mortgage or whatever.
Pretty much in most markets for you can't say most mortgage more products.
Yeah.
And our next question is from Alison Williams of Bloomberg Intelligence.
Good morning, So I had a similar question just circling back to trading and the C. I'd be more broadly I'm sorry to say the bank has gained share but can you speak to future opportunities and runway and maybe this is more of a question for investor day, but specifically businesses like cash management transaction banking and corporate clients in.
General you're a leader in the U.S. anecdotally, we hear U.S. banks have been making gains in Europe can you speak at all to that opportunity.
Sure. So as you said, we'll give you more color at Investor day for that for the Treasury services business. You know, we feel really good about where we're positioned I think going forward, though obviously be some rate headwinds there, which we think can be offset by organic growth, but given the investments that we have me.
Hi, there can you mention is demand earlier, we feel really good at the capabilities that we're adding and what we're seeing in terms of organic growth there, but we can talk to you more about that at Investor day.
Okay. Thank you.
And we have no further questions at this time.
Okay. Thanks, everyone.
Perfect. Thank you.
That tomorrow.
In March.
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