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

I think we're about to kick off. It sounds like the microphones are working. Okay, great. I have a disclosure to read, then we'll get into it. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. All right. Well, with that out of the way, we are thrilled to have Jennifer Piepszak, Co-CEO of JPMorgan's Consumer & Community Bank with us today.

Thank you. Thank you. Happy to be here.

All right. Round of applause from the audience.

That are all from my team.

Now the room is full, so there's more than your team here, but we'll hear that round of applause at the end.

Okay.

All right. I think everybody knows Jenn, but just in case, been with Morgan -- sorry, Morgan -- been with JPMorgan for 29 years in many different fields. We all remember very finally the CFO slot when you were doing that. But now as Co-Head of the CCB, Co-CEO, I just want to turn to how that performance in your business line is going today. You're really crushing it in the ROE. And you've got this target of 25% plus ROE, and you've been well above that for the last 3 years. So I just wanted to kick off here by asking what's the biggest source of that outperformance today? And really, why not raise the target?

Sure. So we're used to questions like that from Betsy. So anyway, thanks for having me. So I think most importantly, just to remember that the 25% is a through-the-cycle target. And so in any 1 year, we will be above or below that. Usually, it's going to be because of credit or deposit margin or some combination of the 2. So looking back the last few years, 2021, 2022 was very much about credit. And '21 was a lot of reserve releases from the build that we did during the pandemic, and then '22 was very, very low charge-off rates, as you'll recall. And then this year, in '23, credit is still normalizing, but it's largely a result of deposit margin, which is above what we would consider a normalized deposit margin, which you can think about as being 2%. And then as we look forward, '24 and '25 as we will continue to see credit normalize, we'll continue to see loan growth normalize, which will mean bigger-than-normal reserve builds. And we have a mild recession in our outlook. You'll then see that offset by coming off -- most likely coming off a peak of deposit margin. And so in '24 and '25, we could be below the 25% target. And that's why we remain comfortable with the 25% through-the-cycle.

Got it. On that 2% that you talked about with the deposit margin, could you explain that a little bit more? That's the normal deposit...

Well, if you look over the last 10 years, that would be what we would have averaged over the last 10 years. And just given the business is obviously cyclical, both from an interest rate perspective as well as a credit perspective, it's just helpful to think about particularly deposit margin at this point in the rate cycle to think about normalizing that for all sorts of reasons, one of which would be operating leverage, which Marianne had mentioned at Investor Day. When you normalize for that and think about where we are in our journey of building up our investment portfolio relative to the opportunity looking forward, we then using that normalized deposit margin would expect to deliver operating leverage. So it's just helpful to kind of think about that number for a whole number of reasons.

Okay. Great. So let's talk a little bit about rates and how that's impacting your business. First off, on deposits. What are you seeing with regard to deposits? It feels like there's a bit of a war for deposits right now, and I'm wondering if you feel that or not.

Well, the environment is certainly very competitive, as I'm sure you've heard from a number of people who have been here. And there are more headwinds than tailwinds on deposit growth, most importantly, of course, QT. But you also have -- you have various other headwinds as well, which is how does QT interact with RRP. You have loan and lease growth. And so you have the treasury replenishing the general account, but net-net, a headwind for deposits, no doubt. So our expectation is that deposits will continue the trend of being slightly down from here. That's excluding First Republic, as we said in Investor Day. So that could get us back to a flattish type of trend. But think about being slightly down from here. Importantly, though, the way we think about it is that the war is really for customers, and deposits are really more like a battle. And when we think about that war for customers, we feel very good about where we are. In 2022, we added net 2 million checking accounts across Consumer & Business Banking on a net basis. And we are on pace this year to do at least that much in 2023. And then we've -- in terms of outflows to online banks, only about 5% of our customers outflow to online banks. And we haven't seen any real change in primary bank behavior amongst those customers. And then when we think about capturing money in motion, yield-seeking money in motion, year-to-date, we've captured about 60% of that in CDs or our Wealth Management products. And in recent months, that number is actually higher than that. So we feel very good about our ability to win the war for customers, as they say. But it's -- deposits is not something that we're going to chase with price because our goal is always to protect primary bank relationships.

On that note, where do you see consumer deposit betas going? And I asked the question because I get questions from investors about, hey, the deposit rates at these banks are so low. Of course, the money is moving, but I know that, that's a back book kind of statement. So I just wanted to understand how do you think deposit betas going to your shop?

So importantly, beta is always going to be a portfolio-level beta. It's always going to be a function of migration to CDs as well as product-level reprice. And so for us, we have been quite competitive in the CD space. And when we think about pricing CDs, that's an economic decision because you earn net new money, you don't have to reprice the back book. So that's something we can do profitably. And there, just to put it into context right now, about 6% of our balances are in CDs. If you go back to the '04 through '07 rate cycle, we peaked at about 20%. So we're going to continue to see migration to CDs, which will, of course, impacts the portfolio-level rate paid. And then when you think about product-level reprice, product-level reprice and savings is more of a competitive response. And if we think we need to do that, we do have a -- like mild reprice in our outlook that we gave at Investor Day for NII. But if we think we need to do that, we would do that at a market level. It would be quite surgical. It would be at a market level, and it would be tiered because it would be a competitive response market by market. And that's if and when we need to reprice savings.

And just lastly here, duration assumptions. How do you think about that with regard to deposits?

So what I would say is that our assumptions haven't changed, although because of the convexity profile of deposits, our duration is different at a higher level of rates. So we're obviously less short at this higher level of rates. And something that we're thinking about, and I suspect many in the industry are rather than changing assumptions on duration, really thinking about given what we saw happen in March and April, the velocity of outflows. And so they're really looking at concentrations in the portfolio, whether it's concentrations between insured and uninsured or whether it's concentrations of affluence or geography or a certain sector. And on that front, we feel very good about the diversification of our deposit base. And then back on betas, I should just say, like, ultimately, it's going to depend upon the path of rates, going to depend on the overall level of deposits in the system, and it's going to depend on customer response. And those are the things that are sort of difficult to know right now given the number of factors at play.

So you're watching and flexing as needed.

That's right. And we feel very good about the products that we have available to our customers who are seeking yield. And we have a complete set of products in our Wealth Management business. And then like I said, we're competitive in CDs at various tenors.

And you're retaining the vast majority.

Retaining the vast majority, exactly.

Now at Investor Day, you also mentioned that you're going to be adding branches on a net basis over time. Maybe you could give us some sense as to where there's more room for you to lean in because I thought you were everywhere you wanted to be already.

So we are in all Lower 48 states, but in many markets, and we talk about Boston, D.C., Philly as the best examples because those markets are in the top 10 retail banking markets in the U.S. And yet we really have just gotten started. And when you look at branch share and deposit share, first of all, retail banking is still a very local business. And you can have a different density of footprint, much less dense than you would have needed 10 or 20 years ago because of the complement of digital. But still, we see that correlation be very, very strong. And in fact, up until about 10% of branch share, you see branch share and deposit share be very highly correlated. Beyond 10%, there's a real opportunity to differentiate yourself in a market if you have better locations, if you have a better operating model, you have better people, you have a better brand, product services. And so a market like New York is a great example, where we have 15% branch share, but we have 25% deposit share. And then you compare that to something like D.C. and Philly and Boston would be similar to this. In D.C., we now have over 3% branch share, which, by the way, we want to continue to build, 3% is arguably even subscale for us in any given market, and yet deposit share is just over 1%. So we know we have opportunity to continue to build, particularly in the markets that we've entered over the last 5 years, and we are very confident that we'll increase our deposit share when we do that. It's also worth noting that we have entered 25 new states since 2017, and we have 500 fewer branches. So as we say, it's not this [indiscernible] choice between do you add branches or do you not add branches. It's more about the complement of the branches and digital and what does that footprint really need to look like. And when we think about branch share, of course, the overall footprint of retail banking is shrinking. So over time, you'll need less branches in a particular market to have that 10% share. But we feel very strong about the opportunity that we have in some of these very large markets where we're just getting started. And so another thing that we shared at Investor Day, which you and I have talked about, is when you look at our overall footprint, branches take about 4 years to breakeven and about 10 years to season -- fully season, that's a big average. But if you look at our footprint, 20% of our footprint is less than 10 years old. So even if we don't add another branch, you would expect to continue to see those branches that are less than 10 years old season, when you compare that to the overall industry, the overall industry is about 12%. Large banks are mid-single digits. And so when we think about opportunity to take share, just the seasoning of that portfolio is a real opportunity for us. And then as we said, going forward, we will be net adding, and that's largely because of the fact that we're going to be consolidating fewer. So we have been consolidating in line with the industry for many years now. It's really been -- now when you look forward, it's not because we're going to build more branches. It's that we're going to consolidate less because those opportunities to profitably consolidate branches are becoming fewer and fewer. And so as we look out, that's why we say we'll see a net add over time because of fewer consolidations. And we'll continue to build out that network, particularly in the markets where we're under 10% branch share.

And just to put a pin on it, I recall you have a target, maybe it's a multiyear target for deposit share in the U.S.

Well, so we aspirationally have talked about 20% simply because we think when you look at the banking industry in the U.S. and how fragmented it is that at some point, someone's going to get to 20%. And we think that we have an opportunity to do that, but that's aspirational and over a long period of time. But we know the formula here. And it is local, and we know how this works. And like I said, using New York as an example, if we continue to build out branches patiently as we have because that's the other benefit of being in all Lower 48 states and having that muscle around building branches because we can be patient. If we want to wait for the best location for the next retail branch in Philadelphia, we can wait because we've got 47 other states where we have opportunities. And so every year, we have the capacity to build about 100 or 150 branches across our footprint. And so with that, we have the patience to pick the best spots in markets all across the country.

Well, that's a great overview on your strategy for branches and deposit growth, so I appreciate that. I do want to pivot to the target that you have for the investment asset target of $1 trillion, is it?

Oh, yes.

Okay. And part of that target, part of the way I believe you're trying to get to that target is by increasing your adviser count and increasing, obviously, AUM. So maybe you could talk to each of those drivers and the kind of time frame that you have in your mind for hitting those goals?

Sure. So the vast majority of our adviser base is in the branches. More than half of them come from other roles within the branches, which is why that operating model, that ecosystem really works so well. But advisers take time to season as well. And they're very related, although coincidentally, take 4 years to breakeven and about 10 years to fully season. So a big component of that, like from where we are now, just over $700 billion to the $1 trillion is going to be seasoning of advisers. Today, about 1/3 of our advisers are fully seasoned. If you were to look at a typical mature at-scale business like this, you would expect probably 2/3 of them to be fully seasoned. And so the path to $1 trillion is going to be continuing to hire more advisers, the seasoning of the advisers we have today. There are, of course, productivity initiatives we think we can do to make advisers more productive. And then self-directed is a component of it, too, because it's not just the advisers, and we do expect to continue to grow self-directed.

And is there any market improvement in that outlook as well? Or this is all core operating adviser and productivity?

I would say it is like largely the vast majority core operating growth. But of course, the $1 trillion will always be market-dependent to some extent, but we're not relying on a big uptick to get to the $1 trillion.

Right. Okay. So I wanted to now flex to the health of the consumer and talk a little bit about credit and how you're dealing with that piece of the business. The consumers appeared to be very resilient and wanted to get a sense from you as to what do you attribute that to? And what's your sense for their capacity to borrow from here?

Sure. So I think what you'll hear from us is probably very consistent with what you've heard from others. The consumer continues to be very resilient. I would attribute that to like the labor market. The job market just continues to be quite strong, and wages have largely kept up with inflation. And that has been very supportive of the consumer. The other reason why the consumer has been very resilient is because cash buffer still remain above pre-pandemic levels. So for us, on the median cash buffer is still about 20% above pre-pandemic levels, and it's even higher at lower-income segments. So the consumer remains very resilient. In terms of borrowing capacity, there's a few different ways that you can look at it. First of all, payment rates are still above pre-pandemic levels, both for consumers and small businesses. So that speaks to more capacity. And then when we look at revolve per customer, so revolve per customer in our credit card portfolio is still below pre-pandemic levels. So there's opportunity there. When you then look outside our portfolio, our portfolio would skew a bit higher quality. But outside our portfolio, the financial obligation ratio is back to pre-pandemic levels but still well below where it was in the financial crisis. So net-net, still a very resilient consumer.

And do you have a sense that they're burning down that excess savings at all? Or is it now hovering at this level?

No, we are seeing that. We think at some point in 2024, we'll see those buffers return to pre-pandemic levels. So we are seeing that slowly.

Okay. Student loan moratorium is going away soon. Any impact there that we should be thinking about with regard to maybe the credit card portfolio?

So I think there, it's been 3 years. So there's no doubt if and when the moratorium is lifted, that will be -- there will be some impact. We've looked at that for our own portfolio and feel that we're adequately reserved. We have a qualitative reserve for that. So feel adequately reserved for that incremental risk.

Okay because that's what about like $200 a month or something that the average person has to start paying back. So...

Sounds about right.

And then anything going on in any of the books that you're looking at with regard to tightening of standards on the consumer? Or are you feeling that where you are today is good to go?

So here, I'll talk about credit card. Here, we are -- like we are always managing the portfolio at a surgical level. And so regardless of the economic environment, we are always looking at where we think it would be prudent to cut lines and then, of course, where we think it's -- there's an opportunity to increase capacity and increase lines. So that's something we're always doing. I suppose you could say at this point at the margin, we're looking at things like customers within credit files or customers who have no other Chase relationship because those tend to be factors that can contribute to incremental losses when we hit a stress.

Okay. And you mentioned reserves earlier. Anything in particular on reserves this cycle that would lead you to a different outcome versus prior cycles? Or can we just look at how you were reserved in the various asset classes and apply it going forward?

Well, there, I would just again speak to the credit card portfolio. So our base case is for a mild recession with unemployment peaking at 5.1%, loss rates of 3.5% in the card portfolio over a couple of years. If you then look at a more moderate recession where you'd have unemployment peaking at 7.1%, you see that's about an impact of $3.3 billion in losses -- incremental losses over a couple of years, another 130 basis points on the loss rate. But as you well know, we reserve to above our base case. And so the impact on reserves in that scenario would be more like $2 billion over several quarters as opposed to the $3.3 billion because of the fact that we're reserved above the base.

Okay. And this gets back to what you were mentioning earlier with ROEs currently being way above...

That's right.

Yes, and this could be a driver if it were to come through.

That's right. But even there, I mean, credit in the card portfolio, normalized loss rates would be more like 3.5%. We underwrite to 4.5%. So even pre-pandemic, we were on our way to higher loss rates because we were underwriting at higher loss rates. So there's still not only reserves, but there's still a ways to go on in terms of normalizing just in terms of that charge-off rate.

Got it. Just while we're on card, one last question here. How are you seeing the consumer with regard to card spend? Any changes and any updates this quarter?

So there, I would say not a whole lot of new news. So if you look at a stable cohort of customers year-to-date through May, we're still up 1.5% or so. And so in recent months, we have certainly seen a deceleration of growth, and things look more like pre-pandemic trends. But we haven't seen spend -- real spend declines.

Okay. And that 1.5% is year-to-date.

Year-to-date through May with the more recent months seeing more of a deceleration. But I think we would still describe spend, discretionary and nondiscretionary, as solid.

Okay. Flipping to small business, an important part of the opportunity set, I would say, I mean, obviously, the current customer base as well. But can you give us a sense as to what small businesses are doing in this environment? What are they focused on? How are you helping them? And also how do you assess their credit?

Yes. So as I said earlier, small businesses also remain resilient. Payment rates still above pre-pandemic levels, and cash buffers also still above pre-pandemic levels. But not surprisingly, what we hear from our small business owners is that they are focused on inflation, inflation and inflation. And so looking at raising prices, of course, in some sectors, meeting more resistance than in others from their customer base and cutting expenses. So that's what they're focused on but still very resilient at this point. And then how we help them, well, we have business bankers in our branches and in offices across the country that support small business owners. And we are adding banker capacity to be able to continue to support them. We've introduced some new products that we're excited about, things that allow small business owners to really operate their businesses within the context of their banking relationship in a seamless way. So things like a 401(k) product for their employees, payroll invoicing, things that just make running the business a lot easier. And then in terms of entrepreneurs in low- to moderate-income communities, we have introduced a team of experts that are senior business consultants that offer one-on-one mentoring and coaching. And then we've also introduced a special purpose credit program to provide access to small business owners who wouldn't otherwise have had that access. So we're really proud of the things that we can do to support small businesses. But as you said, it remains a significant opportunity for us. In fact, we really do think about it as a growth business even though we're #1 in primary bank share. It's still just something we feel we're still relatively underpenetrated in.

And are most of these conversations and mentorships, is that happening at the branch? Or is that virtual now?

Mostly at the branch. Of course, there's some virtual, but it's very local, like boots on the ground, real live coaching in person where we have an opportunity to really get to know these small businesses and sort of help them continue to build.

So I want to flex now to efficiency. And in particular, first off, talk about what are some of the things you're doing to drive even more efficiency. I mean, let's face it. Your business line is one of the most efficient of its kind in the country. So I feel a little aggressive in asking what else you can do for us shareholders. But I know you have some plans. So I would love to hear if you could help us understand what you're doing to drive even more efficiency here.

So well, maybe what I'll do is -- so there is efficiency that we can build within the sales force, and there's efficiency, always operational efficiencies and even efficiencies in terms of top line efficiencies. So when you think about the number of households per branch that we cover, that continues to increase because like I said, that complement of digital. So we have efficiencies, both in revenue as well as expenses. And a good portion of that is going to come from how we're going to leverage AI, machine learning and AI going forward. And when we think about -- we talked at Investor Day of we're on path to move 50% of our data into the cloud by the end of this year, 80% by the end of next year. And what are the things that, that allows us to do? Well, that really improves our ability to underwrite in real time and get preapproved offers to our customers so creates efficiencies in the marketing funnel. It also allows us to be more targeted on personalization in terms of the next best offer that we put in front of our customers. And then like in terms of operational efficiency, being able to leverage that real-time data for an agent on the phone, we can then interpret customer intent, we can transcribe the call. And we can, in real time, deliver solutions to our agents on the phone. We can interpret based upon where customers have been in our channels in the hours leading up to the phone call, what that phone call might be about. And so really, it's a game of inches, I would say, in terms of productivity. And it always will be that every day, we just get a little bit better and leverage tools like AI and ML to be able to do that.

And so the follow-up here is, is AI an extension of what you've been doing already? Or is it something that's a game changer on efficiencies?

Well, I think ultimately, like we haven't even begun, I think, to realize the transformational impact. So I think ultimately, it will be transformational. Right now, it's incremental, but in really, really interesting ways that I think ultimately, we'll describe as transformational.

Okay. And what kind of time frame should we be thinking about with regard to the impact of AI on either revenue efficiencies or expense efficiencies?

Well, I think it's going to be something that is like we'll be talking about for years to come every time we're together. So I don't think there's going to be a moment where I think we should be talking about it every time we're together, like I said. We will be making incremental progress, both from a revenue perspective because we can make our frontline employees more efficient, more knowledgeable when facing off with customers. And we can make our operations employees like much more efficient as well.

I just asked the question because a long call the other day when the investor was asking, should we be putting this in our model this year, next year, in 5 years' time? Sounds like it's already in train.

Yes. Oh, yes, absolutely. Because even our data today is scalable and usable for machine learning. It's just as we move it to the cloud, it's just going to get incrementally better.

And anything here to talk about with regard to competition from fintech? I just raised it because, clearly, fintechs primarily have been on this cloud backbone since inception. That's why they're called a fintech. At the same time, they have a higher cost of capital to deal with. So wondering if the competition there from your perspective is slowing down or heating up? Or are there opportunities for you to acquire?

Well, I would say only the paranoid survive. And so we have a lot of humility when we think about competition. It is probably true that new entrants in the space have slowed a bit, given the higher cost of funding and lower valuations. But like I said, we are very humble when we think about competition, and there's something to learn from the competition all the time. But I'd also say that there's opportunity to partner, and you've seen us do that. And so there is opportunity to partner to deliver better products and services to our customers as well.

So I just have one last theme that I want to hit on, which is the integration of First Republic into JPMorgan Chase. But before I get there, I wanted to ask a question about guidance. At Investor Day, you increased your 2023 NII guide ex Markets, right, by an incremental $3 billion due to First Republic. And that number seemed higher than investors expected. We got a lot of questions on it. And I'm wondering, is that a function of your expectation that FRC deposits will come back or move their cash back in some way, shape or form? Or is there something else going on there?

It's something else. So the discount accretion on the mortgage portfolio hits NII. So that's where -- I mean, we bought the portfolio at $0.87 on the dollar. So the majority of that is going to be that discount accretion. Having said that, we are working really, really hard to win back business at First Republic. And so it is early days, and we feel great about where we are in terms of the ability to stabilize the employee base. And now we're going to work really hard to win that business back. And that is not assumed in the guidance that we gave.

So that would be gravy on top.

That would be gravy on top. So I think -- I mean, the best way to summarize is that, that's the deal model. And so we feel confident in our ability to deliver the deal model. And to the extent that there's opportunity above that, which we think there might be, I would say that it's marginal. When you think about that opportunity in the grand scheme of the franchise, I would say that, that opportunity is marginal.

So the follow-up question on First Republic has to do with what are you going to do to enhance, what you've acquired here as well as integrate it seamlessly into JPMorgan Chase, and do you keep those eye-catching First Republic corner branch locations?

Yes. So I love that you say eye-catching corner branch locations. First of all, we think we have a lot of eye-catching branch locations, too, but it is actually a really good point, because there is marketing value in our branches. And it is something that we think about when we think about where we put branches because when you -- and it's measurable. You can look at the foot traffic, and you know the eyeballs that you're getting when you put a branch on a particular corner. And you can compare that to what it would cost you to buy media that would get that same amount of awareness or out-of-home to get that same type of awareness. So it is something that we think about. As far as First Republic branches go, you may have seen in the press that we have announced 21, initially 21 branches that we're going to close. Those are First Republic branches that are in proximity to other First Republic branches. The brand and those branches need to stay, the remaining 60 something that is, until we convert the back end because we can't service First Republic customers out of a Chase branch at this point. So those 21 are in good proximity to another First Republic branch, so we feel that we can do that without creating customer disruption. Of what's left, there will be some that really are very interesting locations. And they have 2 stories, and they really are eye-catching. And so there may be some of those that we keep and maybe close a Chase branch in proximity or convert it to a Chase branch. And then you heard us talk about potentially thinking about another format as part of our branch segmentation strategy where we may have a private client center with a different staffing and different operating model in it to better serve the affluent.

I was just about to ask about that in your wealth strategy. Yes. So maybe you could just elaborate a little bit more what other pieces would you be adding there in that model? Because I know you're eager to integrate First Republic wealth.

Yes. So probably, it wouldn't necessarily be completely new roles, but just an emphasis on roles that serve the affluent. So you would have more wealth advisers in branches like that than you would typically have in a normal branch or you'd have more business bankers in a branch like that. So -- but in terms of their wealth business, they -- that fits in with -- like I said, the majority of our wealth business, U.S. Wealth Management within CCB is, of course, Chase Wealth Management in the branches. We also have JPMorgan advisers, which is more of a wire house-type model. That's where First Republic fits in. So we have about 450 advisers, $200 billion in assets in JPMA. And First Republic has -- will be at about 200 advisers, $200 billion in assets. So in the grand scheme of Wealth Management franchise, it's not a huge accelerant. But for a business like JPMorgan advisers, it certainly is. It would take us years to hire 200 advisers and build to $200 billion in assets. So from that perspective, it is an exciting acceleration of the wealth strategy.

And would you take this new format and expand it in other markets where First Republic might not be?

Sure. In fact, we were already testing because you heard us talk about the branch segmentation strategy. We obviously have a customer segmentation strategy, and then we should have a branch segmentation strategy to fit that. And you heard us talk last year at Investor Day about our community center branches. Well, this is part of that as well. And we were, in fact, testing in Texas. We were testing a private client center. So it was something we were already thinking about doing, and this now gives us an opportunity to perhaps to do a dozen of them rather than 1 or 2. But -- so it was something we're thinking about.

Super. Well, that's great. Jenn, thanks much for your time today.

You are welcome. Thanks for having me. Thanks, everyone.