Q2 2020 JPMorgan Chase & Co Earnings Call
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Please standby we're about to begin.
Good morning, ladies and gentlemen, Waukesha JP Morgan Chase the second quarter 2020 earnings call. This call is being recorded your line will be muted for the duration of the call.
Just a presentation please standby.
I'd like to turn the call over JP Morgan Chase is chairman and CEO, Jamie Diamond and Chief Financial Officer, Jennifer Pizza.
Please go ahead.
Thank you operator, good morning, everyone I'll take you through the presentation, which as always is available on our website and we ask that you fees refer to disclaimer at the back.
Starting on page one from reported net income of $4.7 billion.
Have $1.38 and record revenue of $33.8 billion would they return on tangible common equity 9%.
If we didn't these results are a number of significant items.
Just a credit reserve build of 8.9 billion.
And approximately 700 million of gains in our breach bulk and 500 million of games in credit adjustments and other both of which represent reversal. Some of the losses, we took in the first quarter.
As we continue to navigate is challenging an uncertain environment. It's quarters performance. Once again demonstrates the benefits of the diversification and scale of our platform. So I'll just touch on a few highlights here.
CRT reported its highest quarterly revenue on record I'd fees, 64% and markets revenue up 79% year on year, each representing record performances with strength across the board.
We saw record consumer deposit growth of 20% over 130 billion year on year.
Furthermore, average deposits for 1.9 trillion up 25% year on year, and 16% quarter on quarter.
Average loans were up 4% year on year and quarter on quarter, largely reflecting the cold winter related loan growth that we saw in March. However, on an end of period basis loans were down 4% quarter on quarter due to revolver pay downs as well as lower balances in card and home lending, partially offset by the impact of 28 billion people.
If you know.
And lastly, we increased our cetone ratio by approximately 90 basis points during the quarter. After building approximately 9 billion of reserves and paying nearly 3 billion common dividends.
As you'll recall, we started the second quarter on the back of unprecedented levels of business activity in March.
On the following pages I'll give you an update on some of those key activity metrics, we looked at last quarter and share what we're seeing today. So we sat let's turn to page two.
Starting with wholesale on the top of the page, we saw record levels of debt and equity issuance in the quarter as client sought to pay down the majority of the revolver draws from March and continue to shore up liquidity, while market conditions were selected supported by extraordinary Central Bank actions.
It's George and investment grade that actually seen in March continued throughout the second quarter and its high yield market to reopen U.S. issuance volumes increased by 90 per cent compared to the first quarter.
It DCM as markets rebounded to pre told his levels. They enjoy together, we're archie busiest month for equity issuance ever driven by converse and fall on.
Moving to consumer spending behavior on the bottom left.
Debit and credit sales volumes overall still down has consistently trending upwards to troughed in the second week of April to down just 4% year on year in the last two weeks to June.
TV in restaurants, Ben continued to be down meaningfully, but we have seen some improvement, especially on the back of higher levels of restaurants band.
A significant improvement we saw within retail with a strong recovery in card present volume in the second half of the corner and consistently strong growth in card not present volumes throughout the course.
More recently between the agreement and overall sales growth across the country flatten out notably in both states with increasing cases and deeply decreasing agents.
We continue to see larger year on year decline in states that remain partially closed, particularly those in the north east and mid Atlantic region.
In terms of consumers demand for credit we deserve similar recovery trends in all else equal saw the lowest level of loan and lease originations since the financial crisis.
<unk> activity rebounded sharply in May and June and in fact hearing ended up the best month for auto originations in our history.
And in home lending retail purchase applications after reaching excuse me, a low and <unk> [laughter].
Usually recovered you well above pre told me bubbles in June June was strong and broad market recovery.
Continuing on the topic of consumer behavior, let's turn to page three for an update on what we're seeing around our customers distance programs.
[noise] relative to the peak levels, we observed at the beginning of April we've seen a significant decline in new request for systems over the quarter.
Today, we have provided customers. These things for nearly [laughter] excuse me 1.7 million accounts, representing 79 billion a balance it across both our own and service portfolio.
Oh, those accounts, a large percentage having need at least one came in well into forbearance period, just over 50% in both current and home lending.
In terms of early Reenrollment trends in card only a small portion of our customers have completed both the initial 90 day deferral period and reach to paint a gate, but the majority of those customers, reaching payments was like say, 20% of accounts requesting additional assistance.
And then at home lending.
Those whose parents period expired in June most have either been extended at the customers request for auto enroll in says news read on for guarantees that approximately 40% 50 extension still parents.
And so while we're following this data closely it's still too early to draw any conclusions.
Now moving onto page four for some more detail about our second quarter results.
We recorded revenue of $33.8 billion, which was up 4.3 billion or 15% year on year.
Well net interest income was down approximately 600 million or 4% on lower rates, mostly offset by higher market and I balance sheet growth.
Non interest revenue was up 4.9 billion EUR, 33% predominantly driven by sea Yankee markets an RBC.
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<unk> expenses of 16.9 billion were up approximately 700 million or 4% year on year on revenue related expenses.
Partially offset by continued reduction in structural expenses.
This quarter credit costs were 10, and a half billion, including a net reserve build at 8.9 billion net charge offs of 1.6 billion.
Let's turn to page five for more detail on the reserves bills.
Our net reserve build at 8.9 billion for the quarter consists of 4.6 billion in wholesale and 4.4 billion in consumer predominantly card.
The reserve increase in the first quarter was predicated on an acute but short lived downturn with a solid recovery in the second half of the year.
And while we have seen some positive momentum in economy over recent weeks. There does continue to be significant uncertainty around the passes the recovery.
At the bottom of the page you can see our updated these kids don't remember this is just want to five scenarios, we used to drive our allowance for credit losses.
Our build is based on the we did outcome of the scenario and it seems to be more protracted downturn, but they slower GDP recovery and the unemployment rate ever need into double digits through the first half of 2021.
In addition, the obvious impact on consumer is protracted downturn is expected to have a much more broad based impact across wholesale sectors and we assumed in the first quarter.
Given the increased uncertainty of the macro economic outlook, how customer payment behavior will play out and the future of government stimulus and its ultimate effectiveness as it relates to both consumers and wholesale clients.
We put more meaningful weight on the downside scenarios this quarter.
So therefore, we're prepared and have reserved for something worse than the base case.
And given people covered life of loan if our assumptions are realized.
When you expect meaningful additional reserve builds going forward.
Now moving to balance sheet in capital on page six.
We ended the quarter, where the C.T. one ratio of 12.4%, which is over 100 basis points above our new FCB a minimum of 11.3%.
And just to touch on SLR, while our reported ratio is 6.8%, it's worth noting that we're not going to rely on temporary relief and so was that our ratio was 5.7%.
Given a wide range of potential outcomes going forward I'd like to spend a few minutes on why we're comfortable saying that including the value of our strong and steady earnings stream as well is how we're managing our capital through this crisis.
So with that let's go to page seven.
It's an obvious points, but it's worth a reminder, that since 2018, our average quarterly p. DNR over $13 billion has been generating over 60 basis points of new CPT, one capacity per quarter, even after having made meaningful investments in our businesses.
It's powerful earning stream allows us to grow the franchise and serve our customers in clients when they need it smells and it provides us the capacity to absorb losses in quickly replenished capital in times of stress.
While over the last two and a half years, we pay out approximately 100% accumulated earnings distributing nearly 75 billion of excess capital. We're now building a significant amount of capital since we suspended our share repurchases.
We believe our capital base remains strong even in more severe scenarios when she can see on page eight.
Andy here today, we have 34 billion of reserves at 191 billion of CPT, one capital of which 16 billion is excess over and above our regulatory buffers.
Our 3.3% FCB translates to 51 billion of capital that is available to prefund stress at any time.
And on top of that are 3.5% GCIB surcharge translates to another 54 million.
All that source 69 million regulatory minimum is never touched.
And as you know, we prepare for and manage our capital to a number of scenarios in one of them is extremely adverse scenario that you discussed any shareholder letter earlier this year.
Weve updated this analysis and now it's James and even deeper contraction of GDP down nearly 14% at the end of 2020 versus Fourq to 19.
And reported unemployment ending the year at nearly 22%.
Even under this scenario, we estimate that we would end the year when it's easy one ratio above 10% and need to be down by then so our regulatory minimum would be kind and a half percent.
While we are not likely to voluntarily dip into any of our regulatory buffers that scenario would require us to do so, but notably only to a small extent.
It's also worth noting that based on the limited information provided from the fed up there you NW scenarios. We believe that are extremely adverse scenario simulated even worse Pasadena economy over the next 12 months.
Even if we get this wrong and our losses are twice as high we still wouldn't use the entire FCB.
Okay, Yeah, sorry, Jamie I, just like the airport as it was born so we were sold. This example, obviously is predicated a lot of assumptions, which were Dr. Gigolo de John just simply to show that we could be up another $20 billion loss reserves that 20 billion brings to the screen adverse.
Well familiar quite to the you were W. That said, we're going through a lot more now so not because obviously, we need to be groups that we dip into advanced to see two one that's because would take you know actions. So I've always told you that advanced or capital with very pro cyclical.
Things get downgraded your ought to be it goes way up your capital base doesn't change that much but the ordinary goes way up and they'll be lots of actions, we would take that we could afford that some taking place or what's your wherever those are going to point out. This extreme Abercrombie kids happened in one quarter, you'll happened several quarters could go do you know kind of would you like it looks like an order.
Yes, and stuff like that so even if the economy starts to it there it'll take US a couple of quarters before you make a determination that has 100% possibility. So remember this is saying we are believed 100% of course things could be worse by the way, but we're just trying to show you the know how much capital a company does.
And the dividend.
Okay, so they're going to come to contradict myself I am not okay.
Today, we have all that P.P. an older earnings all those things. So we can be foolish to guess the future of extreme adverse because your dividends because we could easily go through very very tough times never cut the dividend how.
If you ensure somebody like if he had first oversold youre your scenarios would you even worse.
No one is wouldn't consider going to bigger because it appears you get even worse than extreme adversely we want to be will handle anything out there. The primary concerns of companies just your work or it's sure work you do because there's no one ever worry about trimboard trade. So there's no would tend to do it but if things get really bad we used the word materially significantly.
No that so there is you look at the other thing by the way is just these loan losses or best estimate of loan losses did not see core type of stuff you will do estimates would show D. Fas that adverse we would we will not lose that kind of money for credit.
The next page doesn't explain some stuff and to make a few slice additional comments also wants you to she said to be Lucky is temporary buffers I think it temporaries are funny thing to go into crisis or you could use it for wildlife disappears I'm works first or that would for so much you would be shouldn't Hawaii.
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And all this adds Jamie to feed the point on advanced RW 18 hole on the slide and you can see you know we travel from 13.1% to 10.4% about half of that it's just the RW way increasing in the other half as a lumpy.
So anyway, a Jamie said moving onto page nine all of this is against the backdrop of the capital framework that still has the opportunity for Recalibration. So well we've talked about this for years. It has perhaps never been more importantly, I'll start with see car and Jimmy just made this point, but it is not predictive of will be.
Actually think would happen and the best example of this might be the global market shock. It is a significant portion of the FCB and we obviously experience is very different results here in the first half of 2020. So we continue to believe that there are opportunities to rationalize the overall capital framework, including the points we've repeatedly neat about.
He said these changes would fostering higher pace of economic growth overtime without compromising financial stability.
Yes, so I just figured I'd emphasize couple things here so.
For the C Corps, Where's the things couldn't handle extreme stress and if everything goes wrong.
She court so there's not a predictable forecast or what your results might be so all the C Corps test roughly equates to go global financial crisis and older Secrets has always I was losing somewhere between 25 $30 billion over the ensuing nine quarters. We've done it should we like what was it the leader we made $30 billion never lost wait a quarter.
We take actions would diversify the dollar screens earnings and so I'm not but we're not against C Corps, because that's protect you from the worst of the works the worst, but that's not necessarily predict the global market shock, which I think we I was $24 billion a counterparty losses.
Again, just to be instructive or that you know is always know knowing what feels pretty good baybrook Freddie Mac go bankrupt bear Stearns effectively at Lehman brothers effectively they are gene effectively a tones of financial institutions in Europe tons of C O, both counterparty failures and or trading results in the way.
First two quarters combined with the most important $4 billion not 25 and of course, we it was could be made back because.
As we pointed out when things get bad and trading spreads gapped out and then also when you're making more money training because you ended up recoveries in position. So so the stress capital buffer three three is not indicative of what we would lose and so I.
I don't what we're talking to drive that down by taking real access to a number close to 2.5 GCIB itself like pointed out before I'm not to give the concept or if you don't big banks any more capital, but GE said this is.
It's not the same to seek Hershey core includes your diversification your screen if your earnings European or things like that G. Sibs, it's not it's just a measure of size multiplied over and over and over it doesn't include diversification. It doesn't include more. He does include actually was it doesn't include it's just really not represent a bold I would say is real.
Good company or something like that.
So we would do we have enough capital to spend a lot of stuff, which is always going to company that what we've always run the company. So that we can handle at first time scares me my short lifetime, no watching crises over and over and over and over we're not predicting them, which is prepared for them. So.
Yes.
Okay. Thank you all right. So let's go onto the businesses. So all start on page 20, consumer and community banking.
So CPB reported a net loss of $176 million, including reserve build a 4.6 billion.
Revenue of 12.2 billion was down 9% year on year, driven by composite margin compression lower transaction activity and customer relief, partially offset by strong deposit growth and home lending margin expansion.
It's a target margin was down 108 basis points year on year on a sharp decline in rates, but deposit growth was a record 20% year on year up over $130 billion.
We would estimate that approximately 50%, but that growth is covert related due to government stimulus for consumers and small businesses lower consumer spending and Taksim, Italy.
Mobile users were up 10% year on year and since the start of the pandemic. We've seen increased levels of digital engagement. For example, quick deposit enrollment it's about two times pre told at levels.
As I noted earlier for consumer lending the overall activity for the quarter reflected an environment that continue to evolve.
Auto loan and lease originations were down 9% year on year due to the exit of them off the partnership.
Excluding the impact auto originations were up mid single digits.
And while the home lending market was favorable home lending total originations were down 1% year on year, driven by a decline in correspondent volumes substantially offset by an increase in retail dog.
Total CCB loans were down 7% year on year, driven my home winding down 14% due to prior long sales and card down 7%, a lower spend offset by business banking up 59% due to PPP originations.
Expenses of 6.6 billion were down 3% driven by lower travel related benefits structural and marketing expenses.
And lastly credit costs included the 4.6 billion reserve build I mentioned earlier and net charge off of 1.3 billion driven by card.
Now turning to the corporate investment Bank page 11.
See I be reported net income of five and a half billion and in our or we have 27% on revenue of 16.4 billion.
Investment banking revenues of 3.4 billion was up 91% year on year, largely driven by our strong performance in capital markets as well as the gains on our bridge book, which was primarily a function for the cruise market conditions.
I'd fees for the quarter were an all time record up 54% year on year.
We maintained our number one ranking and grow market share to 9.8% for the first half of the year.
In advisory we were up 15% driven by the closing of a few notable transactions.
That underwriting fees were up 55% you maintained our number one ranking overall wallet and where the leaders and lead left the cross leverage finance.
In equity underwriting fees were up 93% and we grew share by approximately 200 basis points relative to the first quarter.
With regards to outlook, we expect third quarter IB fees to be down both sequentially and year on year due to the usual seasonal decline and lower M&A announcements year to date.
And if the economy begins to stabilize we expect capital markets to revert to normal levels.
However, any sustained period of instability could result in additional demand for liquidity and therefore increased capital markets activity.
Moving to markets total revenue was 9.7 billion up 79% year on year, an all time record driven by strong performance throughout the quarter and it was only later in June that actually began to revert to more normal levels.
We saw strength across products and regions from both flow trading enlarge episodic transactions.
Well the strong activity was a continuation of the first quarter theme, our market, making activity. This quarter benefited from improved market liquidity, and we were able to better monetize flows.
Fixed income was up 99% year on year or hundred 20% adjusting for the gain from the IPO tree with last year, driven by very active primary and secondary markets across products, particularly in macro.
Equities was up 38% largely driven by strong client activity in equity derivatives in cash.
Looking forward, we expect to slow down that we started to see towards the end of June to continue.
In addition, the second half of last year was very strong, making any year on year comparisons difficult.
But obviously the environment makes forecasting markets performance, even more challenging than usual.
Wholesale peanuts revenue of 1.4 billion was down 3% year on year, primarily driven by reporting reclassification in merchant services.
Security services revenue of 1.1 billion was up 5% year on year as continued elevated volatility in the second quarter drove increased transaction volumes and higher average deposit balances.
Credit adjustments in other was a gain of 510 million as I mentioned upfront driven by the tightening of finding spreads on derivatives and was a partial reversal of the losses in the first quarter.
Expenses of 6.8 billion were up 19% compared to the prior year due to revenue related expenses.
Finally credit costs in 2 billion, reflecting that reserve build I referred to earlier.
Now moving on to commercial banking on page 12.
Commercial banking reported net loss of 691 million, which included reserve builds of approximately 2.4 billion.
Revenue of 2.4 billion was up 5% year on year, driven by higher deposits and loans, an equity investment gain and higher investment banking revenue largely offset by lower deposit in <unk>.
Record gross investment banking revenues of 851 million were up 44% year on year due to increased bonds in equity underwriting activity.
Expenses of 899 million were down 3% year on year, driven by lower structural expenses.
The topic of 237 billion were up 41% year on year as the increase in balances from March is largely remained on our balance sheet as clients look to remain liquid in this environment.
End of period loans were up 7% year on year, but down 4% quarter on quarter.
C and I loans were down 7% quarter on quarter as revolver utilization, while still elevated has declined significantly from the all time highs in March. However, this was partially offset by the impact of P.T. loans.
Theory loans were flat, we generally lower origination in both commercial term lending and real estate banking.
Credit cost and 2.4 billion included the reserve Bill mentioned earlier, and 79 million of net charge offs, roughly half of which weren't oil and gas.
Now on the asset wealth management on page 13.
[noise] I've gotten wealth management reported net income of 658 million with pre tax margin and our we have 24%.
Revenue of 3.6 billion for the quarter was up 1% year on year as growth in average deposit and loan balances along with higher brokerage activity were largely offset by deposit margin compression.
Credit cost for 223 million driven by the reserve builds that I mentioned earlier.
For the quarter net long term inflows were 29 billion positive across all channels in all regions led by fixed income and equity.
At the same time, we saw net liquidity inflows of 95 billion, making us the number one institutional money manager globally.
And you end of two and a half trillion and overall client assets of 3.4 trillion up 15% and 12% year on year, respectively were driven by cumulative net inflows into liquidity and long term products.
And finally deposits were up 20% year on year on growth in interest bearing products and loans were up 12% its strength in both wholesale and mortgage lending.
Now, it's a corporate on page 14.
Corporate reported a net loss of 568 million revenue was allowed to 754 million down 1.1 billion year on year, driven by lower net interest income on lower rates, including the impact of faster pace on mortgage securities.
And expenses of 147 million were down 85 million year on year.
Now, let's turn to page 15 for the outlook.
You will see here that despite the uncertain environment, our latest full year outlook remains largely in line with our previous guidance.
Based on the latest implies we expect net interest income to be approximately 56 billion and adjusted expenses to be approximately 65 billion, which is slightly higher than expected previously, reflecting the outperformance in the second quarter and will ultimately be an outcome of our performance in the second half of the year.
So to wrap up.
Against the backdrop on an unprecedented environment, our second quarter performance highlighted the benefits of our diversification and skills and the resulting earnings power of our company.
While the range outcomes is broader than ever before our priorities remain unchanged. We are focused on supporting our employees customers clients to communities around the globe and I'm being good stewards of the capital interested to aspire shareholders.
I'd like to end by thanking all those you continue to serve on this front lines of this crisis and our people here at JP Morgan Chase you have demonstrated unwavering solicitude and dedication 30 times and with that operator. Please open the line for today.
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Our first question comes from John Mcdonald of autonomous.
Good morning, Jan and Jamie Odd Gen was wondering if you could give us some incremental color on your commercial exposures to heavily cove, it impacted sectors across see Ari and see and I you know so thinking oil and gas travel retail just to help us understand the types of areas, where your incremental commercial reserve.
Building was directed towards this quarter.
Sure. So I'll start by saying the most impacted sectors like the ones that you mentioned represents about a third of our overall exposure at more than half of that is investment grade and two thirds of the non investment grade it secured and in terms of the second quarter downgrade well first I'd say in the first quarter.
When we were really looking at a deep but short lived downturn, we were really very much focused on the most impacted sectors and now that we're looking at a more protracted downturn you know where we're a reserve for a much more broad based impact across sectors. So I'm just to put that in context, the second quarter reserve build UBS.
About 40% of that isn't the most impacted sectors versus two thirds of the build in the first quarter was the most impacted sectors and then in terms of the downgrades a that we saw in the second quarter less than a third of those we're in the most impacted sectors.
And just you for your definition of most impacted sectors, what would you be including in that.
Consumer and retail oil and gas real estate.
Retail in lodging is sub sectors as you think about real estate.
Okay and just a quick follow up question you maintained the anti outlook for the year, Despite a pretty big drop in net interest margin can you talk about the dynamics embedded in that second half outlook for Eni and maybe how trading and I might play into the thinking.
Yeah, It's a great question and you're spot on which is markets helps and <unk>. So the outperformance in markets helps and I, but can be a headwind on NIM just given that that the NIM is below the average so ah. So yes. It was Ah you know maintaining that outlook you did have something to do with the out performance in markets you're right.
Our next question is from Betsy Graseck from Morgan Stanley.
Hi, Good morning, Thanks, Jennifer just to kick off on a question on page three you went through a lot of detail around to see forbearance that you've been given and the percentage that has been paying you at least once during the deferral period could you give us a sense on these different asset classes. So you felt like.
And in your base case, what are you assuming those you know delinquencies.
And up becoming.
So so I won't go into specific details, but I'll just say a couple of things which is is it is still too early to really read a whole lot into what we're seeing the visibility here remains low I would say given the amount of support that is out there, but you are right that we are considering.
These customers to be higher risk given that they are in for parents program. So we did account for that as we thought about our reserves.
Okay, because I'm thinking right you've got the inverse of the right hand column could be construed is what should be expected to become delinquencies over time and and then I'm wondering as a follow up question you mentioned during the prepared remarks, but you know if your assumptions are realized or that you know you.
Could be basically close to fully reserved for the cycle, maybe you could give us a sense as to which assumptions are talking about because I know, you're you're you're expecting an outcome. That's worse than your base case I was just a little confused about what I should assume your your base case isn't what assumptions.
You're pointing to that if realized you're you're done on the reserving.
Sure. So so first of all there are a lot of assumptions given as I said the visibility is still quite low so assumptions around economic outlook and I'll come back to that assumptions around consumer being a payment behavior and then assumptions around stimulus. So I'm going back to be economic outlook, we have five different scenario.
Yes, we did leaning more heavily to be a downside scenarios relative to what we would have otherwise done even the fed has put equal weight on downside scenarios and their base case. So we certainly thought having a conservative bias there was the prudent thing to do.
And so as you look at that slide five that is just the base case. So you can see there exiting this year just under 11%. When you then look at the weighted outcome of unemployment across the five scenarios, we end up with double digit unemployment through the first half of 2020 wise.
Versus what you see on page five there is just the base case, what shows some improvements relative to the fourth quarter getting down to just under 8% by the end of 2021.
These are just clarify at the base case, if you took Morgan Stanley's estimates are microwaves J.P. Morgan were fed estimates for their base case that is basically the base case.
Embedded in that are always assumptions about.
Stimulus and PPP Im sorry, always though is the base case were was your more than that.
So therefore, the base case happens maybe a reserve.
I hope the base case habits.
Me too.
Our next question is from Jim Mitchell of Seaport.
Hey, good morning, maybe just a quick follow up on on the consumer and delinquencies. Obviously that you had an impact from deferral programs and billings is actually 30 day delinquencies were actually down can you talk to what you're seeing and the non deferral programs, but it doesn't seem like we're seeing much stress at all.
Even in early stage delinquencies, what would you attribute that to what do you. What are you seeing in your non deferral programs.
I mean simply I would attribute it to the amount of support that is out there a in the form of stimulus and so as I said that the visibility on what we're dealing with is very very low because we're not seeing right now what you would typically expect to see you know given given a recession and so that's the way we have to think of.
Reserving is is all about the outlook because we're not actually paying it today and so Jamie has said this many times may and June will will prove to be easy in terms of this recovery and now we're really hitting the moment of truth I think in the months ahead.
Yeah, there's just so everybody in the normal recession on important goes up delinquencies go up Georgia go up home prices go down none of that's true here. It could go down stages go down savings are up there comes a rough home prices are up so that you will see the effect of this recession, just not going see it right away because of all.
The stimulus in effect, you know 60 or 70% of the on employee to making more money than a religion when they were working so.
It's just very peculiar to artisan.
No that's fair and maybe maybe to follow follow up on D. fast.
Jamie you made comments about the market shark and we kind of went through a market shark and everyone's trading held up quite well do you see that changing the feds view over time in terms, how they think about.
Stress losses in the trading book or is it or are you don't think that's that's too optimistic I don't expect any change.
Like I said, they're not they're looking at as they making sure it bank.
To withstand the bad bad as if they were all divorce break.
We're not giving credit to banks for you know things I'd be good so I'm not I'm not against a concept I just want to say if it goes really bad and you do everything told me wrong, what happens to your creep or something like that I didn't.
And they do the same assumptions like outflows the I suppose they have on liquidity or worse than the outflows, but the worst bank in the words crisis.
But they just want to make sure that everybody can withstand there.
Our next question is from Brian Klein handful of KBW.
Hi, Thanks for question on the balance sheet I mean, obviously, there's tremendous profit growth of liquidity built up in the quarter, but how are we thinking about that on a go forward basis is expected to roll off.
Over the next couple of quarters for that kind of persist and expect to stick around or that's gonna be operating with much larger balance sheet.
Near term.
So so I'll start with the topic I mean in the first quarter. It was very much a wholesale story and we said we expect it to normalized and we have seen that you started to see that so looking ahead on wholesale I think there are puts and takes well continue to see revolvers pay downs security services will likely cutting.
We need to normalize I think.
Tailwinds for deposits that balance sheet expansion will be slower, but but will continue and we do think we'll continue to see organic growth on the consumer side I probably down from here.
He tax payments as well as a pickup in consumer spending but in both cases I think we'll continue to see very very strong year on year growth both for wholesale and consumer in the latter part of this year and then in terms of balance sheet management, I mean, we manage the balance sheet across multiple dimensions and I liquidity capital.
Interest rate risk and so we have had 400 billion of deposit growth at the end since the end of last year and when you consider as you know that some of that growth is likely to be transitory and employment opportunities have been diminish given the rate environment. We have held a decent amount was that in cash. However, we did.
Add about 88 billion in securities here in the second quarter and on the deposit side, we've been very disciplined on pay rates.
So with those deposits the ground, we should expect more to migrate from deposits on the assets into securities are you able to fund loan fund of its.
<unk>.
That said goes the balance sheet is could end up in deposits and for the most poor loads bonds would it be securities because the loan growth usually go to recession doesn't go up that much.
Yeah.
Well it shouldn't be as consumer spending recoveries, we should see some growth in card.
Which will help us, but we'll have you know PDP starting to pay down and she said you know loan growth, but ah, but likely slower.
I should point out to the truth is look at the big numbers, we have over $2 billion Tricare shouldered, the central banks, which is close to four or 500 billion treasuries were scooters several hundred billion and other very liquid assets, mostly good securities. That's a trillion dollars when people look at a safe and sound is twofold like this.
That is a tremendous sum of money. Some is required we recorded a whole lot liquidity, but it was just because we're investing can surely.
Thanks.
Our next question is from Matt O'connor from Deutsche Bank.
Good morning.
As reported figure talk a bit about do you expect the timing of starting to see some charge off obviously, there's a lot of Oh, no ones, where the stimulus in the forbearance, but now what are your assumptions in terms of when charge off start going up a little where they pick and how long they say at that level.
It is really difficult to no I mean first we have to start being delinquencies and ER and so you know later this year, but next year will be much heavier on charge offs. As you think about realizing the assumptions that we've made in the reserve is very good it's Dave.
We'll go to know the good thing and Csos life of loan. So you know so we feel well covered for that scenarios that were looking at.
And the reminder, you are seeing some creep in the nonperforming assets, obviously, that's off low levels, but they are starting to go up and sort of remind us why that's not starting to feed in for net charge off or if it's a timing issue in and we'll go next quarter or tariff.
Yeah. It when you look at that nonaccrual increase in wholesale half of that is one client. So you know, it's really I wouldn't draw any conclusions from that and as you say, it's creeping up often very little levels. So again, we still aren't seeing what what what you would expect to see.
In terms of recessionary indicators.
Our next question is from Mike Mayo Wells Fargo.
Hi, just more on the the reserve question. So it if the fed base case is achieved then you are over reserved if youre.
Ladies Cahill cycles, which are working.
We hope okay.
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And if your base case, it's up if your base case assumptions, which are more conservative I realize then okay. You you're done with the reserve building and if it's worse then you'll have to add more reserves, but since the end of the quarter, we're seeing an increase in koby cases.
I'm in Florida, and Texas, and California, and elsewhere and isn't there a link between an increase in koby cases, with yes with economic activity or how do you think about that and I'm staring at slide two I can't get my eyes off that debit and credit card sales volume and it seems like it's flattening.
Off here in June So just you know since the end of the quarter. You know a you know you were to cut a mark to market, you're thinking mark to market, you're thinking as of this second with what's happening.
Do you feel better or worse or the same versus the ended the quarter as it relates to your assumptions.
Great. So.
We feel exactly what they say that we did at the end of the core.
Some work to market and Mike, we're very clear we cannot forecast for future we don't know.
We're also very clear that at all at least citrate, you're gonna have be much murkier economic environment going forward.
They Andrew.
We do you have to be prepared so you can have a lot of things. It out you got people get scared about cope with it can you give us economy small businesses the company's bankruptcies emerging markets. So there's no. It is just could be murky, which is why you know if you look at the base case.
First case mix female briefcase.
The role possible.
We're just give see that the probabilities overs. That's all we're doing real quick fear the worst case, we simply don't know Oh, we're getting windows and would this year. This the word unprecedented rarely is is really probably this time is being used properly it's unprecedented what's going on around the world obviously.
Over the so they made attribute so the feds W. case, they made it very clear there W. case that covert comes back in a big way in the fall and you have to shut down you've got to media.
And you know obviously, if you got to be picked that too we don't know the probability of that.
We simply don't daughter hurt by the way waking toward guessing.
And I would just <unk> <unk>.
Just to clarify that we are reserved for something worse than the base case and for all the reasons you said they informed our decision to lean in a bit more on the downside scenarios and so you know what while while there is a bit about behold conservatives bias here.
It does represent our best estimate based upon everything we know which does include the sort of slowdown that you referenced in terms of more recent activity.
All right and my follow up would be kind of the flipside. During this very difficult time, you've grown deposits over the past year equal to the fifth largest bank.
I mean, the deposit growth is kind of off the charts here. So you said half of that due to covert but it's the other half due to share gains. So I guess, there's several questions in that but now how much of that is related to digital banking and how much of that do you expect to go away once this crisis.
This past.
So I talked a little bit about kind of how we're thinking about deposit looking forward I I also I just clarify like when we said, 50% colored related that was on the consumer side and so that we do think some of that will leave with tax payments and ER and consumer spending coming back and then in terms of.
How much of its share gain it's difficult to know at this point historically, we have performed well in lower rate environments that I think you're right I think it is because of our digital capabilities and a and our branch footprint and our people and all the things that we offer that differentiate us a anytime like this.
Our next question is from Erika Najarian from Bank of America.
Hi, Good morning. The first question is for a Jamie.
A lot of Investor feedback has indicated that you know they are encouraged by the fact that banks can remain profitable while absorbing pretty significant provisions, which you mean proven today, but are hesitant about bank stocks given the overhang of doing the fast resubmission.
In the fourth quarter, and what that could imply for the dividend and I guess I I just I'm I know you alluded to this in your prepared remarks, but I'm wondering you know under this scenario that you see no playing out and relative to that 60 basis points of C. E. T. One generation per corridor, but you know what is your view on dividends.
He outside of that extreme adverse case.
This concludes dependable.
And if you if we entered the three members case, the board should and will consider reducing it.
Like I pointed out the free members cases, so it was completely sustainable dividend. The reason they would consider reducing the is it is because it would you enter like 14 or 15% unemployment you don't know the future. So now you're not going up.
No the extreme adverse case, which is roughly 20% unemployment and therefore, you protect yourself and I'm going to dividends as she basically and so on so the goal is to sustain the dividends or you can look at the numbers, it's completely miniscule relative corridor by corridor. So this decision could be made you know as you enter these things and we're all hoping to base.
Case happens.
<unk>.
And just a quick follow up we also got this question from investors and the extreme adverse case is there a preference towards cutting the dividend or at a temporary suspension or is there a difference between the two.
There's no difference between the two.
Got you dividends you got to hopefully put it back when the time comes in so you know the temporary suspension just sounds peculiar to suspension.
I don't know twice in my life, it's a prudent thing to do and if you might need that capital going forward or because things are gonna gets a that's terrible something like that so.
The other thing you can answer the question if the base case happens when it was for too much capital generation will start buying back stock again, so I hope we can do before goodwill.
Our next.
We expect that this year, but I wouldn't completely rule it out in the fourth quarter.
And our next question is from Glenn Schorr of Evercore.
Hi, Glenn.
Hello there.
Question for you.
So we had this big market rebounds in the in the overall markets and that's led to a lot of revenue.
But given this outlook on the uncertain pass that we've been talking through this whole Todd I'm curious on ways, you think about potentially de risking on balance sheet that some of it is just a huge liquidity build up is that the rest balance sheet I got that but are there a proactive things you can do to reduce the b hi.
Leverage RW away in a more stressed environment have you been selling into this recovery.
My question.
Uh huh.
Regarding Argentina, I guess, there's two components, which should be investment securities portfolio, and then a proactive things need to be on art anyway. If that answers. Your question Glenn I'll start with investment Securities. We you know we are being cautious and we have opportunistically look to reduce credit exposure there.
Over the second quarter and then on RW way you know we are because we're preparing for a range outcomes. We are spending a lot of time thinking about if we needed to what could you do much but it is you know sort of a last resort because we certainly don't want to have any impact.
On on clients and customers and a and so we're ready we're looking at it but we haven't done anything I would say proactively at this point, we're very much focused on helping clients and customers get through that.
So let me let me answer is really a consumer sorry, we like other basis, you are kind of prudent played it up with our you do great that's already happening.
Just as you could do some more but just you had some great numbers, but how good credit is like I did the goes by gross numbers you gave me.
Well, good how much better home lending no oh that was that on the LTV on a weighted average LTV.
It's really extraordinary and I was in mortgage I should've remember, but I did I didn't have to ask and and in 2010, our weighted average LTV on the portfolio and home lending with 90% tenants out 56% right and you can assume is better in credit cards veteran auto we have no subprime does the consumer side on the lending oneq.
On the business side, we've always been crude well always very tight care food stuffs like that usually what happens in downturns like this you get a little sear more serious Doug security and the management team and responsiveness and raising capital. So all these companies are the raised a lot of capital on the investment side that is incredible to you heard your journey.
And again, we couldn't actually make it more conservatively putting securities into held to maturity, which we've done very little moving over to consider I don't personally this didn't body that reduces risk, but it doesn't do you actually be you know, maybe we'll do that overtime.
But the the security portfolios are pretty through the door and training. It's every day.
As a trading is just think of traded as a joke, Daniel and which were better conversion is supposed to open there. They are every single day managing those risk the most exposed and you could assume they're managing with very very well probably be today and you know we certainly are not.
Clinton's offense or anything like that we're trying to be very cautious and sure workloads and so yeah, you youre more conservative and reduce the order of yet yes. We can if we wanted to we could start doing that but always or is there.
Thanks, one quickie on the consumer side I'm curious if you if you've had went out for months and to the bulk of the lock down in the United States and and and some of your branches have been either closed or or drive up only.
And and we're watching your deposits grow like a lead so I'm curious if if if you've learned many lessons that might change that your thoughts on the branch that work on your organic growth efforts as we go forward and come out of this someday.
Yeah, So put those into deposit number Paul just went up because of PPP deposits went up because of the payroll checks that people got deposits went up the revolvers are taking down by $50 billion or whether there's somebody does all that end up in deposits of course law, that's already reversed and stuff like that so.
You Gotta look at both sides of that.
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But you were just say some Jen I was going to add on I mean, there's there's there's of course, we're learning a lot I mean, I mentioned, great deposit enrollment, but but but we haven't learned enough to make any.
Changes to to our strategy around branch expansion in fact, we just opened or hundreds branch in market expansions and we're really excited about that we think will open probably another 75 Ah. This year. So we'll be nearly halfway to that 400 branches that we've talked about in market expansion.
And and so we'll see we do have I still have about 1000 branches that are closed and a you know it's possible that we learn something that you know helps us think about accelerating he densification or consolidation, but it'll be at the margin then we're not going to make any big changes quickly because we want to make sure that we had the benefit.
Over time of watching our customer behavior. So they can really be the ones that inform our strategy.
Our next question is from Charles Peabody Portales partners.
Yes, hi, good morning, two questions. One on page six you give the SLR ratio as adjusted for these temporary relief Oh programs on the capital Wonder If you had a similar ratio for C.T. one.
And in part of that question would both would be which would be the more confine ratio starting next March.
There's no temporary relief and see you told me he won that they're the only and I'm not even try at call. It really theres a season on c. vote, but it's over many years and so I don't I don't necessarily think about that as temporary like SLR SLR at this point they didnt temporary it is due to expire.
Into first quarter of next year, which is why we're very focused on managing that with or without being exclusions and they're both we noticed in both so I wouldn't say was more than the other you're really notice it's about 20 different capital liquidity ratios.
And Jamie if Soc is meeting today behind closed doors, if I understand there are two topics one has to do with mm mortgage secondary mortgage market liquidity and the other with the cobot stress test overlay do you have any thoughts or insights as to what they may be discussing on either of those I don't feel the coldest.
You could be for goes if someone sorry.
It's a covert obviously, we're going to running your stress test, we're going to run to really look at older. The fed cases, you don't view and stuff like that because they laid it out perfectly reasonable that people there because trust us.
As markets is a different issue, okay, and we've been very consistent good mortgages believe it or not or more formal costing they should be normally you'd be looking at the 10 year rate, which is what 50 basis points. The mortgage they should be 1.6% were 1.8% is good the 3.3 the cost of the reason for that.
It's because the cost of servicing and originations so.
It's always got to be pass throughs the high because.
It was middle ruled regulation or put in place that what do lot Craig safety and soundness. So you can see I was a basic 80% LTV no verified People's incomes. Your victory is doing the right kind of stuff and the second one is because it's very no securitization market the securitization mortgage important because it reduces your your risk weighted asset.
Puts more center for based upon their balance sheet and the securitization market is a real transfer brings to somebody else. So are we I think they should change that these children really the beneficiary of that will be not agency mortgages, which are even more expect a lot more expensive agency mortgages. So once you have a securitization market would be believe it.
And you have to change rig they'd be a little bits that already you know that much better market the cost more to come down and the particularly come down for people.
All right.
I mean, so this there should be phased and it should be right away.
Our next question is from so martinez of you'd be at.
Thanks for taking my question.
The Oh broader question and I, just want to get your perspectives on public policy in banks and and it little bit more broadly than than the discussion about capital planning and stress testing and you know I know banks are working hard to be part of solutions time enough.
Part of the problem, but you know we're well also having more open discussions about things like inequality, social justice, which.
In my opinion or long overdue, but I worry that fair not banks are sort of being depicted as being on strong side of some of those issues and I think you see that and things like the mainstream presses depictions of big banks in PPP and stuff like that and I'm. Just curious if if you or concerned at all about.
Populous Nancy bank policies, gaining traction over you wanted to find them, whether it's you know breaking up the banks director lending recaptured or whatever in a in a pretty polarize political environment or do you think.
Being two alarmist or overly concerned about stuff that you know it was pretty unlikely in our country. So just kind of Wanna get your perspective, just generally on how banks fit into the overall no policy in political backdrop [noise].
[noise] the.
Thank you got to do every single day. When you go to work as you do the right thing for the rise reason surgeon customers. We try to do that you tried very hard to do take your employees to train people. We tried very hard to advance black lead into the company for them. So others of course, we make mistakes and so I understand somebody thinks out there, but so we try to do the best we can.
I would get involved policy like there's more space that would be better for Americans and we understand it just didn't want base to help American we do the most important if we could do as good healthy Viper based you just crisis.
To serve our clients and remember responsible lending is good London irresponsible. When he is bad when these are very often you here. They basically do more back no irresponsible stuff is irresponsible it would be too bad outcomes and that's kind of what happened last time around so we try to do it right we try to listen very carefully when does.
Criticism, and sometimes with an off illegitimate but what we could have done better should do better or try to do better in the future [noise].
<unk>.
Okay. No. That's okay. That's helpful. I guess is broad is that question wasn't ask a very narrow question Virgin and on your in I'd Guide inside does that I presume that includes.
Gains on P.P.P. fees for Unforgiven loans and have you and who have you quantified that are size that up in terms of where do you think the magnitude of those those figures can be.
So so we've been really clear on PPP, which is that we don't intend to profit from PBP that doesn't mean that you won't have some geography issue. So you'll have some revenue and then you'll have expenses and the profit or will be near zero. It is an immaterial amount this quarter I'm getting these fees you recognize over the lives of the loans.
Oh, it's very little this quarter on both revenue and expenses and looking out you will see we'll see more of that you know probably in the third and fourth quarter, a again that they will still be zero on the bottom line and a and even the gross numbers won't be meaningful and Grand scheme of things.
Our next question is from Gerard Cassidy of RBC.
Thank you good morning James.
<unk>.
Can you share with us leap.
Reclassification and the wholesale portfolio that you talked about.
How often do you go through that process, where you have to look to reclassify the corporate loans and second.
You touched on earlier in a question about submitted the cobiz related sectors that are being impacted because of what we're going through can you highlight for us what is the most stressed within that Cobrand group that you mentioned.
So so first on the reclassification, we mentioned it was that it was a geography issuing merchant services. It didn't have to go there was there was no reclassification oppose the alone yeah.
Yeah, and then and then in terms of in terms of the most impacted I mean, they are the ones that you would expect to see around travel oil and gas a and real estate and retail. So it is it the sectors that you would expect to see although as I said.
Earlier, a and it's important to note that for the downgrades that we experienced in the second quarter less than a third of them. We're in the most impacted industries. So really this is you know we're seeing this is being much more broadly.
Okay, and thank you and then second and make mistakes I apologize but.
In your slide three you give me three they didnt detailing the for billings on consumer portfolio do you have any numbers on the commercial and corporate portfolio said loans that might be in forbearance and is it more commercial real estate or CNN.
Yeah, they they're just not meaningful numbers, we would have included them. How did they then I'll just go back to what we said, which is where we're just not seeing what you would typically see but they didn't have a nonperforming they end up and I'm really happy category in wholesale or commercial the same way other category and consumer.
Next question is from Ken Houston of Jefferies.
Thanks, Good morning, I just a question on the points in slide you made about capital and long term opportunities Recalibration first I guess, what do you have any dialogue with the fed about the 3.3 FCB and some other banks had mentioned and then secondly.
Where do you think we stand on the GE said, a recalibration to your points about you know systemic risk not not that shouldn't impact out of a bank's balance sheet.
We're not going to go back to set in the 3.3, but obviously, we're looking at why 3.3, we couldn't trader Joe's store or players going forward to try to reduce the number a little bit.
Because we are we have another C corps coming up in a couple of months. So there's a reason for it to go through extensive mr. work as opposed to stitch fix what's already there and GE said no GCIB.
Yeah look I've always thought you submit school a recalibration, but there are things they shouldn't recalibrated for ready because America gold plated it which I think there's only a necessary or they should have taken care and treasury as a whole bunch of stuff Oh, the calculation because obviously it goes way up when the fed those things like the board recently.
And they never adjusted for growth in the economy or go to the Shadow banking system, which they were supposed to do so I'm just hoping they go about do that a one point, but this is good so wrapped up in political it'll be people politicized pretty complicated calculations, which I forgot to peculiar and funny you put the but my view is that they do the numbers they should do them right.
And they're just not right anymore.
Yep.
And the second question, it's just going back to slide three you lay out the percent of accounts on this page auto seems to be the biggest and then in the supplement on page 13, the balance it seemed to imply a bigger percent on deferral. Just can you talk a little bit about the differences there and then why do you think you're seeing more accounts in.
Auto differing versus other asset classes. Thank you.
Okay, I do I don't actually know the the answer to reconciling to supplement to slide three so Jason and team can follow up with you on that one.
I mean, maybe then just a comment about auto on deferrals and why do you. What do you think you're seeing you know in that customer base versus others. Some and do think that means anything different for Ford credit trends.
No no yeah.
Okay. Thanks very much.
Our next question is from Chris Kotowski of Oppenheimer.
Good morning, Thank you.
I guess I just think it was such an extraordinary quarter for capital raising their dealogic shows over two trillion tours of debt and equity raised in the in the quarter and I guess a two part question around that one is you know as you look at that you know what's a good portion of that and kind of the stressed areas you know I presume.
Notably capital that's the junior to your bank debt and intend to what extent has all that helped raise but the quality of bank loans and then secondly, you know looking forward I mean did all the companies that needed to and could raise capital d. So in the second quarter and therefore.
We're looking at.
You know a a kind of oh, so flat spot going forward or or do you see this is kind of.
Theres, an ongoing need for a lot of these companies that can continue to raise capital.
Well I think for doors across the board I mean, you saw strong companies weaker companies, how you'll markets opened up converts converts equity in their to people that ought to capital raise I think it was wise I think all people said the pre funded all other capital is to make sure. They can get through really this crisis means for their company their industry and stuff like that so.
I don't think it'll be like it was before so we will definitely come down, but I still think there's opportunity for some people to prefund some of that but it is prefunded. This is this is not capital always careful about being raised to go spend has been raised to sit in the balance sheet. So that you're prepared for ever comes out and you've heard a lot of companies make stable.
As you guys go to go through yourself about there we've got two years a cash we've got three years ago as regard or.
People want to be prepared I think it's appropriate.
Okay. That's it for me. Thank you just for just for your models, we don't expect revenues and it doesn't baking that don't normalize or even come down below normal next quarter in the quarters out at one point, we can't predict month by month exactly and portrayed in because no one else cut in half.
Are there.
Probably closer to the future than if you're says could still be double wouldn't normally runs.
And our next question is from Andrew Lim of Society General.
She seems to work.
Good morning, Thanks for taking the questions then.
I think the quite straightforward just on some terrizzi ready on the nature of C., So provisioning and hopefully you you've.
It's a very big positions based on a much more concepts and assumptions about the natural sees a profession voltage TV.
Not in a third quarter, though if you assumptions do not change then Joel provision should fall down quite considerably versus the second quarter to a much more normal no.
Just wanted to see how you thought about that first quarter.
Sure. So so I would start by saying, where we are right now while there's a conservative bias on to where we are right now it is our best estimate of what we're facing we certainly hope that in the future. We look back on this is a conservative moment, but this is our best estimate and so a it our assumptions are realized.
And again, our reserve reflects something worse than the base case. So if that's realize then we shouldn't see meaningful meaningful reserve builds in the third quarter.
Or is that continues to be right.
Yes.
I mean.
Context would it be said, let's see core set we see they switched Miocene for example.
Yes, you have you have you'd have a reserves for growth.
But not for you know if the prices per se.
Exactly exactly that's for next year, Thanks, a lot.
And then on the C Lucky trading environment and <unk>. So would you then it's instead of a July would you say that's mobilized to do a level consistent with what we've seen was 29 people or are you still see some pretty strong trading.
Flowing through.
Switching to the thought I suppose I just asked a question you should assume it's going to fall in half. We don't know it's on a couple of weeks. Some good thing, but we don't assume it's unbelievable trade results going forward and hopefully, we'll do better than that but we should be don't know I also support <unk> reserving since its probabilistic you could actually change nothing.
And what's the probabilities of potential outcome to put up more reserves.
We have no further questions at this time.
Thank you.
Great. Thank you.
Thank you for participating in today's call you may now disconnect.
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