Q4 2021 JPMorgan Chase & Co Earnings Call

In shortly.

[music].

Yes.

Please turn to why we were about to begin good morning, ladies and gentlemen, welcome to Jpmorgan Chase's fourth quarter and full year 2021 earnings call. This call is being recorded your line will be muted for the duration of the call. We will now go light duty presentation. Please standby at this time I'd like to turn the call over to J P. Morgan Chase's, Chairman and CEO , Jamie Diamond and Chief financial.

Sir Jeremy behind them stay behind them. Please go ahead.

Thank you Albert and good morning, everyone.

The presentation is available on our website and please refer to the disclaimer in the back it's slightly longer this quarter to cover both our fourth quarter and full year results as well as spend some time talking about the outlook for next year.

<unk> with the fourth quarter on page one the firm reported net income of $10 $4 billion EPS of $3 33 times on revenue of $30 3 billion and delivered an aro TCE of 19%.

These results included a 1.8 billion dollar net credit reserve release, which I'll cover in more detail. Shortly adjusting for this we delivered a 17% of our O T C E. This quarter.

Touching on a few highlights as we suggested last quarter, we have started to see a pickup in loan growth, 8% year on year, and 3% quarter on quarter X P. P. P. With a significant portion of this growth coming from AWS and markets, but we're also seeing positive indicators in card as well as increasing revolver utilization in C&I.

And it was an exceptionally strong quarter for investment banking, particularly M&A as well as another good quarter in AWS.

On page two we have some more details from the fourth quarter.

Revenue of $30 3 billion was up 1% year on year net.

Net interest income was up 3%, primarily driven by balance sheet growth, partially offset by lower CIB markets NII and then I also was down 1% largely driven by normalization and Seattle markets and lower production revenue and home lending, mostly offset by higher IV fees on strong advisory.

You'll notice that we've added some memo line to this page this quarter to show NII and I are excluding markets as well as a third line Standalone markets total revenue, which as we said before is more consistent with the way we run the company will.

We will be keeping this format going forward and you'll see later that this is how we will talk about the outlook.

If you look at things on this basis. The drivers are the same but the numbers are a little different NII. Excluding markets is up 4% and I are excluding market is up 3% and markets is down 11% a normalization.

<unk> expenses of $17 9 billion were up $1 8 billion or 11% largely on higher compensation and credit costs were a net benefit of $1 3 billion, reflecting reserve releases.

Looking at the full year results on page three.

The firm reported net income of $48 $3 billion EPS of $15.36 and record revenue of $125 $3 billion. We delivered a return on tangible common equity of 23% or 18%, excluding the reserve releases.

Onto reserves on page four.

We released $1 $8 billion this quarter, reflecting a more balanced outlook due to the continued resilience in the macroeconomic environment, our outlook remains constructive, but our reserve balances still account for various sources of uncertainty and potential downside as a result of the remaining abnormal features of the economic environment.

On the balance sheet and capital on page five.

We ended the quarter with a CET one ratio of 13% up slightly and reflecting nearly $5 billion of capital distributions to shareholders, including $1 $9 billion of not repurchases.

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

<unk> reported net income of $4 $2 billion, including reserve releases of one 6 billion.

Revenue of $12 3 billion was down 4% year on year and reflects lower production margins in home lending and higher acquisition costs and card, partially offset by higher asset management fees and consumer and business banking.

Many of the key balance sheet drivers are in line with the prior quarter.

Deposits were up 20% year on Europe , and 4% sequentially and client investment assets were up 22% year on year about evenly split between market performance and flows.

Combined credit and debit spend was up 27% versus the fourth quarter of 19 with each quarter in 2021, showing sequential growth compared to 2019.

Well, then that travel and entertainment spend was up 13% versus fourth June 19, though we have seen some softening in recent weeks contemporaneously with the omicron wave.

Card Outstandings were up 5% year on year, but remain down 8% versus fourth June 19.

Never it's promising to see that while revolving balances bottomed in may of 2020 . One since then they've kept pace with 2019 growth rates and home lending loans were down 1% year on year, but up 1% quarter on quarter as prepayments have slowed.

And it was another strong quarter for originations totaling $42 2 billion up 30% year on year. In fact, it was the highest fourth quarter since 2012, driven by increase in both purchase and refi volumes.

Auto average loans were up 7% year on year and up 1% quarter on quarter. After several strong quarters. The lack of vehicle supply resulted in a decline in originations to eight 5 billion down 23% year on year.

So overall loans X P. P. P were up 2% year on year and sequentially driven by card and auto and expenses of $7 8 billion were up 10% year on year on higher compensation as well as continued investments in technology and marketing.

The CIB on page seven.

CIB reported net income of $4 8 billion on revenue of 11 5 billion for the fourth quarter and for the full year net income was 21 billion on record revenue of 52 billion.

Investment banking revenue of $3 2 billion was up 28% versus the prior year and up 6% sequentially IV fees were up 37% year on year, primarily driven by a strong performance in advisory and we maintained our number one ranked with a full year of wallet share of nine 5%.

In advisory we were up 86% and it was the third consecutive all time record quarter benefiting from elevated M&A volumes that continued throughout 2020 , one specifically from midsized deals.

Debt underwriting fees were up 14% driven by an active leveraged loan market primarily linked to acquisition financing.

And in equity underwriting fees were up 12%, primarily driven by our strong performance in Ipos move.

Moving to markets total revenue was $5 3 billion down 11% against a record fourth quarter last year compared to 2019, we were up 7% driven by a strong performance in equities.

Fixed income was down 16% year on year, reflecting a more difficult trading environment early in the quarter, especially in rates as well as continued normalization from the favorable trading and trading performance last year in currencies emerging markets credit and commodities.

Equity markets were down 2% on $2 billion of revenue as continued strength in prime was more than offset by modest weakness in derivatives for the full year equities revenue was $10 5 billion up 22% and an all time record.

It was a particularly strong year for both investment banking and markets and looking ahead, we do expect some modest normalization of the wallet in 2022, however for purposes of the first quarter in investment banking the overall pipeline remains quite robust.

Payments revenue was $1 8 billion up 26% year on year or up 7%, excluding net gains on equity investments and the year on year growth was from higher fees and deposits largely offset by deposit margin compression.

Securities services revenue of $1 1 billion was flat year on year expenses of $5 8 billion were up 18% year on year predominantly due to higher compensation as well as volume related and legal expenses and credit costs were a net benefit of $126 million driven by the reserve release.

And upfront.

Moving to commercial banking on page eight.

Commercial banking reported net income of $1 3 billion and an ROE of 20%.

Revenue of $2 6 billion was up 6% year on year on record investment banking revenue driven by continued strength in M&A and acquisition related financing.

Expenses of $1 1 billion were up 11% year on year, largely due to investments and higher volume and revenue related expenses.

Deposits were up 8% sequentially on seasonality.

Loans were down 1% year on year and up 2% sequentially. Excluding P. P P.

C&I loans were up 4% X P. P b, primarily driven by higher revolver utilization and originations and middle markets and increased short term financing and corporate client banking CRE loans were up 1% with higher new loan originations offset by not payoff activity and credit costs were a net benefit 80.

$9 million driven by reserve releases with net charge offs of two basis points.

And then to complete our lines of business AWS on page nine.

Asset and wealth management reported net income of $1 $1 billion with a pre tax margin was 34% revenue of $4 5 billion was up 16% year on year as higher management fees and growth in deposits and loans were partially offset by deposit margin compression.

Expenses of 3 billion were up 9% year on year, predominantly driven by higher performance related compensation and distribution fees.

For the quarter net long term inflows were 34 billion and for the full year were positive across all channels asset classes and regions totaling a record 164 billion.

A $3 one trillion and overall client assets of $4 three trillion up 15% and 18% year on year, respectively were driven by strong net inflows and higher market levels.

And finally loans were up 4% quarter on quarter with continued strength in custom lending mortgages and securities based lending while deposits were up 15% sequentially.

Turning to corporate on page 10.

Corporate reported a net loss of 1.1 billion revs.

Revenue was a loss of $545 million down $296 million year on year.

<unk> was up $160 million, primarily on higher rates, mostly offset by continued deposit growth and then <unk> was down $456 million, primarily due to lower net gains on legacy equity investments expenses of $251 million were down $110 million year on year.

With that as we close the books on 2021, we think it's important to take a step back and look at the performance over the last few years through the volatility of the Covid period, and then pivot to discussing the 2022 and medium term outlook.

So.

Turning to page 11.

What stands out is the stability of both revenues and returns through a very volatile period.

Especially when you strip out the reserve builds in subsequent releases in 2020 in 2021.

If you look at the revenue drivers on the bottom left hand side of the page Youll see overall revenue growth with some significant diversification benefits.

NII ex markets was down nearly 20% on the headwinds of lower rates and card revolve that we've discussed throughout the year. This was partially offset by significant NII growth ex markets largely from higher IV fees, and AWS management and performance fees and we also saw strength across products and region.

In CIB markets as the extraordinary market environment in 2020 did not normalize as much as we expected in 2021.

So when you look across the company, we saw consistent modest revenue growth as well as good performance in the areas that we control, notably staying in front of our clients to serve them well and managing our risks effectively resulting in quite stable returns once again proving the power of the J P. Morgan Chase platform.

So turning to the next page.

The strong revenue performance and consistent returns have further bolstered our confidence in forging ahead with an investment strategy designed to ensure that we're prepared for the long term.

On the left hand side of the page you can see the inverse the expense drivers from 2019 to 2021.

First part is structural and while the growth of 2% is modest over the two year period that includes some COVID-19 related effects that we would see as temporary including for example, lower <unk> spend and elevated employee attrition and we do expect some catch up in those effects as we look forward.

Then the middle Bar is $3 4 billion of growth in volume and revenue related expenses.

Some significant portion of that is driven by increases in incentive compensation, primarily from investment banking markets and asset and wealth management. The major areas, where we have seen exceptionally strong results and where changes in compensation are more closely linked to changes in performance and remember we've seen a lot of marketing.

<unk> and strong flows in AWS and ECB. So don't assume all of this as CIB as you look forward because there are some versions of the world, where the markets and fee wallet goes one way and it.

It goes the opposite way.

And then this bar also includes volume related non comp expenses, such as brokerage and distribution fees. Some of which are truly expenses some of which are bottomline neutral because they are offset with revenue gross ups.

The last bar of one 7 billion as previewed with you. This time last year as a result of our investment agenda, which we have been executing largely according to our plans and consistent with our longstanding priorities.

You can see the breakdown of the total investment spend on the right hand side of the page nine 6 billion growing to 11 3 billion across the categories that we've often discussed we're continuing to broaden our footprint and expand our distribution network than marketing, where the significant increase in spend as part of the reopening in the <unk>.

Half of last year resulted in a full year spend comparable to 2019.

Intact, which we've broadened to include tech adjacent spend reflecting our recognition the tech means more than just software development and encompasses data and analytics AI as well as the physical aspects of modernization such as data centers.

And what's really powerful to note here is our ability to make these investments which are quite significant in dollar terms and are designed to secure our future while still delivering excellent current returns.

So over the next few pages, let's double click into some of these investment areas to see what we're doing starting with examples of marketing and distribution on page 10.

We've expanded our reach across the U S and are thrilled to be the first bank in all contiguous 48 states and important milestone in our branch market expansion plans.

We also continued to expand internationally, including 13 international markets as part of our commercial bank expansion, China in both our CIB and AWS businesses.

And in the U K with Chase U K, where we've seen exciting progress since we launched in September although we expect this to be a multiyear journey before having a measurable impact on the firm overall.

We continue to hire bankers and advisers and investment banking private banking and wealth management really across all of the wholesale and consumer footprint, where we believe we have opportunities to better penetrate geographies and sectors to continue to grow share.

And as I, just said the point of our investment strategy is to secure the future of the company. So we're not making short term claims about share outcome causality, but as you can see at the bottom of the page our market shares are robust and growing broadly across the company.

Turning to page 14.

In addition to all of our distribution related investments are critical foundational component of our strategy is technology, where we spend over $12 billion annually was about half of that being investments, whereas we sometimes call. It change the bank spend.

It is important to understand whats in the investment category about half of that is foundational and mandatory which includes regulatory related investments modernization and the retirement of technical debt. In addition to other key strategic initiatives to help us face the future.

On the left hand side, you can as you can see some more detail around this modernization, which includes migration to the cloud as well as upgrading legacy infrastructure and architecture.

Data strategy that enables us to extract the value that exists in our proprietary dataset by cleaning it and staging it in the right ways and then deploying modern techniques against it.

<unk> and acquiring top talent with modern skills and the product operating model, which is obviously a popular buzzword. These days, but if you look through all that it reflects the simple reality that the best products get delivered when developers and business owners are working together iteratively with end to end ownership.

Underpinning all of this is our continued emphasis on cyber security to protect the pharma.

Clients and customers as well as maintaining a sound control environment.

Moving to the right hand side the other half of the investment spend is to drive innovation across our businesses and with our client facing products. We believe it's critical to identify and resolve customer pain points and improve the user experience and we're attacking the problem with a combination of building partnering and buying and so a few is.

<unk> of that on the retail side, we've been able to digitalize existing product offerings with applications like Chase My home and launched our cloud Native digital bank with our recent Chase U K launch.

On the wholesale side, we've continued to innovate execute trading platform commercialize blockchain through on X and are building out real time payments capabilities. In addition, our modernization allows us to more efficiently partner with or acquire more digitally centered companies and you can see several examples of this on the pitch.

So taken together our strategy and investments are critical to ensuring that we can compete with the most innovative players out there whether we're the ones pushing the envelope of innovation or responding quickly to the creativity of our competitors, but doing so at scale.

With that let's talk about the outlook in the year ahead, starting on page 15.

Okay.

As Youll remember from Daniel's comments in December the 17% that we've talked about as a medium term our OTC target is not realistic for 2022.

We do expect to see some tailwind to NII, including the benefit of the latest implied and the expectation that card revolve rates will increase.

But the headwinds likely exceed the tailwind as capital markets normalize off an elevated wallet and we continued to make additional investments as well as the impact of inflationary pressures.

However, despite these potential challenges for the near term outlook, we do continue to believe and 17% of our OTC. He is our central case for the medium term as rates continue to move higher and we realized business growth driven by our investments.

So let us try to give you more detail around forward looking drivers that could be headwinds or <unk>. So first the rate curve.

Our central case does not require a return to a two 5% fed funds target rate as the current forward curve only prices and 625 basis point hikes over the next three years.

Assuming we realize the forward curve from there we see the outcomes as being relatively symmetric with plus or minus 175 basis points of <unk> impact as a reasonable range relative to our central case.

And of course, there are obviously any number of rate paths to get there, which could produce different outcomes over the near term in this illustration. The downside assumes that rates stay relatively constant to current spot rates, whereas upside would be driven by a combination of a steeper yield curve and more hikes together with a more favorable.

Verbal deposit reprice experience and.

And of course, what we are evaluating here is the impact of rates in isolation on NII, but for the performance of the company as a whole credit matters a lot and the reason why rates are higher it will have an impact on that.

In markets and banking, we feel good about the share we've taken and there are reasons why the beginning of a rate hiking cycle could be quite healthy for fixed income revenues in particular at least in the sense that it might provide a partial offset to what we would otherwise expect in terms of post COVID-19 revenue normalization.

In our central case markets and banking normalize somewhat in 2022 relative to their respective record years in 2020 in 2021 and resume modest growth thereafter.

The downside case assumes a return to 2019 trend line levels with sub GDP growth rates, whereas the upside case assumes continued growth from current elevated levels.

As we've been discussing in consumer the big surprise as we emerge from the worst moments of the pandemic was the lower level of cargo evolve even spend has started to return.

In our central case, we assume healthy sales growth on the back of continued economic recovery and strong account acquisitions and that combined with relatively constant revolve rates generates a strong recovery in revolving balances.

But there are those who worry about a permanent structural shift in consumer behavior, which could be a source of downside and in that scenario revolving balances could stay depressed relative to the long term pre pandemic averages, resulting in approximately 50 basis points of downside relative to our central case.

Of course, there could be an upside case, where revolving balances recover much faster, but we believe the risks here are more likely to be skewed to the downside.

Let's touch on inflation for a second which is obviously increasingly relevant unbalanced modest inflation that leads to higher rates is good for us, but under some scenarios elevated inflationary pressures on expenses could more than offset the rates benefit which could represent around 75 basis points of downside.

And while it's not on the page another key driver is capital, where even though we remain hopeful our central case assumes no re calibration of the rules and that we will operate at a higher C. G. One reflecting that we finished the year in the four 5% G SIB bucket, which equates to a 1% increase from G. SIB in the central case, although.

As a reminder, that does not become binding until 2024.

This is a good opportunity to point out the QE deposit growth and growth of the overall financial system proxy by GDP growth of the factors in the original 2015 roll release combined represent two four G. SIB buckets. So in the absence of those we would still be in the three 5% bucket.

That in mind, any recalibration could be a tailwind and each 1% change in the CET. One level is worth about 150 basis points of our OTC.

And to be clear for simplicity, we've assumed a normal credit environment and the analysis on the page.

So when we take a step back 17% remains our central case, and the medium term, but over the next one to two years, we expect to earn modestly below that target.

In light of all that let's talk about near term guidance on page 16.

We expect NII, excluding markets to be roughly $50 billion in 2020 to up approximately five 5 billion from 2021.

As I mentioned upfront. This is a change relative to how we've previously guided as we feel that the ups and downs of markets NII can be a distraction on the vast majority of that variation is likely to be bottom line neutral.

Looking at the key drivers of that for 2022, there are a few major factors.

Rates with the market implied suggesting approximately three hikes later this year and the reason steepening of the yield curve, we would expect to see about $2 $5 billion more NII from that effect.

You can see at the bottom right. We've shown you the third quarter earnings at risk and an estimate of what we would expect to disclose in the 10-K, reflecting the year end rate curve and changes in the portfolio composition.

And as we note in our quarterly filings there are lots of reasons to be careful when trying to use EHR to predict NII changes under real world conditions, but at a high level. If you look at the numbers on the bottom right and what's happened to the yield curve recently, you should find that $2 5 billion increase relatively intuitive.

Then balance sheet growth and mix, where we are expecting higher spend and new originations to drive revolving balances back to 2019 levels and also benefiting from securities deployment towards the end of 2021 and into 2022.

And partially offsetting both of those factors.

A P P P.

So while we do expect NII to increase year on year, depending on the path of rates. It may take a couple of years to return to the full NII generating capacity of the company.

Turning to page 17.

As we said at the outset of this section we are in for a couple of years of sub target returns. Despite this we are going to continue to invest and we're not going to let temporary headwinds distract us from critical strategic ambitions.

And so looking at adjusted expenses, we expect roughly 77 billion in 2022, an increase of about 6 billion year on year or 8%.

And before we go into the breakdown, it's worth noting while the year on year increases Eyecatching a meaningful portion of it is actually the annualized nation of post reopening trends from the second half of 2021 across various categories.

Starting with the first bucket on the page, which is the structural expense increase as I alluded to earlier, we are seeing some catch up this year, both from the impact of inflation in our compensation expenses as well as higher non comp expense with the resumption of DNA.

Then volume and revenue related expenses remember that this is both comp and non comp from a comp perspective to the extent we are assuming some normalization of capital markets revenues, there should be a tailwind here, but keep in mind a couple of points the normalization assumption for markets and IV fees at this point is pretty much.

And our assumption for AUM is for modest increases.

At the same time, we have the impact of volume growth on non comp both in wholesale and in consumer which is offset by lower auto lease depreciation and.

And most importantly, we are adding another $3 5 billion of investments, which I would note includes the run rate impact of our acquisitions as well as some of the run rate effects that I, just mentioned and reflects similar themes to the ones I discussed earlier.

As I wrap up it's another good moment to stop and note how privileged we are to have the financial strength and the earnings generating capacity to absorb these inflationary pressures, while also making critical investments to secure the future of the company.

So in closing on page 18.

We're happy with what we've been able to achieve over the last two years not only the business results some of which are highlighted here on the page, but also continuing to serve our customers clients and communities and importantly, executing on our strategic priorities. As we look ahead, we will continue to invest and innovate to build.

And strengthen this franchise for the long term.

And while there may be headwinds in the near term as we continue to work through the consequences of the pandemic, we've never felt better about the company and our position in this very competitive dynamic landscape. So with that operator. Please open the line for Q&A.

Hello, everyone. Please turn to.

Yes.

And our first question is coming from the line of Erika Najarian from UBS. Please proceed.

Hi, good morning.

Jeremy My first question is for you and it's on page 16.

Two part question on the guidance. The first is could you help us size the.

Timing and magnitude of deposit beta that you presume in this 50 billion number as.

Well as the size of securities deployment, and the second part to that question.

Clearly, we're missing that white box right in terms of CIB markets contribution.

If you could give us sort of realistic to think about CIB markets in light of your comments about.

A more modest normalization versus the.

Idea that this business is naturally liability sensitive.

Right. Okay. So three questions in there let me take them one at a time so beta at the end of the day. The reprice experience is going to be a function of the competitive environment, but for the purposes of working through the guidance I can tell you that we're assuming that this hiking cycle is going to be generally similar to the prior hiking cycle all else equal the.

<unk> is a little bit different in some important respects. So I think the system this time around.

Is flushed with deposits.

Liquidity in a way that it wasn't before so that could start good at the margin make make the reprice a little bit slower on the other hand, the competitive environment is different especially with some of the neo bank on trends in that could could go in the other direction. So it'll be what it'll be but for the purposes of the guidance, we're assuming a repricing experience that's similar to what we experienced in the prior year.

Oh.

In terms of deployment.

Obviously deployment is going to be a situational decision, but if youre looking at the $4 billion bar on page 16 Securities deployment is a modest contributor.

To that $4 billion number the bulk of it is is the loan growth narrative, particularly in card and then in terms of markets NII. The whole point of not guiding explicitly to markets NII is to avoid getting distracted by the noise, there, which can come from a lot of really kind of irrelevant places.

Interest rate hikes in Brazil in cash versus futures positions, which is the example, I like to give.

Big picture, if you need you know.

Something for your model or whatever there's a couple of things we could suggest so if you look at the supplement.

We've actually been disclosing the markets NII number for some time in the supplement so you actually have a pretty decent time series of that number over time. If you were aggressive that thing against the fed funds rate youll actually see that there's a pretty clear negative correlation there and so you can draw some conclusions from that but I just will point out.

Is that like in any given enrollment relatively small changes to the mix of the market's balance sheet and really change the NII quite significantly even in an environment of no policy rate changes. So it's sort of like a health warning against putting too much emphasis on that on that projection.

Very clear. Thank you my second compound question is on capital.

If you could give us an update I know that January one is the adoption for SA CCR could.

Could give us an estimate on the impact of CET, one and just to clarify that 17% medium term our TCE does take into account that your G. SIB surcharge is four 5%.

Yes, So let me do the second one first so in short, yes, so as I said in the script.

We are not assuming any recalibration in that 17% target. So that does mean four 5% G SIB and the equity component of that number in terms of soccer the impact of soccer adoption was about $40 million of standardized our Wi. So I think if you do the math, that's like 10 basis points of C. A T. One.

Thank you.

Our next question is coming from John Mcdonald from Autonomous Research. Please proceed.

Hey, Jeremy I wanted to follow up on that maybe a broader discussion of how you're managing the capital constraints.

<unk> and the rising G SIB and what does it mean for balancing share buybacks, which obviously reduced this quarter preferred issuance and other levers that you have.

Yes, So you know as.

As you know John in terms of share buybacks at the bottom of our of our capital stack. So to the extent that we're seeing robust loan growth other opportunities to invest in the business as.

As well as potential M&A opportunities those are all going to come ahead.

<unk> of buybacks and so you know.

I don't want to sort of guide on our on our buyback plans for next year, which under SCB. As you know are really quite flexible as a function of the earnings generating earnings generation outcomes the capital build but.

You can kind of draw your own conclusions in terms of the growth in the minimums that we see in the future as well as the loan growth as well as some of the investments that we're making and frankly, we're kind of happy about that that says we want the capital to be used that way rather than being used for buybacks.

Okay, and then as the.

And a follow up maybe compound follow up.

The new CET, one target or where you expect to kind of run this year, if you could clarify that.

Also any color on them modest normalization of the FIC and equities wallets that you could flush out.

Yes, so in terms of the target I mean, I've said previously that 12% was not off the table.

And that remains true you know depending on the outcome of the rule side, depending on the Basel III end game, depending on all the various components you can see a world where we're 12% remains the minimum.

But as you can see and as I as I said in response to Erika a second ago, the 17% target assume something closer to 13% as a function of the expected increases in <unk> and some other factors. So we're kind of going to operate in that type of range throughout the year.

Obviously, the flexibility that we have.

And then sorry, you also asked about.

Normalization of markets in IV fees, I mean, I would say if you'd asked me in the middle of the year, we were talking a little bit about thinking that.

Reversion to 2019 run rates and so the thing that could happen in theory.

The way, we feel right now our central case is obviously that we will see some normalization from exceptionally strong performance both in IV fees.

And markets, but I think we're expecting that normalization to be a little bit less like nowhere near all the way down to the 2019 levels.

Because the banking pipeline is really very robust.

We feel good about the kind of organic growth in equities and some of the share gains there and then in fixed income we've already seen a decent amount of normalization, there actually and as the monetary policy environment evolves next year that could actually create some tailwind for that business.

Got it thank you.

Next we have Glenn Schorr from Evercore ISI. Please go ahead.

Alright, Thank you very much.

I Wonder if I could ask.

We'll follow up on the expense side slide 17 laid out.

I'm curious on if I overgeneralize can say.

40%, you've called structural comp normalization between a 60% investment. Thank you I just saw the further breakout in the bottom of the slide but the question I have.

How much of that 60%.

The higher volume.

The <unk>.

Investments.

Investments made in other words, he made 11, either M&A deals are in Boston over the last 15 months.

That was related to Bob coming through the P&L.

Straight up brand new investments for 'twenty, two entering for all those items that you listed below.

Right, Okay, I think I get your question Glenn So number one to the extent that we've done some M&A over the last 15 months as you allude to and that that has introduced some expenses into the run rate the run rate impact of that is in the $3 5 billion.

It's a relatively modest contribution of all our top of my head I want to say, its probably like 300 million or something like that.

So it could be a little bit more depending on some some factors.

So that's one point the other point is that.

There are different types of investments here. So if you look at for example, the change in the marketing expense.

And the marketing investments that come through marketing expense in card a lot of the decisioning of that actually happened as part of the reopening in the middle of the year. So that's actually already in the run rate, whereas other aspects of the investment agenda are obviously things that we're executing now expanding.

Expanding in places hiring people hiring technologists to do things that we need to do it so hopefully that answers your question.

Thanks, Paul.

And maybe if I could just one more question.

I think people get normalized in capital markets.

And that's.

And then I would add Bob to falling by 17.

17% overtime.

Question simple question is.

E <unk> multiyear.

Sure Paul.

Awesome.

Timing of on ally selling full run rate with the timing.

Copper markets falloff on mahogany.

Also with John's question.

So Glenn your line is breaking up a tiny bit, but I think I basically hear your question and I think the simple answer is yes. So in other words, we're sort of saying that as we as the environment continues to normalize and a variety of ways. So that includes policy rate normalization.

<unk> rate curve normalization as well as run rate normalization in markets revenues with the sort of some background expectation of growth in our markets and investment banking revenues with a background expectation on growth and when all of that plays out is finished playing out.

We believe we should be back to 17% all else equal.

So you can kind of see.

<unk>.

Not that long if you know what I mean in terms of like what the current forwards imply about when you get back to a sort of more normalized policy rate environment. John Obviously, we don't really know about 2023 and I'd be very cautious in that plus I expect more interest rates increases in isn't the implied curve.

And obviously the world's very competitive I also want to point out a 17% return on tangible equity if you can get that to the rest of our lives would be exceptional.

Reconfirming that that's kind of what we think we can do is pretty good.

Yeah.

Thank you for all that.

By the way I would take 15% on tangible equity for the rest of my life, if I can guarantee that.

Next question from Ken <unk> from Jefferies.

Yes.

Thanks, Hey, good morning, I wanted to ask you just a couple more questions on loans, you mentioned that youre starting to see some better activity I wanted to just ask you. If you can kind of just flush out what youre seeing across corporate lending commercial lending noticing that the wholesale related commitments were actually down 3% sequentially. So can you kind of just talk us through.

What clients are saying and doing and just how strong can that rebound on the on the corporate and commercial side could we see as we go forward.

Sure, Yes, so in terms of C&I loan growth.

As I said in the script, we are seeing an uptick in rollout and revolver utilization rates, especially in the commercial bank and it remains sort of skewed to the smaller clients.

But we are starting to see an uptick in that actually even in the bigger clients. So that's I guess, an encouraging sign one other things I've heard from the folks who run those businesses is that one driver of that as you know.

As Ceos and management teams, who have been burned by low inventory levels. As a result of the supply chain problems wanting to run higher inventories and that is maybe driving higher.

Higher utilization, there, which as a result, while it would I guess theoretically would be a relatively permanent increase in utilization that is not a thing that you can sort of project forward in terms of compounding the growth, but at the same time. We're also hearing really quite a bit of confidence in the C suites and all else equal that should be positive for C&I.

Growth, but clearly you know.

The levels there are modest still in a world where capital markets have been exceptionally receptive to investment grade issuance in particular and more recently the high yield.

Yield issuance throughout throughout the pandemic period, and so people are well funded from capital markets issuance.

Okay. Second question is just on fees. There are a couple of things and zags and mortgage banking security servicing which were both down a little bit more than expected and card did get a little bit better can you just kind of give us a little bit of color on the drivers of each of those please thank you.

Yes, sure so theres a lot of stuff in there so let me do.

Let me do mortgage and card so in mortgage.

Youll see that if you sort of try to do a margin calculation by taking the production revenue and dividing it and so on you do see you.

You do see an apparently significant drop in margin there. So there's a few drivers of that one is that the margins were actually slightly elevated in the prior quarter as a result of the timing of the flow through of the loan specific pricing adjustments. So that's that's one factor in addition.

You actually we did despite the fact that it was an exceptionally strong overall quarter of originations on for funded loans as we started to see higher rates towards the end of the quarter. We did see the dynamic that you would expect.

In terms of drop in.

Salable, new lock volume and so on so that's a little bit of a factor and then there's the sort of the normal organic.

Dynamics that where you tend to see margin compression in mortgage with rates selling off a little bit. So you have a bunch of factors driving a slightly lower number there.

But the overall mortgage environment is quite healthy and they'll obviously with higher rates, we expect things to be weaker next year, we're still predicting a three trillion mortgage market next year, which by historical standards is very robust so that.

That part and then in in card I imagine that you are looking at the card income line, where we had a significant drop last quarter and this quarter. The number was also relatively depressed relative to what we had two quarters ago. When it was quite high so youll remember that for card income we.

We had a sort of one off items last quarter are depressing. The number this quarter, we have another sort of one off ish type item, which is the impact of the south southwest co brand renegotiations, which is public.

So that is contributing to the card income line and the revenue rate a little bit but it is important to note that in the background of all of this is the impact of the.

Of the <unk>.

Customer acquisition amortization Contra revenue expense.

Which as you know amortize over 12 months and so as I mentioned earlier as part of the big sort of increase in customer engagement as part of the reopening in the middle of the year, we ramped that up quite significantly you know 100000 point offers in the market and stuff like that and so that's coming through the numbers. So as a result, when you look at the sort of.

Full year revenue rate for card of around 10%.

We actually see that as a reasonable central case for next year.

With the sort of elevated marketing and our.

Customer acquisition amortization.

Being offset obviously by expected growth in NII was the revolve narrative that we've laid out.

While we wait for the next question, Yes, sorry, No go ahead go ahead.

So that question is from Jim Mitchell coming from Seaport research.

Hey, good morning.

Excuse me.

Just you guys are doubling the investment spend so clearly seeing success in the prior efforts.

So can you just give us a little bit big picture discussion on what Youre seeing from a return on investment standpoint, and in what timeframe, because I think you've kind of alluded to.

2023 is still being a little bit sub par in return. So is that mean, the payback because a little longer and you still expect significant growth and investment spend in 'twenty three.

Yes, sure. So I mean at some level. The question that you're asking is this is the perennial question of how can we be sure that the investments that we're making are paying back and on what timeline on how do we measure that and it's interesting we were just talking about card marketing.

Think of that as a continuum continuum of investments that start with card marketing, where every dollar that we put it into a card marketing investment.

As part of a very sophisticated extremely data driven highly measurable.

Set of Decisioning to ensure that all of those are accretive and when we have sort of measurable outcomes in the short term. So there's a lot of times there.

And it's pretty precise and you get feedback pretty quickly.

At the other end of the continuum.

<unk> tack modernization type stuff, which is a big part of the theme right now and those things are things that are just we obviously need to do them. If we don't do them, we'll be clunky.

Clunky and inefficient and hamstrung in the future when we're trying to compete.

And it's impossible to prove in some narrow financial sense that there is.

Tangible return payback from that but we know that there are absolutely mandatory so when we think a little bit about you know the revenue outlook and our kind of normalized run rate. We are certainly assuming that many of the investments that we're making now and that we've made over the last couple of years will produce the revenues that we expect.

<unk>.

In that time horizon, but a lot of what we're doing is not of that nature and sometimes those are actually the most important investments because they are the hardest decisions to make and sell.

Some are very basic you know opening reported branches $800 million a year, obviously the payback comes over time, adding thousands of salespeople kind of know pretty much what the payback is but obviously it comes over time and so.

<unk> mix and just think about it as expenses you should expect will go up a little bit in 2023.

Alright, that's helpful. And then just a follow up on just on the NII.

I think the futures market is now pricing in four hikes I think you have three in your and your assumptions. If we do get a four four hikes starting in March is that a material change to the NII outlook for this year and you're in your models.

So if you look at the bottom left hand side of page 16 footnote three.

An extremely small print.

Okay.

The implied curve that we used as from January 1st. So you can take that curve and whatever the current curve is and use the table on the bottom right.

And add along with some caveats that I won't give you and draw your own decisions.

It should be a modest modest increase modest modest additional tailwind very modest.

Okay. Thanks.

While we wait for the next question I said something inaccurate before I realized that wasn't that confident when I say that the 40 billion centralized standardized <unk> increase in Sac or if you do the math, it's obviously not 10 basis points of C. Do you want it's 30 basis points of CET, one correction coming through there.

Thanks, we have a question from Betsy <unk> from Morgan Stanley .

Hi, good morning.

Let's see.

Okay. So a couple of questions first on the NII outlook could you give us a sense as to what's embedded in that with regard to your thoughts on how balance sheet shrinkage of the fed rate Qt is going to impact the liquidity pool and then how much of that liquidity pool. You currently are.

Assuming it's going to get redeployed.

The more duration in your.

Our forward look.

Yes, sure. So I mean, I forget exactly what the market's assuming about the start of Q T. At this point Q2 is theyre not calling it but.

But from last time I looked closely that was expected to be a pretty long lag between sort of the end of the hiking cycle and in the beginning of Q2 and maybe people are now starting to accelerate that but in any case. The important point is that as a result of the acceleration of tapering the amount of balance sheet growth.

Ending pretty quickly and therefore the impact on CIS.

System wide deposit growth should be quite modest this year.

And that and our assumptions are consistent with that or in other words, we're not assuming lots of deposit growth next year because ultimately.

That's going to be primarily a function of the fed balance sheet size.

But obviously, we are still assuming modest growth rather than reduction as a function of Q T. If you know what I'm, saying.

And so then in terms of deployment you can see in the supplement that we already did some deployment. This quarter. It was primarily in the front of the curve. So we're still being quite cautious about really buying duration, but you.

And if you look at again page 16.

You noticed that we call out securities deployment as a modest driver of that for.

$4 billion increase that's tagged as balance sheet growth and mix. So it's reasonable to assume that we might be we might do a little bit of duration buying if if you know the rate curve develops as the forwards predict but it shouldnt be too dramatic.

Okay. Thanks, and then my second question is just on.

The investments of three and a half.

<unk> got incremental here and.

Assume that this is built bottoms up from business unit leaders.

Requests to do everything that you mentioned in the call and my question here is what percentage roughly like just got numbers, but what percentage are you, giving them. This year in other words did they ask for seven youre, giving them three and a half and we should expect another uptick materially in 2023 I know Jamie you mentioned 77 is that run rate that we should.

Good growth from next year, but I'm kind of asking a slightly different question, which is how much of what they need are you, giving them. This year and as subset question is at what point does this fully fund your ability to get into the cloud for U S consumer.

How do you answer that question, we do not sit at a table and tell people you can only do X weave.

Sit at a table and asked people what do you want to do so think of it as a 100%.

Within our capability because some things we just simply can't do you can't attack 14th fronts at the same time or something like that and.

So that's number one so we want to make those kind of investment each one goes through kind of a rigorous process as is necessary. Some of them are table Stakes I do remember sitting around the table one day and people from a digital account opening and do an MPV.

Don't do an NPV just get it done.

That's just serving your client properly and stuff like that and so and like I said a lot.

Jeremy mentioned.

400 branch the United States is 13 sites overseas as more countries more products. It's all of the things we should be doing that you'd want to do if you owned 100% of the company. So it may not be what you would do we would have to meet NII next quarter of X y or Z or something like that so.

Part of your question it wasn't that it was.

Oh, the consumer digital and stuff like that we're not going to start giving you real numbers and all that but that is a march.

That's a journey and it's hard and we want to get there as soon as possible pieces in pockets or have already gotten there. So there are certain applications and certain datasets already running on the private cloud somewhere in the public cloud some parts of the company ahead of other parts of the companies. That's a lot of work and there is you guys had pointed a little bit of I call a bubble of expense and there were not going.

Disclose that either because then we're just going to turn to closing 84. Other bubble expense those are our responsibility and you know and to the extent we have opportunities to do more we will do more because we have extraordinary capability and I think I. Just also want to point Jeremy mentioned the assumptions around capital S.

SLR G Cfe.

In multi though the Calvin should be recalibrated.

Okay, even the regulators anything should we recalibrate for the global side. The global economy would you put capital against treasuries and cap again fed deposits in and let's see what happens.

And that we're kind of conservative we're not really expecting a lot of relief, but even some of the folks yesterday mentioned that were being questioned.

Prospects were being questioned about SRM acknowledged that there are issues around SLR.

Not good for the markets.

And Betsy the only thing I want to add to that.

I was going to basically say the same thing this whole like ask for 10 and hope to get five I mean, we would.

We aim to manage the company much better.

So I certainly don't have that type of authority, that's not the way it works and I think the important point is that what actually happens is a ton of scrutiny of the investment agenda, two or three levels down in the organization with a lot of discipline. There. So that's where the conversation talking about whether this makes sense to do now whether it's the right priority now whether we.

Got the capacity to do it whether.

In the cases, where the returns are measurable wears producing the right returns and Thats really part of how we operate the company and part of the discipline of the day to day like could you give me. Another example, if we can spend $2 billion more and get to the cloud Tomorrow I would do that in a second.

Hum.

Right.

But the step function that we see this year.

I mean, given the pace of competition and the impact of everything that's going on.

It's possible we could see this type of step function again.

It's possible.

But if it if it happens it'll be for good reason.

Right.

Written about the competition in global competition Nonbank competition direct private lending competition Theres Jane Street competition instead of a competition that's fintech competition is Paypal.

Drug competition. It has a lot of competition and we intend to win and sometimes that means you guys spend a few bucks.

Alright.

Got it thanks.

And.

I too embedded upon that as we've always said, we're going to we want to be very very competitive in PE is a $1 billion of merit increase there's a lot more compensation for our top bankers and traders and managers, who I should say by the way did an extraordinary job in the last couple of years living is tough and we will be competitive and PE and that squeezes in March.

Just a little bit for shareholders so be it.

So next up we have Steve <unk> from Wolfe research.

Yes.

Hey, good morning.

So wanted to start off with a question on capital Carlos highlighted in his Swan song speech to potential for Basel, four implementation, increasing capital requirements as much as 20% for select thanks a lot.

We haven't seen a formal proposal from the fed I was just hoping you could provide just some preliminary thoughts how you're handicapping the risk of higher R. W. A inflation ahead of Boswell for adoption and to what extent does that contemplated in the updated <unk> guidance.

Yes, so Steve don't give too much of it is it now.

We've seen different things.

This is why it's a perfectly reasonable question. So okay. So here you go so when you look at the.

The current state of the so called Basel, III game or Basel four proposals.

And you look at the <unk> components of them in isolation, you've got the change in the credit conversion factors, which all else equals a tailwind you've got the fundamental review of the trading book, which is quite complicated and is going to dependent institution by institution, but it is potentially for some folks that headwind and then you've got the introduction of operational risk.

Capital into standardized R. W. A and if you look at sort of central case estimates of all of those things.

And the simple way you will conclude that there's a bunch of <unk> inflation, but couple of things first this all takes place in the context of the global regulatory community or at least in the U S, saying that the system has enough capital that it doesn't actually need more capital and it is important to realize that.

Which by the way anyone does any real announced at all would come to that conclusion.

Yeah. So.

And so it is important to realise Steve that is you know obviously there are additional tools. So the most important one of which is how these standardized output floors and interact with the with the introduction of operational risk capital understand Rosarno anyway, and then in turn how that interacts potentially with the Collins floor as well.

More generally the fact that there are opportunities to tweak potential double counting and the stress capital buffer against so far to be and so on and so forth. So the point of all this is that there are more levers and tools here than just the overall <unk> inflation and the way we see the world. We don't expect the Basel III end game in and.

Of itself to increase the dollars of capital that we need to carry as a company and you were conservative in saying this to 45% G. SIB exactly and we are allowing the juice of fee increases to flow through to the medium term our OTC assumptions.

Okay. Thanks for clarifying that for not punting on the topic Boswell four just for my follow up here.

We will we will do it very very aggressively manage those things when we know the actual numbers.

<unk> aggressively manage them.

Fair enough Jamie I'm, certainly have the track record that supports that just for my follow up on card payment normalization now.

Are you thinking about the trajectory for card payment rates and just maybe just speak to your confidence level that we see car payment rates returned to pre pandemic levels, just given the emerging threats from BNP, you sided and still elevated personal savings rates.

Yes, sure so I still to be honest getting a little bit confused between payment rates and revolve raised in all of these various ratios, but I think it's a little bit simpler. If you just take a step back you look at the revolve rate and you look at the overall level of revolving balances and what we sort of expect for that so theres a few things to note. So.

The revolve rate, having dropped quite a bit has more or less stabilize theres a little bit of a blip in the fourth quarter I was a function of holiday spend and maybe some omicron suffer broadly it stabilized in the meantime, the growth in overall card loans has now for several quarters in a row produced modest growth in revolving card balances.

And our central case for next year basically assumes that that trend stays in place. So what's important about that is that we're not assuming some sort of aggressive return of the revolving rate to the pre pandemic levels were simply assuming that it stabilizes and then overall card loan growth.

Therefore contribute its fair share of revolving revolving loan growth and so the kind of central case that we put on the page for the balance sheet contribution to NII growth in 2022 has very roughly speaking revolving balances getting back to the pre pandemic levels.

By the end of 2022 roughly.

And I'm sorry, you had another was there another part of that question that I forgot.

No no that's sufficient.

Okay, great. Thanks, so much Jeremy.

Next we have Matt O'connor from Deutsche Bank.

Good morning, as we think about the 17% medium term target.

Can you help frame, what you think or what's being assumed on the efficiency ratio and then maybe on credit cost as well please.

Yeah sure. So in terms of credit cost as I said.

Assuming a roughly normal credit environment at that point, so that would mean card charge off rates back into the sort of low to mid threes type of thing as we said pre pandemic. We were assuming we would got to especially as we underwrite some slightly higher loss loss vintages overtime building reserves as the loan book growth.

Importantly, yes exactly.

So I mean I would just broadly describe.

Consistently with the way we are describing it which is kind of medium term guidance in a normalized environment that the charge off environment should in turn be normal.

So that's that.

Then you are kind of asking me I guess about the overhead ratio a little bit so.

Personally I kind of don't love that measure I think it's more of an output than an input and more often than not it's driven by revenues not expenses and more often than not in the short term the revenue number that swinging as a function of the rate curve. So essentially the overhead ratio just becomes a proxy for the fed funds rate, which makes it not a gray.

Management tool for the company, but having said that.

In the assumptions that we're using to build up that 17% rate, we do get back to something like a 55% overhead ratio, but as Jamie said before if that number has to go up to deliver the right returns and the long term it will like we don't consider it to be.

Okay, and then obviously.

Math implies to get back to that 55% do you have kind of outsized operating leverage for.

Right.

Because I think the efficiency ratio goes the wrong way again in 'twenty two.

A couple of years of pretty big operating leverage right.

You got to do your own models okay.

Yeah.

Yeah.

Operating in a world where there are inflationary pressures there is a lot of post pandemic effects in the numbers and we have some critical investments to make.

The notion of operating leverage I think at the level of the company's overall numbers for me becomes just not terribly meaningful I'm not criticizing your question I understand why you're asking but it's just kind of another way when you think about it.

Okay, and I was just curious sorry, Jamie.

Anthony.

Thank you.

Figure out more than expected, obviously expectations have moved up quite a bit and I'm. Just wondering kind of what do you think that opinion and.

Bart do you think the long end it will go up or if it hasn't gone up yet why will it from here.

Thanks.

Yeah, well first of all we prepare for all all eventualities here without kind of guessing at one.

But the consumer is very strong.

With respect to the fact that people suffering still and Covid and all of that factors in spite of omicron inspite of supply change.

2021 was one of the best growth years ever in 2022, it looks like it used to be three and a half of 4%, which is actually pretty good the consumers two trillion dollars more on their balance sheet. Their home prices were up as a price drop jobs of winter plentiful wages are going up which is good for them you know, what we're not against that and sharing the wealth a little bit of Americas.

Every with every body. So the consumer is in really good shape their spending.

Jeremy took you through the numbers, 25% more than they're spending pre COVID-19 .

75% more than that number drives all the order books for everybody else, whether its goods and services and obviously is bouncing around between goods and services. All are kind of sounds like that business is equally are in very good shape with caching capability and competence levels.

What are they seeing they're seeing their order books go up more cars more motors more patios more home improvements more homes more demand we have a shortage of homes in America. So you see the table set pretty well with.

For the growth with obviously.

Obviously, the negative being inflation and you know how that gets navigate and stuff like that so and so my view is a pretty good chance they'll be more than four okay. It could be six or seven I mean, I grew up in a world where you Paul Volcker raised up interest raised interest rates 200 basis points in the Saturday night.

And this whole notion that somehow there's going to be sweet and gentle and no one's ever going to be surprised IAG has mistake that does not mean, we won't have growth. It does not mean unemployment well in a good position and stuff like that so.

And the other fact is it may very well be possible that the long rates and I'm, a little surprised how low these days, but that the long rates may react more to the actual QE and then Q2 and so at one point the fed is going to be letting runoff of $100 billion of whatever number a month ago to come up with and then you may see.

The long rates react a little bit to that and particularly what I just said about growth in demand for capital and stuff like that that also tends to drive a 10 year bond rates and all of that so so all things being equal if you look at the company and it's a very important we have huge firepower to grow to expand to make loans to extend duration.

<unk>.

And you look at capital liquidity I, just wanted to point out 1.7 train. These numbers I've never seen a bank with them. So and you look at percentages not just grocery mass one seven trillion dollars of cash and marketable securities.

One trillion of loans.

Okay, just five or $600 billion of those casualty market with series it can be deployed in higher yielding assets or loans when and if the time comes depending on all these capital constraints and stuff like that we have to deal with and those are extraordinary numbers, it's $2 five trillion of deposits and we don't like taking your risky deposit inflows and then they go down.

<unk> Q T and all that but look at the how that this balance sheet funded I've never seen a bank balance sheet like that and that's think of that as kind of firepower overtime as we navigate through the through the world and so.

We're in pretty good shape, and if I wish I could hold 100% of the company would be private.

Yeah.

Can I just sneak in based on all of that.

I was.

Thinking like the expense pressure or in crude.

That's up from Morgan or expect to see in 'twenty. Two do you think this is indicative of the broader market as you've talked for leaders outside of banks.

And then you see the pipeline of volumes.

There's going to be material surprises on expenses for the broader market. Thank you.

Yes.

I would expect that because almost every CEO he's talking about wages in certain inflation and stuff like that but I just I don't want to be don't please don't say I'm complaining about wages I think wages going up is a good thing for the people who had the wages going up.

And business is simply have to deal with changes in prices of U commodity prices go up and down Mozzarella goes up and down wages go up and down.

It shouldnt be crybabies about this just deal with it the job is to serve your clients as best you can with all the other factors out there and so I'm not opposed to it but I do think youll see more people seen wage pressure et cetera, and some have more ability to offset that others. It hasn't stopped us from doing anything zero none.

Not we're not cutting back on growth plans or bankers or markets or countries because there was.

Some wage inflation.

Next we have a question from Ebrahim <unk> from Bank of America.

Hey, good morning, just two very quick follow ups, one Jamie in terms of capital deployment, just talk to us about inorganic growth.

Is there any likelihood that you look at any larger M&A transactions use your currency at any point this year and should we see a slow down on a let up in the <unk> yourself inorganic fintech investments that you've been on over the last year, if you could address dose dose.

Okay.

So they're not large transactions like over billions unlikely, but we'll always look we're always open minded we're looking all over the place for things that fit in and stuff like that and then the pace of Fintech investment stuff like that that won't change at all.

Yes.

And of that which is consistent with Jamie as is.

You know what.

We continue to be interested in looking at M&A and we're doing that obviously very large deals arent realistic.

And the Fintech investment part is definitely part of the stuff that we're looking at when we look at deals.

That's helpful. And then just double checking something Jamie that you mentioned, you've talked about Venmo square bank, leaving the ground to open for index over the last few years, just talk to us to the extent you can how these investments clearly the market's focus on near term expenses, our OTC pressures, but talk to US do we see as fast forward.

How do you feel about GBM as a franchise competing with big Tech Fintech head to head.

Great.

But its battle engaged I mean, some of these people do a very good job I think there are certain things. We your bank should have done so we should be a little self critical but we have the capability of the economies of scale in all of these things we're not going to do is hamstring ourselves to mediate overhead target.

Not even on the card, so and we have assets and strength.

Competition is very bright I mean, there, Bob and weave and they're not changing and they're not static and I think sometimes people act like the static or enough data so, but we do a good job like today on consumer I'm sure saw you chase customers free trading lot of Atms, you got better and better services more navigation bars more offers.

Travel more of awards more than that you've got more of that coming.

And we've got them a friendlier on overdraft, we've gotten and that's just one business that's true for every single business. So.

I look at the way rapidly computer JP Morgan that could be pretty tough competition.

Well take Chase U K, we've been very very clear that cost us money.

Why do you want payback tomorrow and stuff like that would have to disclose those numbers, but we are there for the long run we will be adding products and services and countries for the rest of our lives.

Okay. So.

I doubt over the long run will fail, we may not do we may not become the best digital bank in the U K, we're somewhere in the short run.

That's helpful. Thank you.

Next we have Mike Mayo from Wells Fargo Securities.

Hi.

Jamie I hear are you ready to do an LVL and J P. Morgan.

So confident yes.

Help me had you would help me raise the equity capital.

Well, that's what I'm trying to figure out here with.

It's a little frustrating this call.

The guidance, you've given us given all the bad news without any targets I mean, you're saying we have to wait two years to the 17% our TCE. Despite the Bourbon leucotomy youre guiding for the second year in a row of negative operating leverage I get it that's not how you run the company, but $15 billion of investments that's up one.

We have over the last three years and that $15 billion is enough to capitalize the 11th largest U S Bank.

I mean, you gave us that but you didn't tell us what to expect from all of this in terms of what specific market share gains are you targeting what specific revenues do you expect when do you expect that can you put some more meat on the volunteer because this is a $5 billion of investments that look at work to gain share at $10 billion.

That it worked he gained share, but now youre going to $15 billion and it might not all we work so well so how do you again put more meat on the bones, the stock's down 5%. The feedback so far has like youre spending the rate hike for our investments over the next 10 years, that's great you're in there for the long term, but a lot of that.

<unk> are planning to invest with a 10 year horizon.

Uh-huh Michael.

Michael I feel your pain.

Frustration. It is very possible in 2023 will have a 70% of our TCA. It depends on how we deploy our capital depends on fixed income markets. It depends on a bunch of stuff like that but every so with the <unk>.

400 branches that were building.

Those things will will get to contribution profitability just like we expect the thousand bankers, we're adding in private banking and a changed.

Chase wealth management, we're pretty sure we'll get to break even by just we expect that takes a couple of years and so yes, we can't we're not going to tell you all of those things and we already mentioned some of the tech stuff is just kind of have to do it and there's a little bit of a bubble of expense and that there's even a little bit above expenses, our new headquarters and so we're pretty comfortable we're doing the right things and we're being <unk>.

Little conservative like.

Jeremy you're talking about the cards to up the return.

I told our folks who were going to card growth. This year, but they were skeptical the American consumer is very strong our products and services are very good chase we call now self directed investing as $55 billion Bank Robinhood has.

The last time I saw something like that we're not sitting here bragging about our product because I would tell you it's not good enough, yet, but you've got $55 billion without.

Without us doing virtually anything.

No marketing and no real stuff like that so there's a lot of stuff coming you know.

The competition, we have to face.

Some of these acquisitions, we made will contribute to profit maybe not exactly in 2022.

And I mentioned the deployment of the balance sheet, we're pretty conservative in the deployment of the balance sheet that may not always be true.

I'll follow up and then I'll re.

<unk> after my follow up but as it relates to technology, specifically, Jeremy you talked about retiring technical debt and so that's kind of playing defense, but also on the offensive side, where are you investing protect where you would expect some more revenues rock that digital banking in the U K are you also going to Brazil.

Other countries are you targeting for that.

Yes.

Funny I wouldn't actually described we're trying technical does playing defense I mean, I think that's actually a great example of the whole point of this conversation, which is that we're hiring technical debt is an easy thing to not do if you're playing defense focused on short term targets, but if you're playing offense for the long term, it's exactly the type of.

A decision they create some of the frustration that you are articulating. This is critical for the long term success of the country. The company. So that's what I mean.

So we spend $2 billion of brand new data centers.

Okay wish you know.

Have all of their cloud capability, you can have in private data centers and stuff like that we're still running the old data centers now we're not going to get involved in every time, we talk to Y'all explained every part of the pancake buildup of expenses going in and expenses going out, but all of this stuff going to these new data centers, which now completely up and running.

No Apple somewhere but most of the applications to go and have to be cloud eligible most of the data that goes in has to be cloud eligible we're running a whole bunch of major programs, which I don't think we disclose on AWS.

We're working with Google and Mike.

Microsoft to run some of the stuff in.

The cloud so we want to have multiple cloud capabilities and this year.

Roughly $30 $40, 50% of our apps, our data will be move into cloud related type of stuff. This stuff is absolutely totally.

Valuable I mean, I can if you sat in this room and looked at the power of the cloud and big data and risk fraud marketing capabilities offers customers satisfaction do with areas of complaints prospecting it's extraordinary.

You actually see some of that already.

How we manage that like for example, with all the fraud and all the cyber and all of the ransomware or forecasted down this year.

It was the reason for that.

Because we've deployed huge capabilities in those things. So we have to do those things in.

That's a margin there'll be hugely valuable for us and you'll see some of that benefit which is why we're comfortable that we will continue to grow and expand and earn like I said, 17% return on tangible capital I would take that if I could push a button and give you that next 20 years I would take and also if I did it for the next 20 years that number probably be like.

Part of the GDP in United States of America.

<unk>.

Okay, I'll I'll re queue for my follow up.

Okay.

Alright.

Got it.

Lastly, a very very good quite a bit market shares we expect to go up in retail deposit market share investment market share private banking market share fixed income market share equity market share investment banking market share global market tier payments market share in security services market share commercial banking market share and what did I Miss.

I'd be surprised if any of them can go down.

And we're not going to give you the number.

Yeah.

Now we have one last question from Jared Cassidy from RBC capital markets.

Thank you good morning, Jeremy Jamie.

Jeremy I'm trying to figure out what the discussion topics is going to be first quarter of 2023, when we talk about fourth quarter numbers and I think it might have more to do with credit then we're hearing about on the call today.

Can you share with us the underwriting standards that you guys are using compared to what they were at the height of the crisis back in 2020, I'm, assuming they're easier today.

Because of the economy stronger, but also can you compare them to 2019, how does that look today versus what you guys are doing in 2019.

Yeah sure. So I think broadly for the company. There is no really large change in our in our credit risk appetite and therefore in our underwriting standards I think I alluded to a little bit I alluded a little bit to this earlier, which is there is a subtlety in the in the card business, where if you remember pre pandemic.

We had talked about you know card charge off rates being at three in a quarter and maybe trending a little bit higher over time as a function of some underwriting of some slightly higher risk vintages still well within our credit box still within our overall credit risk appetite, but just a slight shift in the in the composition of the portfolio.

Folio there so that.

That happened back then and we just didn't see it flow through because of obviously the extraordinary dynamics that we've experienced through the pandemic and now we're exiting the.

The fourth quarter of this year, where the card net charge off rate and you know and I forget the exact number but something like one 2% or something so you'll never see you obviously exceptionally well. So the question then becomes like so and then I think somewhere in your question. There was also about like when we sort of leaned into the reopening.

How do we modify the credit box and the standards and the answer to that is that we returned it essentially to the pre pandemic level. So we were obviously very confident and in light of what we were seeing about what kind of.

Additionally, it got tightened a little bit and that was back to what it wasn't exactly none of that was completely material to results.

One of the things in Germany's fiber to your point.

We will we've been over earning on credit for years.

And we expect that eventually to normalize now you could argue how fast and what type of credit card has been numbers, we've never seen a large middle market has been lower than ever always sale has been lower than ever mortgages had been lower than ever cars, they're all low eventually they're going to normalize.

And then we kind of build that into your model and the other thing is the loan book and this is very important for your own modeling.

Just assume as the loan book grows we will add reserves pretty much proportionate to grow the loan book all things being equal we got six on all of that stuff like that but so that's a flip to the negative obviously for next year that one item.

And so Gerard to your point about the fourth quarter of next year right. I mean, one lens to look at that through is what do we think the trajectory of normalization of card net charge offs is through the course of 2022 and I don't want to get into too much specific guidance, there, but you know.

The numbers that we're putting on the page roughly assume that we get back to that kind of like low threes around the end of 2022 early 'twenty three in terms of card net charge offs. So yes on the one hand, maybe it will be talking a lot about the fact that those numbers are going up but they will have actually gone up exactly in line with our expectations.

Great and just as a quick follow up Jamie and Jeremy you talked about the balance sheet. The way. It is today and all of that liquidity and I think Jamie you said $500 billion could be put to use.

How long will you guys will it take you to get to a balance sheet and our mix of business that looks like you would've thought back in 2019 before this whole pandemic started in the balance sheet did what it did.

I think we're in a way where.

Again, some of those things you outcomes of decisions you make based on clients' stuff, but the real fact is we got Basel four a lot of changes and when all that happens will give you a little bit update how we deploy capital and invested balance sheet and stuff like that.

We're in no rush to reinvest part of that balance sheet will be very patient.

Okay.

Mike would you have another question Mike Your line is open. Please proceed.

Yes. Thank you.

Just more detail on the tech spend and.

When I asked before is on digital banking youre going to the U K what other countries are you going to.

Again, just looking for some more specifics at least on digital banking.

And other tech areas, we expect a.

Revenue pick up not just I mean, you mentioned fraud, and AML and ransomware and cyber and that's all.

Table Stakes that you would say.

But as far as actually getting revenue growth from your tech investments and starting off with digital banking, which new markets are you entering.

Yes, so on digital banking, we're not going to disclose specific countries that we're going into one there's one we're talking about for next year.

Well I mean, I think just a validated Mike's question as you know we have made this divestment in C section, Brazil. So.

Brazil is not exactly the same it's not a de novo build by us, but we're there we're engaged as a significant investment in Brazil's like a very interesting country from a consumer banking perspective, and the digital play there is quite interesting so that.

As one example, and you know obviously, we're thinking about additional places to go and we'll let you know when we do it.

Okay.

Other tech investments.

You could expect additional revenues, but would that include I mean for example, with your your marketing degree you're using AI and big data for what kind of improved take rates do you have or just again looking for more specifics you can provide it.

Yes, I mean, I don't know I'm personally not a big fan of these types of like anecdotal individual like tax stories, I mean, theres cool stuff like we're doing some <unk>.

AI enabled.

Lead optimization staff and AWS for example, so.

I couldn't come up with a list of like 20 things like that but in reality, it's really much more about the <unk>.

Embedding of the modernization and the Digitization of the whole ecosystem as part of customer engagement and competition and making the company more efficient and all of that type of stuff. There examples where it's like I spend $10 million on Ax, that's technology as opposed to like branch build or banker hiring as Jamie says and you can then.

It's hard to tangible revenue outcome to that.

I'm sure we have some of those examples somewhere I don't have them with me, maybe we can talk about them next quarter, but I generally think that that sort of gets into a lot of anecdotal stuff that distracts from the big picture.

Okay last one on that.

Total tech spend again I thought I saw it in the deck how much of that is too.

Run the bank versus change the bank.

Then as it relates to the cloud specifically, what do you expect that absent bold move can you move case.

The core bank to the cloud.

Do you expect that to save once that gets done thank you.

Yes, so a couple of things if you go back to my prepared remarks. So you know, it's like 12 ish billion, but more 50 50 run the bank change the bank.

And within.

Within the change agenda.

Half again is kind of modernization type stuff as opposed to.

Futures and products. So it gives you a little bit of a mic. One example, which may be a little helpful. On this tech platform than I think these numbers are accurate we did this a while ago card.

<unk> our mainframe system is quite good we have one of the most efficient most economic you know 60 million accounts et cetera.

It's been updated for years, but it's a mainframe system and the old data center.

When it gets modernized.

To the cloud the cost savings by running that marginalizing, it will be $30 million to $40 million a year.

That isn't the reason we're doing it the reason we're doing it is once you get that to the cloud that the databases that it uses to feed its risk marketing fraud real time offers and stuff like that become accessible to an enormous machine learning.

So that you can when Mike Mayo is going home on a Friday night. We can offer you. We know you like to eat steak House here immediately offers and fraud stuff that is 10 times, where it is today and so that that's the real value the value isn't the immediate cost saves that you've gone from your savings of $30 million right.

In this application I want the $30 million.

And the other thing allows you to do is to augment that sit that mainframe system and you took your mainframe system, you've got to be a little careful when you go into it make some modifications like in the old days used to modify that mainframe system four times, a year big releases and stuff like that across multiple for multiple reasons now you can go in and Martin.

What pieces of it every week.

Every day.

And so that's why it's so important to do this in and it also makes it was hard to quantify the benefits.

And the cost, but Mike just to pick. One example, I guess from a business that I know you know well if you look at Teresa Security services business. It's an interesting example of the way the investment related to the strategy so in that business.

As you know historically, winning new mandates, especially in fund services administration tended to involve significant correlated large increases in expenses you had to.

Onboard a lot of fund accountants, and so that was typically the dynamic there and I think a lot of the investment that we're making there is to make that business a little bit more scalable in that respect so that when we win new business, it's a little bit more accretive. So that's kind of an interesting example of is that tech investment that produces more revenue.

I mean, I guess I would describe it as investment that it means that when we win the revenue it's more profitable for example at the same time. We're also building out some really great capabilities in there.

<unk> of data and stuff like that.

Which maybe will help us win more men like for example, and then we got to in this call because we got some other stuff like this for just a for example is important one and treats there's all the credit for this we've now are using J P. Morgan's investment banking drew a capability to help clients, who use derivatives for custody to value them and stuff.

That a lot of people, who simply can't do that and of course believe it or not and a lot of portfolios now, they're using more and more I would call derivatives as part of the portfolio management that correspond cost money. It's on the cloud is hugely valuable to trees and having a competitive advantage.

Folks thank you very much.

Good luck to everybody, yes. Thank you.

Everyone.

Of your call for today you may now disconnect. Thank you for joining into the rest of your day.

Hum.

Yeah.

Okay.

[music].

Okay.

Okay.

[music].

Yes.

Yes.

Sure.

Sure.

[music].

Yes.

Yes.

Sure.

[music].

Yes.

Yes.

[music].

Yes.

Thank you.

[music].

Yes.

[music].

Okay.

Yes.

Yeah.

Yes.

Hum.

Yeah.

Yeah.

Okay.

[music].

Yes.

Okay.

Yes.

Yes.

Yes.

[music].

Yes.

[music].

Okay.

Yes.

Sure.

[music].

Yes.

[music].

Yes.

Yes.

[music].

Yes.

Okay.

[music].

Yes.

[music].

Thank you.

Yes.

Sure.