Q1 2020 Earnings Call

Yes.

Please standby we're about to begin.

Good morning, ladies and gentlemen, welcome to JP Morgan Chase This first quarter 2020 earnings call.

Called is being recorded.

I will be muted for the duration of the call.

No go live to the presentation. Please standby.

I would like to turn the call over to JP Morgan Chase is chairman and CEO, Jamie Diamond and Chief Financial Officer, Jennifer <unk> check.

Please go ahead.

Thank you operator, good morning, everyone I get hurt Jamie is with me on the call and I know I speak for the entire company when I say, we're just really back.

Before we get into the first quarter performance you want to start by recognizing that this is an extremely challenging time for all of us and our thoughts are which I was most affected by told at 19, particularly goes on front lines at this crisis.

The presentation. This quarter is slightly longer to address a few key topics as we navigate this environment and as always is available on our website and the assay. Please refer to the disclaimer at the back.

Starting on page one I'd like to highlight some of the ways, we're responding to cope with 19.

As a firm we are focused on being there for our employees customers clients and community in what is an unprecedented and uncertain environment.

We don't know how this will play out we will be transparent here about our assumptions and what we know today.

Our number one priority is to continue to provide our services in an uninterrupted way, but also providing safe work environment for our employees.

We're incredibly proud of all that our firm has been able to do over the past few weeks. So I'll just hit on a few examples here.

We mobilized our workforce around the globe to work for low leveraged <unk>, including operations and finance teams portfolio in risk managers bankers and traders ensuring they have the right tools to work effectively.

Currently we have about 70% working from home crossed the company and for many groups that number is well north of 90%.

So those are you still need to go into the office or into a branch, we are taking extra precautions and being extremely mindful of their safety.

And we are providing assistance in other ways to for instance are offering free co lead related medical treatment for U.S. employees and there's attendance.

On the consumer side, approximately three quarters over 5000 branches have been open all the tightness safety procedures and many recharter option.

And the vast majority of our over 16000 ATM screening accessible.

And while our call center capacity has been challenged we quickly activated resiliency plans to address customer calls seeking assistance.

We put in place new digital and self service solution in record time.

And well wait times I've been extended we're making good progress reducing them.

For our customers who are struggling financially during this time, we're providing relief such as a 90 day Grace period from mortgage auto and card payments as well is leaving a refundings starting piece.

We continue to support our customers in clients by providing liquidity and insights during this challenging market environment and he's a month in March we extended more than $100 billion, if new credit.

In wholesale clients true more than 60 billion on their revolvers with us and we approved over 25 billion of new credit extension for clients most impacted.

And for our small business clients were actively supporting the S.P.A. paycheck protection programs.

The number you see almost like our as of April 12, and as of this morning, we have more than 300000 in some stage the application process, representing 37 billion in loans.

We funded 90.3 billion to business, it's been over 700000 employees.

And to help the most vulnerable in hardest hit communities as an initial step we've announced $860 million on programs to get capital to underserved small businesses nonprofits as well as a $50 million philanthropic investment.

Now turning to page two for highlights on our first quarter financial performance.

For the quarter. The from reported net income of $2.9 billion S 78 cents and revenue of $29.1 billion with a return on tangible common equity a 5%.

Well the underlying business fundamentals this quarter performed very well, we recorded a number of significant items all due to impact from called at 19, which I'll discuss in more detail later, but at a high level. These items are a credit reserve build a 6.8 billion.

Approximately 950 million of losses, and see I'd eat largely due to the widening the funding spreads on derivatives and a 900 million dollar mark down on our bridge folk.

It might be obvious point quarter was really a tale of two cities January February and March when the prices started to unfold.

And with that I thought it would be helpful to talk through some key metrics that highlight this dynamic across our businesses. So let's go to page three.

Starting with card sales volume on the top left in March we saw a rapid decline in spend initially in travel and entertainment, which then spend to restaurants in retail and social just reaching protocols were implemented more broadly.

Well most spend categories, where ultimately impacted we did see an initial boosted supermarkets wholesale clubs and discount stores as people stopped out on provisions, but even that is now starting to normalize.

And you saw similar change in merchant services as highlighted in a significant decline in brick and mortar stand excluding supermarkets, whereas ecommerce spends it's held up well by comparison.

In investment banking in the middle to page there was just curious to get it showing spine definitely great clients as the market remain open end clients desire to shore up liquidity was top of mind.

It was the largest quarter ever in terms of investment grade debt issuance led by JP Morgan.

And your market volatility drilled elevated trading volumes across products, most notably across rate and commodities, which at their peak were more than triple our average January trading volumes.

And on the far right deposit growth accelerated meaningfully in March most notably driven by wholesale clients as they secure liquidity and held those higher cash balances with us.

At the same time, we saw accelerating loan growth, primarily driven by revolver jobs.

And finally flows in eight anyway, I'm more meaningfully different in March compared to January February.

Long term flows through February was strong positive across all asset classes. This was more than offset by outflows in March.

On the flip side, we saw significant that liquidity inflows into our government funds during march which more than offset prime money market outflows.

On page four and some more detail about our first quarter results.

Revenue of 29.1 billion, it was down 782 million or 3% year on year and net interest income was flat to the prior years each of the impact of lower rates offset by balance sheet Rosen mix and higher see I'd be markets and <unk>.

Noninterest revenue was down 5% driven by the significant items I already mentioned, which were largely offset by higher see I'd be markets revenue.

<unk> expenses, a 16.9 billion were up 3% driven by higher volume and revenue related expenses continued investments in higher legal expense.

All of which were largely offset by structural extends deficiencies.

This quarter credit cost were 8.3 billion, including and that reserve build a 6.8 building billion, reflecting the impact of Tobin 19, and net charge offs of 1.5 billion in line with prior expectations.

Now turning to page five well have some more detail on the reserves else.

Our net reserve build a 6.8 billion for the quarter consist of 4.4 billion in consumer predominantly card.

And 2.4 billion at wholesale was built primarily due to impacts of cobot 19, as well as lower oil prices.

Yes reserve increase it soon in the second quarter that U.S. GDP, it down approximately 25% and the unemployment rate rises above 10% followed by solid recovery over the second half a year.

In addition to these macro assumptions specific each business.

Consumer reserve build reflects our best estimate of the impact that payment really we're providing to our customers as well as the federal government stimulus programs.

And the wholesale the majority of the build isn't sectors. Most directly impacted by sold at 19, such as in consumer and retail and also in oil and gas.

We expect other sectors to be impacted to a lesser extent, if we avoid a prolonged downturn.

We have also assumed that the stress in oil and gas continues with W.T.I. remaining below $40 through the end of 2021.

After we close the books for the quarter, our economists updated their outlook, which now reflects a more significant deterioration in U.S.G.P. unemployment.

Is that scenario were to hold would be building in the second quarter and build could be meaningfully higher in aggregate over the next several quarters relative to what we took in the first quarter.

A primary unknown is the duration of the crisis, which will directly impact losses across our portfolio.

That being said, our consumer portfolio skews more prime in the industry average and the effectiveness of government support customer relief and enhanced unemployment benefits, while I'm certain undoubtedly will act as many against a losses.

And so, though even though our losses will be material, we will be doing what we can help our customers recovered from this crisis and help our client sand business.

Now moving to balance sheet and capital on page six.

Our balance sheet capital and liquidity going into this crisis, where incredibly strong and importantly allowed us to facilitate client needs in a period of stress and that combined with our earnings power is an extraordinary base to absorb the inevitable losses to come.

For the quarter, we distributed $8.8 billion capital shareholders, which includes 6 billion in that share repurchases up to March 15th.

Since then we stopped or buybacks, which was both a prudent decision at the time and consistent with what we always say would use that we would prefer to use our capital to serve our customers and clients.

Its capital distribution outweighed our earnings for the quarter and that's coupled with significant our heavyweight growth resulted in a decline in our C.T. one ratio to 11.5%.

On RW way, which you can see on the bottom right. The page the key drivers of growth for market volatility, which should subside over time and more importantly, an increasing lending at this critical time for our clients.

Going forward in order to leverage our balance sheet to serve our clients. We are prepared to use our internal buffers, which may mean, RCT one ratio falls below our target range and if necessary. We can also use regulatory buffers to go below our 10 half percent minimum.

It's worth noting here then environment like this is precisely why we'd have to buffers in first place.

We currently also have capacity and intend should continue to pay the 90 cents dividend pending board approval.

And as you can see into CP, one walk on the bottom left it is a small claim on our capital base.

And before we move on just a moment on liquidity.

Even with everything we facilitated our liquidity position remains strong and looking forward. It's helpful to remember that we have significant liquidity resources beyond HQ away, including the discount window with me.

Now turning to the businesses, starting with consumer and community banking on page seven.

CPB reported net income of $191 million, including reserve build a four and a half billion.

January February showed a continuation of strength across the business, but again marched showed a major shift in trends and across our consumer segments. We saw a drastic deceleration that span across all forms of payments and a decline in origination volumes, except in the mortgage refined market.

And on the small business side, we saw significantly reduced inflows in merchant processing activity early signs of pressure on payment and frequency rates as well as line utilization increased demand for credit.

Turning back to the results revenue of 13.2 billion was down 2% year on year.

In consumer and business banking revenue was down 9% driven by deposit margin compression, partially offset by strong deposit growth of 8% that accelerated in the quarter.

The topic margin was down 56 basis points year on year, and we expected to decline further given the current rate environment.

Oh lending revenue was down 14% driven by lower net servicing revenue and lower Eni, partially offset by higher net production revenue.

And in card and auto revenue was up 8% is driven by higher card and eye on loan growth and margin expansion.

Average card loan growth was 8% with sales up 4% over the quarter driven by January and February activity.

<unk> expenses of 7.2 billion were up 3%, it's driven by revenue related costs from higher volumes as well as continued investments in the business.

Partially offset by structural expense efficiencies.

And lastly on this slide credit cost included the four and a half billion reserve builds I mentioned earlier and net charge offs of 1.3 billion driven by card and consistent with prior expectations.

Now turning to the corporate and investment bank on page eight.

See how do you reported net income of $2 billion and in our we have 9% on revenue of 9.9 billion.

It doesn't banking in the first half of the quarter showed continued momentum from last year, but that's the market environment shifted we saw delays in M&A announcements in completions.

Postponement of new equity issuance and increase draws on existing lines of credit.

At the same time the investment grade debt market remained open and we held our investment grade clients raised approximately 380 billion of debt in the quarter across a wide range of sectors.

By contrast high yield market was effectively closed and high yield spreads widen significantly.

As a result, our bridgeville commitments were marked down by 820 million and here, it's worth noting our bridge. Both exposure is about a quarter of what it was entering 2008 crisis and is a higher quality portfolio.

As a result, this backdrop IB revenue of 886 million was down 49% year on year, largely driven by the bridge markdowns.

Hi, this fees were up 3% year on year, and we maintained our number one ranking was 9.1% wallet share.

Advisory was down 22% not only due to a tough compare but also reflecting delays and regulatory approvals pushing out the closing of certain large deals. We did however, complete more deals than any other banks this quarter.

Equity underwriting was up 25% versus the challenge first quarter last year and we saw strong activity in January February before the market effectively closed in March.

And debt underwriting was up 15% and an all time record.

We maintained our number one ranked with 9.5% share up 90 basis points from 2019.

Lending revenue was up 36% year on year, driven by the impact of spread widening alone hedges.

Looking forward, while a rapid recovery in the economy could produce the corresponding rebound in activity. We could also see significant downside risk to our forward looking pipeline if the downturn is protracted.

Now moving to markets here total revenue was 7.2 billion up 32% year on year.

It's worth noting that even before the crisis as we said at Investor Day markets performance was strong for the quarter.

Then the growing cobot 19 concerns triggered a major correction equity markets significant widening of spreads and spike in volatility leading to extraordinary government intervention and a substantial change in monetary policy, followed by a sharp decline in treasury yields.

Simultaneously, we also saw drop in oil prices.

It's unique combination of events, let you further increased client participation and record trading volumes in several products.

Fixed income was up 34% driven by strong client activity, most notably in rates and currencies and emerging markets.

Equity markets was up 28% on strengthen equity derivatives driven by increased client activity.

In terms of outlook it goes without saying that it's too early to project this performance going forward.

In fact flow rates and low economic activity may even be a headwind. However, we're in a strong position should continue playing a central role and ensuring the orderly functioning as markets and serving our clients needs.

And now on the wholesale payments and new business unit reporting this quarter comprised the Treasury services trade finance and the merchant services business, which was previously hard to see TV.

Wholesale payments revenue of 1.4 billion was down 4% year on year, driven by reporting reclassification and merchant services.

As clients focused on preserving liquidity, we experienced higher deposit levels and wholesale payments throughout the quarter offsetting revenue headwinds from lower rates and payments activity.

In security services revenue was 1.1 billion up 6% year on year.

Market volatility drove increased transaction volumes and deposit balances, which offset the impact of the market correction on asset balances.

In wholesale payments that security services Tailwinds from this quarter like elevated elevated deposit balances, maybe relatively short list and more than offset by the impact of flow rates and potentially lower transaction volumes. If the crisis is elongated.

Credit adjustments and now there was a loss was 951 million, which was one of the significant items that I mentioned upfront.

Credit costs were 1.4 billion driven by the net reserve builds I referred to earlier and finally expenses of 5.9 billion were up 5% driven by higher legal and volume related expenses and continued investments.

Now moving onto the commercial banking on page nine.

Commercial banking reported net income of $147 million, including reserve build of approximately 900 million.

Revenue of 2.2 billion was down 10% year on year with lower deposit Eni I lower rates and the 76 million dollar Mark down the bridge book, partially offset by higher deposit balances.

Gross investment banking revenues were 686 million down 16% year on year compared to a record prior year.

While we remain confident in our long term target, we expect some softness in our pipeline specifically related to M&A an equity underwriting.

Expenses of 988 million were up 5% year on year consistent with the ongoing investments you discussed at Investor Day.

Deposits were up 39% year on year on the spot based as an increased about 40 billion. During the month of March with about half of that coming from clients drawing on their credit lines and holding their cash with us as they look to secure liquidity.

End of period loans were up 14% year on year, mainly driven by increases in see high loans in March.

See an eye loans were up 26% says revolver utilization increased to 44%, which is an all time high.

She or he loans were up 3% and here is a story remains largely unchanged.

Higher origination in commercial term lending driven by the low rate environment were partially offset by declines in real estate backing as we remain selective.

Credit costs of $1 billion included the reserve builds I mentioned and 100 million of net charge offs, largely driven by oil and gas.

Now on asset wealth management on page 10.

I couldn't wealth management reported net income of $664 million with pre tax margin of 24% and our we have 25%.

Revenue of 3.6 billion was up 3% year on year, driven by higher management fees on higher average market levels and net inflows over the past here and then in addition, we saw record brokerage activity in March related to the recent market volatility.

These increases were largely offset by lower investment valuations.

Expenses, a 2.7 billion were flat year on year with higher investments in the business as well increase volume and revenue related expenses offset by lower structural expenses.

Credit costs were 94 million driven by reserve builds on the entire took over 19 as well as loan growth.

Net long term outflows were 2 billion as the strength we saw in January and February was more than offset in March.

At the same time, we saw 75 billion net liquidity inflows driven by significant inflows into our industry, leading government funds in March as I mentioned earlier.

And you end of 2.2 trillion and overall client assets of three trillion up 7% and 4% respectively were driven by cumulative net inflows, partially offset by lower market levels.

Deposits were up 9% year on year on growth in interest bearing products and finally loan balances were up 11% with strength in both wholesale and mortgage lending.

Now onto corporate on page 11.

Corporate reported a net loss of $125 million revenue was 166 million a decline of 259 million year on year, primarily due to lower net interest income on lower rates, partially offset by higher net gains on investment securities.

Expenses of 146 million were down 65 million year on year.

Now, let's turn to teach trial for the outlook.

I didn't yesterday, we showed you a path to 2020, where we expected net interest income to be slightly down from 2019, and obviously since then the backdrop has changed significantly.

Based on the latest some five and what we know today, we expect to see further pressure from rates, partially offset by balance sheet growth and CRB markets and <unk>, which results in Eni of about 55, and a half billions of full year.

And to give you an idea for the second quarter, we expect an eye on to be 13.7 billion.

On non interest right now, it's always difficult to provide meaningful guidance and even more so given the current heightened level of uncertainty.

But based on our best estimates today, we do expect to see headwinds and 2020 compared to 2019.

In addition to the two significant items in the first quarter. These headwinds include three and a half billion dollars decrease in non interest revenue all else equal, which is also due to the impact of rates and if the offset to hire CRB markets and I and therefore revenue neutral.

We also expect to see pressure on E.W.M. and investment banking fees.

And we now expect adjusted expenses for 2020 to be approximately 65 billion largely due to lower volume and revenue related expenses versus the outlook, we provided at Investor day.

It goes without saying all of this is market dependent and we'll keep you updated a future earnings calls.

So to wrap up.

The challenges, we're all facing as the code at 19 crisis continues to unfold around the globe are unprecedented.

Although we don't quite know what's the path will look like going forward. What we do know is that we will continue to be there for our employees clients customers and communities as the always happen and we have the talent resources and operational resiliency to do so.

Our employees have proven that being resilient did not just about maintaining operations. It's also about culture and that feel stronger than ever with our teams worked around the world working harder than ever to continue to serve our clients customers in community.

We've never been more proud of our people and we simply can't thank them enough.

And with that operator, please open the line for QNX [noise].

And our first question comes from Erika Najarian of Bank of America.

Hi, good morning, and Jamie we're glad that you could join us among your old enough to join us.

My first question is on the forbearance activity, John if you could give us a sense of byproduct how many of your clients for example in card and auto home lending or in a forbearance state. So they started to defer the payment to the percentage of your clients.

And how we should think about the significant government intervention relative to the severely adverse scenarios I believe for you know for total losses of 5.9 over nine quarters for the fed and 4.1% for company run.

Sure. So first of all I'll start with that payment relief and from forbearance. There I'd start by saying that we have already refunded millions of dollars in fees. We if approved payment really for hundreds of thousands of accounts across consumer lending and we obviously expect that to be meaningfully higher through time.

I'm, we pause foreclosures and auto Repossessions and importantly, we've made the process easier for our customers through digital and self service options that we built in record time, but in terms of what we're seeing that those are those are the numbers are still as I said relatively small compared to what we think will ultimately.

Stake in mortgage just to give you contact outside of customers asking for forbearance, which is just a little over 4% of our service spoke at this time April 1st payments seems to be a you.

It's hard working team is right payment rates down a bit but still strong than we've seen a slight uptick in late Phoenix in auto, but the quality of these portfolios was strong coming in as we've done in surgical risk management over the last few years and that has made these portfolios more resilient.

And then in terms of how we think about significant government intervention I mean, I think the ultimate effectiveness of these programs, which are extraordinary in terms of the direct payments are they enhance unemployment insurance on the ultimate effectiveness is I think the biggest I've known a key obviously is being able to enrich Pete.

So back to employment and so you know we have assumed a you know it's as best we could for our first quarter results may impact those programs as well as the ultimate impact on pain relief.

That will be providing a lot for our customers, but that is that is for sure and I've known and we certainly expect to learn a lot more about that in the second quarter.

Thank you My second question, you mentioned that you're prepared to go below 10.5% seats you want to.

To help your clients below going below 10.5% is also when the automatic restriction start kicking in from the fed in terms of pay out. So you know if I understand it would be a 60% payout restriction on eligible net income and just wanted to understand your thoughts on you know back.

One thing servicing your clients and also thinking about your capital levels relative to those automatic restrictions from the regulators.

Sure. So as you probably know Erika that said made some changes there recently, which as you say puts us in a 60% bucket as we go go below 10.5% and we have a reasonable amount of room or below 10, and a half to remain in a 60% bucket I would say that that was very.

Helpful clarification from the regulators in terms of how we should think about using regulatory buffers. So that was particularly helpful and right. Now we are focused on serving clients and customers and we've looked at a range of scenarios. So we can ensure that we're managing our capital quite carefully Jamie.

Talked about an extreme adverse scenario in his chairman's letter that weve looked at assuming large parts of the economy remain in locked down through the ended this year and a in that scenario, our C.T. wind drops to about nine and a half percentage and so yeah. We think we have a you know significant room.

We continue to serve our customers and clients through this crisis, but we are managing it quite craftily and looking at a range of scenario. So we make sure that were prepared.

Our next question is from Mike Mayo of Wells Fargo.

Hi, I know welcome back Jamie a question for you.

How do you thread the needle between you know supporting or your customers and the country and doing all those things like.

You want to do well still protecting the resiliency of the balance sheet and not getting hit with unexpected litigation costs. As you mentioned in your CEO letter.

So those two very important question and.

In terms of need no banks have always been the London, where she's working with customers and obviously is going to be disciplined capital provider because on discipline loans are bed bugs. So you take your calculated risk and we're making additional loans. We're adults. We know that if the economy gets worse will bear just from a loss would do.

Forecast old actually or no we can handle.

Adverse consequences, there will be a poor even less working well end up with where you get below 10% seats you want even though.

Mm 300 million capital and a truman's all liquidity all these older construed started kicking my guess or do you see.

Our advanced risk weighted assets, the makes money to constrain and so far and they're obviously that's going forward. So we want to do their job. If we can help the country's get food is everybody's better off if we need more money in the meantime, no so be it but obviously, we're protect for our company your balance sheet are grown.

Well be having close commissaries regulars dealt with that is.

Oh. Thank you you have to take in consideration extraordinary measures. The government's taken that's the because of the you come through individual PPP and always felt was users.

So also in your CEO letter you talk about the economy coming back on.

In line and I guess with your reserve build you're assuming what 10% unemployment and then the economy improves in the second half a year. So what is your base case for how people come back to work that behind those assumptions and I know you have a lotta scenarios too, but just the a base case.

No Oh, a gentle at the base case, but back to work you should think who's buying everything that is that after the CDC and old construction through government enough is enough capacity into hospitals. Thereafter. This problem not a testing I remember a lot of people go to work today.

Forms factories food production retail pharmacies hospitals, but isn't like no one's going to work and you're going to hoping you can turn it back going towards very safe. There's plenty capacity you don't worry we can't give every American who does get sick best Hospital men medical device and the turnaround.

I would be a regional boys like company Oh, we are all falling standards of home personal preferences and you know in some ways you need to get that done because the bad economy has varied adverse consequences read beyond just the economy.

No in terms of mental health domestic abuse or substance abuse et cetera. So we are rational tend to get back to is a good thing to do a in your hopefully it'll be sooner or later maybe mid.

In terms of June July August.

Something like that so.

I'm a bit answers your question.

Yeah women can you give the base case I'm sure. So so Mike as as we close the books for the first quarter just to give a context, we were looking at a and economic outlook that had GDP down 25% in the second quarter and unemployment.

10% its just important to note that that kind of gives you a frame how to think about it but there's a lot more that goes in to our reserving including management judgment of some like World class risk management, and finance people and Ah and also other analytics and so not just kind of gives you a frame of reference but they.

They are we didn't think about a number of other scenarios that we should contemplate in reserving and we also thought about the impact you know, what's our best estimate of the impact of these extraordinary government programs as well as our own payment relief programs. Since then as I noted in my prepared remarks, our account.

I must have updated their outlook, a and now have GDP down 40% in the second quarter and unemployment at 20%. That's obviously you know materially different both scenarios, though do include a recovery in the back half a year and so all else equal and of course, the one thing probably the only thing we know for.

Sure Mike is that all else won't be equal when we close the books for the second quarter, but all else equal or given the deteriorated a macroeconomic outlook, we would expect to build reserves in the second quarter, but again, a lot will depend on the ultimate a effect of these extraordinary programs.

And how effective they can be in bringing people back to employment and we're going to still have a number of unknowns Ah I would say at the end of the second quarter, but what we're going to learn a lot through these next few months that will inform our judgment for second quarter reserves.

Our next question is from Steven Chubak of Wolfe Research.

Hey, good morning, and our Jamie nice to have you back.

So one of that's a question on some of the remarks relating to capital corals actually made some comments on Friday.

These efforts by the fed to incorporate real life covitz stress in the upcoming see CCAR cycle.

We haven't gotten much color. Since then I'm wondering whether universities any guidance from the said on which changes if any they plan on contemplating for this year staffs and maybe just bigger picture, how you're thinking about the potential impact.

I could have on the FCB and potentially raise some of your capital requirements.

Sure Thanksgiving, So we haven't gotten specific guidance, but it certainly makes sense a that the fed would want to look wants to look at a scenario like that we have Ben as you might imagine staying very close to our regulators through this crisis. So they can have a very good understanding of how we are managing things.

And then in terms of the potential impact we'll learn more about that in June we've given our best estimate of a FCB and the impact it will have on our minimums and that is absolutely incorporated into our thinking about how we'll manage capital or through a range of scenarios here, but we'll learn more from the fed engine.

Okay, just one follow or who.

Going forward the small doing one stress tests, which will not be destruction go through JP Morgan does 100, a week and I've always looking at potential outcomes and obviously, we're doing their own cobrand related type is a stress testing, including extreme and will always be octane them towards irregular is about it because that's what they have to deal with his time not.

We ought to consider its traditional stress test.

Yeah. We got this 1.88, you know that the range of outcomes, probably have never been a broader and so as Jamie said, we have so far has been a good place for us to start in terms of one scenario, but we have looked at a number of different scenarios at how this may play out and obviously Jamie articulated.

You know, what we think could be an extreme adverse and we're prepared for that too. So I think the most important thing a is that we're prepared for a range of outcomes. Then we'll learn more about SCB in June.

Got it and just a follow up on those Securities book No just given some of the significant declines at the long into the curves.

And I was hoping you could help us think about where reinvestment levels are today, just compared with 2.48% yield on the blended Securities book and then just separately given the large impact of two we driven deposit growth, how you're deploying some of that excess liquidity in this environment.

Sure. So on the investment Securities portfolio, you know managing the balance sheet in this rate environment is obviously a different dynamic.

And with lower rates as well I spent deposit growth that you mentioned a with with the fed balance sheet expansion. You you do see a large increase in our investment securities portfolio, a this quarter, which makes a lot of sense right now in terms of balance sheet management, we are completely focused on supporting.

And client activity, our balance sheet is harder to predict right now, but we are prepared for arranged outcomes.

Okay. Thanks very much.

Sure.

Our next question comes from so Martinez have you been yes.

Good morning wanted to follow or see so related questions Jim you.

Good good amount of color on what the underlying economic assumptions that reviews to build the reserves and then where offerings Kadmon economic scheme is now for the for the second quarter, but maybe thinking about it a little bit differently in terms of how do you attribute the.

See so reserve builds and we're not looking for specific numbers more just directional.

How do we think about it in terms of how much is attributed to sort of mechanistic model related changes, where you calibrate your model for new economic scenario versus actual signs of stress that you're seeing your book that they aren't showing up in incredibly measure, but that you think will show up in a you know.

Reasonably short time period color you know within the next few quarters, how much of its growth how much of its mix. Just if you can you talk to that and you know because I guess, what I'm trying to get a is how much of its more mechanistic and how much of its actual tangible signs that you're seeing a of financial stress.

Senior borrowing base that could be merging the reasonable your futures credit losses.

Sure. So it's it's a great questions also I I would start by saying that we haven't actually seen the stress emerge as of yet so I wouldn't necessarily use the term mechanistic, but I would say that what we took in the first quarter is our best estimate of future losses. It is.

Also important to note that we don't reserved for future growth and so future growth you know would all else being equal be a reserve build so I wouldn't necessarily think of it as you know materially different because the c. So we didnt actually really think about the impact of C. so relative.

To the incurred model I mean, the regulators have given their point of view on that given the change in the capital rules were 25% is is assumed to be the difference, but that's their view and like I said, we just spend a lot of time thinking about it and you know I would say that it is a you know it is our.

Last estimate of the losses.

That will inevitably emerge through this crisis and it is life alone which of course is different undersea selling so again all else equal you can think card was larger than it would have been under and encouraged models, but we didn't really think about it that way and it's impossible of course to know what judgment, we would have applied under.

A different model.

Okay. No that's helpful and your interest on on the point of growth you know pivotal pivoting a little bit.

Well you know obviously a lot of the pressure and see if you one was because of risk weighted asset growth and draw downs on commitments <unk>, where are we entered where do you think we are in terms of those draw downs and things like 350 billion still at wholesale commitment unfunded commitments, but how do we.

We think about that and how it you know how much room. There is for that to continue to to me pressure risk weighted asset.

Version.

Yes, so like so many other things you know it. It is it is difficult to predict I will say that early here in the second quarter, we have seen a pause on revolver draws but it could very well just be a pause and so we're assuming as we think about our own capital plans that we will see revolver draws.

Can you in the second quarter, a albeit at lower levels. Then the first quarter and then of course, the timing and the taste of the pay downs will depend upon Oh, you know the ultimate path of the virus any economic recovery.

Our next question is from Glenn Schorr of Evercore ISI.

Hi, Thanks very much.

I appreciate the limited like we all have a baby up.

Let's assume hopefully sooner than later, we get past.

The bulk of the of the credit impact.

On the other side to this.

Have you thought about.

Lending spreads underwriting criteria and how much turns need to tighten given what we've learned or or an.

Oh scenario that we didnt and capture on their previous underwrite another worked as lending spreads.

Why do you get paid more for your balance sheet I'm, just curious on how you're thinking about risk management on a go forward basis.

Sure. So there I would say that you know our approach we always take a long term franchise view on things like that and so our philosophy has not changed it is true however that the marginal cost of new activity is higher for US right now and so that's a consideration.

But I would say in terms of risk management, we do what we've always done and then what we always do which is you know managed carefully within our risk appetite and I think that has served us well coming into this crisis and you know will continue to stay close to our client and manage that carefully.

Could you said on the consumer side.

Forward looking view of risk.

In the wholesale side, the revolvers are taken down to like 50 billion or existing spreads. The bilateral stuff is being done what are you credits you know there be done a slightly different spreads just go for Doug a higher or and then trading obviously, you're actually getting higher spreads and long for you're doing Fraser for now.

People are and do things and stuff like that and then you will see a tightening of credit in the market big levers lending certain underwriting certain non bank lenders, who are no longer there. So you will see an eventual targeting this will increase in spreads when you won't see banks to reprice carriage, which you've seen other industries.

The banks are very careful to support their cars through times like this.

Okay, and then one more impossible question, John maybe could could you.

Okay.

Hello qualified I know you can't quantify but exit rate revenues that you kind of alluded to in some of those.

Things like underwriting.

Falling off so tale of two quarters.

Quarter itself that Werent for the check on this credit issue that we're facing would've been like us revenues down a little bit expenses up a drop.

Okay, but how much of the exit rate revenues are we looking at.

Second quarter third quarter versus the full first quarter.

And that's a hard money.

So glad I'm glad you acknowledge that it's impossible question and a hard one and so there's a reason why we gave directional guidance here in terms of you know what what could be headwinds, but it is just impossible to predict right now as as you point out so, but I will say like well you know if you think there's there's obviously.

Nothing that we can really say with confidence about exit rates in 2021, I will say you know based upon the latest implies if you look at and I. You know you could see growth in 2021 on balance sheet growth. There and then and I are is absolutely going to depend on the that path.

The virus and the economic recovery and when and how we all get back to work and a and then we've given you expense guidance to think about and then from a credit perspective as I said you know we could see continued built over the next several quarters, but the way seems to work in theory again, all else equal is that that.

That should be a could be behind us by the ended the year and we then have those reserves to absorb the losses that will inevitably emerge over the back half of this year in into 2021.

Our next question is from Gerard Cassidy of RBC.

So.

Thank you.

Can you shoot for so I know you gave us the color on the best case, the sound turn.

The second quick.

What's your outlook on that recovery and the second half in New York and it gives us any color on what kind of recovery, you're expecting second half for the year. That's part of deep sees the reserve build live.

Sure. So so it is I don't have the numbers to hand, Gerard but their their public. It was I suppose you can say it was based on our economist outlook a at the end of March which did have a recovery I just don't have that the GDP numbers to hand, I think and the unemployment I think what's most important to note.

Gerard is that what what <unk> based upon what we're looking at you do have a recovery in the back half of the year, but is it still leaves you from a GDP perspective, and unemployment below your launch point on a absolute levels of GDP and above your last point on absolute levels of unemployment. So.

It's a recovery. It is you know our latest outlook and as I said earlier is probably the only thing we know for sure is that that is going to change through time.

But it is a you know it is a a it is a recovery in the back half a year that doesn't get us back to where we started and importantly, as as we've said that we're prepared for a range of scenario. So you know what while that maybe the case that we based our reserve levels off and it's not the only scenario that we are for.

Going forward.

Very good and then just as a follow up on the bridge book and I apologize, if you dresses and I missed it I know you guys mentioned the losses in the bridge book could you just the size of the book and then some more color on what triggered the losses in the bridge book.

Sure. So there I would just start by I, you know I said it a in the prepared remarks, but it's worth repeating Irish book is about a quarter of the side. It was in the financial crisis. So its about $13 billion, it's slightly down from where we were at yearend.

Importantly, we don't have any imminent closing deadlines and market is actually performing a little bit better here in the second quarter.

So we'll see see where we landed the ended the quarter by that so much.

Just basically marking the positions to market yeah, sorry.

Yeah, and the good news with axes, right and with no imminent clothing deadlines, it's not necessarily indicates that will realize those losses, but as James said, there mark to market at the ended the quarter.

And I was just also couldn't the super sector. We're adults. We know there you have a bridge loan book, because you're gonna have quarters, if things got fairly to my loosing money. There was a leader in leverage lending, we're the leader in high yield a leader in.

Loans et cetera, I mean, we intend to amazing that position every now and then you have not particularly good quarters. So we're not we don't worry about is very much more Jim said, so far because of its spread is probably recovery this quarter.

Our next question is from John Mcdonald of Autonomous research.

Hi, John I'm going in credit cards, just based on payment rates that you've seen so far and maybe that draws on revolves how are you expecting card spending and card balances at the trend over the next few quarters. This year.

Yeah, Hi, John So so based upon what we're looking at right now spend was down we talked about different categories, but spend in aggregate was down 13% a in the month of March year over year, and we're seeing trends like that continue here in April and a and so with that I would say that we would we would given what we know today.

I expect outstandings to trend down from here.

And then can you help us think about how you do the accounting for the consumer deferrals, you keep accruing, but do you had some kind of hair cut for and I and suppression in terms of what might not be collectible, even though technically you're allowed to accrue while you defer.

Yeah, you got it John that's so we do continue to accrue, but it is a lower yield over the life of loan.

Our next question is from Betsy Graseck of Morgan Stanley.

Hi, good morning.

Betsy.

I just want to I've two questions. One just thinking about the outlook for the next couple of quarters here I know you mentioned that your economics team had updated their estimates and maybe just give us a senses to you know the timing of when you clip your reserves versus you know this estimate changes in part of the reason I'm asking is because of the.

Reserve ratio move between Fourq, you 19, and one Q 24, the various segments. When I look at you know the C.I.B. and the commercial bank the reserve ratios are.

Down from where they weren't for Q 19, so I'm trying to understand how.

The next you know really the next change in the reserving is likely to traject between the various asset classes is is there as you move from an adverse case was severely adverse case are there different asset classes that potentially have a higher.

Uptick in reserve ratio that we should be expecting here.

Sure. So I'm on the wholesale side, specifically, that's either reason you see that dynamic and because of Cecil So and it's in the presentation. So you can see the numbers. So we see fill adoption impact at wholesale was a net relief and a and so we've now built back and so.

It's why you see that dynamic there and then in terms of of the reserving when we close the books, which you know what's here early in early April we do have to of course kind of snap the chalk line at some point and a and close the books, which is why we want it to be very transparent about how we think about reserving.

Going forward, because like I said, all else equal given the macro economic outlook that we're looking at that we would expect to have a built in the second quarter and perhaps you know beyond because as I said, obviously everything is incredibly fluid and we need you really need to learn a lot about the ultimate impact of these programs.

Because they are extraordinary and and should have an extraordinary impacts, but talent, but but we need some time to learn.

And also set a wholesale side, it's a one point every overlay, but we expect concerns of migration downward and downgrades and stuff like that it won't be name by name.

When you play company name by name Reserve by Reserve.

So real detailed review of the.

So as as we think through you know because effectively I think what we're saying is there's the possibility of the severely adverse case coming which you know we can look back a prior fed stress tests to see what you anticipated that to mean for the credit losses, and maybe Jim If you get an understanding as to you know.

How you're thinking about you know what your economists are looking for versus prior are severely adverse stress cases that you have run on your own bank is this.

It was it fair to look at the severely adverse stress cases on a bank run modeling basis that you know, we have access to and and it's in line with that kind of level or is this something that's even a little bit tougher and and specifically around like things like commercial real estate.

I get the name by name on the corporate side that that is it's probably still extraordinarily granular and you have access to that but I'm wondering on the commercial real estate side is there anything we should be thinking about that's different from perhaps what effect stress test might have suggested in the past.

Okay, and if we don't see first moved is eventually you will be loan by loan the name by name too. So you have reason to believe it alone is bad you're going to write it down to put a reserve adjustment that I got this.

This is such a dramatic change of events. So there's no models that have done goes no GDP is down 40% no unemployment growing this rapidly.

That's one part, but also new models ever dealt with the government, which is doing a P.P.P. program, which might be through 50 billion. It might be 550 billion unemployment were no. It looks like 30, 40% approval of employment.

Higher income than before the when unemployment so what does that mean for credit card or something like that where the or that the government just can make direct payments of people. So this is all in the works right now we compete very good shape to conserve our clients and we'll give you more detail on this is happening as we speak.

And I think people, making too much mistakes kind of modeling.

Good for the ended the second quarter, we'll know exactly what happened in the second quarter. Like you know you know, we've gotta expected credit card delinquencies and charge will go up.

She bird boots, so for it but in the second quarter, you'll see more of it and then we'll also know if these are fourth round of government stimulus wouldn't know airborne systems and reporting now no hope for the best to choose you have that recovery and plan for the worst she could handle it.

Yeah, and then in terms of planning for the worst Betsy on maybe be helpful. The extreme adverse scenario that Jamie referenced in his chairman's letter had a 2020 credit costs more than 45 billion. So clearly that is not are essential case, but that's the kind of scenario that we are making sure that we're prepared for.

And then just coincidentally, if you look at our credit cost from the fourth quarter of a weight to the fourth quarter ago nine across those five quarters, we had credit cost of 47 billion.

So I felt like Scott number we read reserves went from like 7 billion to 35 billion back to 14 billion right was losing itself is Kathy pro cyclical.

Often wrong.

Then you're required to do it but it should we doesn't match revenues and expenses and so we'd like to be conservative reserving what I have to point out the floors with it.

Our next question is from Brian Klein handful of KBW.

Yeah. Thanks, good morning difficult questions again, one on fees for maybe to start with can you just maybe give a little bit more qualitative disclosure on how this payment relief factors then I mean, it are you assuming some amount of government programs get use and that's included or this just payment relief that your directly giving to consumers and corp.

<unk>.

I'm just trying to get a sense of how all these government programs going to flow through the model.

Sure Brian. So you can think about the government stimulus as being incorporated in the macro economic variables a and then the pain relief. Those are you know I'm, referring to our own programs there and there we based upon our judgment and experience in the past, we you know apply some percentage of pull through.

In the portfolio of people, who will who will get pain relief and then we think about the impact that that could have again I would say both while estimated for the first quarter will you know, we'll know a whole lot more about both of them for the second quarter.

And remind me would do the 10-Q for the quarter, we laid out lots and is there something about Cecil and what are the policies or is this precisely.

They spend all day on Cecil No, which was $4 billion and it's kind of a drop in the bucket, but its lot of data like all the data do different left crisis, we give you on level three and always assumptions I still feel it doesn't know what I've looked at anymore. That's right and we saw private companies and every company does it differently, yes, and we still have.

Usually several weeks and so before the queuing. So we'll be able to you know give our best view on things then.

Okay and then the quarter is there I mean, good what the March where on the bridge loan but is there were weighted a frame what the total mark for me I'm, assuming credit spreads tighten kinda dramatically posts.

Quarter M.. So it seems like there would be a reversal some of those marks initially.

Yes, there could be but but you know that's only where we are at this point in the quarter and so it'll it'll obviously all depend on the market from from now for the under the corner, but right now that market is is performing better and spend some come in as as you mentioned.

A couple deals maybe syndicated bank hopefully my pieces dividend second or third quarter.

Our next question is from Chris Kotowski of Oppenheimer.

Hi, Good morning, Thank you [laughter] after they Jim so.

So ER earnings or pre provision earnings minus benchmark Dodd Frank.

Looked at the world often problems with put its vital component.

First does.

Uh huh.

Okay.

All right guys are soon if we can't understand are worth is saying yeah. Chris. This is unfortunately part of our overhead in reality, we offer remotely we couldn't hear you.

Oh, sorry, that's better.

Yes.

Okay. So my apologies.

At Investor Day, Jamie you said something like that the real economic earnings our pre provision earnings minus net charge offs.

So I wish I agree with and so if you pushed aside all to see sold reserving noise I'm curious does the customer relief.

The that 90 day Grace period does that change the.

Alter the historic charge off assumptions like for example, I mean credit cards. It was always pretty cookie cutter 180 days after delinquency.

Sorry, just off one.

Maybe with auto or where it so it.

We'll we'll those customer at least periods pushed back the charge offs.

Curve as well.

It may because as long as they customers performing under the forbearance program. They are not they're not delinquent but of course it will all depend on whether these programs ultimately are able to bridge people back to employment.

Right. Okay somebody for 90 days, we no longer 90 days about how this effect is what we would have expected.

Yeah, and will be and it's the JV point, what we named learned over the next 90 days is of course, whether programs have been offensive or whether they just delayed losses and of course, we see sold being life of loan. If it's just delayed losses, you can expect that that when you know we would be reserving for that.

Okay, but.

In terms of drugs Johnston <unk>.

Starts to credit card off after 180 days Oh I see.

270.

Am I getting that right.

It maybe it may be but again, it's it's it's going to just completely depend on whether people are able to you know remain performing under attainment really for forbearance program.

But we don't really think about it that way, we think about what the ultimate losses will be and we reserve for that.

And then importantly in the first quarter. The chart, if you're seeing which is why don't I was clear to say it was consistent with prior expectations because the charge offs in the first quarter of course don't at all reflect.

You know the ultimate impacts of Kogan 19.

They were just normal before you I would say.

Our next question is from Andrew Lim of Soc Gen.

Hi, good morning, Thanks for taking my questions. So firstly on government guaranteed savings are these those every person risk weighted.

And I'm wondering to what extent, you're using them to refinance existing zones on your portfolios.

And if you want to what extent this way, it's it assets of going the right.

As he do this.

Yeah, so so I'm not sure specifically, what what programs, you're referring to I would just say broadly speaking on offense facilities.

There are obviously very large programs rolled out very quickly and just an extraordinary response to a you know unprecedented market conditions here, we are happy to leverage the facilities to intermediates Ah. These programs for our clients, but we are only using them where it makes sense to make sure that clarity.

Got it and liquidity is flowing to where it's needed.

So so I mean, just to maybe elaborate on that it's a maybe some paul was where there's a bit of a capsule uplift.

If you use government guaranteed lending to represent misplacing what else I previously.

A couple of [laughter]. So you risk weighted assets go down say for somebody like learn something that I won't go a government guaranteed.

But gross well.

We'll incorporate all that to how we run the company you're trying to serve to climb et cetera, and there were two things you're like the PPP you put your balance sheet is serum orderly way what it does affect a lot all the things I guess, all orangeade, Syfy and stuff like that there's a reseller to to the government those old goes.

And vote with whom adds to that as the as we learn with these public forum to working and want to do.

<unk>.

<unk>.

And we have no further questions at this time.

Okay. Thanks, everyone. Thank you spending time with us.

Thank you for participating in today's call you may now disconnect.

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