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

As many of you know, JPMorgan really doesn't need an introduction, but Jeremy Barnum is, of course, the CFO with JPMorgan Chase. Prior to that, he was in the Capital Markets division as CFO, also headed up research, I think, pretty global.

Briefly.

There you go. But to start it off with is being Halloween, we've got the animal [indiscernible] animal crackers. And I had to ask Jeremy, is he related to P.T. Barnum?

The answer is no, as far as I know. We've always sort of -- every time it comes up, it's a little bit of an arm's length thing. I'm having with my dad tonight who lives in town. I'll push him a little harder. Find out what's really true.

Very good. Thank you. Jeremy, this is the first time you've been here. Obviously, you've been in your role for about 18 months. Can you tell us about some of the priorities and challenges that you -- you're seeing in the opportunities that you're seeing from your position?

Yes, definitely. Let me start by saying thank you to you, and to all the other members of the Banc Analysts Association of Boston. Very happy to be here, first time here since I'm in the job, nice to see a full room post pandemic. So really good stuff. For the company right now, it's really pretty simple. We're focused on building capital to our new hire requirements. That's going well, continuing to deliver the returns, 17% return to the cycle. So simple, consistent focus. In terms of opportunities, it's really about executing on our investment strategy, which we're doing very aggressively, and that feels good, too. And I think the challenges are pretty obvious. We're in a moment of elevated uncertainty in turmoil from a geopolitical perspective. And we're also in a very complicated moment from a macroeconomic perspective, a lot of sort of tension in the system. And all of that is against the backdrop of ongoingly dynamic competitive environment. So that's the world that we're in, and we're sort of navigating it. From my personal perspective, as the CFO, it's really been a lot about focusing on return or specifically scrutinizing investment cases. Obviously, in that context, expenses are important. So I'm spending a lot of time on that. A little bit less about hitting numbers for the sake of hitting numbers, as you always hear Jamie say, but more about making sure that the investment cases are rational and thoroughly inspected and challenged as they should be. And then, of course, in light of capital and everything that we've talked about around [ RWA ] optimization, capital management has been a big focus. And finally, structural interest rate risk, clearly, given what's going on in rates, that's a major focus for us as a company right now.

Got it. Third quarter arguably was a very good quarter for you guys. Can you share with us what you'd like investors to take away from that quarter and also possibly when you look out over the very near term, what it might look like in the current quarter?

Yes. So a really nice quarter, 18% ROTCE, higher, if you pull out the losses on securities sales. We printed 12.5% CET1. We had talked about targeting that in the fourth quarter and then targeting 13% next year. So very good progress on hitting our new higher capital requirements on time, if not early, as we'd said. And broadly, I think it's interesting to note, given that it's not as if every single business is doing amazingly given the environment, obviously, we have headwinds in investment banking fees. We have headwinds in mortgage. And despite that, we're still producing excellent returns while continuing to invest. So it feels like a nice validation of the strategy. And as we look forward, of course, as I said at the outset, there are challenges and complications in the environment, but we feel as if we're very well positioned and we're optimistic.

We've heard from Jamie, whether it's a hurricane or a tale of 2 cities, he's got different quotes out there, of course. But certainly, the environment is very volatile and uncertain. How are you guys managing in this kind of environment over the next 6 to 9 months?

Yes. It's interesting. I've joked. About sort of -- we've all become metrologists recently, but it is a complicated environment. And I think the reaction to the Fed minutes and the press conference after the recent FOMC meeting is sort of the current environment in a microcosm, right? You see the release of the minutes. It sounds kind of dovish. It sounds like maybe a pause is on the horizon and the market rallies. And then you heard the press conference and the press conference is we're going to do whatever it takes, high for long, inflation is the sole priority and so many big sell-offs in the market. So in that sort of half hour period, you see the challenge of the moment encapsulated, which is this real tension between low unemployment, and we see it again today in this morning's numbers, even though the unemployment rate ticked up, the payrolls number was above expectations, and we saw a sell off again. So you see this very robust current economy, the Fed acting really quite aggressively to restore its credibility catching up from having lagged a little bit during the pandemic. And then we're all just waiting to see when are we going to start to see the effect of the significant tightening of financial conditions into the actual numbers. And it's not showing up yet meaningfully in lower inflation, we saw a high PCE number, it's not showing up in any weakness in the labor market. And so when is it going to crack basically. And so for us, it's the stuff that you always hear Jamie talk about. We want to make sure that we're not sort of naively focused on the so-called modal outcome and that we're really looking at the distribution of all outcomes. It's not about predicting a particularly bad situation. It's about recognizing that there are elevated probabilities in the tail and we have to plan for that. So I'm sure we'll talk a little bit more about credit later, but that's a little bit of the context that we were trying to give at earnings.

Yes. And following up on those comments, you've got a good read JPMorgan does into consumer spending trends. What are you guys seeing in these trends? How are the revolving balances doing? Is it still pretty healthy, which, to your point?

Yes. Yes. Yes. So let's talk a little bit about card revolve. So we talked a bit about this at earnings. So we saw, obviously, at the beginning of the year, we talked a lot, we talked at Investor Day and we talked throughout the year about -- obviously, there were pressures from low revolving balances through the pandemic as consumer cash buffers really spiked up. And we talked about expecting to see revolving balances return to pre-pandemic levels maybe by the end of this year or early next year, something like that. At the beginning of the year, that outlook had sort of gotten pushed out a little bit due to the kind of early in the year, Omicron wave and the headwinds to consumer spending that, that introduced. But -- and then we wound up seeing balances trough in around May. And since then, we've really seen very nice growth in revolve. So we said at earnings 15% year-on-year growth in revolving balances relative to a sort of pre-pandemic baseline of around [ 6% ]. And now looking sort of on track to hit those pre-pandemic levels before at the end of this year or early next year or something like that. So it's nice to see that normalization. It's healthy.

When you look at credit, you brought it up. I think on the third quarter call, you or Jamie mentioned that credit card charge-offs could be around 150 basis points, which was quite low. Can you share with us as were many of us in this whole conference, credit, everyone is seeing good credit, and we're all expecting a normalization of credit losses. Can you share with us what you guys are thinking about regarding that? But also, when is the inflection point potentially coming where it goes from normalization to deterioration? Any color there?

No, no. It's a great question, and we all have it, and there's no super easy answer, but let me talk about how we're thinking about it. So first, as you said, Gerard. We have been pretty consistent about saying, of course, that we are over earning on credit right now, at least in isolation on credit with that 150 basis point net charge-off guidance for the full year this year. Of course, having said that, given the headwinds in revolve, on a bottom line basis, it's not obvious that we're actually under earning. And therefore, as credit normalizes next year, but revolve also normalizes and annualizes into next year. It's also not too that that's necessarily going to be in that headwind from a bottom line perspective. But focusing in isolation on credit, as I've said, I think I might have said this at earnings. As you said in your question, it's a little bit hard to tease out. We think -- we know realistically the charge-offs and delinquencies are going to be going up. And in any given moment, it's going to be hard to unpack, is that just normalization, would that have happened anyway? Or is that actually deterioration. So we're looking at a couple of different things. One is just the rate of it. So to the extent that we see the normalization accelerate, we would tend to think that, that's an indication of deterioration rather than normalization. We're not really seeing that. The other thing that we've done is look a lot of these constant cohorts of customers, higher income, lower income and try to see the patterns inside that across a range of dimensions, cash cushions, spending, revolve. And what we see across all that is really a pretty consistent pattern throughout, which is the normalization is happening significantly faster in the lower income segments than in the higher income segments, whether you talk about delinquency, you talk about more use of revolve or you talk about spending down cash buffers. And yet, even in the lower income segments, you see discretionary spending still being very robust. And to me, I'm a little bit new to this stuff. But when I think about it, that is our intuitive point that as a lower-income customer, if you're under pressure, the first thing you're going to deal with is your discretionary spending, and we're not seeing that. So we'll see. Obviously, it gets back to sort of your beginning question. We're in this tense moment between [ excellent ] current performance with obviously elevated uncertainty as we go.

And speaking of credit, some of the banks, again, in the last day or 2 are talking about if their CECL assumptions were higher unemployment, reserves would go up a certain amount. And I think you guys were asked that call -- asked that question on the third quarter call. And Jamie made a reference that we could see a $5 billion to $6 billion increase in the provision and you can handle it. Can you expand upon what his intention there was or just color there?

Yes, absolutely. I think what we're trying to do there a little bit is resolve this tension between the sort of the following 2 statements, that on the one hand, we are reserved well above a central case assumption, meaning most economic forecasts have some version of a soft landing or a very mild recession at this point. And so if we were reserved assuming that there's a 100% probability of that happening, it would be naive in our opinion, and we would be not appropriately reserved. And we want to make it clear that we are reserved well above that level to recognize significantly elevated probabilities of downside scenarios. But if one of those downside scenarios actually materializes. So if you look at it probabilistically, there sort of relative adverse type of path goes from being a 30% or a 40% chance to actually happening, and therefore, it's a 100% chance, then you're going to have a new bell curve around that outcome. And so therefore, realistically, even though we're reserved for the loss expectation on a weighted average basis, we will still be have a build. And the point I think of the numbers that Jamie shared was to say, it's fine, we can handle it, like $5 billion or $6 billion in that type of environment over -- and as he always says, it will be over a couple of quarters, which is a little bit the lesson that we learned in the pandemic, too. It took a couple of quarters. So -- and of course, there's a lot of uncertainty around that number. It really depends on how things play out. But we're just trying to give a little bit of context and color for how this CECL thing that went live, then we had the pandemic. We just don't have that much experience with it in a more normal type of recession to get some intuition about how it might behave.

And with that being said, what are you guys doing about underwriting standards? Is it time to start maybe tweaking or tightening them, assuming maybe the hurricane is coming or something on the horizon?

So a couple of maybe slightly contradictory things to say about that. So first thing is that we underwrite through the cycle, right? And so -- and we did not loosen underwriting standards in the peak sort of cash buffer pandemic moment when it would have maybe been tempting to do so. And therefore, we don't need to sort of preemptively make radical changes for our underwriting standards just because we're looking at a slightly more uncertain environment. On the other hand, you may recall, Daniel, talking at Investor Day, what we've done in wholesale and leveraged lending, whereas terms on deals started to really get away from what our standards are for what we think is reasonable, we actually gave up quite a bit of share there to the point that we went from, I forget like mid-teens share, something like 4% share, now, which is obviously helping us a little bit right now where we have relatively light bridge book exposures right now. So of course, we're always mindful. We're always thinking and adjusting. And if we transition from sort of elevated uncertainty to actually bad things happening, of course, there's a playbook that we roll out. But to be honest, part of what might be true under such an environment is that we would have more opportunity. And so we just try to always think through the cycle and be dynamic and react to data.

Following up on your answer, bridge book lending and leverage lending is, of course, always a high-risk area. You just indicated you guys have wrote it down quite a bit ahead of time. Who is stepping in, I mean I don't want you to point names. But is it other competitors? Is it the outside the banking industry?

I mean, I guess it's a little bit of everything. As I say, we've given up share even within the industry. So clearly, some of our competitors have taken some share there. And that's, for us, a core part of the discipline of underwriting. We have to be willing to give up share when things are happening that are outside of our risk appetite. And at the same time, I think implicitly are addressing the whole private credit direct lending dynamic, which is a theme. And we're competing with that in a variety of ways. So -- but all inside of the risk appetite. So we're -- the world is dynamic. I talked at the beginning about how the very dynamic competitive environment is one of the major strategic considerations for that. And some of the dynamism in the wholesale lending market is very much one of those examples and one of the things that we're reacting to with new offerings and some of our direct lending initiatives of our own, the whole unique [ tranche ] thing.

Got it. Yesterday, with the Fed raising rates, of course, or the other day, not yesterday. In their hawkish comments about going forward. Can you share with us your outlook for rates and how it may affect net interest income and what are the drivers of net interest income for your organization?

Yes, sure. So let's just kind of recap a little bit where we stand back from earnings. So we guided to $19 billion in NII for the fourth quarter, both on an all-in firm-wide basis and on an ex markets basis. So therefore, implicitly saying that we would have 0 markets NII in the fourth quarter. And that was sort of assuming the forward curve of the time, which was basically the 75 basis points hike that we just saw. And somewhere between 50 and 75, in the December meeting, which, frankly, doesn't make that much difference obviously, for the fourth quarter numbers. So that's the picture there. And then as we look into next year, there are a series of headwinds and tailwinds there. We talked a little bit about card revolve. We were just really using the forward curve. So I think maybe some maybe one more hike earlier in the year, maybe some cuts later in the year, the market keeps kind of re-debating that depending on the moment. And then obviously, reprice is an important dynamic there, but we can talk a bit about the famous annualization of the fourth quarter thing.

Actually, you took the question out of my mouth.

Yes. So I think the point there is a little bit like, okay, so we're guiding to [ $19 billion ], if you annualize that at [ 76 ]. So what are we supposed to assume for 2023? And I think part of Jamie's point there was, let's just review headwinds and tailwinds. So potentially some more hikes including, by the way, the annualization of December hike, whether it's [ 50 or 75 ] or whatever, that we're only going to have a couple of weeks of that. So that in itself is a factor. Card revolve, we talked about. Other loan growth, fine. So there are actually some significant tailwinds from that number as we look into 2023. But on the other hand, we look at deposit reprice/migrations, let's talk about migration. We're in the market with [ CD ] offers. Those are going to start driving up deposit rate paid, of course, as well as additional reprice forces we know are out there. The reprice lags are going to come out. We don't know exactly how fast, but that's a factor. And also, the macro environment is going to create uncertainty in various ways and could lead us to adjust our portfolio reinvestment strategy in various ways. So I think Jamie's point there was just be careful about annualizing. And if you want to put a sort of more cautious number in the model, use [ 74 ]. And as we start to get a bit more visibility, we'll update the outlook for you.

What's driving the capital markets NII being -- as you just mentioned, it's actually going to be 0. And should that change as we go forward?

I think, just simply, I tend to get a little bit sort of too deep on this question. But the simple version for now, I think, is that the single biggest factor that drives that number is just what's happening with Fed funds. So to the extent that looking out from the last hike in the fourth quarter were kind of expected to be relatively stable around that new whatever 4.5 type level in 2023. It shouldn't make that number swing too much. But the caveat that I always like to introduce is that there can be significant balance effects in that number, which are very hard to predict as a function of what's going on inside the markets business, where we have interest earning versus noninterest-earning strategies or whatever type, which even in the absence of a big Fed fund swing can move the number somewhat. But all else equal, the sort of significant drop in markets NII that we experienced this year pretty predictably as a result of all the hikes should be a lot quieter next year [ is what I would say ].

Yes. And some of the presenters over the last couple of days, talked about the use of different derivatives to kind of protect net interest income as we go forward. Any thoughts on hedges that you guys may use or floors or swaps? And can we think -- how do you think about that?

Yes, yes, yes. I mean it's a fun topic, to be honest. But I think that for given that we have limited time, and I know that the audience probably has some questions. I probably need to speed things up a bit. The short version of this is that it's probably better not to get too much into this particular instruments and strategies. And just think big picture about, okay, we've clearly been relatively short duration. That's benefited us in a lot of NIM expansion through the hikes. And are we supposed to be kind of locking that in now by buying duration in some way. And I can say that it's, of course, something that we're thinking about and looking at very carefully. But as you can imagine, it's not quite that simple because the deposit reprice dynamics are reasonably complex. And we need to look at this across multiple scenarios, multiple set of assumptions and multiple risk management type considerations about what we're really trying to optimize. So I'll sort of refrain from giving any more detail on that just given how dynamic and situational that's likely to be. But certainly, it's something that we -- that is an important question, I think, for all banks right now.

And I will ask questions in a second from the audience, so please be ready with your questions. But before we go there, one last question for me. Can you share with us about deposits, retail versus wholesale? What's going on in the repricing market, you alluded to it? And also, how is QT affecting your deposit base?

Yes. So let's start with QT quickly. We've talked about this a lot. Of course, as long as [ RRP ] remains elevated and keeping loan growth assumptions constant, QT is going to drain deposits out of the banking system. And we have started to see that already and primarily showing up in wholesale deposits, primarily showing up in wholesale non-op. So all of that is broadly part of the plan and not concerning. And of course, Jamie has talked about this a little bit, even in a world where we see really significant drainage from the system, it's not a concern for us from a liquidity perspective, it's all fine, basically. In terms of repricing, the dynamics between wholesale and consumer are obviously going to be different. In consumer, the repricing is quick and the lags are relatively short. So we did see some tailwinds from lags and consumer as we were coming off 0 earlier in the year. But now we're starting to see that catch up and it's playing out more or less as we would expect it, as we would expect. In Consumer, I alluded to a second ago, we're in the market with CD offers. And so we're starting to see the effect on deposit rate paid from a little bit of migration, but that's going to take quite a bit of time. In the meantime, we know that there's been surplus liquidity in the system. And so the beta dynamics, the cycle are different from what we've seen in prior cycles. So lags are the big question in retail deposits right now, and we'll just have to see how it goes. But we're going to be out there competing and being commercially rational, and it will be what it will be.

So no real surprise, wholesale obviously repricing faster than in consumer. Charlie, you had a question?

I know you -- in your headwinds and tailwinds for NII, you didn't talk about the possibility of a treasury buyback. And I know it's a hot topic in the fixed income markets, but I don't think the banking community understands the potential benefits to NIMs in NII next year. So Mike, bear with me my question is multipronged, but and as much color as you can give you may not be able to answer all of them, but -- so what do you think the probability of the treasury actually pulling the trigger on a buyback is 50%, [ 70% by 100% ] eventually. Does it change? [ Brian Mohan ] last night said, well, we'll need some political courage to deal with some of these issues like capital change. Does it change after the election, the likelihood of that? What kind of size would the treasury buyback be? I mean TBAC has talked about $200 billion, but the treasury could issue potentially up to $1 trillion of T-bills and still stay within their 15%, 20% range. Thirdly -- or fourthly, would you have to change the SLR ratio as part of this because it would enhance excess reserves, would that be? And then finally, you guys have been taking security losses all year long, which is very contrary to what the rest of the industry has done, which I give you kudos for because you've kept your portfolio current. If they're buying these off-the-run coupons, would that give you extra incentive to do that?

Okay. Right. So usually on the earnings call, I've got a little pad, and I can write down the multipart questions to make sure I don't lose track. So I'm going to do my best here, and then, Gerard, help me out. So first, the buyback. I'm going to leave it to my colleagues in research to opine on the probability of that thing. I've looked at it, of course, I'm aware of the debate and some of the discussions at TBAC, but I don't consider myself an expert, so I'm not going to bother handicapping that. But I think there are a couple of things that are worth saying that are relevant to us from a bank perspective. We are in the middle of QT. It's quite clear that there's no buyback scheme that can involve -- that can involve actually like net buybacks because otherwise, it completely would offset the impact of QT and like that doesn't make sense. And the priority is inflation and the normalization of financial conditions. And while treasury is concerned about treasury market liquidity, we can't have buybacks that add reserves back to the system at the same time that we're doing QT. That makes no sense. Therefore, you're looking at a tension between buybacks and issuing on the runs or buybacks and issuing bills. And I think there are people debating this a lot and I don't concern myself an expert, but it seems to me that as you look at it, if you do buybacks and issue on the runs, those on the runs eventually become off the runs. So it doesn't -- it's not obvious to me that would help that much with the liquidity situation, whereas sort of going back to my prior comments, in a world where there's a little bit of shortage of short-dated collateral and you could argue that RRP is getting a little bit big, I would have thought it makes much more sense to fund the buybacks with short-term issuance. And I gather that's a thing that's being debated. But certainly, treasury market liquidity is a concern. We've written about it a lot. We talk a lot about how some of these non-risk-sensitive capital constraints like SLR undermine the incentive for banks like us step in and intermediate with relatively low risk density assets like treasuries and that's bad for the system. So share of buybacks, but also like it would be better to restore that core incentive structure. I think I've probably got about half of your questions, but I think John has a question too. So maybe we can come back later.

Jeremy, can you talk about how you're thinking about expenses going into next year as you go through your budgeting process? You've already talked about kind of TheStreet estimates, which implies about a 4.5% increase looking like the right ballpark. But just what are the factors you guys are going through as you're going through the process?

Yes, totally. So as you know, we've kept our guidance constant at [ 77% ] for this year. And one of the natural questions that we've heard a lot, I don't think I've ever gotten a chance to address it at earnings, but I know you guys have been asking Michael, is, well, wait a second. We know investment banking fees are down a lot. So why aren't you revising your expenses down for this year? And it's a fair question. And the answer to that is there's not only investment banking fees, but other areas of the business like mortgage to create volume and revenue-related expenses are also experiencing headwinds. So there's no question that volume and revenue-related expenses for this year are down, all else equal. And so what's the offset? And the offset, no surprise, is inflationary forces. And those are real, and we've had to do salary increases of various types, and we've experienced sort of high attrition and higher replacement costs with people in various ways. So we're obviously not immune to inflation, and that's been a factor this year, too, and we're happy that across all of that, I think another proof point of the diversification of the franchise that we're still managing to come in, in line with guidance. So as we look into next year, there's really no change relative to what I said at earnings. Of course, we're going through the budget, and we're going to look at everything the way we always do, and you know our culture. We're going to focus on ensuring that we're doing everything that makes sense to generate returns. But given the inflationary environment, there's no question that we're going to be applying, I would say, maybe stricter scrutiny on everything than we would otherwise, and we're going to be trying even harder than we always are to generate internal productivity to sort of counter some of the inflationary forces. But certainly, when we talked a little bit about what we might expect for 2023, we were well aware of the inflationary forces. And so we did our best to incorporate that in the outlook, but we'll tell you more in the fourth quarter as we continue to work through the budget.

Right here, Mike?

I just want to follow up on the cost question. Can we pull the lens back a little bit and the tax spend [ $14 billion ], I mean that's just so large. And do you think that you're spending too much, and I know you're taking a deeper dive on this? Or do you think others aren't spending enough?

We definitely don't think we're spending too much because if we were spending too much -- if we thought that we would spend less. So I think that I don't want to opine on others. I think we are spending what we think makes sense, given our footprint, our platform, our strategy and importantly, our capacity to actually spend effectively. We've talked a lot about how many doctors can you have operating on the patient at the same time, plumbers under the sink, et cetera, et cetera. And as we've started to look at early rounds of the budget, we do see businesses starting to say that. They start to say things like realistically, we want to do all these things. We think all these things would be profitable to do, but from an execution perspective, from a capacity perspective, from the perspective of getting teams up and running and being effective, we're not sort of going to try right now. So I think that we're very much -- I mean you know the culture. We're not going to not make investments that we think make sense to hit a number. But at the same time, we're also not going to be so enthusiastic about investing in technology that we're going to let ourselves get sloppy about throwing money at things where we don't actually have the capacity to deliver efficiently.

Julian?

Can I ask a couple of questions about capital. So capital requirements rising to 12.5% beginning of next year. But where does it go beyond that? It seems like [indiscernible] buffer only ever goes up, stress capital buffer is like pretty random, right? It's hard to predict. And then Basel III end game, whatever that means, but presumably more. So how do you see capital coming beyond January? And then the flip side of that is -- how much room do you have to manage that, whether it's more risk-weighted asset optimization? And given that SCB is so opaque, I mean, is there room to manage to an SCB or not?

Yes. Okay. A lot in there. I'm going to try to keep this concise. So let's just review capital requirements. So as of now, with the SCB having kicked in 12%. And then in January, in the first quarter when the G-SIB step kicks in 12.5%, we're going to run with the 50 basis point buffer, therefore, 12.5% at the end of this year and 13% in the first quarter. And in that context, very happy that we printed 12.5% this quarter, so in line with what we've said on time, if not early, very healthy organic capital generation, all good. Next year, as you say, another round of SCB and then another G-SIB step in the first quarter of 2024. So therefore, all else equal, that 13% goes to 13.5% then. Okay. In that context, [indiscernible] SCB, random is a bit strong a word. I will remind you that we did actually anticipate some increase in this year's SCB. We did talk about that at our Investor Day. Although to be fair, it was more than we expected, I think, for us in the industry. So we've been vocal about that. It's too volatile, it's too unpredictable. It's not responsive enough, et cetera. We don't need to go through that now. In terms of RWA optimization, yes, we've talked about this a lot. It is a big focus. I'm spending a lot of time on it. The company is spending a lot of time on it. This is a tricky one to message, so I want to be very careful here. So we need to recognize that we've got a lot of very smart people who've been working on this stuff for the better part of the last 10 years in various ways. So the notion that there's like a ton of low-hanging fruit, we just need to be realistic about what's actually achievable. On the other hand, we are in an unusual environment right now that we haven't been in for a long time, where any given excess usage or inefficiency instead of cutting back on buybacks is cutting back on alternative deployment that people really care about in their business. And you've seen that as we've cut back a little bit, for example, from the mortgage correspondent channel. So the level of intensity and inspection like we're sort of turning over every rock a little bit more aggressively in trying bigger rocks to look even harder in light of the current moment. And we've seen some benefits from that, and we've got creative smart people, and so we're going to keep pushing. But some of what you may see is simply applying kind of probably a higher threshold to some of the lower returning areas that we temporarily back off from a little bit as we prioritize building capital to new levels. And maybe just to synthesize this a little bit, we talked a little bit about buybacks at earnings. This is not a big secret. You can see this from the outside in. In light of the trajectory through the first quarter, at that point, we're going to have, obviously, with all the obvious caveats, very significant organic capital generation. At which point, we will apply our usual capital hierarchy, but realistically, there's going to be surplus organic capital generation, which should be available for buybacks at that point, unless there's something really different in the macro environment or something comes out on Basel III, but despite all the caveats about the scope of that, the fact that it's in the PR rather than a final rule, would make us think twice about that. But the sort of central case, the trajectory, even from your own estimates is sort of very clear about how things play out through the beginning of next year.

Betsy?

So buybacks start in 1Q?

With a very long list of caveats that I will not repeat.

Two quick questions. One just on the market NII, you indicated, all right, Fed funds volatility likely comes off next year. So the conclusion there is markets NII should go up in '23, Is that right?

No, good question, but let me be very precise. So what we're saying is I think we did this a few quarters ago, we said, you can just run a regression from our markets NII to Fed funds. And you can see that when Fed funds goes up, markets NII goes down. What I'm really saying is a rate of change point. So from the Fed funds exit in the fourth quarter, the expectation and the curve is relatively stable Fed funds next year, like you might see a couple of hikes. You might see some cuts, it all depends. But that sort of incredibly accelerated pace that we saw this year from 0 to 4.5% or whatever is, of course, not going to be repeated next year. So the decline from -- I forget the number, but $6 billion, $8 billion, something like that, to 0 that we're seeing this year is, of course, not going to be repeated next year because you, all else equal, based on the current forwards, would not expect the same level of increase. So the statement is simply that no further declines in market NII, unless there are further hikes. So the exit rate from the fourth quarter is a reasonable -- that exit of 0 is a reasonable forecast for 2023.

And then could you just give us some color around the actions that you took with the bond portfolio? Are you done -- like the rationale for what you did? And are you done with that? Or should we expect to see more?

I think that -- sort of I'm hearing Jamie as I'm giving a sense of we're always going to do the stuff that we think makes sense in the moment. So we're never going to say we're definitely going to do it. We're never going to say we're definitely not going to do it. And I think that the specific driver of doing it this quarter was a combination of structural interest rate risk management, which I alluded to at the outset, and the fact that there were expensive instruments in the portfolio on a relative value basis, in particular, certain low coupon agency mortgages that we just want them to sell. And I think philosophically our point is we're not going to not do things that make -- that we think make sense just because they generate an earnings headwind if the hit in particular, is already in capital as, of course, it is with the AFS securities. So looking forward, we may well do more. If it makes sense, if it doesn't, we won't.

I think I'm back, Chris.

Yes. Just looking at your third quarter 10-Q interest rate sensitivity disclosure, it now makes it look like you're liability sensitive. It shows net interest income going down by $2 billion with rates go up and up if they go down. And in the second quarter, it looked like under either an increase or a decrease and net interest income would go down. So it looked like it was like the June 30 level was the absolute Goldilocks moment in rate levels. So I mean, that's a strange kind of set of disclosures and very different from everybody else. And so is that just a quirk of the model? Or is that reflecting a change in positioning or explain that?

Yes, yes, happy to do that. So of course, we've spent quite a bit of time on this recently. I think quirk in the model probably is a little bit too pejorative to the hard-working modelers who design these things. But for sure, it is an effect of the model. And I think actually, as much as people have debated like, is the EAR thing useful? Is it good? Is it bad? It's only 1 year, it's not correct. I think it actually tells us something quite interesting right now. One of the questions that I gather many of you have is these sort of -- are we at peak NIM question. And the EAR gives you a little bit of a hint of that because the EAR is kind of saying, actually, if you believe the assumptions in the EAR, we are at peak net. Now then you have to go back to your point about quirks in the modeling. What are the assumptions in the EAR? And the primary assumption in the EAR is that the deposit rate paid is based on model betas. So right now, we know that we have very significant reprice lags, especially in retail deposits. And so the actual behavior of the NII is going to be very different from the behavior that the EAR would indicate. That's by design. That's a feature, not a bug. The EAR is in the risk section for a reason, which is it's saying, this is our kind of run rate risk from a stable deposit reprice situation. And in a moment where you've had these very fast hikes, the surplus of deposits in the system, leading to very low betas relative to prior cycles. The lag effects are so significant that they basically dwarf the other dynamics of the EAR, which are based on a fully repriced deposit base based on terminal betas. And by the way, those terminal betas that are in the model, those are guesses, those are assumptions. We don't actually know that, that's going to be the case. So I think the way to think about the peak NIM question is like, sure, based on some theoretical long-term assumptions that are highly uncertain of deposit reprice, we may, in fact, be at peak NIM at this level of rates. But in the short term, given the lag effects, the dynamic that you've seen throughout this year, which is increasing NII with increasing hikes will probably continue to be the case. And by the way, the opposite of that would also be true in the short term. And then in the background, you're going to see the migration and reprice dynamics playing out at whatever pace they play out as a function of the competitive environment.

And with that, we've gone over a little bit. But Jeremy, thank you so much. Please join me in a round of applause thanking JPMorgan.