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

Yes, absolutely. Absolutely. And we've done all of those over time. Obviously, our preference tends to be in those things is build it ourself or buy it and own it. And then we will partner where we think that, that looks like the right answer for both parties.

So let's shift gears a little bit and talk about credit cards. You mentioned before about card payment rates. And the company, you've talked about those being really high. Do you have any historical context for how high they are today versus longer-term trends or history?

Oh, they are significantly higher than I've ever seen. Significantly higher. But I think very understandable. There is all this liquidity in the system and customers have used it to pay down their debts in multiple different ways. And so really, as a business matter, what we try to do then is say, well, how comfortable do we feel with the product franchise that we have? So does it mean that there's something systemic that has changed? And some -- I think some important points, John, to make on this is, one, when we look at our retention rates of customers in the credit card space and across the business -- the other businesses, they have never been better. So customers are keeping their products. Whether they are fee-free or whether they carry a fee, we have not seen better retention rates. And I think Marianne Lake and her team have done just a super job of just adjusting the value propositions to meet the needs of customers during the pandemic environment. So the first thing is that those retention rates look superb. So we feel very good about health of the business. Second thing, I would say, just literally late breaking news is when we look at year-over-year credit card growth for May, it's up about 17% over the same period in '19. Not the same period in '20, obviously, but the same period back in 2019. So that's really encouraging. I would expect over the next quarter or 2 for us to see a stabilization in the outstandings and potentially start to see modest growth towards the end of the year.

And what drives that view about the stabilization and then growth in the outstandings. You had the house view there that the payment rates should come down. I guess we're trying to understand what gives you that outlook?

Well, in order to get spending in the credit -- in order to get loan development in the credit card business, we've always viewed the need that customers are using the products and that they are spending. So the spending is coming back, hence the 17%. By the way, the 17% is despite the fact that airlines are still down in that range of 25% to 30%, which is a huge improvement from where the airline industry was. It's coming back very quickly, but you still got that deflated, and yet overall spend is up about 17%. So spending will be the primary driver of us starting to see core loan growth. And as I say, that's what we're starting to see here in -- actually over the course of this year, not just May.

Yes. And could you talk a little bit about what you're doing to stimulate loan growth, even amid these high payment rates? And I know, Gordon, you love to tell your competitors what you're doing. I'll ask anyway. Is the company thinking any differently about how it spends card marketing dollars today than in the past?

Yes. What we always try to do with marketing dollars, you have to be -- it was true in the financial crisis. It was true during the pandemic. It is pointless and actually, I think, damaging to the customer relationship to be trying to market customers to take some action when that's not how they are feeling. And actually, I go all the way back to 9/11, and people completely understandably were scared. And to start to market aggressively immediately after 9/11 or the financial crisis and so on is a waste of marketing dollars, and b, I think, damaging to the relationship. So we have a whole set of initiatives which are underway now. So our customers will see more marketing, more offers. So you're going to start to see that pick up quickly.

And maybe we could ask you about your...

By us and by our competitors. I have actually no doubt about that, John.

Right, right. It does feel that way, for sure. And how about T&E? You mentioned getting the 17% without the full T&E returning. Some companies pulled back from the T&E sector. Chase seemed to make even a bigger commitment across that segment during the pandemic, and including you've bought the cxLoyalty platform, which actually looked like a sizable acquisition. So maybe you could give us a comment about the firm's commitment to T&E and why cxLoyalty is such a helpful addition for you?

Yes. Well, if I start just with T&E, I kind of separate between business travel and consumer travel. I think we just have to wait and see how quickly business travel is going to come back. We've all spent 14 or 15 months on Zoom or its equivalent. And so I think there's a level of comfort with that. They'll never be a substitute, as Jamie says, for a banker in front of a customer. You'll continue to be business travel -- there'll continue to be business travel. The question is just how much. Switch to the consumer side of the equation. I don't meet many people who are really looking forward to their next trip. There is this pent-up demand of people wanting to fly to Europe or Asia or wherever they want to go for a vacation, but significant pent-up demand. So our belief is that the travel and entertainment space for the consumer is going to be very robust over the next number of years. And what cxLoyalty does is give us some really powerful capabilities when linked with our Ultimate Rewards program, which we launched in 2010 and has just been an enormous success for us. And so it's going to help us bring unique offers to those customers to simplify and more fully integrate Ultimate Rewards with the travel experience. So it was, I think, a very nice acquisition done by Marianne and her team. And as you say, it was done at a time when it looked like travel was something that was no longer fashionable.

And is that an example of something where you said, "Hey, this would take us years to build what they have," and acquisition made sense, not just the price, but what you're getting for versus what you have to do organically to get there?

Yes, yes. And we look at those things very closely. Like just how much time could we say, how could we accelerate time to market if we were to acquire an infrastructure, acquire a set of capabilities that we don't have today. We're actually regularly looking at those. Quite a few, by the way, we walk away from. Why? Because when we dig into them, we fully expect that we're going to have to do some level of uplift, particularly for things like cybersecurity. When we're acquiring something from a smaller company, that's fully expected. But what we occasionally will also find when we get into due diligence is that just it's just not built in such a way from a technology platform perspective that will allow us to be able to scale to our volumes without potentially a fundamental rewrite. In those situations, we'll tend to walk away and put the resources on to building it ourselves. So we try to look at those pretty constantly actually.

Great. Well, the upshot of what we were talking about before with the high payment rates is that your credit quality and those of your peers has just been outstanding. And your net charge-off outlook in credit card of 2.5% for this year is shockingly impressive to anyone like me who's been looking at card loss rates for years and thought when they were good, they were at 3% or 4%. So is that again just everyone's got lots of cash, there's not a lot to revolve? Or is there other fundamental issues that are just making the credit quality so good?

Well, I think we came into the pandemic in -- with great strength, both the industry and for us specifically. So our loss rates were really superb when we entered the pandemic. And then for the reasons that you've described the kind of liquidity, the level of savings, the people have had the drop in consumption, which has existed, has obviously significantly reduced consumer spending, consumer activity. So loss rates are very low. I would expect that over the next -- at least the next couple of years, that loss rates will remain exceptionally strong, at least the next couple of years.

Which does make the 10% reserves you're carrying against the card book look conservative, if anything. Is that saving for a rainy day or just something that just takes time to adjust in the new accounting?

No, it's not saving for a rainy day. And just as a thank you matter, our people don't have any personal benefit from holding reserves or releasing reserves. So just people sometimes ask me, is that so that people can be compensated? No, it is not. It doesn't appear in any of the compensation plans. There's no effect whatsoever. Firstly. Why we held them, these things are very difficult to model. Again, we haven't seen a pandemic in modern times. But our concern as we kind of overlay what the models will tell us with sort of management judgment has been that what if we saw this bad turn take place in. And if we think about the pandemic as having kind of 2 components, one is how rapidly it spreads and then how fatal it can be. And we've seen it spread really quickly. But thankfully, and we should all just pause and give a huge thank you, yes, to all the frontline people who have done an astounding job for us over this last 18 months, but also the scientists who have brought a vaccine or vaccines to the market in a time that we've never seen before. Imagine if this had been 5, 6 or 7 years that we had to live through this, which historically might have been the case. So anyway, listen, I just think that we're in, I think, a very, very positive position as it comes to reserves. We were worried about some of those things taking a bad turn. That -- the probability of that is reducing, I think, pretty significantly as we're seeing the vaccines deployed across the world. And at the appropriate time, we'll begin to release those reserves.

Okay. So I want to tick through a few other product types within CCB. In mortgage, you mentioned, I think, it was a few years ago that only a small percentage of the CCB customer base had mortgages with Chase, and that was a significant opportunity for better penetration. Is that still the case? Have you made progress against that?

Well, 2 things. Yes, it's still the case. And no, we haven't made as much progress as we would have liked. So yes, we still see that as a real opportunity. But -- so kind of what has really happened in the mortgage home lending space has been just a deluge of business. So obviously, with rates being where they are, refinancing has been really significant volume for us. And obviously, people have been out buying homes, and we read about the shortages and -- I don't know you, but I received letters from realtors at my house in New Jersey, saying, I've got this person, that person who's looking for a house. So there's just a great deal of demand out there. So our home lending business had a superb year. It's continuing to do extremely well, but was also overwhelmed with volume. So it's still an important -- a really important target for us. And it will be over the next number of years, but we made less progress on it this year than I would have liked to have seen, but we had an awful lot of great business.

And any other big strategic questions you're wrestling with and how Chase approaches the mortgage business and competes with nonbanks?

Yes. We've done so much over the course of this last number of years in the mortgage space from dealing with many of the consent orders, which we and others in the industry had to wrestle with. We've replatformed the business onto a more flexible infrastructure, and we've made excellent progress in digitizing it. So If we go back a year or so, very, very few, single-digit percentage of our customers that were applying from mortgage started that journey digitally. We're now well over 70% of customers who start their mortgage with us, and that's rising very quickly. So the digital journey that we are progressing in mortgage is really starting to accelerate for us. And we have a whole set of initiatives that over the next 24 to 36 months, we'll just continue to automate a process which is quite slow and quite expensive generally for the industry. And I think this is just going to end up as a real positive for customers because they're going to be able to complete the mortgage process much more rapidly than they have been able to historically, and it will drive down costs and so on. So I'm very excited about what's happening in the home lending space.

Great. So we've got a few more minutes left, and there are some questions that have come up in the queue. And a reminder to folks, if you do have questions, you can click on the right-hand side for pigeonhole there and submit them. Gordon, one thing that's come up is about the U.K. digital bank launch. So I guess why is the right -- why is now the right time for Chase to launch digital bank in the U.K.? There does seem to be a fair amount of neo banks competing there already. So what will you bring competitively to that space? A market you know.

Yes. It is a market I know quite well. We think there's just a significant opportunity for a bank of our scale to be able to go in, have a longer-term point of view and to really deliver on the customer experience. And many of the innovations that have been generated in the U.S. will be very applicable to the U.K. market. I have had a -- I'm not going to mention who with, but I have had a bank account in the U.K. since I was 17 years of age. My needs now at almost 63 are quite different than they were when I was 17. But I would say that the bank that I'm with in no way has recognized any part of my journey, either the start, the middle or the end. So I just think there's a fabulous opportunity to build a very customer-centric offering for the U.K. market. And we're excited to see how that goes. We'll be launching later this year. And Sanoke and his team, I think, have done a really nice job building some excellent capabilities, and we'll get it into the market and see how it does.

Do you have any baseline brand awareness there that you're going to be building off of? Or are you really starting from scratch, do you think?

No, we do. Actually, we do. That's the beauty of JPMorgan Chase, and it's the beauty of our global retail business. As much as Chase is really a U.S. domestic business, and obviously, we have terrific scale in this market. But because of the huge geographic footprint that we have in Wealth Management and the Corporate and Investment Bank, it does give us good brand awareness. So there aren't too many people who haven't heard of JPMorgan Chase.

The next question is about buy now and pay later. Do you view this industry as a threat to your payments or lending business at all? And to what extent are you responding?

We're definitely responding. Every day, there are threats and opportunities that come at these businesses. But I think about buy now, pay later in sort of 3 categories. There's before the transaction, I'll come back to each of these. There's at the transaction, which we think of typically is buy now, pay later. And then there's post the transaction. So let's go back to kind of pre the transaction. And if we look at American Express, for many decades, they've been very, very successful with a product called, Sign and Travel. It may have changed its name by now. But I think many people remember Sign and Travel. And effectively, what you could do is turn around and say, well, if I fly or if I book a hotel or if I drive a car, automatically want to revolve those transactions because they're typically larger. Very successful. Second area, at the point of sale. So firstly, we have a strategy for the first piece. We have a strategy for the second piece, and a strategy for the third day. So the -- at the point of sale is evolving quickly. We think that that's going to be an opportunity for us. But it's also existed for many, many years. If ever you've gone into a major department store, there's always been some type of buy now, pay later capability, less automated, more friction in the customer experience, but it has always existed, and it's being made much better. So that can both be an opportunity and a threat for us if we aren't quick enough to capitalize on it. And then post the transaction, this is very interesting because post the transaction, we can look at almost any consumer payment, whether it came through on credit card, whether it' came through on a debit card, whether it came through on a check, whatever it is, where we have access, unique access to that check or payment vehicle for our customer that we can offer them different opportunities to revolve the transaction. So I think net-net, when I look at the 3, it's a very real opportunity for us, and we're working on each of those as we speak.

And these seem like there would be marginal changes or evolutions you need to make to your existing products to compete effectively.

Yes, yes, I think so.

So the next question is on wealth management. You recently consolidated your wealth management operations under a single head. And clearly, Chase is not nearly as well known in wealth management as it is in deposits, banking, cards. What is the company's aspirations in U.S. wealth management?

Yes. Well, we -- it's a huge opportunity for us. And if we think about where we are relative to the scale in the other consumer businesses, it's much more modest in wealth management. We do really well in the ultra-high net worth space, where we typically have kind of 4% market share. But if we think of that sort of mass affluent, affluent space, our share is less than 1/2 that. So just a huge opportunity to grow, and again, with our existing customers and with prospective customers. So it's an area that Jamie really asked us to start focusing on more aggressively, and we're already seeing actually some pretty good momentum. So a terrific area for growth for us.

And I think people asked about you guys here. Is it product offerings? Is it technology? Is it just branding, so people associate you in this space? Is it all 3 of those, would you say, or?

I worry less about the branding. I don't think it's branding. People expect to see financial services products from us, of course. And interestingly, I think about the retail bank is a superb foundation stone upon which to then build wealth management products. So you own -- where you can own that primary relationship, the operating account for customers, if you like, it's a natural step to be able to add wealth management, particularly on top of a retail banking relationship. But then in terms of product, we have a bunch of work to do that's well underway. So we have you invest for self-directed, which is growing well, but we can do much more with that. We can do much more with that. So we have a set of plans there to invest heavily. We're going to invest heavily in the retirement stage. So I'll try and take personal advantage of that as I move into retirement mode. And then I think the last piece I would say that we are behind on and we are catching up quickly is in the whole space of kind of personal financial planning and how customer, particularly from a mobile perspective, can be building their own plan and evolving that plan as their needs change. So whether they got kids they want to put through college and they've got that done, and now they want to worry about retirement, and digitizing all of that capability. So a number of different areas. And the team, I think, have laid out a really nice product road map that I think will help us to compete really successfully in that space.

That's helpful. Two final questions from the cards here. First, do you view JPMorgan's card franchise as more travel sensitive than some of the money center peers, clearly not versus AMEX, but versus some of the other peers. Are you more T&E travel sensitive?

Well, we have a probably pretty heavy share in the travel and entertainment sector, but our business is sufficiently large with 22% market share in the U.S. that we tend to have a pretty meaningful share in each of the segments. So our business has worked through the pandemic where travel was devastated actually pretty successfully. And I think I go back to the fact that Marianne and the team were able to adjust the value propositions in the T&E products to be able to meet the needs of customers who are not traveling. So if we just have left it static and said we're making no changes, we would have felt the pain of that. So the answer to your question is really yes, but. And yes but being that we have been able to evolve those value propositions while keeping the core of travel and entertainment. And you'll see more of the things that we're doing in T&E, because we do believe really strongly in it, over the course of the next number of days and weeks and months. Lots of new stuff coming.

Great. Great. Okay. Last question. Just a quick comment on auto. To what extent have you participated in what's been a very strong auto market? And is this the time to be aggressive in auto or careful in auto?

Auto has been superb, and we have certainly participated strongly and gained some share. Unfortunately, right this very moment, the issue is supply. So there's plenty of demand out there from customers. But this chip shortage is really starting to slow us down a little bit here. So won't have a significant impact on us in the short term, but I'd like to see auto growing more quickly. And I think it's going to be a terrific business over the next number of years because the industry is going through such a fundamental change as EVs become regulated to be a larger and larger piece of the market. But the technology is reaching a point where battery capability is becoming less of an issue. It's not an issue yet, but less and less of an issue as range starts to increase. But right now, as the automakers are trying to get product out onto the lots is a challenge. And there's nothing we can do about that one, but we'll be ready when our customers have a product to ride.

Great. Well, Gordon, we really appreciate you coming back and speaking at our conference, maybe your grand finale of conferences as President of Chase. And we really appreciate it over the years. You've been great and really helpful to us, so we appreciate it.

John, thank you so much. Really a pleasure. Thank you.

Take care.