JPMorgan Chase & Co. (JPM) Earnings Call Transcript & Summary

Okay. So let's switch gears a little bit to M&A. And you've obviously been very vocal about M&A since really long before the pandemic. But has the development of your balance sheet over the last 12 months or so, whether with regards to the amount of excess capital above the 12% CET1 target that you're carrying, the distribution limitations or leverage becoming more binding. Does it change the way you think about M&A, including really your areas of focus or interest as well?

So it doesn't fundamentally change the way we think about M&A, although it was interesting with the distribution restrictions that we were able to buy someone else's stock but not our own stock. But that was just a quirkiness of the limitation. So -- and it's also -- yes, we have excess capital. That is true. Except for -- remember, we generate an enormous amount of capital in any given quarter. And so the fact that we actually have excess capital right now, I wouldn't say, is driving a change in our thinking. I think what it is, is perhaps a greater sense of urgency. There are businesses like Asset Management, where scale matters even more than it did a year ago. And then other businesses, like I said, where the need to move quickly and to innovate quickly to keep up with competition is certainly accelerating. And so it is possible that the changes that we know we need to be perhaps more aggressive about how we think about buy versus build because of the need to move quickly. But it's all innovation and customer-related and market related, not necessarily because of the change in our balance sheet.

Okay. And we're going to get to a discussion of the balance sheet in a minute. But let's detrek to credit now, if you would. And at the end of the fourth quarter, I think I know you took -- me by surprise with the magnitude of the loan loss reserve release and it was about $3 billion, $2 billion in wholesale, $1 billion in Home Lending. But you were a little bit cautious at that point in time on credit card. Can you give us an update on what you're seeing across the wholesale consumer portfolios?

Sure. So I would say things are certainly more positive than we even would have thought at fourth quarter earnings. Looking at C&I, I would say, broadly stable to improving downgrades there. As you know, peaked in the second quarter of 2020 and have been coming down steadily since then. CRE, commercial real estate, that's, of course, an area that we're watching closely. Everyone is watching closely. But rents have held up. The book is well structured. It's primarily investment grade. We run a significant stress analysis on that portfolio all the time and feel good about our ability to manage that. And then on the consumer side, Card, it's really interesting. I mean what you would typically see in Card is a seasonal uptick in delinquencies in the first quarter relative to the fourth quarter. And what we're seeing right now is actually the opposite. We're seeing delinquencies improve year in the first quarter relative to the fourth quarter. And then Home Lending with HPI continuing to improve low rates, that's very supportive of the credit environment there as well.

So how does this then impact the trajectory of net charge-offs and reserve release?

Right. So on net charge-offs, I would say -- well, first of all, wholesale is a bit more episodic given what we are looking at right now. We don't see significant meaningful increases on the wholesale side but it's episodic. So always more difficult to forecast. On the consumer side, it's a bit more straightforward to forecast the near-term because, of course, you fill up the delinquency buckets before you actually realize the charge-offs. And so we're just not seeing that. And so on the consumer side, it's perhaps more straightforward to say that we don't anticipate a meaningful uptick in charge-offs this year. And then as it relates to reserves, we are just starting our process for the first quarter. There's a lot of time to go and a lot of work to do, so things could change. But as I said, things do look better than we even thought at the fourth quarter when we had a reserve release then. So more work to do, but things look better than we thought, trending positive, I would say, on reserves.

Well, we like that trend. So if you think about the credit experience over the course of the last year, over the course of the crisis, is it indicative of how banks risk profile has permanently changed as a result of really post-crisis -- post-financial crisis, regulation and then kind of government and fiscal support in here. Is your risk profile changing? How we put this in perspective over the course of the last decade?

Well, I think it is certainly true that what we saw in 2020 was a banking system that looked much healthier than, of course, in the great financial crisis. And so increased capital, increased liquidity, resolution planning, all of those things clearly worked as we came into this crisis. And so I think it is indicative of a permanently changed and healthier capital structure for the banks. But I think also many of the banks, I certainly know, it is true for us. The overall portfolio, credit quality of our portfolios were stronger coming into this crisis as well.

Okay. So when we think about the other side of this crisis and where the allowance coverage ratios go at the end of this cycle relative to where they were on CECL day 1. How are you thinking about that today?

Yes. It's -- well, it's a bit easier to talk about where we should land. It's harder to talk about the path to get there. So if we go back to CECL day 1, which was only a little more than a year ago, but certainly feels a lot longer ago than that. It was still a very benign credit environment. I mean we knew that we were still over-earning on credit. And so you would think -- and even in our credit portfolio -- credit card portfolio, we were still seasoning on some vintages where we had expanded the credit box. And so even then we thought we were at an allowance coverage ratio that was possibly lower than where you would land in a more normal environment. So I do think, eventually, we should get back to a place where a more normal environment is higher than where we were on CECL day 1. But of course, the path to get there at this point is unclear. We could end up in a healthier place before we get back to what feels more normal. It's unclear.

Okay. So let's switch gears again. Now we're going to talk about Capital Management, the context of G-SIB and CCAR. And let's talk about the challenge of holding JPMorgan CET1 target at the 12% level. And maybe we start with G-SIB surcharge management in the current environment with deposit flows really still quite strong. Let's discuss what you can actually manage at JPMorgan and maybe touch on whether or not there's any constructive discussion around G-SIB surcharge recalibration?

Okay. Sure. So I'll talk about G-SIB. But I'll just start by saying that the overall 12% there, of course, it's possible that there are puts and takes in that number. So we'll talk about G-SIB, but of course, it's possible that there could be an offset in SCB. But on G-SIB given the enormous expansion of the system that we saw in 2020, we do expect to be in the 4% bucket as we end even 2021 without recalibration. And given the size of the system and the fact that the system is going to continue to expand here in 2021. It would be very, very difficult for us to get back to 3.5% without recalibration. So we do expect to be in the 4% bucket. I would say whatever we need to do to even manage to stay in the 4% bucket we'll be very thoughtful about. And we have time to think through that, of course, because remember, even as we end at 4% at the end of 2020, that's not effective, of course, until the first quarter of 2023. And then if we end 2021, even in a higher bucket, that then puts you out yet another year, which then gives some time for that recalibration, which we, at this point, expect to be part of the Basel III end game. That is the latest that we're hearing from the Fed that all of this would be considered in 1 package as part of the Basel III end game. So we remain hopeful that comments that have been made through time about the level of capital in the system being about right will be reflected in what we see in the Basel III end game, and we'll get that much needed and long overdue recalibration on G-SIB.

We want to ask you how you really feel about that, I think here. And that's a fairly optimistic outlook with respect to recalibration. In the very near-term, I know that the growth in the balance sheet would roll in several years out, so this may not be an issue. But you uphold at the 4% level, will you take more aggressive action in the near-term vis-à-vis deposits?

Well, I mean, we had -- as it relates to deposits, and as I said, we do expect deposit growth to continue in 2021 given the Fed balance sheet expansion. We will be thoughtful, but we'll have not only the G-SIB impact, but the SLR impact, which we can talk about in more detail. But we may -- it's a little bit different for G-SIB than it is for SLR. But we may have to do things like issued preferreds, and pass that cost on, which is not something we want to do or turn away deposits. But that -- we'll be thoughtful. But there's no doubt we're going to have to manage this just like we manage all of our scarce resources.

So you touched on the implications of the world without SLR release at the end of March when that expires. And just remind us, thinking back to the 2015, 2016 period, where you took specific action at JPMorgan to ship not operating deposits off the balance sheet. And how you think about doing that? And how you effected that process 5, 6 years ago?

Yes. So I would say broadly similar themes, obviously, but some differences in the detail. So back then, we were managing to a new LCR requirement. And so it was about non-op deposits, not all deposits. Whereas now, given that we are in a very low rate environment with very little loan growth, the liquidity value of the marginal deposit, whether it's -- even if it's an operating deposit, it's very, very low. And so right now, what we're talking about is, in a lot of ways, more complicated because it's all deposits and the issue is an issue for all of the major banks. But yes, we will have to think about how we can manage deposits. We have a couple of choices. Unlike back then, we do have a couple of choices in the sense that we could issue preferreds to cure the SLR issue, but we -- or we could hold more common. That's another avenue for us or we could turn away deposits.

Okay. So let's switch gears. None of those options are terribly good, but you'll manage them. So what's your take on the 2021 CCAR scenarios? Because you did mention some potential offset to G-SIB, to SCB management. So your take on the scenarios as well as the actions that JPMorgan is taking to reduce stress loss content relative to, I think, it was at 3.3% SCB in 2020?

So I mean, the scenarios were broadly in line with what you would expect, more stress in CRE, less stress in unemployment. So I think they were broadly in line with what we would have expected. As far as the actions that we've been talking about that we could take in SCB, we have completed those. And so that includes transferring securities from AFS to held to maturity. We did that for other reasons, but it has the benefit of helping on SCB. And then loan reclassification on the balance sheet out of trading into loans, that also helps SCB, and there's a few other mechanical things. Of course, the SCB is scenario dependent. So what I can say is relative to the scenario that resulted in the 3.3%. We do think that there's opportunity for us, but it's scenario dependent and, of course, based upon Fed modeling.

Sure. So when I think about CCAR as well, it's increasingly clear that CECL and CCAR are almost in conflict with each other. And let's talk about this for a second because when you think about the round 2 scenarios and the benefit to loss content of having the loan loss reserves on your balance sheet after the second quarter of last year, in particular. Does this conflict with how you think about or impact how you think about loan loss reserve relief?

Well, it's a really good question because structurally, it's sort of a very obvious point. I think it's more obvious at this point in time because we are coming through a period of stress where we built reserves. And of course, now heading into a period of recovery. So I think it's a very good question at this moment in time. I think it will be less of an issue going forward when you're in more of a benign BAU environment. Having said all that, no. It's not the way we think about it, of course, because our reserves are at any given point in time are our best estimate of future losses and they're compliant with GAAP. And so it's not something that we do or should consider as we think about the level of reserves. But it is a good question given how the stress is constructed.

And so when we -- we've touched about on some of this in terms of the discussion around capital management. But in terms of the regulatory outlook, what do you think changes in the Fed's approach to CCAR considering the last year with the pandemic, the drawdowns, the loss realization, the market activity, what changes?

Well, I can touch on what I think should be considered. Of course, like I don't know what put -- what will be changed. But I do think that there were a lot of really important learnings in 2020. And they include the extraordinary system expansion that has put pressure on size-based measures. Obviously, we've spent enough time talking about G-SIB and SLR, but there's a very real lesson there in how we need to think about and sort of future-proof these size-based measures that were never meant to be finding constraints. They were meant to be a backstop. So -- and then they stress test themselves. I think we were -- we learned that they don't necessarily reflect reality. So the SCB is an enormous buffer. And of course, it is a buffer, but it is treated like a minimum. And in that world, when we build reserves, we then replenish that capital. And so as we build reserves and replenish the capital to meet our SCB minimums, we have now increased the loss absorbing capacity in the system pretty significantly. So that should, I think, be considered as well. So I think there's a number of learnings. We're certainly hopeful that they'll be taken into account in the future. And I certainly hope that we can believe in the SCB framework, such that next time we go through a crisis. This time was unique, obviously. We had CECL. We had a new accounting framework. We had a new capital framework, so it was understandable that the Fed wanted to do what they did in terms of pausing on distributions. But I'd like to think that in a future crisis, we can have confidence in the SCB framework and not have to introduce capital distributions of that.

Fair enough. And in what other areas do you expect the new administration to possibly drive regulatory change as it pertains to your businesses?

So I mean, it seems pretty obvious that the priorities at this point are the COVID recovery, climate and racial equality initiatives, and we are ready to be helpful and look forward to being a great resource and partner with the new administration on all of it. And obviously, you're familiar with the path forward announcement that we made, $30 billion commitment. It includes commitments to promote affordable housing and homeownership in underserved communities. Growing Black and Latinx businesses, including announcements we've made over the last few days about support for minority depository institutions, improving financial health, and access to banking in underserved communities. So we are really committed and excited about what we can do in the path forward initiative. And then the Paris-Aligned announcement that we made recently as well as other historical commitments that we've made, whether it be $200 billion of a commitment to financing, green, social, and economic development, to be carbon neutral in our own operations. Towards the end of last year, we issued our first green bond. This year, our first social bond. So we're incredibly committed to all of these initiatives. And I said, look forward to being a great resource for the new administration.

Wonderful. We do have 1-minute left. So I'm going to take a question that's come in a couple of times with respect to the 10-K disclosure and the meaningful increase in interest rate sensitivity, asset sensitivity that was reported. And I know there was a bit of a change in the earnings at risk model. But can you just clarify what changed?

So we updated the rates paid or the betas in the consumer deposit model. It just was really important for us to do that now that we're back at the 0 bound. So there, I would just remind everyone that, of course, there's convexity there. So it is not linear. So the impact of the 100 basis points from this level is not the same as the impact of the next 100 basis points. But that was really a function of us thinking about the experience in the '15 through '19 rate cycle and now that we're back at the 0-bound updating for that experience.

Okay. Fair enough. Well, I think we all look forward to continuing to see this economy recover and interest rates move in a direction consistent with that recovery, which would allow you to realize the benefits of that rate sensitivity. And so to end this on that high note, I want to thank you so much, Jen, for being with us today for skipping an Investor Day or going to an every other year schedule here to join us at this conference. Thank you so much.

That's Great. Thank you. Thanks for having me. Okay. Bye-bye.