Q1 2021 JPMorgan Chase & Co Earnings Call
Yeah.
Please standby we are about to begin.
Morning, Ladies and gentlemen, welcome to J P. Morgan Chase's first quarter 2021 earnings call. This call is being recorded.
Line will be muted for the duration of the call.
We will now go live for the presentation. Please standby.
At this time I would like to turn the call over to J P. Morgan Chase's, Chairman and CEO, Jamie Diamond and Chief Financial Officer, Jennifer Pizza <unk> Ms <unk>. Please.
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. Please refer to the disclaimer at the back.
Starting on page one the firm reported net income of $14 $3 billion EPS of $4.50 on revenue of $33 1 billion and delivered a return on tangible common equity of 29%.
Included in these results are two significant items 5.2 billion of net credit reserve releases, which I'll cover in more detail shortly and a $550 million contribution to the firm's foundation in the form of equity investments.
Touching on a few highlights we saw another strong quarter in CIB. In fact net income was an all time record with IV fees up 57 per cent year on year, reflecting continued robust activity and markets up 25 per cent year on year as the environment remained favorable in January and February although it did start to normalize in March.
And AWS, we had record net long term inflows of 48 billion this quarter.
And deposits of 2.2 trillion were up 36% year on year, and 5% sequentially as the fed balance sheet continues to expand but loan growth remains muted up 1% year on year, and 2% quarter on quarter with the bright spots being AWS and secured lending in CIB.
On to page two for more detail on our results.
When looking at this quarter's performance, there's a lot of noise in the year on year comparisons, particularly given what happened in March of last year and so it's important to remember a few key points here about March of 'twenty 'twenty affair.
Effectively investment banking activity stopped or got delayed except for investment grade debt issuance.
We recorded $950 million of losses and credit adjustments in other in CIB as well as a $900 million markdown on our bridge book.
And then credit we built $6 8 billion of reserves relative to this quarter's release of $5 2 billion.
So with that in mind revenue of $33 1 billion was up $4 1 billion or 14% year on year.
Net interest income was down $1 6 billion or 11%, primarily driven by lower rates.
And noninterest revenue was up $5 7 billion or <unk> 39 per cent.
While this comparison is in part impacted by several of the items I just mentioned in absolute terms, we saw strong fee generation across the franchise, including in investment banking AWS and home lending as well as a strong performance in markets.
Expenses of $18 7 billion were up 12% year on year on higher volume and revenue related expenses the contribution to the foundation that I just mentioned as well as continued investments.
And credit costs were a net benefit of $4 2 billion driven by reserve releases and here, it's worth noting that charge offs were down about 400 million year on year or 28 per cent and continue to trend near historical lows.
Turning to page three for more detail on our reserves.
Yeah.
We released approximately $5 2 billion of reserves this quarter as recent economic data has been consistently positive indicating that the recovery may be accelerating faster than we would've thought just a few months ago.
Starting with consumer in card, we released three and a half billion as the employment picture has continued to improve the round three stimulus has provided another level of support and early stage delinquencies remained very low.
And in home lending, we released $625 million, primarily driven by continued improvement in H P I expectations and to a lesser extent portfolio runoff.
And then in wholesale we released approximately $700 million.
While a strong recovery seems emotion. We're also prepared for more adverse outcomes given remaining uncertainties around the impact of new virus strains on the health of the underlying labor markets.
So for now we remain cautious and are still weighted to our downside scenarios and at about 26 billion. We're reserved at approximately 7 billion above the current base case.
However, it's worth noting that even in a more normalized environment, we wouldn't expect to be 100% weighted to the base case, and we'll always have some waiting on alternative scenarios.
Now moving to balance sheet and capital on page four.
We ended the quarter with a CET one ratio of $13 one per cent flat versus the prior quarter as net growth from retained earnings was offset by lower Aoc I and higher R. W. A.
Perhaps the more interesting ratio right now is SLR, which is at five 5% excluding the temporary relief that just expired.
As we said all along we were never going to rely on short term temporary relief as a long term planning matter and this is evidenced by actions we've taken.
We've already engaged with our wholesale deposit clients to explore solutions and we issued $1 5 billion of preferred stock in the first quarter.
Having said that it's worth reinforcing a few points here.
First it's important to remember that the SLR as a leverage base requirement not a risk based requirement.
The growth in bank leverage has been driven by deposits and therefore cannot be cured by reducing lending in fact, the opposite would be true. If we had more loan growth. It would help because it would absorb excess risk based capital.
The issue is that we've had muted loan demand to date and even if it starts to pick up it's hard to envision that organic loan growth could keep pace with further T V.
And therefore, we expect this leverage issue to persist for some time.
And finally, when a bank is leverage constrained this lowers the marginal value of any deposit regardless, if it is wholesale or retail operational or non operational.
Regulator should consider whether requiring banks to hold additional capital for further deposit growth is the right outcome.
As we told you last quarter, we have levers to manage SLR and B will however, raising capital against deposits and door turning away deposits are unnatural actions for banks and cannot be good for the system in the long run.
And then just to wrap up on capital regarding distributions.
The limitations were extended another quarter. So based on our income that corresponds to buyback capacity of about $7 4 billion in the second quarter after paying our 90 cent dividend.
Given the preferreds, we plan to issue in the work underway around excess client deposits. While of course this could become more challenging we believe that we should be able to buyback most if not all of that capacity.
Now, let's go to our businesses, starting with consumer <unk> community banking on page five.
C C. B reported net income of $6 7 billion, including reserve releases of $4 6 billion.
Starting with the key drivers of year on year financial performance, which I'll. Just note have generally been consistent over the last few quarters against the backdrop of strong consumer balance sheets with higher savings rates and investments as well as healthy deleveraging.
Deposit growth was 32% or 240 billion as existing customers balances remain elevated and we also continue to acquire new customers.
Client investment assets were up 44% driven by market appreciation and positive net flows across our advisor and digital channels.
Home lending originations were 39 billion up 40% and an overall larger market.
An auto loan and lease originations were $11 2 billion up 35 per cent with March being the best months on record.
However loans were down 7% as Outstandings in card remain lower even our spend is recovering to pre COVID-19 levels.
This is in addition to the continued runoff of the mortgage portfolio and partially offset by P. P. P editions.
Mobile users grew 9% to nearly 42 million and the customer migration to digital continued with branch transactions still down double digits.
In consumer banking, approximately 50% of new checking and savings accounts were opened digitally and that's up more than 10 percentage points year on year.
Notably, we're also seeing a few emerging trends worth covering.
Consumer sentiment has returned to more normalized levels, reflecting increased optimism.
We've seen debit and credit card spend returned to pre pandemic levels up 9% year on year, and 14% versus <unk> 19, Despite T any remaining significantly lower.
That said, we are seeing strong momentum in tea and he would spend up more than 50% in March compared to February and similar growth across CX loyalty and ultimate reward travel bookings.
With higher rates mortgage lock margins have tightened in refi applications have slowed but the overall market is still robust.
And on credit Gov.
Government stimulus and industry forbearance programs have provided confidence that the bridge is likely going to be long enough and strong enough.
Taken together with the pace of the vaccine rollout, we believe theres, some permanent capital loss mitigation and while <unk> 'twenty one card losses are higher quarter on quarter, we do expect losses to decrease in the second and third quarters.
In summary revenue of 12, and a half billion billion was down 6% year on year, driven by deposit margin compression and lower card NII on lower balances largely offset by strong deposit growth and higher home lending production revenue.
Expenses of $7 2 billion were down 1% as we self fund our investments.
And credit costs were a net benefit of $3 6 billion driven by the $4 6 billion of reserve releases I previously mentioned, partially offset by net charge offs of 1 billion.
Now turning to the corporate and investment bank on page six.
CIB reported net income of $5 7 billion and an ROE of 27% on record first quarter revenue of $14 6 billion.
Investment banking revenue of $2 9 billion was up 67 per cent year on year, excluding the impact of the bridge book Mark down last year.
I B fees of 3 billion rub 57 per cent and while we now ranked number two largely due to spec ipos, we maintained our global I'd be wallet share of 9%.
The quarters performance wasn't all time records driven by the continued momentum any equity issuance markets as well as robust activity and M&A in D. C M.
In advisory we were up 35% benefiting from a surge in announcement activity in the second half of 'twenty 'twenty.
Debt underwriting fees were up 17% driven by leveraged finance activity and here, we maintained our number one rank and lead left position.
And in equity underwriting fees were up more than 200%, primarily driven by Ipos as clients continue to take advantage of strong market conditions.
Looking forward the IPO calendar is expected to remain active with M&A momentum likely to continue.
And while the pipeline is higher than it's ever been the number of flow deals outside of the pipeline. Both this year and last year make it difficult to predict the second quarter.
So at this point I'd say, we expect I be fees to be about flat year on year.
Moving to markets total revenue was $9 1 billion up 25% against a strong prior year quarter.
In January and February we saw robust trading environment and client activity remained elevated with the positive momentum from the end of 2020 carrying through to the start of the year.
In March our performance started to normalize but remained above pre COVID-19 levels.
Fixed income was up 15% without performance in securitized products and credit supported by active primary and secondary markets, partially offset by lower revenues in rates and currency in emerging markets against a tough compare in March of last year.
Equity markets was up 47% and an all time record driven by a favorable trading environment and equity derivatives as well as strong client activity across products.
In terms of outlook based on recent weeks, we would expect this quarter to be closer to the second quarter of 2019 as to Q 'twenty was the best quarter on record for our markets franchise, but obviously, it's still early.
Wholesale payments and security services revenues were $1 4 billion and $1 1 billion, respectively, both down 2% year on year with higher deposit mark deposit balances more than offset by deposit margin compression.
Expenses of $7 1 billion were up 19% year on year on higher revenue related compensation, partially offset by lower legal expense.
And credit costs were a net benefit of 331 million driven by the reserve releases I discussed earlier.
Now, let's go to commercial banking on page seven.
Commercial banking reported net income of $1 2 billion and an ROE of 19%.
Revenue of $2 4 billion was up 11% year on year with higher lending and investment banking revenue and the absence of a prior year markdown in the bridge book, partially offset by lower deposit revenue.
Record gross investment banking revenue of $1 1 billion was up 65% with broad based strength as market conditions remain favorable.
Expenses of 969 million were down 2% driven by lower structural expenses.
Deposits of 291 billion were up 54 per cent year on year and five per cent quarter on quarter as client balances remain elevated.
And loans were down 2% year on year and 3% sequentially.
C&I loans were down 4% from the prior quarter on lower revolver balances as clients continue to access capital markets for liquidity, partially offset by additional PPP funding.
And CRE loans were down 1% with continued low origination volumes in commercial term lending, partially offset by increased affordable housing activity.
Finally credit costs were a net benefit of 118 million driven by reserve releases with net charge offs of 29 million driven by oil and gas.
Now onto asset and wealth management on page eight.
Asset and wealth management generated record net income of $1 2 billion with pretax margin of 40 per cent, an ROE of 35 per cent.
For the quarter revenue of $4 1 billion was up 20% year on year as higher management fees growth in deposit and loan balances as well as investment valuation gains were partially offset by deposit margin compression.
Expenses of $2 6 billion were up 6% with higher volume and revenue related expenses, partially offset by lower structural expense.
And credit costs were a net benefit of 121 million, primarily due to reserve releases.
For the quarter record net long term inflows of 48 billion were again positive across all channels asset classes and regions with particular strength in equities.
And in liquidity, we saw net inflows of 44 billion as banks encourage clients to move excess deposits away from them.
AUM of $2 eight trillion and overall client assets of 3.8 trillion up 28 per cent and 32% year on year, respectively were driven by higher market levels as well as strong net inflows.
And finally.
Deposits were up 43 per cent and loans were up 18% with strength in securities based lending custom lending and mortgages.
Now on to corporate on page nine.
Corporate reported a net loss of 580 million.
Revenue was a loss of 473 million down 639 million year on year.
Net interest income was down nearly 700 million on lower rates as well as limited deployment opportunities on the back of continued deposit growth.
And expenses of 876 million were up 730 million year on year, primarily driven by the contribution to the foundation I mentioned earlier.
The results for the quarter also include a tax benefit related to the impact of the firm's expected full year tax rate relative to the level of pretax income this quarter.
So with that moving to the outlook on page 10.
You'll see here that our 2021 NII outlook of around 55 billion remains in line with our previous guidance as the benefits of the Steepening yield curve are being offset by customer behavior in card.
It's worth noting that forecasting NII is perhaps more challenging than it's been in a long time as many of the key inputs market implied rates deposit forecast securities reinvestment and customer behavior and card are all quite fluid.
And as a reminder, while customer deleveraging and higher payment rates and card is a headwind for NII, it's a tailwind for credit and we now expect our card net charge off rate to be around 250 basis points for the year.
And then on expenses, we've increased our guidance to approximately $70 billion with the largest driver being higher volume and revenue related expenses, which importantly have offsets in revenue.
So to wrap up.
The year has gotten off to a strong start in a robust economic recovery seems underway.
Of course, there are still risks and uncertainties ahead that we're preparing for as well as specific issues that we're facing including the balance sheet dynamics I mentioned the rate environment and tough year on year comparisons among other things.
Having said that.
The earnings power of the franchise remains evident and we'll continue to use our resources to serve our clients customers and community and with that operator. Please open the line for Q&A.
Yeah.
Your first question comes from the line of Erika Najarian with Bank of America Merrill Lynch.
Hi, Erika.
Hi, Good morning. My first question is for Jamie Jamie You noted during a December conference that you believe that normalized R. A T Z for J P. Morgan would be about 17% and you know investors are wondering as we think about jpmorgan for hops cementing a higher.
G SIB surcharge at 4% this year is 17% still achievable under that context are constrained.
So yeah.
Yeah, So Erika I'll I'll start so just a couple of things to think about on capital.
So while were we ended the year in the 4% bucket for G. SIB and it's probably worth mentioning given the continued expansion of the system through the fed balance sheet, even staying in for could become challenging for us, but just a couple of things to keep in mind. There is we we believe that like we do have offsets in distress.
Capital buffer and we do believe we do believe that it's very possible that we'll see those come through in this round of course its dependent upon the fed models not our models, but we've talked about things that actions that we've taken sort of mechanical in nature. In addition to moving our investment securities into held for maturity that should give us some benefit on.
The S C. B of course that scenario dependent but we do expect some benefit there that could offset it's also important to remember that we still are waiting for the Basel III end game and the indication from the fed is that they will address G. SIB recalibration as part of that and so it's quite possible that we see G.
Recalibration, but perhaps another another constraint that will be managing so there is a lot Ah that we'll learn over probably the next year or two and of course, the higher G. SIB it doesn't come into effect until the first quarter of 'twenty. Three so we do think we have offsets were still thinking about 12% as being.
A target CET one for us of course, given what we know today, but we are still waiting for that Basel III end game to really understand what we're dealing with an app that 12% in a more normalized environment, which wouldn't just be about rates. It would also be about loan demand them, 17% still feels achievable for us.
Got it and thank you for going through you know somebody the leverage constrained now the SLR has been exemption has expired I think investors have also been wondering you know as we think about your opportunity to continue to facilitate the economic recovery globally yeah.
The constraint on the SLR and the moving pieces on G. SIB change your priorities in terms of timing or sizing.
The 30 billion dollar buyback or you know inorganic growth opportunities that you've mentioned in the past.
I would say broadly speaking no, but an important point there on SLR. We obviously the levers we have our issuing preferreds, we can retain more common but we're also working closely with wholesale clients in a very selective way as I mentioned to find alternatives for excess deposits.
So it is true that common is one of the levers, although I will say that while it might give us more flexibility. It comes at a much greater cost. So at this point given what we know and what we expect we don't we don't expect that we would have to retain more common. We think we can manage this through issuing more preferreds and working closely with our clients to find alternative.
So so I would say broadly speaking no. The G. SIB constraints as we've been saying for years now is one that will become increasingly challenging for us and now, particularly with the expansion of the system, it's even more challenging than perhaps it was just a few years ago, but we're managing through that as well.
Your next question comes from the line of John Mcdonald with Autonomous Research Hi.
Hi, John.
Good morning, Jan I wanted to ask about expenses, obviously, you've raised the outlook by $1 billion. A few times. The last couple of times you spoken I guess in terms of the increase that you announced today to the outlook could you give a little more color on how much of that is volume and revenue related as opposed to the other buckets you talked about in January which were investments in structural.
Sure sure. So the increase from the 69 billion, which was the guidance. We gave in the K is almost entirely volume and revenue related and so they're all just just make an important point that its volume and revenue related. So as an example volumes in C. C V just given the environment.
They are very valuable for long term franchise revenue growth, but we may not see that revenue growth in the near term, but as we always say, we're we don't manage displaced for one quarter or even one year. So there are expenses associated with volume growth that may not have the revenue growth you would anticipate over the.
A long run, but it's almost entirely volume and revenue related there are a few other things like marketing expense that given the strength of the recovery that we expect are we now expect to lean more in an Ah Ah on marketing expense in the second half of the year. So that's part of it as well.
Okay, and I guess the follow up would be is that necessarily mean that it's more concentrated the increase in the first quarter. Because you had such a big quarter and are there other COVID-19 related costs that you have in your numbers this year that might come out over time.
Obviously some of it is in the first quarter, but things like further volume related expenses like I talked about or marketing, they're they're less so in the first quarter and are and then what was your other question.
Covid Oh those numbers are those numbers are are are lower than they were even last year end and are included in the outlook, but not material in the Grand scheme of things.
Your next question comes from the line of Glenn Schorr with Evercore ISI.
Hi, Glenn.
Hello there.
So.
If youre right on the economy, which I think a lot of US think you are.
We're starting to see the day.
The spend part of the pick up now as you mentioned across credit and debit and some of the Q&A. So my question is.
How do you think about the staging of the lens part.
Both consumer and corporate debt, so flushed with all of that liquidity.
How do you think about the timing for loan growth and if I could.
Again, our consumer base wholesale comment that would be that'd be great.
Sure. So so you used the right word which is demand and it really is all about demand which of course is you know quite healthy, particularly as it relates to the consumer when you think about the amount of deleveraging that we've seen through this process. So there we do expect a second half pick up because.
As you say, we first have to see spend recover before we see re levering on the consumer side. So and then it is also true even for small business, which is obviously part of C. C V. Their demand has been very low given the support that's available through P. P. P. And so you know that will likely tick up in the second half is.
Well and then elsewhere AWS has been strong throughout and we see that continuing and then on the CIB side I mean, that's always lumpy and deal dependent but but that's you know active as well and we do see within secured lending opportunities there across assets.
Classes again, that's a bit more opportunistic and then in the commercial bank are given the level of support for the amount of liquidity in the markets as well as the amount of cash on balance sheet loan growth. There has been you did and probably will be for some time, but again, that's that's incredibly healthy ultimately for the recovery in <unk>.
So whether we see that pick up later this year or next year, you know it remains to be seen but that but its all for for good reasons.
I appreciate that and maybe I'll just ask one follow up on that day.
Posit side, obviously deposit growth has been incredibly strong.
So the hardware is what do you think happens on the deposit side as the economy goes down that path.
Outlines and.
What do you do with the deposit money in the meantime, I saw Aladdin clear Jamie's comments on it's hard to justify the price of USD debt.
Where are we doing with all that liquidity in the meantime.
So so first of all are you know I would say that deposits are going to be driven by the fed balance sheets and you know to some extent, obviously by bank lending, but given the demand picture. There you can think of it in the near term is all being driven by fed balance sheet expansion and so we obviously continue to.
I expect significant deposit growth, which is why we've been talking about this so much and then just in terms of how we deploy it you will have seen that our cash balances are up quarter over quarter and there. It's just it's just important to remember that for sure. We are being patient are in the investment securities portfolio that is.
True I'll also mention that we are because of the steepening of the yield curve. We are less short banks banks will will drift long in in a sell off and so that has been part of the dynamic as well, but they're short term cash deployment also and so what we saw there was when when repo markets fall below I O. We are we're going to hold that short term.
Cash deployment in Io, we are relative to the repo market. So you'll see that dynamic on our balance sheet as well.
Your next question comes from the line of Ken <unk> with Jefferies.
Hi, Ken.
Hey, John Thanks. Good morning, just wondering if you could elaborate on that you mentioned the record investment banking pipeline and and you know flattish year over year or is the best stock GAAP. So I'm just wondering if you could talk about the mixed dynamics. There. Obviously the first quarter was just ridiculously great in terms of ECM markets and can you just give us a flavor of just where you see activity and how much is that underwriting.
<unk> potentially dampening.
What might be happening on the commercial loan side.
Well I'll start with the latter which is it's absolutely been very very supportive of corporate and therefore, it has a lot to do with what we're seeing in terms of the muted loan demand from corporate and then in terms of the mix, we expect ECM and M&A to continue but on DCM Theres a.
Lot of flow activity that doesn't necessarily get represented in our pipeline because it's high velocity type activity. We saw that in the second quarter of last year. We continue to see that now which is why I said it makes it a little bit difficult to to predict the second quarter. So that while the pipeline is higher than it's ever been there is still a lot of high velocity.
The activity and so that's why.
We think that the quarter will be flattish year over year, despite the very high pipeline.
Can you guys hear me yeah, yeah, okay.
We cant hear you anymore.
Yeah.
Okay.
But for your mood for a minute okay.
Jamie is traveling so so we have them on Jim I know everybody can appreciate technology challenges because we've all had them over the last year.
Okay great.
Mike just my follow up Jamie just keep on going because I can't hear the questions I can hear you, but you're doing a great job and you don't really need me [laughter] well. Thank you.
I'm sure I'll need your at some point so hope there on that.
Anyway go ahead I'm sorry.
No problem debt.
Okay. The second one is just.
Okay.
With regards to the comments that you guys have made for a while.
Looking at acquisition opportunities just wondering just how is the interplay between everything you've talked about already on balance sheet capacity.
And ongoing deposit growth and the limitations on for you. If you wanted to sell are versus how you make potential decisions around usage of capital and an acquisition capacity.
Yeah. It's a great question Interestingly the issue is not that we don't have a capital available to make those types of decisions. The issue is is that we have the wrong binding constraint. So the binding constraint is leverage not risk based and so it doesn't change the way we think about acquisitions at all in fact acquisitions.
Indoor increase loan growth would help to kind of normalize the constraints between leverage and risk based and so we would we would love to be able to absorb some of our C. E. T. One through acquisitions, because as I said, it's sort of just brings the balance back into focus the issue is that that it is leveraged based constraint that is.
The constraint and we're in a low rate environment with low loan demand and very strong deposit growth. So it's the combination of all those things that makes leverage the binding constraint.
But it doesn't change the way, we're thinking about acquisitions.
Yeah.
Your next question comes from the line of Betsy <unk> with Morgan Hi, Betsy.
Hey, John Hey, Thanks for the time.
John a question on card and looking at the net charge off.
You gave us for full year of two and a half and I know you spent a lot of time in card earlier in your career. So maybe you could give us some sense on how you're thinking about the quote unquote normalization of that loss content over time, when I think back to the bankruptcy you no change.
And Oh, Oh as you know it took many years for consumers to re lever and I'm wondering given your your background. There could you give us a sense as to what is different this time and are there a timeframe historically, we should look at for what a normal course like re leveraging back to normal of that card loss content.
Good day, how do you think about that.
Sure I would say that first of all it's it's it's difficult to find a oracle comparison, that's totally relevant here because I don't think we've ever seen this amount of support in the system, which came of course on top of a and already reasonably healthy consumer.
So it's it's difficult to find the historical perspective, but I will say the two 5% I mean pre.
Pre COVID-19, we would have thought that our loss rates in card. This year would have been 3.335%. So it just gives you a sense there of that tailwind on credit is significant and in terms of you know what what what it's going to take for.
For for consumers to re lever I mean, we do expect there to be significant economic activity in the second half and so that could come quite naturally, but it it could come a little bit later, given the amount of deleveraging we've seen but the fact that we already see spend above pre COVID-19 levels and obviously, we still have.
Restrictions in place, particularly around T N E on on consumers' ability to spend when that comes back we do think that we'll see spend tick even higher and that will be you know that will be a point, where perhaps we'll start to see that re levering, but it's it is difficult to know it's a great question.
Okay and then the follow up I have on your comments around the NII Guide and you know the fact that it's hard to forecast.
I got a couple of questions. In this morning, just on Hey, why do you think its flat versus prior guide given the you know the curve has steepened and also you know deposit growth should continue to be up significantly given QE is continuing this full year. So is there some spread angle that you're.
I'm kind of thinking about debt that keeps you a little bit more muted is it more of a loan growth maybe you could talk a little bit about.
As piece parts that you identified.
Sure I think it's probably all of the above Betsy, but starting with the steepening of the yield curve. So if you. If you look at the earnings at risk disclosure I mean, where we did see the benefit roughly in line with what with what that disclosure shows which is since we last guided on NII, we steepen, probably 25 30 basis points.
So that is incorporated in the outlook, but it is completely offset by the fact that we continue to see consumer behavior in card in terms of higher payment rates and we haven't started to see re levering as we were just talking about even though spend is recovered. So card are the impacts of card.
Completely offsets the the Steepening of the yield curve. You also mentioned loan growth, which is critically important to to realizing the benefits of the steepening yield curve and then I would just mentioned we you know we have reflected in our outlook. The fact that we have been patient on our <unk>.
Deploying further deposit growth into the securities portfolio in terms of duration and then also it's probably worth noting that debt. The marginal benefit of further deposit growth is quite small given the fact that that deployment opportunities are minimal and and so you know you you can think about about.
Them as being something less than 10 basis points them, because we do have pay rate above zero. So its something less than 10 basis points. So the marginal deposit growth from here doesn't add a whole lot.
In this environment anyway.
Your next question comes from the line of Mike Mayo with Wells Fargo Securities.
Hi, Matt Hi.
Hey, Jennifer My question for Jamie and Jamie Your philosophy is to invest through a downturn and you're increasing your investment by one fourth year over year, you already said that but what's your philosophy about investing through a boom as you expect over the next three years I mean, if the pie is growing do your investments go higher.
It looks like Thats not the case with the guidance you guys gave.
So I think Mike the way to really look at it is it doesn't affect as much by boom or bust as you say.
Opportunities like for greenhouse with your higher free.
100, or financial advisers, who have your debt.
Boom or bust for building new data centers for a job well done.
Doesn't really change your debt much overtime I, just think you'll probably see our investment going forward from buckled down with Covid.
Organic growth opportunities.
One in regards to them.
And then how much you're spending a climate. Your 66 pages CEO letter was I guess guys like us could be a third of our book almost but you really are.
Pad the table on climate risk and Voip you guys need to do how much you actually spending and what's the payback on that spending for shareholders or is this really an ESG reputation will benefit youre looking for.
So I'll start there Mike and then Jamie you can you can chime in but climate is a long game, obviously and we're investing a lot of effort in our ESG initiatives not only because they have a positive impact on society and community, but because they are also important to our clients customers and our shareholders. So we don't we don't exactly think about it.
That way, Mike, but we've also invested in multiple teams to help clients through the transition and we do recognize it's a transition and clients appreciate that.
We've also made the Paris aligned financing commitment last year, and we're going to release our annual ESG report next month, so you'll see more there and then we also committed to financed 200 billion towards our climate action and sustainable development and we're continuing to grow those efforts as well and in fact your questions quite timely because.
We're planning to make an ambitious announcement tomorrow about our long term scaling of our financing efforts here so much more detail to come shortly on that but Jamie I don't know if you want to add anything.
Okay.
Your next question comes from the line of Jim Mitchell with Seaport Global.
Hey, good morning.
Morning, maybe just maybe a question on the on the bank SLR, which I think was a bit more of a constraint even than the firm order for just I guess two questions related to that.
What kind of flexibility do you have to kind of manage the difference between the two moving assets out of the bank, perhaps and then just if you have any updates or thoughts on potential changes that regulators are discussing to kind of give maybe released 2.0 in a more permanent sense on the SLR.
So the bank SLR I mean broadly speaking, it's going to be the same levers, we do have a little bit more flexibility as you note them because we can move things you know, we can inject capital into the bank from the holding company. So it's a little bit more flexible, but generally speaking that the constraints and the levers are the same and then in terms of changes we know what you.
No and so you know we look forward to our proposal. The only thing I can mention is of course, the difference between the U S and and Europe on a Basel as it relates to SLR is there, it's a 3% plus half year G. SIB and so we have a constant 2%.
<unk> buffer and so you know and with that you get the flexibility in the Basel compliant way to exclude deposits at central banks for a period of time. So you know it's possible that it could look something like that but but we don't know.
Okay. Thanks for that.
So it will work for Christmas.
We run the business for a great job servicing clients over card.
We manage once a year.
God knows how many different capital liquidity for growth.
We have multiple levers to pull all the time to do that while serving their card with regard with Joseph drugs going forward still be it will probably be for all your good questions, you're asking isn't what it means for us.
We use the marketplace I've already mentioned several tier $145 billion of cash from marketable securities, which we cannot deploy and a whole bunch of different ways.
Marketplace was depot or just financing positions are helping people because of these consumer.
For the constraints, you're more of a constraint on.
The economy than they are from JP Morgan Chase, we will find a way regardless what they used to.
The other day news.
So Laura Youre always publicly they need to be recalibrated.
People, who are how would you be proud for the best job work for United States.
Thanks, Bob for JP Morgan Chase.
What would be fine either way.
Great. Thanks.
Yeah.
Your next question comes from the line of Gerard Cassidy with RBC.
Hi, Gerard Hi, Jen how are you.
A question and I apologize if you addressed this at the jump off for a minute here, but can you share with us on the service mortgage servicing business. It looked like you had a small loss this quarter similar to the fourth quarter.
Can you tell us some of the metrics that went into why the servicing business recorded a small loss.
Oh gosh strong.
I'm not even sure right regime. The team can can follow up with you.
Okay very good second question has to do with them when we go back to the day one.
Loan loss reserves established in January one 2020 for you and your peers under Cecil accounting.
If I recall I think your loan loss reserves to total loans at the time, we were approximately 187% today. There are approximately 2.42% I know you guys gave some color on your outlook for what you think credit will look like.
A little more conservative, but can you share with us what would it take to bring the reserves back down to the day one levels that we share in January one 2020.
Well, it's it's very difficult to try to compare today to.
Just taking our balance sheet today, taking taking the profile of our portfolio today and compare it to Cecil day, one because we are a very far away away from that in fact in a very healthy way. So that's very difficult to do what I will say is that it is true that things have continued to improve even since <unk>.
Is there a process in the first quarter and we obviously expect things to be you know, we expect the recovery to be robust in the second half of the year and so if we continue to see that if we continue to see labor markets recover if we continue to see the vaccine rollout be successful we would have future.
[noise] releases from here and but I would note importantly that the 7 billion that is the distance between our reserve in the base case is just for context, we will always have weightings on alternative scenarios and so all else equal.
Which is theres a lot in the all else equal bucket, but but we would release something less than 7 billion so difficult to compare back to see still day, one but there there could be further releases ahead.
One of the negative you saw where.
If you didn't have you spent a lot of time on these calls describing something with you virtually irrelevant for the bank.
Which is these are multiple scenarios hypothetical probability based.
And the more volatile environment more volatile these numbers.
Our base case was $40 billion and we now have something like 30, we're not going to be taking down a lot of reserves because you're always as Jen said, you're always going to have.
Extreme adverse basic things like kind of a C Corp, and you always have a percentage of reserves up for that permanently.
So you're always hopefully.
I mean, my view is we should wait a lot less pharmacy. It makes almost no different for the company.
General.
And then and then back on your servicing point I got the answer its updates to the MSR model.
So H P. I updates prepay updates so it's a it's it's less about the operation and more about that the MSR model update.
Yeah.
Your next question comes from the line of Matt O'connor with Deutsche Bank.
Hi, Matt Good morning, I wanted to ask about the letter where there was talk about.
Being open to Fintech deal, which was hoping you could talk about in the past.
What type of deal.
Would you be interested in and I guess, because that would be material to take them.
Morgan.
As we think about whether interest strategy or financial impact.
Yes.
Remember, we're prepaying debt.
Careful dividend.
You must prefer to invest our business organically, excluding the acquisitions and buy back stock, we're buying back stock because we're going to go.
We have 14, 6%.
Capital to risk weighted.
Advanced risk weighted assets were only a tremendous sum of money moving.
Flow option right now.
I think the doors open to anything that makes sense. So we've already done that.
Would you say electronics.
<unk> payments platform providers.
Consumers and health care, we did 55 IP.
The tax.
Our tax efficient way of managing money and we're looking at public things ourselves somewhat moving ourselves like guided most of them will go to part of the people we've got investments in <unk>.
Probably 100 different obviously for Jamie.
We reported a week or a life, who will completely open minded it can be.
Payments it could be asset management, the adjacencies of the data it can be.
Anything like that it cannot be a U S bank.
Oh.
We're just reminding people have you got great ideas for us let us know.
And other than mentality.
Specifically is it to potentially accelerate from the investments that you would've gone on your own or to add capabilities or moving to protect what you already have.
Well, it's a little of everything because you see us adding chase my plan in place by loan obviously see competing oberg buy now pay later you see us doing.
Chase offers us compete with people you see us doing zelle payment.
Payments, we've got fabulous stuff from.
We did do we've got a couple of years ago and had a very good quarter, we're adding.
Robo investing.
Just getting going so we're in a broad set of capabilities across the full spectrum and you can see a lot more and you're going to see personalized Brooklyn personalization of apps.
If you go into the payment system, you can see global wallets, you're going to see tons of stuff from some of them like I said.
Ed.
The Fintech has done a great job for you.
The other big on the different constraints, but they've done a great job.
For the pain points, making automated surprising things using the cloud.
It is incumbent upon us for both gas with your cloud we already have.
Major AI projects, but my guess is five years it'll be a thousand AI project, where we're going as fast as we can.
Doing great job for customers and obviously.
There will be a challenge because a lot of money there, they're very smart people.
To be clear, we're not wishing regulations on debt.
You bet Primerica, but we are wishing for a level playing field going from.
A rev share broader consumer services right for one thing is grossly unfair that a new banking should have a small checking account.
$100 Durbin fees, a mere 100, okay.
That just isn't right when I go at it a lot about from the unfair thing for us.
Look the regular Stuart I'm not expecting any day, we will just adjust our strategy accordingly.
Your next question comes from the line of Brian Klein Hamzah with K B W.
Hi, Brian Hey, Mike.
A quick question I mean, as we start to look out the forward rates for market kind of implying fed moving from in the near term or intermediate term I mean, how are you guys thinking about deposit betas. This cycle and kind of whats included in your NII sensitivity, both on the consumer and commercial deposits.
Sure.
So obviously the way to answer those.
Betas have gamba.
Overtime.
We have our best guess at the number that can give you.
So obviously the beta is going up all the time and then it levels off.
That's right and so the betas have gamma.
I'd say that if you can think of it as being non linear meaning the beta for the first 100 basis points will be lower than the beta for the second and third.
Increments of 100 basis points and so from here on the retail side, specifically you know the first 100 basis points will be very valuable because there is a lower beta associated with it. So that's really where we see the benefit them you know in NII with short rates.
In an environment with low loan growth.
Yeah.
Your next question comes from the line of Charles Peabody with Portales partners.
Hello.
I'm Mr. Peabody. Your line is open. Please ensure that you do not have your line on mute.
Hello.
Can you hear me Okay. Yes, we can hear you go ahead, sorry about that.
I had a question about the impact negative rates at the short end of the yield curve might have on New York entity.
Specifically if we.
You touched a little bit on <unk>.
Right.
Overnight repo rates being raised.
Would that have any impact on your market related NII.
Five basis points secondly, if we do get negative rates at the short end.
Is that incorporated in your $55 billion.
NII guidance and then thirdly.
Do get negative rates for short and does that have any implications for what loan demand might look like.
Sure. So I'll just start by saying, while we while we have seen repo go negative at times, it's been orderly and and so we don't we don't expect short rates to be negative for any longer period of time or and we certainly havent seen spikes, which is something you would worry about more I think with the with the amount of capacity.
<unk> in the money market complex and the fact that the fed increase their RFP facility now that facility is that zero. So that certainly is supportive of of ensuring short rates don't go negative for any meaningful period of time. They also obviously could increase that and then for US I would say not a meaningful impact because obviously, we have we have.
10 basis points of Iot or as an option for us, but we do trade around it.
I would just add debt.
Why is far more important for the number.
Obviously like in trading that goes in and out for hope you can equal no just goes up from different place for you.
If you go negative NII, because you're going back into recession free negative variance.
Whole different issue then.
I would tell you we would expect rates moving up.
Rather healthy very strong economy.
Yeah, and what we've seen so far on the short end is is not unhealthy for something we're worried about it's a dynamic of so much cash chasing the supply.
Thank you.
Your next question comes from the line of Andrew Lim.
With Society General.
Hi, Andrew.
Hi, John Jamie Good morning.
So just circling back to the U S law.
By issuing one and a half billion. Besides you sold off about 30 basis points on your S. A law.
I'm just wondering how you're thinking about the ratio two to three quarters out from now whether issuing.
And having a discussion discussions with wholesale deposits. This is going to be enough to put a floor on the escalade five and a half a cent or whether you can have pull harder on debt.
Those leave us or have to pull hardwood for leases.
Yeah. So so the minimum is 5%. So we have some room naturally we will have a buffer above the minimum as you always need to when you have binary consequences of going below. So you can think about some some management buffer above that but we do still have room at five 5% and we do things that we can manage it.
At this point through issuing we will be in the market again with preferreds as well as the conversations that we've had with clients. So far they have not been disruptive we're hopeful that that remains the case and that we can manage this.
Okay. So what.
What what's your level of comfort for the buffer above the 5%. That's my follow on then.
Just another question.
You gave an update.
Couple of quarters kind of thing that you had a buffer.
Or was it let's say excess provisions of about $7 billion.
<unk>.
Your base case for longer economic outlook, obviously, you've released.
Efficient since then.
Can you give an update on what that for Bristow.
Sure. So you can think about a buffer on the SLR of call. It 25 basis points. It is important to note something like a OCI is something that we have to incorporate into our thinking and the impact of Aoc I is thats part of tier one capital. So we need to have a buffer to make sure that we can manage through any nor.
So we might see there. So that's why we have a buffer in 25 basis points is probably a reasonable one to think about in terms of the on reserves the distance between where we are in the base case.
As I said in my prepared remarks, that's now 7 billion. What's interesting to note is that that was $10 billion. It was than $9 billion and we've released 8 billion and its still 7 billion. So the all of the scenarios have been moving and there are a lot. There's a lot that goes into how we think about reserves. We've always just provided that is <unk>.
Context for everyone, particularly last year as we were managing through so much uncertainty in terms of the inputs into our reserves. So I wouldn't put a lot of weight into that because what I also said.
On the 7 billion is that you shouldn't think about that is available for relief because we will always have some waiting on alternative scenarios and so even if everything plays out exactly as we expect based upon where we closed the books for the first quarter it would be something less than $7 billion.
Okay.
Your next question comes from the line of Mike Mayo with Wells Fargo Securities.
Hi, Mike.
Hi, Yes, I'm still.
I still wrestling with the deposit.
Conundrum.
So I guess your national deposit share or something like 12% and over the last year I think your incremental deposit share gain is 20%.
In other words for the industry deposits were up around three trillion in your deposits were up 600 billion. So I'm just wondering how much of that was due to QE and how much of that is due to organic growth and maybe you can fill us in because you're building out in the branches and the lower 48 states and Youre expanding commercial bankers.
<unk> tried to build up all this organic growth at a time when you can't really monetize those deposits.
Sure. So first of all as we always say, where we're running the place for the long term and we don't expect this challenge to be a long term challenge, maybe a short to medium term, but not a long term and then I will just say that yes. There was certainly some organic growth, but it is it is fed batch.
<unk> sheets and bank lending that create deposits and so that's that's what we are focused on and we do think given what what we expect here that we can manage it so and it certainly isn't going to change the way we think about.
Market expansion or otherwise is that is long term franchise value.
Okay.
Yes.
Mike at the 600 and.
And it's really hard to tease that we think will grow in actual sphere in almost every business deposits.
Part of the 600 was the fed balance sheet.
And we're a big wholesale bank and a big consumer bank for obviously, a big portion of that shows up.
Inside our company.
Again, we tried to Nebraska doing great, they're not going to move the needle quite like.
Eddie.
<unk>.
That's right.
And just.
Quick update on the build out into the 48 lower states branches, you said by the middle of this year.
Yes, so we will be in all lower 48 by the end of July is that right. Yes. Reggie is confirming for me we will be in all lower 48 by the end of July we.
We opened about 75 branches in market expansion last year, we got a little bit slowed down by Covid, but that's going to be about 150. This year.
So remain super excited about that.
And all the opportunities that across the company not just in deposits of course, because it brings incredible value to the commercial bank into the private bank and so.
The business case, there if you will is not just about deposits.
Your next question comes from the line of Erika Najarian with Bank of America Merrill Lynch.
Hi, Eric Hi, again apologies for a prolonged the call I just got this question a lot on Bloomberg from investors.
Just wanted to re ask the first question another way it seems like we have been waiting for a recalibration on the G. SIB for some time now on.
On the other hand, clearly the expansion of your balance sheet comes with.
Additional revenue generation and market share, taking and income opportunities and so investors are wondering if we don't get any sort of calibration, that's meaningful and that TEP. One for guys have to move up from 12%.
What is the sensitivity of the normalized ROTC outlook, if any at all if that 12% does have to move up and 50 basis points increments.
Okay. So so if the 12% has to move up Erika that would obviously have an impact but there is so much between here and there and that being a reality that we can't really comment on it because not only I know we've been waiting for G. SIB recalibration for a long time, but it has been made very clear that G. SIB.
Recalibration will be part of the Basel III end game, which we have also been waiting for for a very long time, and so there will be potential offsets that we yet or not.
We're unable to manage because we don't know what they are yet so we continue to wait for Basel III end game and then as I said, we do believe we can manage the stress capital buffer again, it's scenario dependent but we do believe we can manage that to be closer to two 5%, which helps an awful lot in terms of an offset to G. SIB constraints.
So we are thinking about that 12% number until we know something different.
Oh I'm sorry.
We're gonna finally, Cherokee for 12, and we're pretty sure we can do it so I'm not that worried about it.
I don't know what the confusion if it did go up if we're only 20% tangible equity.
Capital goes up by 5% and we get no return to 5% are already go to 19.
So I don't understand the confusion.
<unk> results are still stable and great and yes, very low return, but are you for that will be temporary we will overtime barring strategies and tactics to get referred to be fair to our shareholders.
For the most important about those refer to them.
Great branches, great products Great service.
Martin.
Oh good.
We really build all that volume and there's other stuff is just managing around capital from Frankfurt.
It's a shame that this is I mean this is not the way to run a railroad anymore.
We're staying partners, Paul and she saw SLR.
It's a shame.
It doesn't distract from growing the American economy, I've mentioned overall, we have one we have from point.
Two for your deposits.
One trillion of loans.
One <unk> for cash and marketable securities.
<unk> cannot be deployed intermediate for Lynn.
Sure.
Our consumer do you want to get.
No I agree I think the market needed to hear that thank you.
Thank you.
There are no further questions at this time.
Thank you thanks, everyone. Thanks operator.
No.
Thank you for participating in today's call you may now disconnect.
Okay.
Yeah.