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

I think we're going to get started with the final presentation of the day. We are delighted to have Daniel Pinto, who will shortly be assuming the sole President and COO role at JPMorgan. He has served in lots of different capacities at JPMorgan, most recently as CEO of the Corporate and Investment Bank. I believe his career started at JPMorgan or one of its predecessors in 1983. I believe that's right.

Yes. [indiscernible]

And he's worked across numerous countries, continents as well as different business practices within the finance industry. So thank you very, very much for joining us. We really do appreciate you being here.

I thought I'd start off with a broad question just about the new role that you're taking on. So as I mentioned, you will take on the sole President role at JPMorgan at the end of this year. What does that role entail? And maybe you can talk a little bit about what your priorities are over the next 2 to 3 years and what you're looking to achieve in this new role.

So first, thank you for inviting me. It's a pleasure to be here. So the role essentially is to work very closely with Jamie in delivering the strategic agenda of the company across all line of business and close all the issues so he and I, we work together -- we've been working together for many years. And there are areas where I will focus, and areas that he will focus. There is a great degree of communication amongst the 2. And over the next few years is, as we said, is to deliver that agenda, that it cuts across the Corporate and Investment Bank, the retail business, the private asset wealth management and the commercial bank. So do you want to go into the details now? Or do you want to go...

No. Maybe we can come back and then talk about each of them in some of the questions. But before we do that, maybe let's start with the macro environment. And I think really the biggest question people have been asking at this conference is, look, what does this transition to a higher interest rate environment look like? And what does it mean for the financial services industry, in particular? And I thought maybe you could touch on your view of the current state of the economy, talk a little bit about how corporate and consumer confidence appear to be shaping up heading into 2022 and maybe talk a little bit about some of the risk factors, like higher inflation and supply chain disruptions.

So my view on the economy, U.S. and global, is definitely positive. So when you look at the level of growth that we are experiencing in the United States, over 5% this year, over 3% next year globally, 6% plus and close to 5% next year. So overall, all these stimulus that is being injected into the economy is essentially filling the purpose. And the economies are doing well, and the business environment is very positive. So the risk, if I have to pick a risk that could derail the process here is essentially, in my view -- there are probably 2. There is always geopolitical issues and escalation between U.S. and China and the Russian actions and all that, which normally, unless they are very, very big events, don't derail the path of economy. And I think that the most important issue at the moment is inflation. I have a relatively positive view on it in the sense that obviously, the level of inflation at the moment is quite elevated. And you can see all the reasons for that is people are gradually coming back into the workforce, but it's happening at a slow pace. The demand for jobs and people to do jobs is very high. The participation rate in the labor force has been -- is correcting, but it's very unlikely to get to the levels where it was pre pandemic. So the labor shortage that is going to probably take the employment rate towards 3.5% at the end of next year and a bit lower at the end of '23 is an issue. And I think that, that was always an issue because of demographic, because of immigration policies here in the United States. So that situation is really an issue. On the other hand, then you have the issues about supply chain that clearly, they are important. The consumption of goods here in the U.S. has gone up like 25% from pre pandemic to the peak, and now it's around 16%. So when you have that demand, obviously, that will have an issue on transport, containers and certain industries. So you have all these issues, but even the supply chain starts improving. So we have seen indications like PMI. Delivery times are lower. The price of containers are coming down. So overall, all the components -- and I think that it will normalize slowly over the next year. So there is -- the risk of inflation is there. But for this to become a real turnaround, an issue that is really very, very important, it will have to be to a point where the Fed, which is a very credible Central Bank, will ignore the signals or do very little, number one. Number two, they will have to -- inflation expectations that tend to react very slow, they will have to substantially change. So in which case, you could see a scenario where long-term inflation expectations start changing. The Fed totally [ underwhelm ] in their reaction. And then you have a big change in real rates in the long term, which is a scenario that I don't see. So I do see inflation being high and probably moderated into the second half of the year to a level between 2.5% to [ 2.75% ]. I think that interest rates -- the absolute levels of terminal rates at the moment, they are not in line with inflation picture. So interest rates most likely will have to continue to go up, and the market most likely will have to price more than it's pricing today. But I think that my central scenario is that the Fed actions and the components that they are pushing inflation up, they are going to converge in a way where the business cycle, in my view, will continue. So in that scenario, I think that we are going to be in a benign environment for business, at least for the next couple of years. And when you look at consumer confidence, it's very high, which is looking at our own credit card numbers. And at the moment, when you look at expense -- the amount of money [ spending ] through credit card is around 17% higher than it was pre pandemic. And it's across all items except airlines, which is a bit lower. So the consumers have a great balance sheet. They have accumulated savings over this time. Though the sales rates in the economy is normalizing towards normal levels, the stock of savings is still there. So that's good, and it will be spent over time. So the consumers have delevered quite a lot. So the consumer is in a great place. The companies have very, very strong balance sheet, very good margins. So it's very likely they have all -- they have to produce growth. So therefore, it's very likely they are going to continue doing acquisitions. And the confidence of the CEOs is relatively high. It's high for what we see. So I see a really good backdrop for business to do well in the next couple of years.

That's great. So maybe we can segue to your strategic priorities against that backdrop, which is, I think, broadly a very constructive economic backdrop. And I feel like the strategic priorities at JPMorgan have been consistent now for a long period of time around expanding your geographic footprint, deepening customer relationships and building scale. I mean are those still your priorities today? Has the balance between those priorities shifted in any way? And has the pandemic highlighted any new strategic priorities that you're thinking about today?

The strategic -- the direction of travel is -- really hasn't changed much. We do believe in business that they require scale. They are diversified. They are global. So that direction of the strategy really hasn't changed. What we see is as we continue delivering, so there are plenty of opportunities still for us in many, many places. Like, for example, when I think about the markets business where we have increase our market share from, I don't know, in the last 5 years were over 200 basis points, and we are, on average, between around 12% and 13%. I think that we need to continue investing in that business because it's very likely that [indiscernible] will continue to consolidate into the top players. So that's -- we've been investing on that. That's the direction of travel, and we'll continue to do so. In Investment Banking, we've been adding bankers and develop where we have gaps in different sectors. And we are already focusing investing into the middle market, particularly in the United States, where I think that it was a great opportunity this year, and we'll continue to do so as we are doing in Asia, and we did very well in Europe, and we'll continue to invest there. So there are -- and we are very focused in private markets and both primary and secondary. So the whole Investment Banking space, I think that there is a way to grow. We are roughly short of 10% market share. Probably there is more to go there. We've been very clear about the opportunities and leveraging the assets that we have in the payment space, both across retail and the Wholesale business. I think that this is a humongous opportunity. Going forward, the market share in that business in the last 5 years has gone from low 4% to over 6%, and we continue to invest. I think that this is a business that is I am personally very focused, great opportunity. The same in security services where the challenge there, which we are doing very well. We've been really getting a lot of more market share. And the challenge there is data, how we are going to help our investor clients, asset managers to ingest data in a standardized way to be able to use it. So we are working on that. I think that in the retail business, it's all about creating a client experience across payments, lending and creating client journeys that allow us to maintain and grow our market share in that business and continue expanding and improving the client experience across cars, auto, unsecured lending, et cetera. So I think that in the private bank, specifically, and in wealth management, the big opportunity is in the U.S. We are very good and very big in the ultra-high space. But below that, we have 1% or 2% market share. There are plenty of opportunities in the few hundred thousand dollars to $25 million to grow. So across the company, there are so many opportunities. That's why we believe that -- even though we may talk about expenses in the -- later today, but we are not going to -- because revenues may come down in some parts of the company, we are not going to starve the company from continue investing just to have a better return on equity in the short term and then hurt the ability for the company to perform in the long term.

So maybe we can talk a little bit about disintermediation and the risk of disintermediation. It's definitely something that's coming up more and more. And I think there's a lot of focus on what payment companies are doing. A lot of discussion around the fact that a lot of small businesses today, their first point of contact isn't with a bank. It's with a payment company when they get up and running. From your perspective, how much of a risk do you think it is? And how do you think both JPMorgan and the industry best defend themselves against that?

I think that the payment company is -- the PayPals of these world, Adyen, Stripe, Square and others, they have done a very, very good job. They have created services for clients that are easy to consume, great client experience, [not cheap], but particularly the small and the middle market clients, they are really willing to pay for that quality of services. And I think that at the same time, a lot of the banks, they -- we kind of sleep at the wheel and allow this to grow. I think that -- that's why, in our case, we put the payments, assets together because I think that we have everything to compete. And the way that I think about it is it's very easy to say that, well -- and explain why buy now, pay later will not succeed or this will not succeed or that will not succeed. And therefore, you do nothing. I think that the way that I think about it is in the scenario that they are amazingly successful, what do we need to do in order to compete with them? And I think that we have great assets, for example, in the merchant acquirer space. We are very big in the e-commerce space, both in the U.S. and in Europe, but we haven't done such a good job going into the small and middle-sized business and deliver a service and a set of products and additional services that is a compelling story to move to us. I think that we are working in delivering on that. There is plenty of growth in the international space. So I think that the payment space is, as I said, is we do a good job that I have no doubt that the possibility of growing that business and continue increasing market share as the market consolidate because still it's extremely fragmented, I think there is a great opportunity for us.

I mean how concerned are you about an absence of a level playing field? Obviously, payment firms are regulated and therefore the banks, I mean is that a significant disadvantage in your view?

It is, but it's not an [indiscernible]. So it is what it is. And then you can feel sorry about you and we say, well, this -- there are these 10 things that is unfair in life or just deal with it. And I think that we need to do is just deal with it. Hopefully, at some point, we all play by the same rules. But if that were not to be the case, we still have a very, very good competitive advantage. Like for example, for the -- some of the payment companies that they have done such a great job in the middle market and small business. As they are trying to go up market, that's really difficult because it just requires a tremendous amount of services and a complexity of serving these companies around the world that is not so easy to compete. And for us to go that market, well, it's relatively possible. So -- and we are doing it. So the unlevel playing field is there. It's true. But it is a fact of life, and I think that we need to move on and do what is right and really compete with them. And I have no doubt that we can win.

Okay. So maybe we can talk a little bit about financial targets as we get further away from the pandemic economy into something that's more of a normal economy. And I think if we go back before COVID, you talked about an ROTCE of 17% and an overhead ratio of less than 55% over the medium term. If I look at market expectations for this year, I think the market is expecting an ROTCE somewhere around 22% and an efficiency ratio of just below 57%. So maybe you can talk a little bit about the longer-term return potential of the franchise in the context of the fact that interest rates are going up, which is obviously a positive, but also the fact that credit losses are obviously running well below normalized levels today.

So I think that, obviously, for this year, so the return on equity will be above, as you said. And even if you strip the release of reserves, still we'll be marginally above. So -- and that is driven by very, very strong performance in capital markets, banking and markets and other factors. So in the -- and I think that Jeremy and Jamie mentioned last time around that for next year, we are not going to get to that 17% level because, essentially, we are investing. So the expenses will go up. Capital markets probably will continue to normalize, particularly in the market side, and interest rates are still low. When you get at the level of investment that we are doing, and we continue doing a good job increasing market share and improving our business, and interest rates normalize, even though the credit cycle at the moment is very -- credit losses are very, very, very low, and it will normalize over time, at the same time, probably loan growth, particularly in credit card, will improve. So overall, in the medium term, we feel that it's not a walk in the park, but it's achievable outcome. In the short term, for the next year or 2, probably it's a bit more of a challenge.

Okay. So maybe we can talk about loan growth. It's obviously an important theme. We did see a pickup in loan growth in the third quarter, both Consumer and Corporate. What are your expectations for loan growth heading into next year? What have you seen over the course of this quarter? And do you expect that loan demand is going to accelerate from the [indiscernible]?

Yes. So the picture is the following. If we talk about credit cards, revolving balances. So the balance has bottomed around May this year, down roughly 16%, 17% from the levels of prepandemic 2019. And since then, they've been growing alongside the level of growth that we saw in '19. So we believe that probably, we will go back if all remains based on our view that probably early in 2003, we should go back to the levels that we saw in 2019. One of the encouraging signs is even though there are a lot of savings in the economy, and deposit balances are high, when you -- if I look at the segment, the clients or the customers, they have deposits and their deposit customers and credit card customers, 70% of the ones that normally revolve, the level of deposits that are equal or lower than they were pre pandemic. So it's very likely that segment will start revolving faster. So overall, we believe that, that will continue to accelerate. We are seeing some net of PPP. We are seeing some acceleration of lending in the middle market space pretty much across sectors. So gradually, it's improving.

Do you think supply chain disruptions are holding back corporate loan demand because companies can't build inventory as quickly as they would like?

Yes. Probably. Probably. And this normalized. It will be -- also, you have such a -- for the bigger segments. So you have such a vibrant capital markets. Companies don't need to really rely too much on bank borrowing. But yes, I think that as the supply chain evolves and improves, probably, will be some more credit demand from there, too.

Okay. So let's talk a little bit about the international aspirations that you have at JPMorgan. And it does feel as if you have been investing more capital outside of the U.S. in recent years. So obviously, the U.K., parts of the EU. I think Brazil is another market that you've been investing in. And it isn't just retail. It's also corporate as well. So what are your aspirations outside of the U.S.? How big do you think the opportunity is there? And if you think forward over the next 5 to 10 years, I mean, how much of a bigger part of JPMorgan's business do you think non-U.S. markets could become?

Well, let's see where we are today. So obviously, retail is in the United States until recently. For everything else, for the Wholesale business, the U.S. business and the international business, they're roughly the same size. So 50-50. So that will continue to be -- it's already today a very, very important source of earnings and revenues for the company. In retail, I think that this is an investment in the long, long term. We feel that we need to diversify on the predominance of retail in the U.S. business. We are using the U.K. as a first market to invest. We have made an acquisition of Nutmeg to incorporate and fast-track some products into our offering. We bought -- we are in a process to buy 40% of C6 in Brazil with a path over time to control if we decide to do so and use these 2 platform to keep growing and expanding the retail business outside the U.S. All digital, great client experience. And we believe that if we create a great client experience with the solid name of Chase, it will be really a very good competitive advantage. So this is a long-term investment. It's not going to pay out in the next couple of years, but I think that it's prudent to do it considering the challenges that the U.S. business will have probably coming from competition and from the platforms and ours. So beyond that, we've been investing, as I said, in payments outside the U.S., another big opportunity. We've been investing in growing the commercial bank activities for smaller clients outside the U.S. We've been investing in growing our global corporate banking activities outside the U.S. So I think -- and clearly, Asia and China has been a big factor of growth. So China has been a factor of growth. So overall, the international business will -- we will continue to invest, not so much through acquisitions, but mainly towards -- through organic growth.

Okay. So let's talk about the capital market businesses a little bit. I mean that's been a real bright spot for you, for the industry, both in 2020 and in 2021. There's a lot of different moving pieces. So the pie has got bigger, but it's also consolidated, as you mentioned, amongst a smaller number of players. So as you think about that business heading into 2022, how should we think about a normalization of activity? How should we think about the sustainability of some of the market share increases that you've seen? And perhaps you can touch on what you've seen in the fourth quarter in terms of activity levels and client engagement just given the recent pickup in volatility.

So when I think about markets -- so the wallet that it was around -- in fixed income was roughly $160 billion in 2010, sort of bottomed out around $100 billion in 2019. Last year was $147 billion. And this year, it's likely to be around $125 billion. So some of the normalization has already happened. And the way that I always thought about these 2 years -- and clearly, 2021 was a better outcome than I was planning for. I saw that in -- the bottom that we saw in 2019 was the real bottom. And then from there, we're going to see steady growth. And I think that probably we're going to see some more normalization next year across fixed income and equities, some of the normalization, particularly in the more macro business that's already happened. But when you look at from the bottom, I do see growth and the wealth growth and capital markets develop. In equities, similar story. You have a wallet that has been between $55 billion to $65 billion over the years that picked up this year around $77 billion, likely to be some normalization this year. In banking, when I look at the -- how the pipeline looks like, it looks quite strong into next year, both across M&A, debt and equity. How is it going to play out? Difficult to know because I think that it will be very linked to the path of interest rates. So we have a smooth path from normalization of interest rates. Most likely, that pipeline will be executed. And probably, we'll have a good year in banking. If there is a very volatile and very disruptive increase in interest rates, probably capital markets will suffer, and it will be more difficult. For this quarter specifically, and I just give you a bit of guidance on how the numbers will look like. So Investment Banking fees, they are going -- when you compare the fourth quarter of 2021 with the fourth quarter of 2020, it's going to be up in the mid-30s, plus minus 35%. Markets last year, fourth quarter, it was our biggest fourth quarter in history, including for the market as a whole and for fixed income. This year, the fourth quarter, as you compare with that quarter, is going to be 10% down plus/minus, relatively flat in equities and down in fixed income as a normalization continues. So that's what we see.

Okay. Great. Okay. So let's talk a little bit about the dynamics in net interest income and the outlook for that heading into next year. And I think one of the big moving pieces is the pace at which you decide to redeploy liquidity into securities. I think at the end of the third quarter, I think you had something like $735 billion of reserves at the Fed. That number has obviously grown very rapidly. My guess is it's continued to grow over the course of this quarter just given deposit flows. So can you just talk us through how you're thinking about managing liquidity, other rate thresholds that you have in mind that you would accelerate, securities remixing? And what you think the steady state level of cash versus securities should look like for JPMorgan?

Well, we've been patient and prudent in deploying liquidity into duration, though more recently as curve has flattened. So we have deployed some liquidity in the front end of the curve. The pace of deployment is very dependent because of the convexity nature of the portfolio on the path of increase of interest rates. So we are going to continue to be patient. We believe that the current levels of terminal rates are too low to be deploying duration at the moment. So we will see how as the rates -- the markets continue, pricing, the outcome and rates continue to normalize, at some point, prudently considering the complexity of the [indiscernible], we will probably extend duration. But I don't think that we are going to do it at these current levels.

Okay. Got it. So let's talk a little bit about operating leverage and expenses. Again, a very important theme. And I think, look, there is this view -- and I think you should correct if you think it's wrong -- which is that pre pandemic, you were very focused on driving operating leverage in the franchise. And you were very successful at doing it over a number of years. It does feel as if the priorities have shifted somewhat to growth relative to delivering operating leverage. So maybe you could talk a little bit about that view and talk about whether you think that view is correct, but it will also be very helpful if you could unpack a little bit of the increase in expenses that we've seen at JPMorgan over the last few years. And there's a lot of drivers from higher levels of capital markets, core inflation in the business, COVID-related expenses, plus investment. So how should we think through the expense base? And how should the investment community think about your view around operating leverage in '22 and maybe '23?

Yes. So first, if I look at expenses this year, what are we doing, you can very easily explain the increase for 2 components. Like out of the 100% increase, 40% of that is related to volumes and revenues, including comp. The other 40% is investments. And then the last 15%, 20% is what we call structural, which is other expenses that they are going up as some of the attrition is going up, and we need to [ rebase ] some of the expenses related to labor and things like that. So for next year, we are going to give detailed guidance when we announce our earnings in January. But in general, going to see a continued increase mainly -- not much related to -- revenue-related or volumes, but we are going to see a continued increase in investments, and then some of realization of the structural cost that increased this year will hit in the next year or 2. So -- but as I said at the beginning, I don't think -- so we do want to grow. We think that we have so many opportunities to set the company for future success that to start the company from investing in the right projects, maintaining the discipline, it will be a real, real mistake. It will be to prioritize short-term return on equity and really mortgage the future of the company. So we are going to be disciplined, but our strategy is about to take the opportunities that we have in front of us and continue to consolidate the success of the past into the future.

Got it. So I think we only have a few minutes left. So maybe we can finish on capital, which is another important subject. And look, 2 related questions, I guess, which is the first is that leverage has become much more of a binding constraint for JPMorgan over the last couple of years, really just reflecting enormous success that you've had in terms of growing your balance sheet over the course of the pandemic. So maybe you can talk a little bit about what that means in terms of how you manage your balance sheet and the things that you can do to create more leverage capacity. And then secondly, you have moved up a number of G-SIB buckets. How are you thinking about your longer-term CET1 capital targets? And how should the investment community think about capital returns over the next 12 months?

So on SLR, obviously, is a consequence of -- to a very large extent, a consequence of monetary policy. Deposits are going up in some places are more manageable than others. So what we are doing is being very disciplined in the areas where we can control the intake, the deposits, that is particularly in the wholesale space to be very diligent in how do we manage the increase of deposits versus other business that they're attached to it, particularly in the payment business, but in the security services business. In retail, it's a bit more difficult. Deposit come -- they will come. In the meantime, while we are hopefully expecting a change in regulation that allow -- give us the benefit of not being hurt by the increase of monetary policy. So what we have done obviously is related to maintaining capital, issuing preps and maintaining the levels of SLR at a prudent level. But we hope and we think that is the possibility of some correction -- regulatory correction on that front that makes a lot of sense may happen in the next few months. Similar story plays into G-SIB. So probably a passive increase of G-SIB, meaning increase of deposits, the revaluation of assets, trading assets and the increase of the stock price has positively increased the consumption of points for around 100 points, which is just 1 bucket just by doing that. So what we are doing at the moment -- and we do believe as the economy has grown like 20-plus percent that at some point, this should be recalibrated in some way or the other. In the meantime, as we are waiting for that, and we think that probably the next 6 to 9 months, we will have some positive or no news on this, but hopefully some [Audio Gap] We are not penalizing the growth of business because of the passive consumption of G-SIB. So essentially, the plans that we have growth, we are prudently, but we are delivering it and then absorbing into the increase this sort of 100-plus points that they are passive. So then we need to make a decision. Let's assume that nothing changed. It's the decision is do you really can validate the 4.5 or you go back to 4 and you try not to go to 5. I think that, that decision we haven't made, and we will make that decision at the time where we see if there is a regulatory change or not. But at the moment, as I said, we are prudently managing all this, but we are not constraining the business for the plan of growth that we have.

Okay. So with that, sadly, we're out of time. But Daniel, thank you so much for joining us. And hopefully, we'll get to see you again next year. Thank you very much.

Thank you. Thank you for inviting me. Thank you.