Q3 2020 JPMorgan Chase & Co Earnings Call

[noise]. Please stand by we're about to begin good morning, ladies and gents.

Morning, Welcome to Jpmorgan Chase's third quarter's 2020 earnings call. This call is being recorded your line will be muted for the duration of the call.

Now go live to the presentation. Please stand by.

At this time I would like to turn the call over to JP Morgan Chase is chairman and CEO, Jamie Dimon, and Chief Financial Officer, Jennifer Peep Sac Ms sacks. Please go ahead.

Thank you operator, good morning, everyone I'll take you through the presentation, which as always.

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Please refer to the disclaimer.

Starting on page one afforded.

Reported net income of $9.4 billion.

$2.92.

Revenue of $29.9 billion with a return on tangible common equity 19%.

Included in these results are 524 million legal expenses, primarily related to the resolution of legal matters announced last month.

Oh I wonder why we're still in a very uncertain environment, our underlying business fundamentals performed quite well. So I'll just touch on a few highlights year before getting into one business results.

<unk> continued its strong performance with <unk>.

<unk> up 9% and markets revenue up 30% year on year and he had record revenue.

About 5% year on year.

On deposits, while we expected to see some normalization our balance sheet instead, we saw another quarter of growth.

Average deposits were up 5% sequentially and notably we moved into the number one spot in U.S. retail deposits.

<unk>, 0.8% market share gaining 50 basis.

On your.

On the other hand average loans were down 4% quarter on quarter, primarily on revolver pay downs from our wholesale clients.

With that let's turn to page two for more detail on the third quarter results.

We reported revenue of $29.9 billion, which was flat year on year.

Net interest income was down approximately 1.2 billion or 9% on lower rates, partly offset by higher markets and <unk> and balance sheet.

Noninterest revenue was up 1.2 billion or 7%, primarily driven by sea I'd, including higher banking and markets revenues as well as net securities gains in court.

Expenses of 16.9 billion were up approximately 500 million or 3% year on year on the higher legal expenses that you mentioned.

This quarter credit cost of approximately 600 million were down 900 million year on year, primarily driven by modest reserve releases, which you can see in more detail on page three.

We released approximately $600 million.

This quarter, primarily on run off in home lending and changes in wholesale loan exposure.

Charge offs across our portfolios remain relatively low and in fact were down slightly year on year and quarter on quarter.

Well, we could see an uptick in charge offs over the next few quarters, given timing and government stimulus already provided you.

I don't expect any meaningful increases in charge offs until the second half of 2021.

As you can see at the bottom of the page our updated beach reflects some improvement from last quarter. However, the medium to longer term.

Uncertain in particular as it relates to future stimulant.

We remain heavily weighted toward downside scenarios and with reserves of 33.8 billion, we prepare for something worse than <unk>.

And now turning to page four I'll provide a quick update on what we're seeing in our customers.

[music].

You can see here the vast majority of card and auto customers have exited the lease and so whats left in deferral is primarily in home lending, including 11 billion to own loans and 17 billion in our service portfolio.

And in terms of what we're seeing with our customers that have exited approximately 90% of accounts from insurance.

Now turning to the balance sheet and capital on page five.

We ended the quarter with the T., one ratio was 13% up 60 basis points versus last quarter on earnings generation and lower our <unk>, partially offset by dividends of 2.8 million.

And it's worth noting that we have over 1.3 trillion up liquidity sources available to us across each cumulate an unencumbered securities.

Now, let's go to our businesses, starting with consumer and community banking on page six.

CCB reported net income of $3.9 billion and an army of 29%.

Revenue of 12.8 million was down 9% year on year, driven by deposit margin compression and lower card and <unk> lower balances, partially offset by deposit growth and strong home lending production margins.

Deposit growth was 28% year on year up over 190 billion largely on lower spending and higher cash buffers across both our consumer and small business customers as well as organic growth.

Klein investment assets were up 11% year on year, driven by both net inflows and market performance.

Overall consumer customers are holding up well they have built savings relative to pre told at levels and at the same time lower debt balances.

With regard to digital adoption early signs the chassis increased customer migration migration to digital will persist.

Nearly 69% of our customers are digitally active and that's up three percentage points year on year and accelerating.

And quick deposit now represents more than 40% of all check deposits versus 30% pre Toby.

Moving onto the consumer lending.

Starting with home lending total originations were down 10% year on year, driven by correspondent however, consumer volumes were up 46% year on year, and notably more than half of consumer applications were completed digitally twice the level of the first quarter.

In card, while net sales were down 8% year on year spend continued to improve throughout the quarter and in the month of September sales were down only 3% year on year, reflecting the lowest decline since March.

Retail, which is a significant portion of overall spend was a bright spot reaching double digit year on year growth in the third quarter, largely driven by card not present transactions.

And then in auto record originations for the quarter of 11.4 billion were up 25% year on year.

Total TCV loans were down 7% year on year with home lending down 15% due to portfolio run off and cars down 11% on lower spend offset by business banking up 83% due to P.T. loans.

Expenses of 6.8 million were down 4% predominantly due to lower marketing investments.

And lastly credit cost of 794 million included a $300 million reserve release in home lending and net charge offs of 1.1 billion driven by card.

Now turning to the corporate and investment bank pumping seven.

She I'd reported net income of $4.3 billion and then are we have 21% on revenue of 11.5 billion.

Investment banking revenue of 2.1 billion was up 12% year on year and down sequentially off an all time record quarter and we maintained our number one ranking fees year to date.

The quarter's performance was largely driven by our equity capital markets business, which saw an uptick in IPO issuance driven by strong equity backdrop like stocks trading at or near all time highs.

In advisory we were down 15% year on year, largely impacted by the new did M&A announced volumes in the first half of the year.

However, we saw a surge in M&A activity. This quarter was announced volumes returning to pre coldest levels and companies began to shift their focus from day to day operations to more strategic and opportunistic thinking.

Debt underwriting fees were up 5% year on year, but down 21% sequentially. As you saw investment grade activity returns to more normalized levels from the record volumes, we saw in the second quarter.

The leveraged finance market continued to recover how are you.

Spreads approaching pre told at levels and some notable acquisition financing deals closing.

We maintained our number one ranking in overall wallet and we're the leaders in need left across leveraged finance.

In equity underwriting fees were up 42% year on year, resulting in the best third quarter ever primarily driven by our strong performance in IPO. If you follow on.

In terms of the outlook, we expect fourth quarter I'd fees to be roughly flat versus a strong quarter last year and down sequentially.

However, if valuations remain elevated we could continue to see momentum in capital markets.

Moving to markets total revenue was 6.6 billion up 30% year on year.

Well activity continue to normalize with spreads volumes and volatility reducing from the elevated levels of the first half of the year.

The performance was strong throughout the quarter and across products, reflecting the resilience and earnings power. This franchise through a broad range of market conditions.

Fixed income was up 29% year on year against a strong third quarter last year, driven by favorable trading environment across products, notably in commodities as well as elevated client activity in credit and securitized products.

Equities was up 32% year on year on continued robust client activity in equity derivatives as well as the recovery and crying balances and a solid performance in cash.

Looking forward, it's important to remember that 14 19 performance was very strong making for a difficult year on year comparison, and obviously forecasting market's performance remains challenging in this environment.

Wholesale team its revenue of 1.3 billion was down 5% year on year, driven by deposit margin compression largely offset by balanced growth as well as the reporting reclassification in merchant services.

Security services revenue of $1 billion was flat year on year, where higher deposit balances were offset by deposit margin compression.

<unk> expenses of 5.8 billion were up 5% compared to the prior year largely due to higher legal expense, partially offset by lower structural and volume and revenue related expenses.

Now moving onto commercial banking on page eight.

Commercial banking reported net income of $1.1 billion and in our we have 19%.

Revenue of 2.3 billion was flat year on year, driven by deposit margin compression offset by higher balances and fees and higher lending revenue.

Gross investment banking revenue of 840 million was up 20% year on year on increased debt and equity underwriting activity.

Expenses of 966 million were up 3% year on year.

Average loans were up 5% year on year, but down 7% quarter on quarter due to declines in revolver utilization by sea and I clients and lower origination volume is Uri.

Deposits of 248 billion were up 44% year on year, and 5% quarter on quarter as client balances remain elevated.

Finally credit costs were a net benefit of 147 million, including a $207 million reserve release, and net charge offs of 60 million.

Now on to asset and wealth management on page nine.

Asset and wealth management reported net income of 877 million with pre tax margin of 31% and our week 32%.

Record revenue of 3.7 billion for the quarter was up 5% year on year as growth in deposit and loan balances along with higher management fees and brokerage activity largely offset by the positive margin compression.

<unk> expenses of 2.6 billion were flat year on year.

Credit costs were a net benefit of 51 million, primarily due to reserve releases.

For the quarter net long term inflows of 34 billion were positive across all channels and driven by fixed income and equity.

At the same time, we saw net liquidity outflows of 33 billion.

You end up 2.6 trillion and overall client assets of 3.5 trillion up 16, and 15% year on year, respectively.

Net inflows into liquidity and long term products as well as higher market levels.

And finally deposits were up 23% year on year and loans were up 13% with strength in both wholesale and mortgage lending.

Now, it's a corporate on page 10.

Corporate reported a net loss of approximately 700 million.

Revenue was a loss of 339 million down $1 billion year over year, driven by lower net interest income on lower rates, including the impact of faster Prepays on mortgage securities.

Partially offset by 466 million of net securities gains in the quarter.

And expenses of 719 million were up 438 million year on year, primarily due to an impairment of legacy investments.

Now, let's turn to page 11 for the outlook.

Let's see here that our full year outlook for 2020 remains in line with what I said at Barclays.

We expect net interest income to be approximately 55 billion and adjusted expenses to be approximately 66 billion and.

And while we don't have anything on the page for 2021, and we're not planning to do Investor Day, we'll share more color with you on the outlook in the first quarter of next year.

So to wrap up.

Even though recent economic data has been more constructive than we would've expected earlier. This year there remains a significant amount of uncertainty and so we continue to prepare for a broad range of outcomes, while focusing on serving our customers clients and communities through this time.

Operator, please open the line for <unk>.

[noise].

Our first question comes from Matthew O'connor of Deutsche Bank.

Good morning.

So I think one of the key questions on investors' minds right. Now is how will that grow revenue I'm kind of medium term here, if you think about lower for longer rate.

I was hoping you could just talk about how you think about marriage of the company if rates stay very low for a long time and how you can grow revenue.

And obviously year to date, the other revenues and very good up 4% because if we then the branch expansion that you alluded to in my comments.

Answer that'd be helpful. Thank you.

Sure. So in terms of how we think about that the revenue outlook for 2021 first of all it's it's it's early and we'll all come back to you in the first quarter with more details, but it is true that if we think about the <unk> outlook that that will be under pressure relative to 2020.

And I can get more detail on that but also we are on pace for record revenue in markets and investment banking and so that will be a tough compare having said that we're not going to change the way we run the company because of what might be temporary rate headwinds and we see significant a friend.

<unk> value in the growth that we're seeing in the topography and with that branch expansion. Yeah. We are continuing on our plans in branch expansion. We have I think almost 120 branches open in our expansion markets will do more than another hundred and 50.

So far this year, we got approval to enter 10 additional states, which will ultimately put us in all lower 48, or so we continue with the branch expansion and a and you know remain very excited about it with those new branches are in most cases, performing well see a the original business case.

Yeah, Chris Koch said started to give you a little bit longer term view, there's not one single business were not any bankers countries products digital ongoing security services and care for the services were heading overgrown chase, both Americas business ready private bankers.

Any products in asset management, we combed through all the things I called kind of cold weather, we just keep on growing that bridge. The bridges grants is one example, we never stopped doing that never got any credit card products, we never stopped growing digital money.

Do not for the next decade and of course, you have always in demand from other cold water spreads margins markets et cetera, but the goal is always to say to grow the business that you have your cars.

Around the world.

And then as a follow up John you said that you'd elaborate on the net interest income.

I didn't know if you back now where you're going away for January for that yeah.

Production for the puts and takes sure.

Sure. So there I said at Barclays that current run rate was a good place to start. So 13 billion you know it's a good place to start in for 2021 reflects the impact of the rate environment and some normalization in markets and I, but from there you know balance sheet growth and mix should be.

Be supportive throughout the year and so for the full year of 2021, you know my best view at this point would be 53 billion plus or minus but yeah, we'll will sharpen our pencils on that and continue to provide updates that but right now full year 53 billion.

Our next question is from Glenn Schorr of Evercore ISI.

Oh there.

Right so.

So I.

Good morning, So so I guess.

The reserve release was definitely driven by mortgage pre pay in run off so I get that but npis were still up 18% quarter on quarter I Wonder if you could talk about what drove that maybe comment on commercial real estate, specifically would be appreciated. Thanks [laughter] short.

So the reserve at least as you said was largely on portfolio run off and changes in exposure in wholesale so not a reflection of a change in our outlook and then the increase in non accrual loans is on the consumer side is mortgage and it represents the customers that have come out.

Forbearance and are not paying and so as you saw on that slide de <unk> deferral slide about 90% are still currently other 10% I have now been reflected in the non accrual exposure. So that is a that is all mortgage and then the increase in non accrual on the wholesale side was.

Just a few names specific downgrades, which are in sectors. You would expect as you. Just said you know retail related real estate and oil and gas and then more broadly on on commercial real estate I'll I'll just share that we feel adequate reserve for for what we're facing but if you look at.

Rent collections as an example, overall with the exception of retail between 85% to 95% and then even retail in the month of September was about 80% had recovered so about 80% or so still a lot of uncertainty there, but ah, but we feel adequately reserved.

Okay I appreciate that.

Steve one on asset management, you have been doing great I don't mean to ask on your specific business, but in the past you've spoken about.

Potential interest in participating in industry consolidation, we saw some of that happening lately can you.

Can you just talk remind us about the parameters of what you would and they might not be interested in doing that and that's and wealth management.

[noise] Oh, she's really rolling along with all the doors Northcote lawns wide open we would be very interested in dogs. We do think you'll see consolidation of the business, but we're not going to be more specific that's [laughter] audits.

Autocam second system the technology there.

Business logic, the ability to execute the <unk> no a lot of issues it will determine whether something makes sense for us.

Our next question is from Mike Mayo of Wells Fargo Securities.

Hi, Hi, Hi, Jen Jamie that with some comment you said you do not expect much higher charge offs until the second half of next year and that's even with the higher NPK. So what are your assumptions behind that.

Yeah, and as far as specifically Oh, when that forbearance actions, you know run their course and Jamie.

Policy actions that might be embedded in that expectation.

Okay. So I'll just start Mike with first of all the increase in non accrual was on mortgage and when you look at the LTV on those the loan to value on those loans. That's that's what is embedded into how we're thinking about the what charge offs will look like in the near term, they're still very healthy ltvs.

On those loans, so really when we talk about loan losses really emerging in a significant way not until the back half and 21, we're talking about cars and just given the amount of stimulus and payment relief and just support in the system.

I haven't seen the delinquency buckets begins to fill up and we charge 180 days you don't have to do in cards. So that is primarily just a timing issue as it relates to card we could see increases in charge offs in the next few quarters or you know on the wholesale side or it may be here and there on the consumer side, it's just that the meaningful.

Change in charge offs, we don't expect until the second half of 2021.

And my brother policy for drugs.

Shaded policies determine if you're because this is unprecedented times and we're saying is that policy will matter and will skew the audience favorite better outcome she already.

Obviously, that's doing well you can't keep mortgage locally, but the policy on the physical side. It give some kind of a continuation of unemployment insurance and PPP.

Those are the two most vulnerable errors. So just maximize the chance to work better outcomes than I do think that overtime and told you would turn to work I caution people remember 100 million people go to work every day to complete focus is on the 50 million, who don't go to work with all the way to go to work its rivals safe.

Well, there's a lot of examples where your duty social distancing the cleaning and older and people are.

Let me say further being home in your community and so.

Getting back to work is a little bit important because if you look at cities and travel and a whole bunch of stuff there aren't a lot of people who are under a modest doesn't strain who will feel survived a year of complete goes down so the other policies.

Pneumonia.

Rational thoughtful trophy office done properly, which will help you know all things to support the big office towers in buildings and stuff like that and our.

Most of these remarks, Mike she has a good outcome don't guarantee that she has a good outcome.

And I know this is a tough question, but you're in the middle of the stress test part too when all said and done Jamie or Jan where do you think these charge offs go as a percentage of the global financial crisis, and you have to have I know you have scenarios, but worst.

Thinking it's like half the GFC levels same dfc level twice the GFC level. What are you guys thinking in the back half of your body.

I think it's a very difficult question to answer it's very different of course, because the the GFT was heavily mortgage related and ER and this will probably be less though we also our portfolios are in significantly better shape.

Coming into this whether it's mortgage work hard, but but just given the amount of uncertainty about where this could go we still have 12 million people unemployed you know and I think it's very difficult I know Jamie letter you add.

It's fairly or groups such as ours.

It depends on the outcome again, we look at it was a good case goes medium case be relative every case midstream edrs, Jason the other yes, you completely different and we don't know the future. So its hard to predict what is going to be we're always you're welcome.

They are true gold developers kits, which is equal to me.

Roughly equivalent to see core extremely adverse case that we just got roughly again very hard to compare apples to apples reserves.

Our next question is from Erika Najarian of Bank of America.

Hi, good morning, I'm going to ask the two questions that I often get from investors that are hesitant to dip their toe back into bank stocks and the first is and John just goes back to your earlier comment. The one question I guess on credit quality is didnt stimulus and policy right.

Define cumulative credit losses lower for the cycle I'm in other words, I think Jamie said change the outcome or do you think it just delayed the realization of these losses.

So I think it's difficult to know I think the the purpose of it was to wants to change the outcome not just delay the losses up but it's difficult to know I'm people sort of described it as a bridge and the question as to whether the bridge will be long enough and strong enough to bridge people you know.

Actual employment Enbridge small businesses, you know back to normalcy. So I think it remains to be seen as Jamie said, we're obviously preparing you know for four inch and not necessarily change the outcome. Obviously, because we've built significant reserves. So you know we're prepared for it to be a a delayed rather than change the outcome.

Got it and my follow up question and perhaps if I could direct this to Jamie as you know this is a bit of a follow up to Matt's earlier question, but investors are essentially worried on the other side of the credit recovery about what the interest rate environment may imply for quote normalized or.

He see and if you think about what you mentioned to be quote whether considerations you know what prevents G.P. Morgan from going back to that 17, 19% ROTC that you posted in 18 and 19.

HM.

[laughter].

You know you are you are you guys have to forecast in two party Kelly I think negative interest rates were bad idea and we'll pause for us overtime today, you can see the shrimp and <unk>.

We want to be buying back stock and doing other things either capital, but are used the word werent able to handle more rights and we can have decent returns at low rates I expanded long term strategy housing is a bad idea you own.

All assume you're going to continue look like forever. I mean, you had massive global Q. We in the last go around and we didn't have inflation for most people are the key was around for the fed and the Central Bank Sports Securities does that create problems to gauge the big supported with deposits and the central bankers. So it was not use inflationary.

Fiscal stimulus fiscal stimulus what he'd been extraordinary around the world is by its nature inflationary and so we don't really know the outcome of that.

No my view when it works or doesn't live builder business is David they're out because of interest rate environments et cetera, and we have plans to drill to ensure environments. We cannot do certain things. We can charge for certain things you can do a whole bunch of different stuff, but the services are still required moving money around the world training for people under our unsecured.

Helping manage their money and won't won't be okay worked well.

Our next question is from Betsy Graseck of Morgan Stanley.

Hi, Good morning can you hear me.

Yes, Hi, Duffy hi.

Hi, I had two questions one was be interested in understanding how you are threading the needle between.

Your outlook here for reserve and the potential to buy back stock you know you've got the reserve level high with a base case outlook for unemployment you know that's above where we are today for the next.

Six months, it looks like or even longer and.

And you know your capital build is obviously continuing to to increase here. So how should we think about that could we imagine that your buyback could kick off before reserve release happens and would you release reserves before you know the net charge off start to come through like you mentioned in the second half 20.

One.

Sure. So so as we first of all on on stock buybacks. Obviously, we are restricted here in the fourth quarter. You know we are hopeful that said, we'll see what they need and get what they need in the resubmission to give them the confidence to revert to a more normal just.

You should framework under FCB in the first quarter. So that's obviously the most important hurdle for US and then if we have excess capital and and the reserve decision and the buyback decision are not related to one another which are always going to make sure that we have our best estimate of losses that repeat.

Thing considering the uncertainty as well ER and then of course, our capital hierarchy would would always well always look to grow our business is first and foremost, but if we have excess capital and if we do not have regulatory restrictions you could see us buying back stock as early as the first quarter.

And like I said that wouldn't necessarily be you know related to a reserve release. The other thing on on a potential reserve releases, we obviously need to economy continued to deliver on the base case to give us the confidence.

That that is is what we're dealing with but I would just say that remember there was a a capital lease a partial capital relief on seasonal build so when you release reserves only about half of that actually falls through Q2 capital.

And could you talk a little.

And could you talk a little bit about the slide three where you've got the base case outlook for unemployment and just give us a sense as to you know what's driving this base case outlook for unemployment and for Q 20 at 9.5% and 20 to 21 at eight and a half there if they're obviously above where we are today and could you.

Help us understand how you're thinking about.

Flexing that going forward, what would change those assumptions.

Yes, that's that's like large you largely I see a timing issue with when we actually run the models for the reserve that's not necessarily as you rightly point out reflective of our economists latest outlook. So we would as we progress through the fourth quarter use the latest outlook ER for the base case, but then again.

And as James said, we look at a number of different scenarios and depending upon you know what we think we're dealing with in terms of the uncertainty. We may continue to heavily weight, the downside scenarios or or maybe even more heavily weight. The downside scenarios. We have to see so if you look at the the weighted outcome of all of the scenario.

Those that we used to drive the reserves. It is you know we are prepared for a double digit unemployment peak unemployment level Buddy wood. It would start with the IEA revised Speedskate shall I say from our economy.

Yeah of course is put into perspective is a little bit of capital I mean, we have extraordinary lucky capital $200 billion down 1.3 trillion of liquid assets in securities No. I mean, what do you should look at it as a tool is going into the next eight quarters well.

Corridors will earn PPNR like pre tax pre provision earnings roughly 80 billion give or take and we don't know exactly. So that's been a good sort of 80 billion you know when things get better it will be more than that and well take down reserves. If things get worse you maybe about data was never put up 20 billion, even if you pull up the 20 billion.

In my view that we want to move in the quarter that will emerge over several quarters, which means you can buy it dividend buyback stock I plenty of capital and still be very conservatively capitalized.

And that's the reality of the K forget all the other stuff you read.

Well I'm sure, we'd like to be consumed going loan loss reserves and capital so well be Asian, but you know we have a tremendous amount of where with all to do both when the time comes.

And just my hope a lot to do a whole lot to do with where the stock is much harder.

And that the 20 million that Jamie references we talked about each stream adverse scenario last quarter. So you can think that you know that that's the 20 billion that gene is referencing if that is what.

Yeah, that's what he's doing his own employees 12, 13%. It goes on for the better part of six quarters. I mean, it's really it's pretty diverse it's far worse than the C Corps taste, we just got.

Our next question is from John Mcdonald of Autonomous research.

Morning, Dan you mentioned that next year you have some tough revenue comps can you talk about the notion of expense flexibility at JP Morgan you know underneath the surface of it flattish expenses, where are you on your saving money from Digitization and structural change and how does that give you flexibility against where you'd like to be investing.

Sure. So first of all it's early we're still you know working through next year. So I certainly refine the guidance I'm in the first quarter, but as it relates to expenses you know, we will and you mentioned digital that's that's one we will continue to deliver on structural expense efficiencies as we have been for the last.

Several years, there will as we do can you know expect the world to normalize a bit there will be opportunity in volume and revenue related expenses, but we are going to continue to invest and so you know there there will be puts and takes and we'll provide more detailed guidance in the first quarter.

Okay and as a follow up on capital can you talk about the notion of reducing your FCB and maybe your GCIB surcharge footprint over time I think Youve commented that you know there is potential to do that what is the path and the route to doing that and how do you feel about the prospects for those two things getting better over time.

Sure. So I'll start with GE said, which is that we do expect to be in the 4% bucket at the end of this year, but it did not effective immediately and so we will have 2021 to to manage that back down what I would say there is that you know with the fed balance sheet it easy.

Levels, possibly expanding that makes managing the G SIB back down quite challenging so in the absence of Recalibration, which we remain hopeful about managing that back down, we'll certainly the challenging but not impossible, but we'll certainly Ah think about any impact on our client franchise before.

Do anything so we have to time, there you could see recalibration that would help but but no doubt that that's a challenge on FCB I'd start by saying its scenario dependent of course, so all else equal we do think that we have opportunities to manage down the FCB and that could include transferring securities from.

Affects to held to maturity and then some other mechanical issues on our side that that you know, we're confident we'll all things equal or reduce our C D, but again its scenario dependent.

So all that being said John I would just say that our expectation at this point overtime is that our target capital level of 11 and have to 12% is is should be on changed overtime.

Got it thanks.

Our next question is from Ken Who's done of Jefferies.

Thanks, Good morning, [laughter] gender, Jamie mentioned earlier that you've got 1.3 trillion of cash and securities. It didn't look like you are really change the size of the investment portfolio. This quarter, but he didn't make a bunch of moved into held to maturity from available for sale and I'm. Just wondering you know you guys have talked about expectation that deposits might settle down.

The continuing to grow and so what can you do at this point.

Going forward with that move starting to move some of that cash into things that might at least earn some more to protect the a and I could going forward. Thanks.

Sure. So I apologize I, just think that we're going to do anything in particular.

We have $300 billion of care forget about today that becomes 400 billion I'm not going to invest in the stock, making 50, 60 or 70 basis points. So you get a TV will be more than they are real.

Well, we didn't make long term decisions for the company and New York and I didn't get squeezed a little bit so be it.

We don't want to be in a position, where we lose a lot of money you made investments in five or 10 year Securities, which you lose a lot if.

Rates go up so we were not protecting in IR, yes, so as a principal matter. It's important to remember that we manage the portfolio across multiple dimensions, not just optimizing and she said and we're thinking about capital protection.

These levels, but just in terms of the activity that you saw in the securities portfolio. We've been very active we added about a 160 million through the end of Q2 in Q3, we were active buyers and sellers because in Q3, we saw attractive selling opportunities, which made economic sense for us.

So you just to Jamie's point, so you give up some in <unk>, but it just made economic sense for us, but we were also buying in the third quarter. We also focus ourselves on optimizing liabilities with the excess liquidity. So you'll see that our debt is down nearly 40 billion from last quarter. So then just in terms of that tranche.

For to held to maturity with this significant growth in the securities portfolio. It just made sense from a capital protection perspective, and it's also helpful for FCB as I mentioned and these are high quality core holdings.

Yep and fully agree on that duration point, Jamie I'm a follow up just on if you think about the fee businesses and if somebody is going to be raised you guys don't be raising the question about wanting to do something to held to maturity reduces FCB or there's any rational but I don't think you guys, but that's what it is that's when the deal was mortgage regardless the bid.

Yep.

On duration. The tenure has backed up a bit over the last couple of weeks and so we have been you know we'll remain opportunistic but we have added.

Levels.

Great and then just one follow up on the fees in General you know you've got the consumer fee businesses that are still trying to get back to where they were a year ago and then you know last quarter Jamie.

Jim you made the comment about you know cut it in half in trading and it wasn't anywhere close to that which was positive it's still quite quite good and just how you. How you think through just a you know pushes and pulls between fees. As you look forward right. You know in terms of how much better do you think the consumer can get from where it is and if so how much if any are the institutional businesses over over earning.

Relative to where you know they they posted in the first half thanks.

Sure so on consumer fees, you'll see that consumer fees recovered a bit in the third quarter.

The decline there was little relief actions that we took but also because of the higher cash buffers that consumers are experiencing that also impact fees. So and that's a good thing. So we'll take that so that's that didn't recover a bit in third quarter, but but that will take time to to get back to you know what you might consider normal.

<unk> levels and then on the institutional side, we did expect to see markets normalize in the third quarter, we did see that a bit but not as much as we had thought when a when we were at second quarter earnings a an IB fees also you know continue to be very strong in the third quarter exceeding our expectations for what we might have thought the second.

Quarter looking forward, though the fourth quarter is a tough compare so we do and we do expect markets to continue to normalize and then on the IB fees side, you know our pipeline is flattish to what it was last year, it's still down a bit in M&A, but we did see M&A recover in the third quarter and it's up.

And easy EM, so as I said flattish in the fourth quarter feels about right at this point.

Our next question is from Steve Chubak of Wolfe Research.

Hi, good morning.

So James I was hoping you could speak to this expectations for loan growth across both the institutional consumer channels. When do you anticipate we could begin to see balances and like positively and separately just what level of loan growth is contemplated in the 53 billion and I guide that you provided for 21.

Sure. So loan growth will will be challenged I think for you know in the short term on the wholesale side I think we'll probably tread water at these levels, but increasing CEO confidence.

With M&A activity and capital investment should be supportive of more normalized loan growth, but that may take some time on the consumer side. We are seeing cards continued to revert to more normal levels and so that will continue into 2020 wise, but that could be offset by continued.

You Prepays in mortgage so there will be puts and takes there and a and then asset management I think well continue to see solid growth. So net net I'm not significant loan growth, but mix will be helpful. Because car growth is supportive of a have you know a mix benefit on an <unk>.

Thanks for that and maybe a question for you Jamie you had alluded to a potential for charging for additional products and services to offset rate pressures and I was hoping you could speak to some of the areas, where you might look to potentially charge clients and just philosophically, how you're handicapping the risk of client attrition if competitors ultimately.

Follow suit.

Hi, Gary first of all I don't think its going to happen. So I won't spend too much time worrying about it but we have as a company that has gone through everything we do and how we do it and how we respond to negative right somebody else who account by account partners. Your line is necessary services all the competitors, it's a competitive world I agree.

Those don't do stuff you'd have a hard time doing it but but I think you will see a lot of competitors respond.

To negative rates in a lot of different ways. So there will be an opportunity to do something more.

Our next question is from Jim Mitchell of Seaport Global.

Hey, good morning.

Maybe just a question on deposit growth I think we've all been surprised that at the continued growth can you just kinda talk to what you're seeing it looked like we had further growth in September.

Are you expecting this to continue as it sort of moving out of money markets and the deposits. What do you think is driving the growth and do you expect to continue.

Sure. So there's no doubt that with the fed being this active that there is significant excess liquidity in the system. We did things that we would see a deposit in analyzing the third quarter, both on consumer spending on the consumer side and a and then on the wholesale side you know in places like six.

Sure he services with asset managers holding cash on the sidelines, we didnt see what we thought we want so yes, we did continue to see deposit growth here in the third quarter going forward I think that normalization, it's still very much a part of our outlook except for that given that the normalization is a bit deferred here and will likely be offset by.

<unk> continued organic growth, perhaps more than offset by continued organic growth.

Right makes sense and then maybe a follow up on credit I mean, I appreciate that we're not going to see charge offs, given where delinquencies are today. What do you think how do we think about delinquencies and what triggers you to either release or build reserves I would imagine it will see it but you would be making those decisions before charge offs.

Oh wait where do we see delinquencies you've had very good experience so far in your core book as well as the.

Deferrals acting well when do we <unk> I mean, it just seems very surprised that we haven't seen delinquencies tick up yet in any material way when do you expect that or is it really all dependent on sort of the goodwill of the government.

Well I think.

We are one of the reasons, we haven't seen delinquencies tick up is because of the you know pain relief, but also the extraordinary support that has been provided through stimulus. So you know, we'll probably see delinquencies tick up in the early part of 2021, we're not assuming a further stimulus beyond the end of this year and how we think.

About reserves. So we do think you'll start to see delinquencies tick up really 2021, and then charge offs in the back half of 2021, I think future stimulus would give us more confidence in a you know in the economy delivering on the base case there's.

A lot of factors that we'll be looking at as we think about the right level of our reserves over the coming quarters and delinquencies will be just one part of that.

[noise] [laughter] [laughter].

Our next question is from Gerard Cassidy of RBC.

Thank you good morning, Jennifer.

<unk>.

And then Miss this I had to jump off for a minute on the call but.

Can you give us some color.

Well, you've spoken very well about what's going on in the consumer credit area, but when you go.

But when you go into the commercial side of the business can you share with us the sectors that you're seeing the biggest challenges in can you give us some color on the re rating process that you're going through on those credits that are troubled today, and what kind of deterioration you're seeing in those specific credits in terms of possibly write downs.

Or revaluations of if its collateral like on the commercial real estate loans.

Sure. So so the sectors I think there are ones that you would expect airlines lodging restaurants, other t. any real estate oil and gas and you know those those continue to be the sectors under most pressure when you look at downgrades I'm here in the third quarter or not.

During the third quarter in the third quarter, we saw downgrades slow a bit because in the second quarter. We saw significant downgrades just on the increased level of debt that companies were taking on so we saw downgrade slow a bit in the third quarter, but we do expect downgrades to continue particularly in real estate and then elsewhere.

Her in wholesale I, you know I would say CEO sentiment is is guarded but constructed.

Very good and then as a follow up I know you Jimmy touched on interest rates and how you're very focus in growing your business in any rate environment could you give us some color there.

Inflation, if it does pick up and if we get a steepening in the curve. Obviously chairman Powell has indicated he is not going to move on rates for quite some time, but if we're looking in your third quarter of let's say 21, and the 10 year government bond yields is lets say a 125 basis points can you just give us some color I know that's not your prediction, but.

What would that do for the margin in revenues. If we were fortunate enough to see a steeper curve due to higher inflation.

It's a great [laughter] I don't I don't have a sensitivity to hand.

Go ahead Jim.

Doug can you build your disclosure, we're making the tank chose board happen if rates go up 100 basis points.

Got the numbers yet.

This is true boom they have dollars a year with the war and is a piece of that but the smaller piece, you know rolls and that rolls in and compounds over time, but that's not the right way to look at the water.

Having active environment rates are going up we have more volume and more in my view of Stagflation places and that's really bad idea. So why is more important than just the one here.

Our next question is from a cell Martinez of your business.

So your line is open. Please proceed.

Hello, sorry about that it goes on you.

I wanted to follow up on an earlier question I think it was for Ken on on partly on sales and trading, but you're tracking this year in sales and trading to a revenue.

Close to $30 billion and if we go back to say 2010. Shortly after the crisis, it's been pretty consistently the annual revenues and see the 18 to 21 billion dollar range. There's obviously a lot of volatility on a quarterly basis, but you know it's it's generally been in that range. So hum.

Do we think about you know we're frame the range of outcomes is market conditions normalize. It do you feel like you know there there have been changes in terms of your share of market structure that maybe allow you to have a larger revenue base, then and more revenues from those.

Businesses that you have had historically, even as market conditions normalize or is it just kind of too hard to tell and just trying to think through because you don't see a pretty big impact on your overall PPNR growth forecasts don't for <unk>.

So I I think that I mean, as you know we're on pace for a record year. So I think any from carriers are going to be challenging and would you expect the market to ptcs worldwide.

That could be partially offset by share gains as you mentioned, but it is.

It is it is never a good idea to try to forecast markets. Even early in the quarter never mind, you know the year before.

Right how did you add anything.

And say look this is a rare working you know got lots of competitors and roll buildings, no systems and stuff like that it can do a better job for them.

Almost impossible to forecast short term numbers in there.

Yeah, No no no and I understand totally.

Totally you know get.

You know get then appreciate that it's just that you're kind of tracking to revenue that's about 50% higher than what you've done in the close you know any here in the post crisis environment or or to that somewhere to that effect. So you know just is that delta between the current run rating. What's what has been a more normalized run rate is pretty you know pretty soon.

Usable so I'm just trying to get you know any color in terms of kind of thinking through kind of a range of outcomes for where that could settle in at not necessarily in a given quarter per se, but just you know more on a on a normalized basis do you think about the business as a whole.

The dogs me or trade or do they have done an exceptional job, but I would say the second quarter was well not typical in the fourth quarter far along.

The hope hopefully might be done in the past couple of years, but we don't know, but remember the market itself total bonds to us its an American total credit brought total mortgage broker total global problem. That's growing overtime. So there is an underlying growth is no spread themselves around the competition moves around.

Our next question is from Andrew Lim of Society General.

Hi, good morning, Thanks for taking my questions. So the first one a you've got 33.8 billion of reserves or I guess, that's in line with Ah Ah extreme its us snobbery.

No you can't tell.

What's going to happen going forward given different given many different variables, but.

We're already seeing some of that being released so I was wondering if we had the the base case snobbery pan out over the coming years, how how much about 33.8 billion should we expect to be released.

Through the Pinedale and over what time period.

So I'll start by saying, we're not reserved for each stream adverse scenario. So we are reserved for something worse than the base case, because we have put so he weeks on scenarios that are worse. Many case, but we are not reserved for the extreme adverse scenario and be well me. This quarter was first of all very.

Small in the Grand scheme of things and was almost exclusively related to portfolio run off or exposure change is not anything to do with the change in our outlook and then if the economy delivers the base case, you will see reserve releases from us in the coming quarters, but is it is very very difficult.

She tries to tell you how much and when.

I mean surely you've got like can make it like an estimate of your reserves. If you did see in the base case going forward and I guess, that's it that's the difference between <unk> and already started already said I've already said that the base case, the fed base case happens, we're probably something like $10 billion over.

Sure.

[noise] 10 billion over reserved.

Overall simply didn't see price happens.

Well, Tim Bright line reserve.

Got it.

I mentioned it earlier, it's just important to remember that there were capital modifications to see so so only about half of that ends up in capital.

Because as you release, yes of course, yes.

Got it understood thanks for that.

And then just a follow up question on your Cc one ratio.

You had a nice pickup.

This quarter also you've got strong writing study for a new 2% reduction in risk weighted assets. I was just wondering if you could get a bit more color on that.

On the moving parts the.

And then how you expect that to pan out in the coming quarters.

That's largely that they aren't any reduction was largely on revolver pay downs. So I wouldn't expect that kind of pace to continue we will continue to build if it were not allowed to buy back stock, but we will continue to build capital on on earnings.

But probably less so in order to gain adoption.

Our next question is from Charles P. body of Portales partners.

Yeah. Good morning question about your rate sensitivity to the long end.

If I look at a time series going back to the second quarter of last year. Your rate sensitivity has increased every single quarter to a steepening yield curve and others, who ran I wouldnt improve more of the yield curve.

Fuel curve Steepens its long and so my question is it with that.

Intended.

Action or residual effect, because I did notice that you've been adding fairly significantly to MBS portfolio.

Yes, so Charles I don't I don't know precisely the answer to that but it is it's largely going to be I'm, assuming on the growth in our deposit base, which then has supported the growth in the securities portfolio.

Okay.

It's it's substantial I mean, if you go back to the second quarter of last year, you had a $600 million potentially increase in second quarter. This year was 1.7 billion.

Anyway.

My My second question is related to the legacy impairment charge can you give us some color around that what sort of asset class that was in and is it over a half a billion under half a billion.

So under a half a million of what remains and it was a legacy investment that we took an impairment on and it's it's not meaningful in the Grand scheme of things.

Our next question is from Brian Kleinhanzl of KBW.

Great. Thanks, just a quick question to start with maybe as you think about kind of what you've been doing for a customer accommodation.

As it relates to the pandemic I never would've been fee waivers first quarter second quarter of this year, but what kind of customer accommodation is really happening in the third quarter that kind of a clean number from a fee perspective in the third quarter or is there still for level of accommodation going on.

Oh, there is probably I don't actually know Jason and he can give you the detail it is less than what it was in the second quarter and it's more that they see what worries me.

What we need in terms of the reduction in fees. It is more a function of cash buffers.

Okay and then.

And then as everybody can you give an update on the I'd be pipeline, but on a geographic basis, I mean, everything make it relates around covert kind of around the world as there are different pipelines building in different regions. Thanks.

There's there's there's less of a regional story about from a product perspective overall were flattish to the two last year, but M&A is a little bit lower importantly, though recovered quite nicely in the third quarter and easy M is a little bit higher overall flattish.

And we have no further questions at this time.

Hi, Thanks, everyone.

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

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