Q2 2022 JPMorgan Chase & Co Earnings Call
Please standby we're about to begin.
Good morning, ladies and gentlemen, welcome to Jpmorgan Chase's second quarter 2022 earnings call. This call is being recorded your lines. It would be muted for the duration of the cool video and they'll go live to the presentation. Please standby at this time I would like to turn the call back to Jpmorgan, Chase's, Chairman and CEO, Jamie Dimon, and Chief Financial Officer Jeremy.
Pardon Mr. Barnum. Please go ahead.
Thanks, operator, and good morning, everyone. The presentation is available on our website and please refer to the disclaimer at the back.
Starting on page one the firm reported net income of $8 6 billion EPS of $2.76 on revenue of $31 6 billion and delivered an <unk> of 17%.
A few highlights we had another quarter of strong performance in markets, which generated revenue of nearly $8 billion credit is still quite healthy and that charge offs remain historically low and there continues to be positive struck trends in loan growth across our businesses with average loans up 7% year on year and 2%.
For encore.
On page two we have some more detail.
Revenue of $31 6 billion was up $235 million or 1% year on year.
And I know I ask markets was up $2 8 billion or 26% driven by higher rates and balance sheet growth.
And I, our ex markets was down $3 6 billion or 26% largely driven by lower fees and higher card acquisition costs and markets revenue was up 1 billion or 15% year on year.
Expenses of $18 7 billion were up $1 1 billion or 6% year on year predominantly on higher investments and structural expenses, partially offset by lower volume and revenue related expenses and <unk>.
Credit costs were $1 1 billion, which included net charge offs of $657 million and reserve builds of $428 million, reflecting loan growth as well as a modest deterioration in the economic outlook.
Now onto balance sheet and capital on page three.
Let's start by talking about our plans for capital management over the coming quarters.
<unk>, 4% SCB will raise our standardized CET one requirement to 12% effective in the fourth quarter and a 4% G. SIB effective and wanted to twenty-three further raises this requirement to 12, 5%.
At Investor Day, we said that we expected FCB to be higher and made it clear then in the near term share buybacks would be significantly reduced in order to build capital for the increased requirements.
Light of the FCB coming in even higher than expected, we have paused buybacks for the near term.
As we discussed at Investor Day, and as we show at the bottom of this presentation page our organic capital generation allows us to rapidly build capital in excess of future requirements with a current target of roughly 12, 5% in the fourth quarter.
Any access over the regulatory requirements offers us protection against a range of economic scenarios with room to deploy capital in line with our strategic priorities.
We have a long established track record of balance sheet discipline across the company and this quarter was our W. Ay reduction shows evidence of this discipline.
Turning to this quarter's results you can see that our CET one ratio of 12, 2% is up 30 basis points from the prior quarter.
Our R. W. A was down approximately 44 billion with growth and franchise lending being more than offset by the combination of active balance sheet management and the normalization of market risk <unk> from the first quarter.
<unk> capital was slightly down as earnings were offset by distributions and the impact of LCI draw downs in our portfolio.
Now, let's go to our businesses, starting with consumer <unk> community banking on page four.
Before I review of <unk> performance, let me touch on what we're seeing in our data regarding the health of the U S consumer.
And there's still healthy with combined debit and credit spend up 15% year on year, we see the impacts of inflation and higher non discretionary spend across income segments, notably the average consumer spending 35% more year on year on gas and approximately 6% more on recurring bills and other.
Non discretionary categories.
The same time, we have yet to observe a pullback in discretionary spending including in the lower income segments with travel and dining growing a robust 34% year on year overall.
And with spending growing faster than incomes median deposit balances are down across income segments for the first time since the pandemic started though cash buffers still remain elevated.
With that as a backdrop this quarter excuse me we have reported net income of $3 1 billion on revenue of $12 6 billion, which was down 1% year on year.
In consumer and business banking revenue was up 9% year on year driven by growth in deposits deposits were up 13% year on year, and 2% quarter on quarter and client investment assets were down 7% year on year, driven by market performance, partially offset by flows.
Lending revenue was down 26% year on year as the rate environment drove both lower production revenue and tighter spreads partially offset by higher net servicing revenue and mortgage origination volume of 22 billion was down 45%.
Moving to card and auto revenue was down 6% year on year, reflecting higher acquisition cost on strong new card account originations and lower auto lease income largely offset by higher card NII.
Card Outstandings were up 16% and revolving balances were up 9%.
And then auto originations were 7 billion down 44% from record levels, a year ago due to continued lack of vehicle supply and rising rates, while loans were up 2%.
Expenses of $7 7 billion were up 9% year on year, driven by higher investments in structural expenses, partially offset by lower volume and revenue related expenses.
In terms of actual credit performance this quarter credit costs were $761 million, reflecting net charge offs of $611 million down $121 million year on year, driven by card and a reserve build of $150 million in card driven by loan growth.
Next the CIB on page five.
CIB reported net income of $3 7 billion on revenue of $11 9 billion.
Number of notable items this quarter, including net markdowns on certain equity investments of approximately $370 million was about $345 million reflected in payments and.
And Mark Downs on the bridge book of approximately 250 million in RV revenue.
Investment banking revenue of $1 4 billion was down 61% year on year or down 53%, excluding the bridge book markdowns.
I V fees were down 54% versus an all time record quarter last year, we maintained our number one rank with a year to date wallet share of eight 1%.
And advisory fees were down 28%, reflecting a decline in announced activity, which started in the first quarter.
All the volatile market resulted in muted issuance in our underwriting businesses underwriting fees were down 53% for debt and down 77% for equity in terms of outlook, while our existing pipeline remains healthy conversion of the deal backlog may be challenging as the current headwinds continue.
Funding revenue of 410 million was up 79% versus the prior year driven by gains on mark to market hedges as well as higher loan balances.
Moving to markets total revenue was $7.8 billion up 15% year on year in both fixed income and equities against a strong quarter last year.
In fixed income elevated volatility drove both increased client flows and robust trading results and the macro franchise, most notably in currencies in emerging markets. This was partially offset by credit and securitized products and a challenging spread environment.
And equity markets, we had a strong second quarter and again increased volatility produced a strong performance in derivatives.
Credit adjustments and other was a loss of 219 million largely driven by funding spread widening.
Payments revenue was one 5 billion up 1% year on year or up 25%, excluding the markdowns on equity investments.
On year growth was primarily driven by higher rates.
Security services revenue of $1 2 billion was up 6% year on year with growth in fees and higher rates more than offsetting the impact of lower market levels expenses of $6 7 billion were up 3% year on Europe , predominantly driven by higher structural expenses and investments largely offset by lower revenue.
Compensation.
Moving to commercial banking on page six.
Commercial banking reported net income of $1 billion.
Revenue of $2 7 billion was up 8% year on year, driven by higher deposit margins, partially offset by lower investment banking revenue.
Gross investment banking revenue of $788 million was down 32% driven by lower debt and equity underwriting activity.
Expenses of $1 2 billion were up 18% year on year, predominantly driven by higher structural and volume and revenue related expenses.
Deposits were down 5% quarter on quarter, driven by migration of non operating deposits into higher yielding alternatives, which we expect to continue given the current rate environment.
Loans were up 4% sequentially C&I loans were up 6%, reflecting higher revolver utilization and originations across middle market and corporate client banking CRE loans were up 3% driven by strong loan originations and funding in commercial term lending and real estate banking.
Finally credit costs of $209 million were largely driven by loan growth, while net charge offs remain historically low.
And then to complete all lines of business AWS on page seven.
Asset and wealth management reported net income of $1 billion with pretax margin of 31% for the quarter revenue of $4 3 billion was up 5% year on year, driven by growth in deposits and loans as well as higher margins, partially offset by investment valuation losses versus gains in the prior year.
<unk>.
In addition reductions in management fees linked to this year's market to clients have been almost entirely offset by the removal of most money market fund fee waivers.
Expenses of $2 9 billion were up 13% year on year, largely driven by investments in our private banking advisor teams technology and asset management as well as higher volume and revenue related expenses.
For the quarter net long term inflows of $6 billion were driven by equities.
Of 217 trillion and overall client assets of three point in April and down, 8% and 6% year on year, respectively.
Predominantly driven by lower market levels, partially offset by net long term inflows and finally loans were up 1% quarter on quarter, while deposits were down 7% sequentially driven by seasonal client tax payments.
Turning to corporate on page eight.
Corporate reported a net loss of 174 million revenue was 80 million versus a loss in the prior year NII was 324 million up $1 3 billion predominantly due to the impact of higher rates and expenses of 206 million were lower by $309 million year on year.
Max the outlook on page nine.
You will recall that at Investor day, we expected NII ex markets for 2022 to be in excess of 56 billion. We now expect it to be in excess of 58 billion, reflecting fed funds, reaching three 5% by year end.
We still expect adjusted expense to be approximately 77 billion and the card net charge off rate to be less than 2% for 2022.
So to wrap up the company's performance was strong again this quarter and what was a complex operating environment. As we look forward. We are mindful of the elevated uncertainty in the global economy, but we feel confident that we are prepared and well positioned for a broad range of outcomes.
With that operator, please open up the line for Q&A.
Please standby.
And the first question is coming from Steve <unk> from Wolfe Research. Please proceed.
Hey, good morning, Jeremy Good morning, Jamie I wanted to start off with a question on capital targets I don't believe you provided an update on your firm wide CET, one target of 12, 5% to 13% and given the new hire FCB future increases in your G. SIB surcharge to four 5%.
<unk> minimum is slated to increase beyond 13% by 2020 for which is also beyond the horizon reflected on slide three and just given that high regulatory minimum elevated ICB volatility in recent years. What do you believe is an appropriate capital target for you to match to from here over the long term.
Yeah, Steve Good question, So obviously youre right in the sense that a we didn't talk about 2024 on the slide and as you note. We have two G. SIB bucket increases coming one in the first quarter of 'twenty three and the other one in the first quarter of 'twenty. Four. So you know we had worked all that out.
Investor Day, and talked about 12, 5% to 13% target, which implies sort of a modest buffer to be used flexibly based on what we expected would be some increase in F. C. B, obviously, the increase came in a bit higher than expected. So for now we're really focused on one through 'twenty three of course, all else equal you would assume that that 12 and a half.
13% for 2024 would be a little bit higher but there is another round of SCB and that's a long way away and as you as you know and as you can see there's a lot of organic capital generation. So what kind of cross that bridge when we come to it but we intend to drive that SCB down by reducing the things that created it.
Fair enough and just for my follow up on the loan growth outlook loan growth continues to surprise positively certainly the tone Jeremy that you conveyed was quite constructive despite the challenging macro backdrop, but where companies are citing higher inventory levels declining personal savings rates growing inflow.
Scenario pressures whole list of potential headwinds that could negatively impact loan growth from here and I was hoping you could just speak to the outlook for loan growth across some of the different businesses and what do you see as a sustainable run rate of loan growth over the medium term.
Yeah. So we've talked as you know Steve about sort of a mid to high single digits loan growth expectation for this year and that outlook is more or less still in place. Obviously, we only have half the year left we continue to see quite robust C&I growth, both higher revolve higher revolver utilization.
And new account origination. We're also seeing good growth in CRE and of course, we continue to see very robust card loan growth you know, which is nice to see.
Outlook beyond this year I'm not going to give now and obviously as you know what it's going to be very much a function of the economic environment. So the only thing that I would like to add is that certain loan growth is discretionary and portfolio based think mortgages is a good chance, we're going to drive it down substantially.
Fair enough. Thanks, so much for taking my questions.
Thanks, Steve.
The next question is coming from Glenn Schorr from Evercore ISI. Please proceed.
Hi, Thanks very much.
I Wonder if you could just talk to how you balance it all meaning E. J P. Morgan is always growth minded you underwrite for returns over the cycle I get that but it is given some of the potential.
Bad stuff going on in the World that you've noted in some of the some of the articles you've been in and at the conference. It is is there any point where that rough or outlook.
Has you tightened the underwriting box.
To build capital and liquidity faster or what do you think you can get there just through what you've laid out today and on the buyback pause.
Yeah, no. So I mean look I think all of these things are true at the same time right. So first of all as you can see on page three the organic capital generation enables us to build very quickly.
To get to where we need to be with a nice appropriate buffer on time, if not early at the same time as Jamie has noted obviously in this moment, we're gonna scrutinized, even more aggressively than we always do.
Elements of our lending, which are either low returning or have a low client access or book, we do that all the time anyway, but of course in the small amount, we're going to turn up the heat on that a little bit in terms of underwriting as you say, we do underwrite through the cycle I think we feel comfortable with our risk appetite and our credit box and you know I don't think we expect any particular.
Change there.
Is it certain obviously risks that we take kind of price themselves. So if you look at our bridge book is smaller than it was because we price yourself out of the market and that was a good thing because you know a lot of people will lose a lot of money there and we lost a little and so we are very conscious of their kind of thing all the time.
Well I appreciate that.
Did you all consider Cecil reserve and and increasing the probability to the poor scenario in this quarter and just curious on how you thought about that thanks.
But we didn't do it and obviously, what we do in the future quarters will remain to be seen and Glenn just remember that we did do that last quarter right. So we already introduced sort of skew to the outlook beyond what's implied by the market to reflect our own slightly more negative view and in a sense arguably we were sort of early on that so it really wasn't necessarily this.
<unk>.
Alright, Thank you both.
The next question is coming from John Mcdonald from Autonomous Research. Please proceed.
Hi, Good morning, Jeremie. It's wondering if you could talk about the deposit trends youre seeing the differences between commercial deposits wealth management and retail in terms of flows and re pricing pressures.
Yeah, Great question, John and I think Youre right to break it down by the different segments. Because we are seeing different dynamics. There. So on the wholesale side you do see some lower deposit some deposit attrition and that is entirely expected and part of the plan in the sense that for our client reasons, we had slightly higher appetite, especially in parts of.
The commercial banks or non operating deposits, knowing fully that our pricing strategy as rates went up I was going to be to not pay off and therefore, we expected the attrition from those from that client base and so we're seeing that and that's actually something that we want all else equal and Ah and that's playing out in line with expectations.
Do see a little bit of a decline.
What are a headwind and wealth management I think that's just seasonal tax payments being a little bit higher than usual and then on the consumer side, we're really not seeing much at all so that that remains strong.
Not seeing any attrition there and you know it is early in the cycle to really be observing much one way or the other from a pricing perspective.
Okay, and then as a follow up in terms of the updated NII outlook, you had talked about an exit rate in the fourth quarter of about 66 billion in Investor day, just kind of wondering what that looks like and what kind of fading benefit from rate hikes do you have assumed in your outlook.
Yeah. So the 66 number if you want kind of to put a number and you can use something like 68, 60 X plus something like that obviously, we're annualizing one quarter. So there can always be noise in there, but that seems like a good number to us that's consistent with the increase for the full year I'm sorry, John can you repeat your other question.
Great.
Yes.
Yes, so in terms of 'twenty three we had talked at Investor day about how we saw upside into 'twenty 'twenty three are from that fourth quarter run rate and that more or less remains true. There is some upside obviously, we're starting from a higher launch point higher rates and less so after the CPI friend, but there have been moments, where there were cuts into 2023.
Fed expectations, so that could.
In fact on the dynamic obviously this is all in a environment of very volatile.
Slides, but the core view of some upside from that fourth quarter run rate into 2023 is still in place.
Got it thank you.
The next question is coming from Betsy <unk> from Morgan Stanley .
Hi, good morning.
Hi, Betsy.
Jamie you mentioned just on the FCB earlier that you intended to reduce it by reducing the things that caused it to rise could you give us a sense as to what you saw in <unk>.
The results that you got that drove that FCB, because I've talked to folks to say, it's a black box. So it would be helpful to understand what you.
He is what the drivers were to that SCB increase.
Alrighty.
Well first of all it's public so you can actually go see what drives at the global market shock and credit losses and stuff like that.
And we don't agree with the stress test. It's inconsistent is not transparent is too volatile is basically capricious arbitrary we do 100 a week.
This is one and I need to drive capital up and down by 80 basis points. So we'll work on it you know we havent made definitive decision, but I've already mentioned about we dramatically reduced our debate. This quarter. We may do that again next quarter, we're probably going to drive down mortgages and will probably drive that other credit to that creates sep's, you and I could go into specifics of net it's easy.
For us to do well you've seen us do it before we drive out not I bring deposits does.
<unk> no risk to us, but you know as the G. SIB, if you'd always various things and so we're going to manage the balance sheet get good returns have great clients and not worried about it we just want to get there right away I don't want to sit there and daughter lives.
Rule, they gave it to us for Goldman.
Got it and then I'll jump in.
Hey, Betsy maybe I'll just jump in a little bit on the black box.
Another very important point for much for shows that number.
That doesn't even remotely there's the stressed loss doesn't even remotely represent would happen under that kind of scenario and I'm not saying the fed says it should or shouldn't but I would tell you we'd make money in that scenario, we wouldn't lose I think they had us losing 44 billion, there's almost no chance that that would be true.
So I and I.
I feel bad for the shows because people look at that and say well, what's going to happen anybody. There's good evidence we didn't lose money. After Lehman we didn't lose money in the great. We're just happened and we didn't lose money great financial recession. So the company's got a huge underlying earnings power and consistent revenues in Cc B asset management custody payment services and then.
You have some kind of affiliate volatile streams that we got the seesaw, which obviously can go up or down quite a bit but again, that's sort of an accounting entry and so we feel very good shape. We just have to hold a higher number now and we're going to go there.
Maybe I'll just comment briefly on the Black box point, because you know as Jamie noted.
The FCB is quite volatile and I think you'll see that across the industry and it's it's you know you have to.
We feel very good about building quickly enough to meet the higher requirements, but you know, they're pretty big changes that come into effect fairly quickly for banks and I think that's probably not healthy and the the amount of transparency. There is a lot of information released as Jamie says, but since the STB is really a quantity that gets measured to the peak drawdown period.
That information does not get released it winds up being really very hard at any given moment to understand what's actually driving it and that combination of.
You know it was suboptimal transparency and high volatility is really our our central Christmas All I guess I would say, but nonetheless, you know.
Capital has got bad effects.
The economy, because we are.
I just said, we will drive down this and drive down it's not good for the IC its economy and in the mortgage business in particular is bad for lower income mortgages, which hurts.
Lower income minorities and stuff like that because we haven't fixed the mortgage business and now we're making it worse, there's no real risk and it is not a benefit to JP Morgan you opened it hurts this country and it's very unfortunate.
No I hear you on all of that and the mortgage comment you made earlier was about shrinking mortgage growth rate. So we're shrinking the balances of mortgages that you have on the backlog.
Hello.
Originally the bounce in the books will probably come down and I mean look we reserve the right to change that but you know that's a portfolio decision and.
If it doesn't make sense to own mortgages were not going to own them.
Yeah, and would you reduce the buffer I mean in the past, Jamie you've talked about hey, as the required capital ratios increased.
Relative to the risk in your business staying more consistent than you said before that you may operate with less of a buffer could you could you.
<unk> that a little bit.
We're going to keep a buffer I'm not even sure what the SCB means at this point, we're not going to go below any regulatory minimum and if we have to we'll just dragged down credit more to create but we got a great. It's a terrible way to run our financial system and we owe you more than what we think that buffers should because theres so much.
I think it's so much excess capital you know it just causes huge confusion about where you should be doing your capital, but just keep in mind. One thing we're around 70% of tangible equity we can continue doing that.
The other companies in great shape to serve our clients and manage the hell out of the rest of the stuff. We still think we have great businesses and stuff like that and that's what we're going to do most of this stuff doesn't create any additional risk at all it just creates capital.
Lee.
Okay. Thank you.
Yeah.
Yeah.
The next question is coming from Jim Mitchell from Seaport Global Securities. Please proceed.
Hey, good morning, maybe just on expenses, if I kind of look at the first half with the slowdown in investment banking I think your annualized less than 76 billion, but youre still targeting 77 is that implication of just higher investment spend in the second half we're just uncertainty around.
Getting the pipeline completed or not and just.
Just assuming it might get done until we know better.
Yes, Jim Good question and we've looked at that too it's definitely more of the former than the latter in other words 77 is the number that we see right now in the number that we believe and we can see in our outlook you know a bunch of factors driving up second half expense, including a deal M&A closing and adding to the run rate as well as continued execution of our inverse.
Current plans, resulting in increased head count probably at a faster pace as we kind of have ramped up our hiring capacity and so on so I wouldn't draw any conclusions about.
Lower than 77 based on the first half numbers.
Okay, Great and then just maybe on credit.
It continues to look I guess very good.
Whether it's on the consumer side or commercial side.
We don't really see it but are you starting to see any initial cracks in credit or strains in the system.
Look I think the short answer to that question is no certainly not in any of our reported actual results for this quarter.
Place that everyone excellent alright exactly.
Obviously running still well below normal levels from the pre pandemic period, but if you really want to kind of turn off the magnification on the microscope and look really really really closely if you look at cash buffers and the lower income segments and in early delinquency roll rates in those segments.
You can maybe see a little bit of an early warning signal to the effect that the burn down of excess cash is a little bit faster. There buffers are still above what they were pre pandemic, but coming down and the absolute numbers for the typical customer are not that high and you do see those early delinquent.
Three buckets still below pre pandemic levels, but getting closer in the lower income segment. So if you wanted to try to look for early warning signals, that's where you would see it but I think there's really still a big question about whether that's simply normalization or whether it's actually an early warning sign of deterioration in.
For us as you know our portfolio is really not very exposed to that segment of the market. So not not really very significantly for us.
Alright, so prime is still holding up quite well.
Yes.
There have been better.
The next question is coming from Ken <unk> from Jefferies. Please proceed.
Yeah, Hey, guys. Good morning, just.
Just a follow up on the points about managing the balance sheet and capital and <unk>, How do you think about it.
Your ability to manage that Aro <unk> output and Dimensionalize, how if at all it might impact either the net income.
More of the Aro TCE outcome as you look forward.
Just very roughly we have a tremendous ability to manage it.
I think we do without affecting our OTC targets and stuff like that obviously, you don't pick an eye a little bit in capital generation, a little bit of a stuff like that but all told we're gonna magic of it will be fine.
Got it Okay. That's a fair point and then just second one on cards card revenue rate continues to slip even with the NII benefit obviously, you've got the art you got the denominator increase in there too and spend versus land can you just help us understand the dynamics underneath card revenue rate and where are you.
Expect it to go from here. Thanks.
Yes, sure. So on card revenue rate, we'd said that we thought 10%. It was a reasonable number for the for the full year and that's running a little bit lower right now and I think the current level, whereas it Michael nine six or something is probably the right. The right number for the full here at this point and really the difference is driven by a couple of factors the main one.
That while the growth in revolve.
Is basically still in place our view that we would see normalization revolve balances happening you know.
Early beginning of next year.
The starting point of that did get slightly delayed by omicron by about six weeks and so that all else equal is a little bit of NII headwind relative to what we'd expected, but still obviously very robust.
Are you just add a little bit on because I know I'm harping in mortgage as well here, but I just want to explain it.
Because if you go to Europe , the capital held against mortgages like a fifth what we have to hold here.
And we can obviously manage that and standardized risk weighted assets do not represent a written.
Turns or risk.
So there are a lot of ways to manage it and we don't have there's no securitization market today. So our view would change if there was a securitization market might do something different but by not buying it signed it hedging. It swap is their main ways to manage it without really affecting a lot of your risk of returns and so it's unfortunate because I think this is all kind of a wasted time in terms of <unk>.
Serving our clients.
Our job is to serve clients through thick and thin good or bad, but what they need how they need it and now we spend all the time talking about these ridiculous regulatory requirements.
Right, so yeah, and just to finish on card so.
Lower NII just from the omicron delay.
And that slightly better than expected new client acquisition as a driver there and then there are some subtle kind of funding effects from the higher rate environment contributing to it as well.
Okay. Thanks, a lot.
The next question is coming from Mike Mayo from West Fargo Securities. Please proceed.
Hi, good morning.
Hey, Mike could you help me could you help me reconcile your words with your actions after Investor Day, Jamie We set a hurricane is on the horizon.
Today, you're holding firm with your $77 billion expense guidance for 2022, I mean, it looks like Youre acting like they're Sunny skies ahead, youre out buying kayak surfboards wave runners.
Before the storm. So is it is it tough times or not.
Now let me.
Run the company.
We've always run the company consistently investing doing stuff through storms.
We don't like pulling in cloud and go up and go down and go into markets out of mortgage through storms, we manage the company and you've seen US do this consistently since I've been at bank. One we invest we grow we expand we manage through this storm and stuff like that and so and I mentioned our view on the.
Media coal, but there are very good current numbers, taking place consumers are in good shape theyre spending money. They have more income jobs are plentiful, they're spending 10% more than last year, almost 30% plus more than pre COVID-19.
Businesses, you talked to them. They are in good shape Theyre doing fine we've never seen business credit be better effort like in our lifetimes and that's the current environment.
The future environment, which is not that far off involves rates going up maybe more than people think because of inflation, maybe declaration, maybe a soft there might be a soft landing I'm simply say it is a range of potential outcomes.
From a soft landing to a hard landing driven by how much rates go up effective quantitative tightening.
The effect of volatile markets and obviously this terrible humanitarian crisis in Ukraine, and the war and then the effect of that in food and oil and gas and we're simply pointing out those things make the probabilities of possibility that these events different it's not going to change how we run the company.
The company the economy will be bigger in 10 years, we're going to run the company going to serve more clients are going to open a branch we can invest in the things and we'll manage through that we do Matt. If you look at when we do our bridge book is way down that was managing certain exposures were not in subprime fundamentally that's managing your exposures, Joe we're quite careful about how we run the risk of the.
And there was a reason to cut back and something we would but not if we think it's a great business. It's got great growth prospects. It's just going to go through a storm and in fact in fact go into a storm that.
That gives us opportunities to you know.
I always remind myself the economy, a lot bigger than 10 years, we're here to serve clients through thick and thin and we will do that.
So.
You're clearly running the company for the next five to 10 years, if we have a recession in the next five to 10 months, how does technology help you manage through that better whether it's credit losses, managing for less credit losses expenses more flexibility where revenues may be gaining market share. What's the benefit of all of these technology investments if we have a reset.
The net.
I think we gave you some examples at Investor Day for example, AI, which we spend a lot of money on we gave you a couple of examples one of them is we spent $100 million building certain risk and fraud system. So that when we process payments you know on.
On the consumer side losses are down 100 towards me with volumes way up that's a huge benefit I don't think it was to stop doing that because there is a recession.
And so and plus in a recession should things get cheaper branches enormously problem bank of noisy probably keep on doing those things and we've managed through recessions before we'll manage it again I'm quite comfortable doing quite well.
Alright, thank you.
Starting on on recruiting or training or technology or gradually that's that's crazy. We don't do that we've never done that we didn't do it in a way no nine.
It put us at that interim.
Yes.
Yes. The only other thing is just market revenues for a lot weaker right I mean, the market outlook is worse and so we know you've had some structural spending so when all else equal would that be a little bit less than that.
Yes, that's very performance based to.
Again, Mike Mike the way I look at a little bit in 15 years, the global GDP or 20 years, the global GDP Global financial assets Global companies.
He has over $5 billion right well double.
That's what we're building for them in that building for like 18 months.
Okay. Thank you.
The next question is coming from generic <unk> from RBC capital markets. Please proceed.
Thank you good morning, guys.
Jeremy you touched on the deposit commentary a short while ago can you elaborate on Q T and the impact that you've seen no grant that I know June was not full Q T of 95 billion of months, but can you guys give us a flavor and I think Jamie you mentioned that if I heard it correctly that maybe three to four.
$401 billion of deposits could outflow over time.
I'm, assuming due to Q T. But can you guys elaborate what you saw in June is it tracking the way you think it's going to be any further outlook for what the deposits could be over the next 12 months due to Q T.
Yeah, Hey, Gerard so as you know Judy just started so I think it's it's not the sort of thing where you can say I expect this exact outcome and then sort of track it sector by sector. Because you know you can see the clear impact on system wide deposits, but that also interacts with RP and T G a and stuff like that and so how that flows into the banking system and then to.
Any individual bank across the wholesale and consumer segments.
A tricky thing so it's early on that but you know at a high level in your in your comments about Jamie said before right.
Ari remains true, which is that depending on how Q T interacts with RP and loan growth. In particular, you know you could see some decline in deposits in the banking system and we would see our share of that but we would expect that to primarily come out of a wholesale on primarily come out of the nonoperating and sort of less valuable.
Portions of our deposit base falling consumer while you could in theory have a little bit of a headwind there.
We feel pretty good about our ability to keep those levels pretty steady you know based.
Based on the strength of the franchise and the ability to take share.
Very good and then as a follow up.
I don't believe you guys disclosed the Outstandings in the bridge book, but to two questions and Jamie you've been very clear about this for the last 10 years, how you've derisked the balance sheet and yet and you mentioned it already today can you just give us some color on how different it is today from OE nine just so investors know that it is.
Meaningfully different and second what caused the write down in the Enbridge book this quarter.
So if you go back to O seven I think the whole Street Bridge book was 480 billion.
I think the whole Street Bridge book Today is 100 are under 100, it's like 20% or percent of that bridge book has come down substantially just in the last 12 months and that's really just underwriting loan by loan by loan and you when somebody who's so I'm in and if you and if you guys look at high yield spreads and stuff like that bonds are down 6% or that's what you see when you have.
Some flex you noted some flex and we're big boys, we know that there was write downs a couple of bridge loans, they're not huge there just you know I think they were in the.
Investment banking line and the IV revenue line and there's a small amount in the commercial bank as well, but as you said, Jamie and as Daniel also mentioned at Investor Day, I think we made conscious choices here or to dial back our risk appetite here and acceptance and share losses.
Chance so yeah.
We feel good about where we are we're still open for business for the right deals at the right risk appetite on the right term absolutely, but we've been careful.
Very good thank you.
Yeah.
The next question is coming from Erika Najarian from UBS. Please proceed.
Hi, just had a.
A few follow up questions. The first is on balance sheet management Jeremy.
The loss for that Paul.
As set forth on slide three does that include <unk> mitigation.
And as we think about the 58 billion in updated NII guide.
What kind of deposit growth does that assume you noted that part of the STB mitigation is to drive out non operating deposits.
Wanted to understand what the assumption was that as well please.
Yes, sure. So first point you have to turn off your magnifying glass, but if you look at footnote five on page three.
You can see that right at the end of their test assumes flat or WMA in the projection, so and I think within that you know.
Who knows what the exact mix for me and you've heard jamie's comments on that but if you look at the table above yeah.
You see that you've got the usual moving parts, we've got organic loan growth that we want is profitable on its own or par.
Part of important relationships that we'd like to see continue to happen. Some of it is a little bit passive we can't really control it it moves up and down as a function of factors like bar and then theres. The mitigation piece of it which you know we're going to turn off the scrutiny quite intensely as I said before on or returning lower client in excess or both so.
Across those three beds, we'll see how it goes but as Jamie said, we feel pretty confident in here.
In terms of deposits you know at this point deposit growth is probably less of a driver overall looking for.
Outlook.
Our deposit outlook remains you know more or less the same that I said before and that we've talked about at Investor Day, which is we do expect to see some attrition on wholesale we expect consumer to be relatively stable and wholesale it goes.
And my follow up question is for Jamie.
You know Jamie we've heard.
Your question about the economy and I think there is.
A bigger debate on how the U S consumer is going to be impacted.
Light or in context of a downturn the statistics that Jeremy laid out.
Like a pretty healthy starting point for the consumer that you bank.
And the reserve build for loan growth in card and the.
Less than 2% loss rate in card.
Lead us to believe that your consumer is still okay.
And as you think about the various scenarios and you think about the realistic range of outcomes.
How does the U S consumer perform because it feels like that's the big wildcard.
The journal term.
Global recession, I, just wanted to get your thoughts there.
Yes, so first I just want to point out that I'm not sure that's not a forecast what it's going to be at the end of the quarter.
So if.
If you go to pencil something you Myles is 12 and a half.
On December 31.
Probably be 13 at the end of the first quarter.
And because obviously, we use capital for a whole bunch of different reasons and.
And the consumer.
Like a broken record the consumer right now is in great shape. So even go into recession, they're entering that recession with less leverage.
Far better shape than they've been didn't wait no nine.
And far better shape than they did even in 2020.
And jobs are plentiful and of course jobs may disappear, you know things happen so but they are in very good shape.
Obviously, when you have recessions it affects consumer income and consumer credit our credit card portfolios Prime I mean, it is exceptional but we're again we're adults in that we know that if you have recession losses go up we prepare for all that in.
To take it because we grow the business over time.
We're not going to just run out of it and so I think it's great to consumers in good shape at an excellent debt that I'd like the fact that wages are going up for people, who are low and I like the fact that jobs are plentiful I think that's good for for the average American we should applaud that and so what we're.
They are in good shape right now.
Thanks, a lot.
The next question is coming from Matt O'connor from Deutsche Bank. Please proceed.
Matt I don't know Shaun.
Yeah.
Yes. The next question is coming from Ebrahim <unk> from Bank of America Merrill Lynch. Please proceed.
Hey, Good morning, I guess, just one for a couple of follow up Jamie in terms of the markets have gone very quickly from pricing and as Donald <unk> potentially pricing indeed cuts next year.
Talk to us like how that's informing your radical balance sheet management as you think about hedging downside risk from lower Hey, It's 12 to 18 months out. It should we expect you to add duration or do anything synthetic to protect against fluid hits.
We're going to keep that to ourselves.
Yeah.
But I don't know, maybe if you want a little bit of a general color about how we're thinking about the portfolio I do think.
Yeah Okay.
I'll keep it brief.
On duration I think at this level of rates also with you know very quickly cash yields being roughly not that different from 10 year yields the question of duration, adding or not is just generally less important for us than the other piece of it is whether there's the opportunity to deploy cash into a non issue.
Security is broadly into spread product and obviously spread product is more attractive right now, but as we've been talking about a lot on this call. The priority right now is to build capital so that that'll be something for later I would say.
And I should just point out.
The forward curve has been consistently wrong in my whole lifetime, but we don't necessarily make investments based on the forward curve.
And second we've always told you that we use the portfolio and other things to manage the broad range of outcomes not just to try to NII. So if you said it NII next quarter, Yeah, we could do that.
That would be managing that brought outcome of potential outcomes here, which is to protect the company through all possible.
Outcomes.
That's helpful. And then just one follow up on credit I heard your comments on the consumer.
And did some version of a mild recession like if you had to pick one or two areas, where do you think losses will be given by is it on the commercial side is it TRT like how do we expect that downturn to kind of play out.
Did you I think at Investor Day, you had a chart that showed through the cycle losses, yeah. Yeah. So I mean I would just go back to that end. We showed when we think through the cycle losses would be for credit cards C&I had a bunch of other things and obviously through the cycles and average you could kind of break.
Some of that okay.
That showed exceptionally low losses in wholesale so [laughter].
Whether or not that's a prediction of the future but yeah.
Thank you.
And the next question is coming from Matt O'connor from Deutsche Bank. Please proceed.
Hi, sorry about that I somehow got disconnected.
Hum.
Sorry, if I missed this but if we think about provisioning or reserving for a moderate recession now what's the best stuff on how much that might be I think for a COVID-19 it was around $14 billion.
So, but obviously you alluded to the consumer being better off alone makes a change there's lots of puts and takes but how would you frame kind of put over to ourselves or moderate.
Let me first very soon before you in Covid, we got to 15% unemployment within three months.
And in two quarters, we added 15 billion.
We can easily handle that is clearly I was put out almost as the worst case.
It will clearly be a lot less than that in <unk> and <unk>.
You guys can look at the things yourselves you know every 5% is another $500 million or something like that if you change your odds and so on.
Yeah, I mean, we think the current reserve the current allowance, we think is conservatively appropriate for a range of scenarios and as you know, it's already kind of skewed to the downside and there are probably some other elements of slight conservatism in there. So we'll see how it goes but what we see.
Feel that it's.
[noise] appropriate and conservative at this point.
Okay, and then separately.
<unk> got about $14 billion of losses, and OCI, obviously, most of that flows back to capital as the bonds mature.
What what's a good run.
Rule of thumb in terms of how quickly that comes back if rates stabilize here.
10 basis points, a year of seeing two one.
Alright, 10 basis points you said.
10 basis points of seed you want a year that got it okay. Thank you.
After you after five year after tax basically five years is kind of bleed back.
The weighted average life of four or five years ago. So it did roll out the good rule of thumb on constant rates.
About 10 basis points from C. Do you want accretion here.
Yeah.
Thank you.
At the moment there are no further questions in the queue.
Okay folks everybody. Thank you very much and we'll be talking to you in a quarter.
Thank you everyone that concludes your conference call for today you may now disconnect. Thank you all for joining and enjoy the rest of your day.
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