Call Start: 10:30 January 1, 0000 11:10 AM ET
JPMorgan Chase & Co. (NYSE:JPM.PK)
Barclays Global Financial Services Conference Call
September 13, 2022 10:30 ET
Company Participants
Daniel Pinto – President & Chief Operating Officer
Conference Call Participants
Jason Goldberg – Barclays Bank
Jason Goldberg
Next up, very pleased to have JPMorgan Chase. From the company on stage with me, I’ve Daniel Pinto, President and Chief Operating Officer of JPMorgan Chase, also CEO of the Corporate and Investment Bank. And I also just noticed we have Jeremy Barnum, Chief Financial Officer, sitting in e first row. So if you want to tackle a math here, I guess you can, or try. I guess before we jump in, maybe put up the first ARS question that I’ve been asking everyone. Just what is your current position in the shares of JPMorgan. We’ll get these at the end.
I guess, Daniel, as they answer the question, maybe we’ll just jump in. At the start of the year, you’re named President — or sole President and COO to help set out the strategic division of the firm. As we sit here today, what were some of the key challenges that you faced this year and one of the most important opportunities for JPMorgan looking out.
Daniel Pinto
Yes. So first, thank you for inviting me. It’s great to be here. It’s — I think that it is a great opportunity. I’m really enjoying not just participating in the corporate investment bank, but participating in other parts of the company. And I think that we have so many opportunities that Jamie, myself and the rest of the management team we are working on.
And just to name a few, in the retail business, in CCB, so essentially, we are focusing continue deepening and expanding into the rest of the country in the new markets where we have still some branches here and there. There is plenty of opportunities for growth there as well as connected commerce. We — you saw that we have a couple of acquisitions in the travel space to complement our credit card business. And wealth management, that is an area of weakness for us. We’re very, very good in the ultra-high segment in the United States in private bank. But when you go into more into the affluent space, our market share is relatively small, and we are adding bank — wealth advisers. So we are really focused on that.
In the Corporate and Investment Bank, it’s about payments. So I think that bringing all the assets that we have together into a global payment services offering from merchant acquirer to treasury services, liquidity management and payments. It’s a great opportunity. We have grown a lot of market share there. There is an industry that no doubt is consolidating, and we’ve been one of the beneficiaries of that consolidation.
Markets, big market share at the moment, we still up there, will continue to invest, great business for us at our scale. In investment banking, obviously, a tough year, we’re sure we’ll talk a bit more about it. But there are opportunities in the middle market in the United States to continue growing market share. You saw that we launched JPMorgan Connect, which is essentially a way to tackle the smaller business capital needs in a low-touch way where we cannot — obviously, we have a business for private placements, but when you go down a bit to smaller companies, it is a bit difficult to do it that way.
So it’s a way to connect investors and smaller companies to raise capital and debt. In the private bank, I think that the challenge is outside the United States and continue getting scale there. And in the commercial bank, a great business that we have, like 23,000 clients and is the connection with Investment Bank to get more out of the lending and the activities that we do with those clients. So — and then we are working with Jamie in the whole technology transformation of the company that really is crucial to prepare the company for the future. So it is super exciting. So, I’m really enjoying it.
Jason Goldberg
Sounds good. I guess maybe shifting more to kind of the macro environment. Obviously, a lot of focus there, inflation, recession concerns, Ukraine volatility. At the same time, unemployment very low, consumer is still spending. We’ve heard Jamie talk about storm clouds, hurricanes. Maybe give us your current weather forecast.
Daniel Pinto
Well, I try not to talk about weather. So I’ll give you my view. I think that things are shaping up better than one would have thought it would happen, because you have massive geopolitical issues, you have China-U.S., the war in Ukraine, inflation, the end of function of monetary policy. So at the end, when you look at what is going on in the world, the United States is around flat growth this year, where, as you said, consumer spending, the labor market still very robust. And then we think that the economy will grow around 1.2% next year in our core case, a bit lower than the potential but not much less.
So essentially, I see 2 central scenarios with relatively equal probabilities. So one of the scenario is the soft lending scenario. That’s pretty much market pricing. I mean less today, but for sure until yesterday. So in that scenario, so what you see is Fed get into the neighborhood of 4%, and that is enough to carve inflation to their target by the end of next year. There are some factors in inflation that they’re already positive, like energy prices are coming down, some of the supply chain challenges that are being resolved. We still have a very hot labor market and a strong demand.
So that is a possible scenario. When you look at the level of S&Ps and everything else, it looks like kind of the market is pricing a high probability of that scenario. If that were not to be enough, meaning that we get to that neighborhood of 4% and inflation is still running or the Fed perceived that inflation is not going to get towards their target, so probably, they will go a bit more. Powell kind of mention it the other day.
I don’t think that, that scenario is a de-recession scenario. I think that they may go have to go to 5%. And unemployment rate may have to go to 4.5% or 5%. And that may be a couple of quarters of a shallow recession, which is a bit worse than the previous scenario, but not terrible. I think that the probability of that, those 2 scenarios are the higher probability. Clearly, if you — and that assumes that — it has one assumption, that the geopolitical theme stays stable. So the war in Ukraine and Russia doesn’t get any better, but doesn’t get any worse and doesn’t escalate. And the U.S.-China relationship stands, but it doesn’t move any worse than it is today.
So obviously, if there is a geopolitical event on top of whatever monetary and fiscal policy too, and so that is worth a scenario that, at the moment, it’s hard for me to see, at least not for now. So essentially, it’s quite okay overall.
Jason Goldberg
Sounds good. Sunny with a chance of rain. Can we get the next ARS question? What’s your top reason to own JPMorgan? Pretty evenly distributed between scale, revenue growth and balance sheet. We’ll make sure we touch on all those. But I wanted to shift gears and maybe talk about the CIB. I guess, IB fees have been under pressure all year, issuance advisory activity under pressure. Can you maybe talk to — do you see these trends improving by the end of the year? What do you think is the catalyst to get corporates more active? And while we’re at it, why don’t you give an update on the quarter?
Daniel Pinto
Sure. I think that sometimes, it’s good to remember history. So when I look at the IV wallet from ’11 to ’19, sort of move from, let’s say, $70 billion to $85 billion, it was $79 billion in ’19. So it went to $95 billion in ’20, $123 billion in ’21. This year, according to Coalition, it will be around $69 billion and $70 billion. So clearly, a little lower than last year, but last year number was really very, very over standard. And I think that the reason why this year is weaker, obviously, there’s uncertainty about inflation. And as a Fed was in front or behind the curve and now a more hawkish curve with Fed that creates concerns about recession. I think that when the dust clears and we normalize, I do believe that we are going to be somewhere in the neighborhood of 2020 over the — not necessarily next year, but over a period of time, with plus or minus depending on the economic environment.
So then what do we do with our investment banking business? So this is corporate and institutional relationships over a very long term, then they are institutionalized in the company, well, that they are clients of JPMorgan, but at the same time, the bankers and the relations of bankers play a very big role. So you need to be very careful when you have a bit of a downturn to start cutting bankers here and there because you will hurt the possibility for growth going forward.
So if anything, in some environments like this, there may be some very, very top bankers that you could not access or hire in the past and now they’re available to be hired. What you need to adjust, and it’s not for whatever is the volume next year or next year for more the medium term, what is the structure that serves that business that is related to the volume. And then we will adjust over time to whatever we believe is a medium-term structure needed and overall banking business size needed to kind of cater to that wallet size and with some volatility.
Also, the banking business have a big component of variable compensation. So therefore, you can’t sort adjust not just letting people go, you can adjust by reduce income. Normally, we try to smooth it out over the cycle. So last year, we didn’t pay 100% of the outperformance, neither we’re going to reduce compensation by 100% of the underperformance this year. I think that the combination of the 2 things will bring the banking business to the more stable level.
Clearly, last year, we have to add a lot of bodies just to execute the huge amount of volume that we’re executing.
Jason Goldberg
Any thoughts on the quarter?
Daniel Pinto
On the quarter, well, it’s — kind of the trend continues. I think that it will be around between 45% to 50% down IB fees year-on-year.
Jason Goldberg
Got it. I guess, not a surprise given what we’ve seen with the Dealogic activity.
Daniel Pinto
Yes.
Jason Goldberg
I guess, you talked about managing the expense base, but IB activity doesn’t pick up for the remainder of the year. How do you think about that? One of your [indiscernible] competitors yesterday, the headline on Bloomberg that they’re scaling back. Just how do you think about it?
Daniel Pinto
Yes, that’s what I just said. I think that over time, we will adjust this year or next year, whenever it is, the structure of the business to the potential of the business, and then the rate will be managed by comp.
Jason Goldberg
Okay. And then I guess, markets on the other end have benefited from higher levels of activity. I guess anything you’re seeing out there that would cause you to be concerned about the health of the markets?
Daniel Pinto
Not really. I think that the markets business has surprised us and pretty much everyone on the upside. So the wallet for market in ’19 was $160 billion. And in the last 3 years, it’s been between $200 billion and $215 billion. And depending on your mix of business, if you’re overweight in commodities, overweight in credit, you are performing better or worse on that range. I think that the market business going forward, I still believe that it’s going to continue in that range. Like, for example, if I think about equities. So what is the scenario where equities remain in the current range, either you see the soft lending scenario where the equity market does well. So therefore, there is a reengagement of client activity into equities that creates volume execution and the business as well. Or you have a lot of volatility. Even if it is a downturn market, that is also helpful. The various scenario for equity, just to give you an example, if you have low volatility and markets that they are grounding, grounding and lower and lower, so that will not be that scenario.
When I look at my core economic view, I think that markets will do relatively well in that scenario. So I believe that the 3-year range that we have seen will hold going forward, plus/minus depending whatever economic scenario growing — economic outcome we see.
Jason Goldberg
And I guess within markets, I guess, one of the things that, I guess, is a concern is, is there a natural limit of how much market share can be consolidated without creating some sort of counter party or size-based constraints? And if so, are we approaching such limit?
Daniel Pinto
We — our market share in the last 2 or 3 years has been gravitating around 12%, 12.5%. So at that level of scale, so you have a very, very profitable business, including the increase in capital that we are allocating to the business this year. I think that what we have seen in the last several years are concentration of wallet into a lesser number of players. The wallet — the growth in wallet in the last 3 years brought back some of the players that have became very, very marginal. And — but I think that the trend still continues. It’s a very expensive business to run. It is a business that consumes a lot of capital. It’s a business that you can only be profitable at a very high scale.
So — and once the trend of the increase normalizes, even normalize at these higher levels, some of these banks, they are going to be challenged again, that they are going to have a business that even in this cycle, they didn’t manage to get the scale that they need. So therefore, they may do these investments again. So we are really committed to this business across fixed income and equities. In both places, we have made a huge amount of progress in the last several years. And I think that the trend of these 2 or 3 years is more like a derailment of the trend rather than changing trends.
So I think that the consolidation will continue. If it is, I don’t know what is the ceiling, but I think that probably you have another 100, 200, 300 basis points more increase in market share over the years to come, assuming that I’m right on that. If I am wrong, at 12%, 12.5% market share is a perfectly good business with very high or relatively high return on equity.
Jason Goldberg
And I guess on the subject of markets, the questions come in 2 weeks ago in the quarter, how are things shaping up?
Daniel Pinto
It’s shaping up okay. It’s a solid quarter, a bit weaker in equities, stronger in fixed income. And we are, at the moment, expecting around 5% increase year-on-year. So quite solid.
Jason Goldberg
So growth off a strong base. And I guess over the past few years, payments become an increased focus in CIB. You talked about it in your initial comments. Maybe discuss how this product area provides you with a competitive advantage to corporate and institutional clients and just how we think about the growth rate of this segment.
Daniel Pinto
Yes. I think that segment in itself — so first, to have put all the assets that we have together, the merchant acquirer and the treasury services assess and invest and innovate on those, give us — and having that business not separated from the corporate and investment bank. So therefore, it’s part of the strategy. The strategic dialogue that we have with all our clients give us, in my view, a massive competitive advantage. It’s a business, as I said at the beginning, we have — this is just treasury services, around 4%, 4.5% market share 5 years ago. Now we have over 7% market share globally.
One of the factors that is forcing companies and other institutional investors to consolidate the wallet into the bigger players is because — one of the reasons is ability to invest and quality of services, but the other one is cyber. So the more open ends you have, the more rates you have. So a company that invests over $1 billion in cybersecurity, it makes you feel a little more confident. And then you will feel more confident concentrated with that provider.
On the Merchant Services side, I think that we have a good franchise, particularly in e-commerce in the United States. We’ve been investing heavily in the platform because it was a bit antiquated and making it more global. So then now we can go to corporates and really offering a solution end-to-end for all their payments, liquidity management, pay in, pay out and liquidity management solutions.
And essentially, we are focusing growing our business with smaller companies in the United States. We kind of dropped that ball in the past. We are refocused on that, growing internationally with corporates and e-commerce and marketplaces under 2 other areas where we are investing and seeing growth.
Jason Goldberg
Daniel, I could talk about CIB with you all day long, but I guess one of the benefits to us of you being President and COO is we get to broaden the conversation.
Daniel Pinto
Yes.
Jason Goldberg
So maybe let’s shift gears and talk about one of the other topics on investors’ mind, just net interest income. Obviously, it’s a driver for all banks as well as yourself. I think this year, you’ve talked to 2022 NII of $58 billion plus ex the markets component from CIB. Just I guess, how are you guys thinking about that?
Daniel Pinto
Yes. We said — at Investor Day, we said 56 plus, and then second quarter earnings, Jeremy guided 58 plus. Well, since then, what have we seen? We have seen rates going up. Our loan growth is in line with what we have predicted, around 8% across. And in credit cards, specifically, we are expecting to go back to the revolving balances of ’19 by early next year. So that is the same. And we have seen that the repricing of deposits being a bit slower than we were expecting. So clearly, I’m sure Jeremy will give you a numeric guidance in the third quarter. But clearly, the 58 plus now is a bigger plus, number one.
The other thing that we are going to do is it start — just to help you is to give a bit of guidance on markets and NII…
Jason Goldberg
Sure.
Daniel Pinto
That — so therefore, we avoid any type of conclusion. We believe that we are going to start doing that the next earning…
Jason Goldberg
You don’t want to start today?
Daniel Pinto
No. I’ll leave that. I have to leave that, right? So…
Jason Goldberg
All right. That’s fair. I guess you mentioned slower deposit reprice. Can you just maybe talk about some kind of deposit beta assumptions and how you’re thinking about the cycle?
Daniel Pinto
Yes. So I’ll tell you how we thought about it and what is happening. So we thought about this cycle, that it will be similar to the — let’s say, ’15, ’19 cycle speed of repricing. And that ’15, ’19, it was faster — it was, sorry, lower in repricing than it was in the average of the previous interest rate cycles. What is happening is that this cycle is even slower than it was in ’19 — in ’16, ’19. So the repricing the deposit pay rate is adjusting slower than we expected, that sort of contributes to NII. In terms of deposit balances, so we are in the retail business, we have seen obviously a massive increase from ’19 and now has stabilized. So we are not losing deposits but it has stabilized. And then the wholesale business, deposits are clearly when the — obviously, those bidders were retail bidders.
In the wholesale business, so you have the security services business that is probably the most sensitive of them all where the reprice is faster. And then even in treasury services in the payment business, deposits betas are going even slower than we were planning at probably several quarters ago. So the deposit story is a good story. We lost a bit of deposit in the whole sales space, some related to Russia. It has nothing to do with monetary policy. But overall, you would have saw that, that will start — balances will start sort of — but very little, less than we were expecting in retail, steady. So it’s a very, very good picture on deposits.
Jason Goldberg
Got it. And I guess the other forward-looking data point we have is 2022 adjusted expenses of $77 billion, although the first half of the year was less than half that. Maybe just talk to it in terms of how you’re thinking about the second half of the year.
Daniel Pinto
I think that the $77 billion is still holds. So let’s put that one clear. So what are the components of that, pluses and minuses? So investments, investments naturally, you have your investment plan that you execute towards a year. So then you will have some in the first half, and then it accelerates into the second half. So that puts a bit of burden into the second half versus the first.
Then we have acquisitions. Acquisitions comes to the company wherever they can, and that is the time they hit your expenses. This year, not last year, but particularly this year, in the first half of the year, we have way elevated as in any other company attritional levels when you compare with historical levels, not just in technology, but all across. So we have to do some adjustments to salaries just to cope with that higher level of attrition. So now attrition starts normalizing, still elevated from the previous levels, but with a good trend. And then you have the revenue-related expenses, that there will be a just wide performance. So that as we talk about banking, really variable compensation will be adjusted, and that will be part of our benefits.
And then markets, we’ll see how the year ends up. But that’s how it is. I think that the $70 billion is the number that we are going to achieve. And then I think that Jeremy will give a bit of color about what we’re expecting for next year but we will continue working on it.
Jason Goldberg
I guess on that, the market was a little bit surprised in January with the expense number. You’re starting the 2023 budget process, I’d imagine. How are you kind of approaching that?
Daniel Pinto
Well, we are working on that. So we are — it’s a bit too early to guide you on that. And I think that we are — as you know, in the corporate investment bank, I’ve been always super focused on expenses and investing and waste and margin compensation properly and all these type of things. And that discipline is not just in the corporate investment bank, it’s across the company. We are going to continue investing in the things that we believe will create growth for the future. But we are going to be that rigorous about what other — any other expense and make sure that we optimize that to the maximum. So I think that whatever the analysts have the ballpark scenario of expenses for next year, plus/minus, we are going to be most likely around that, but it’s a bit too early in the cycle to confirm that.
Jason Goldberg
That’s fair. Maybe put up the next ARS question. Besides pausing share repurchase, what should JPMorgan’s biggest focus be to meet its higher C1 ratio requirement? And while the audience answers this question, Daniel, I’m going to go to you with my question. But there is this kind of stair step-up in your minimum capital requirement from 11.2% [ph] to 12.5% the fourth quarter, 12.5% in the first quarter of next year. And as of today, it feels like the current G-SIB, you go to 13% in the beginning of ’24.
Daniel Pinto
Yes.
Jason Goldberg
I guess, first of all, how does this kind of impact in terms of how you manage the company? And then do higher capital requirements change your view around the 17% ROTCE number?
Daniel Pinto
So in the way that how we’re thinking about this, so on top of that, we want to have around a 50 basis points management buffer. So I think that when I look at the projections of earnings for the company quarter on quarter, we have plenty of capacity to get to those minimum level and exceeded it and plan for growth. So that growth, depending on the opportunities that we see, it will be obviously paying dividends, whatever is left. It will go either 2 things, either our priority will be to find ways to invest that capital very profitably or increase buybacks. And then depending how the year turns out, so we’ll do more buybacks and less growth or more growth and less buybacks. So there is plenty of capital generation capacity in the company to comfortably get to those levels. We will get around 13% by the beginning of the year.
So I think that we are in a very good place. We are not concerned about that. So then the return on equity, I am sure Jamie will guide you at the right time, but the earning generation of the company is very good. So we’ll continue to deliver best-in-class return on equities in the years to come.
Jason Goldberg
Got it. And I guess after seeing the stress test results, I guess we weren’t surprised that you kind of ceased the share buyback. I guess, when do you think you could start buying back stock again?
Daniel Pinto
Well, I said — that’s exactly what I said. So we will see next year. There is the capacity there. We will see what the opportunities are, and then we will decide so how do we deploy the capital through buybacks or investments.
Jason Goldberg
Got it. I want to maybe shift gears, turn to the consumer side of the house. But maybe before we jump into specifics, just share any observations from kind of all the data you have, whether it’s deposits, lending spend on the consumer against this backdrop that we all see of higher inflation, et cetera?
Daniel Pinto
Well, some of that, we commented already. So the consumer here in the United States is in a very, very good place. It looks like when we said that deposits are being stable, when you think about how the consumers are behaving is — I think that is in the following way. So the saving rate in the country was around 10% last year, now it’s 5%. So essentially, people are not touching much the accumulation of the wealth that they accumulated over the last couple of years, and they are saving less to pay — to maintain consumption and to pay for higher prices. So what we see both in discretionary and nondiscretionary consumption, very good rates of growth for now.
So I talk about credit cards. So revolving balances are increasing. And we still feel comfortable that by the beginning of next year, we will go to the ’19 levels. But the consumer has been a strong place — in a strong place. They are paying back and they are being cautious. So I think that, that looks a very good picture. Clearly, there are some businesses that have slowed down. Clearly, mortgage is one of those. But in general, the consumer is in a very good place, and that is reflected.
And then when you think about delinquencies in the credit card business, so I think that if I remember correctly, the lower delinquency rate was August 2021. From there, we increased, but increased very, very, very little. And where we see normalization towards the level of ’19 for delinquency rates is in the low income, low FICO scores, 650 and down. But for us, it’s a very, very small part of the portfolio and more — so the overall portfolio for us in terms of delinquency is looking really, really good, way below the historical trends.
Jason Goldberg
And I guess, maybe just talk to, you mentioned kind of credit card. We’ve seen, I think, balances up $25 billion but reserves have come down, similar trends across other portfolios. Just maybe talk about kind of how you feel about the reserve positioning, particularly if we’re entering some of these scenarios you talked about in the beginning.
Daniel Pinto
Well, I think that when you are thinking about any of the dual scenarios where I believe are, in my mind, the core scenarios that we are running the company for, I think that our reserve levels are perfectly fine. So if — even in the second scenario, even in the second is enough, where you have some increase in the employment rate and some shallow recession for a couple of quarters, the resale levels are perfectly fine.
Clearly, we may decide that at that point, that we want to be a bit more conservative or there is a combination of factors that creates a deeper recession and higher unemployment rates than what we are planning. At the moment, in which case, clearly, we’ll have to increase reserves. But at the moment, for our current scenario, for the current scenario that most of the analysts are looking at for growth and employment, I think that we are perfectly well reserved.
Jason Goldberg
Got it. I’ll maybe put up the next ARS question. Out of the investments discussed at Investor Day, which one are you most excited about or think will have the most positive impact? And Daniel, while the audience answers that question, I’m going to ask you one that I get a lot of questions around, which is international consumer. You talked about several initiatives around that. I guess given the changing economic, political backdrop since, are there any change to attractiveness or timing of these investments?
Daniel Pinto
Not really. So I think that these are very long-term investments. So this is not something that’s going to materialize, but it’s going a little better than we were expecting. So we’re expecting to have around 500,000 in the U.K., 500,000 clients by the end of this year. So we are more than double that. So we know that the brand, the quality of the client experience, quality of services and the strength of the company, it makes a very, very attractive proposition. How fast we grow, we don’t, is related to — if we go too fast without having all the products, then you burn a lot of cash. So we are trying to grow at the right pace, to stay within the guidance that we gave at Investment Day of pretax income and redirecting investments at a different pace. Like, for example, instead of expanding into new countries, we may develop more products that makes our income statement more balanced, lending-related products. So we are working on that, but we are very happy, and that strategy hasn’t changed.
C6 the investment in Brazil. So when we started talking today, they have 5 million clients. When we closed the deal, they have around 7 million, now they have 18 million. So it’s growing very, very fast. I think that we are working, we are learning a lot, but I think that, that one is going according to plan. So international retail is all about continue smartly building services to complete the offering to our customers in the U.K. and hopefully, in the rest of Europe over time.
Jason Goldberg
Got it. Number one response to the question with technology, which you talked about. Number two, interestingly, was growing U.S. Wealth Management. And I guess here, there appears to be kind of strategy shifts in terms of how you’re approaching the mass-affluent customer base. Maybe talk to what CCB is doing in the wealth space and just how big of an opportunity can that be.
Daniel Pinto
Well, that is a huge opportunity. So when I look at our — we got — we have a relationship with around 50% of the affluent households in the country. With the ones that we have deposit relationships, we do have like $4 trillion of assets invested with someone else. So we have an audience where we were not providing the quality of services that, that audience needed to invest with us. So essentially, we are investing. And the way that you’re investing is the branches are very powerful in this space. So we are adding wealth advisers to the branches. A lot we hire from the outside, a lot, we retrain people. We get opportunity to train and become wealth advisers. And that is the way that we have probably around 4,500, 5,000 at the moment. We are going to continue growing that number of advisers.
We are improving the quality and the amount of services for self-service. And we are developing like hybrids, where you can have a remote adviser and do some self-service. So we can essentially provide a great customer experience across, no matter how you want to interact with us. So overall, I don’t know the number, this may be wrong, but it’s around less than 2% market share in that space. So with the franchise of Chase, I just see only upside today. So I’m really excited about this business. We are probably the biggest area of focus and growth that we have in the United States in the retail business.
Jason Goldberg
Perfect. On that note, please join me in thanking Daniel for his time today. Thank you.
Daniel Pinto
Thank you.
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