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

So we didn't double down. What we did is, if you look at it, we are also consolidating certain branches. Where there's logic, we should consolidate. And I'm a real skeptic about that, okay? When I got the bank when they were consolidating, clicks not bricks. They were closing branches to make a $1 million a year profit. They would have made $1 million a year profit for the last 20 years. I mean, what in the hell they were thinking? And Chase was doing the same thing. So it might -- you be very analytical about what you close, why you close it, where you can keep. I give you some very specific examples that I stopped closing the branch and they act like I'm interfering. I'd say, "No, I'm not interfering. Don't close that branch." I'm not going to give you all examples. I don't want to tell my competition why. And also, I'd say, "If you close that branch, you know who's going to open there. Wintrust, Cap One. Like tomorrow, take the lease, move in." Actually, I was -- I think it was at a Bernstein conference once. And I was in the back, listening to, who's the guy who built Commerce Bank?

Vernon Hill?

Yes, Vernon Hill. Vernon Hill was up here. And he's doing a flip chart, a slide presentation for you all, and he was making fun of Chase. And he said, "They closed this branch, I moved in. They closed that branch, I moved right in." And when he was walking down, I said to him, "Vernon, that will never ever happen again." And I put in place a rule at the time that you couldn't close a branch without my permission. Because they would say, "Well, you can move to the second floor." He took 100% of our consumer business. 100%. Even if there's a Chase branch a block away. "Well, they will just go to the other branch." No they didn't. They wanted that branch. And of course, he did other things that got the good service. So -- and then we opened branches, too, because there's always places you should be opening branches, always a place you should want to gain some share. And the 48 states is -- allows us to do other things in the states and is kind of a foothold. And we have a strategy around that, which I think she alluded to a little bit of covering more people within driving distance. A little bit more rural. Certain -- and there are certain different types of branches. So we like our branch strategy. I think she said that 900,000 people visit a day. So remember, you don't have branches because you have a strategy department, where you have a CEO, where you have marketing people or salespeople making statements. You have branches, you have customers who like them. People like to visit their money. That's what it is. And the branches, of course, have changed their nature over time, more advisory than operational, et cetera. And we can always adjust the fleet. So if you said to me, well, what if you're wrong? We can adjust the fleet very quickly, okay? It's not -- it literally wouldn't be that big a deal between leases and selling stuff and modernizing some of the branches.

Things worked out well for you better than Vernon Hill, it seems like, because the other side of the balance sheet really...

I used to -- again, I would look at people. Like I know Vernon, I still see his stuff. But you always look at every competitor and say, "What are they doing that's better?" And they -- remember they have those little machines that would put your coins together and gum for kids and biscuits for the dogs and more hours. And customer service works. So he did do a lot of things right, and you should always learn from that. When I got to Bank One, they were saying, Jamie, it's going to be cost efficiency and stuff like that. And that they would get rid of the coffee, the lollipops and the dog biscuits in the branches. Well, if you go visit a branch, I mean, you could see dogs pulling their masters into the branch to get that biscuit. I mean -- and they even would come into the drive-through, and their tails will be wagging and they send a biscuit through the pneumatic tube thing. They're like -- and you don't get rid of stuff like that. And some people like to visit the branch because they just are lonely. And just you got to be really thoughtful how you run a business. I don't think it's all about math sometimes. It's not. And there's some wonderful stories. We had a kid killed in a branch yesterday with a gas explosion in Youngtown. So there's a terrible thing. But when the branches are human, they deal with customers. I go to these community branches. If you haven't been to one, there's one in Harlem, there's one in Fordham Road in Bronx. Go to the community branch, sit there for 1.5 hours, watch the people walking in and out and tell me it doesn't work. And some of you guys used to do those branch visits. So what analysts does them? Someone does...

Today, not as much anymore. But...

[ They've shown rights ] every year about their branch visits. Anyway. And I read that analyst report in detail because they're learning about what the people do this well and not well. I read John, too, but he's very good at what he does.

Not that report. But you've got the goal to go from 11% consumer retail share to 15%. Some of that seems baked in the cake from some of the investments you've made and all of that is a multiyear.

Yes. They're all -- you actually showed the branch growth that we've been around for 15 years. The branch growth is only 5 years old, so you can build in what you think is going to happen down the road. But obviously, we want to cover more people, cover more accounts, more product, more deepening. We announced today that -- I think it's been announced. If it hasn't been announced, I'm announcing it now. That our self-directed investing, we've added fractional shares. We've added a better kind of research. We've got 5 or 6 different things. One day, that self-directed investing will be really good. And then you're going to see us really push it. And then you're going to see us really push it. And then you're going to see -- because we have competitive advantage on it. And so I get very excited about that. When you can do certain things in Chase that you can maybe -- Chase can do it. I also think our order match system will better than payment for order flow. I'm going to try to prove that to Mikael Grubb over here. I can probably prove it, that you're going through our order-match systems, and we give our consumers the same order-match effectiveness that we give our big wholesale clients, okay? So payment for order flow has a deceptive characteristics to it. And so I think of those advantages that you're going to see us try to take advantage of soon in self-directed. Chase Offers, Chase Media. I think if you have a Chase account -- how many of you have Chase accounts? How many of you have Sapphire Card? Okay. But you're going to get -- you get offers at the bottom of your account, the bottom your Sapphire card, you go online, you're going to get more and more highly relevant stuff. It will take us a while, but we're building the systems to give you some really neat stuff. And also, Chase Media allows other people to come in. And if you like golf or you -- and we make it consumer-friendly. So we're not just bombarding you with -- which we do a little bit today with stuff that is irrelevant. I tell the people, when you give me offers to have my nails done downtown, really, you think I'm going to like drive downtown? I don't get my nails done. I'm not -- I don't even go downtown for a meal anymore. It takes too long.

So on that topic, AI came up quite a bit at the Investor Day. And you talked -- you said it's already interwoven into many of the businesses, having an impact at JPMorgan today. Again, for kind of the broader audience, what are some of the examples of biggest opportunities banks have to leverage AI?

I think the best way is to stop talking about what it's going to do. It's already here. We've been using it since 2012. We started our own department in 2013. And to me, as a management thing, every time we have a management -- I didn't go yesterday, Daniel Pinto did it. But every time there's any kind of review, it's also what you're doing on analytics? Think of AI. It was true, by the way, before AI. It was analytics. We're always doing deep analytics and deep math on credit, market and underwriting. And now it's just a whole another level of that where you can find correlations and things you couldn't -- the human eye couldn't do. So I think we say there are 400 use cases. Probably by the end of this year, maybe 800 as management teams are getting better. It's not understanding AI, it's understanding how it works. But you say, my God, you mean you can do this for me? And so we use it for prospect marketing; offers; travel; note taking; idea generation; hedging; equity -- hedging and the equity trading floors; anticipating, when people call, what they're calling in for. Answering customer -- this is on the wholesale side, but answering customer requests. And then we have -- and we're going to be building agents who are not just answers the question, it actually takes action sometimes. And this is just going to blow people's minds. It will affect every job, every application, every database. And it will make people highly more efficient. Like a lot of you clicking away, taking notes, you won't have to do that because it'll -- you can just summarize what Jamie said. You push a button and you don't have to wait all that time. And it's just powerful stuff. And we use it for risk and fraud recognition. And bad guys are going to use it, so we have to use it to counter the bad guys. We have to use it to get better and better in cyber. So it's going to be everywhere. And I think for smaller banks, too, it will be offered through AWS or through Fiserv or FIS. So it isn't like they won't have any access to that. And so I think we're in good shape. But it also creates some disruption maybe in payment or something, where people use it to build something better, faster that we just didn't do or something. So -- and to me, it's just part of the management team now. We have someone on the management team, very experienced. Some of you may know Teresa Heitsenrether, who is now responsible for data and analytics because they're directly related. Getting to the cloud, private or public, is directly related to access the compute power you need and to go across all the database in the way you never used to do it before. And then there's a mirror inside credit card, consumer, payments, trading, banking, to do the same kind of work. And we're just getting smarter and better at it. But in the meantime, what I don't know is the pace by which all these things will happen because we're probably adding headcount at AI for quite a while. So you'll see our cost going up, not down. We think there are benefits. We do try to measure ROI and NPV. In some cases, we do. In some cases, we don't. I think it's like a waste of time. But it is super real. And it's a continuation of the deep analytics we were doing years ago.

Maybe you could talk a little bit about the importance of some of the...

I think we gave -- some of them gave some very specific examples at Investor Day. The KYC cost down 50%, 80% faster. And that was like literally taking one person who is an AI expert saying attack this problem. And they just attacked it once. Wait till they attack it four times. And so think of when you ever deal with a bank, and like why is this happening that way? We should get -- OSAT should be going way up with this.

So you've been doing it...

And it will eliminate jobs, too, by the way. So in my view, don't be afraid of that, get ahead of that. I mean, a management team shouldn't be putting its head in the sand. They should be observing and thinking about what it might mean because if you're ahead of it, you can save your people a lot of aggravation. You're not going to wake up one day and you have to lay off 50,000 people. You can build it into your plans. And that's where I always say attrition becomes your friend. You do have 20% attrition at a lot of jobs. And therefore, that's 40% over 2 years. So you can plan, retrain, et cetera, if you think ahead a little bit.

So can you talk a little bit more about these adjacent businesses and how important they could be to the future for you? You've got a travel booking portal. You mentioned Chase Media Solutions. What's driving the opportunities there? Is it technology?

In every business -- and I don't know if adjacency is the right word. In every business, the goal is do a better job for your customer. See it from the point of view of your customer. So in a lot of cases, just making it better, faster, quicker, cheaper. We add a lot of services for nothing. So think of today, when you go online, over the years, you have Zelle, you've got free trading, you've got more data, you got more analytics, you got free wealth planning, you've got free -- so some of it's just doing a better job for the client. Some of it may create revenue opportunities. So Chase offers, Chase travel where if you book through us, and we can offer you better deals, we also can earn the travel commission effectively. So we're both doing a better job for you and we create another revenue stream. And that's true in every business. I always tell people, in a lot of wholesale businesses, we actually price by the drink. You charge a little bit for everything. A lot of consumer businesses, they're bundled. I just gave you an example about your account so -- but some aren't. And so -- but anywhere you have data that you can use to make a client happier or offer them something they want, you can maybe charge for or not charge for it. But think of even in -- I may not even want to tell you some of these things. There's certain areas where we can anticipate something and offer the clients something better, quicker, cheaper, faster, and it's better for us too. And so we -- obviously, we have the new compliance and regulatory stuff like that, but it's endless. And with our data, like I tell people, we know-- we might know where you eat at night on a Friday night, that you like Chinese food. So maybe the small new Chinese restaurant one block from you. Every Friday night, we'll offer you $30 off or even a free meal to get you to try it. That has to come through our data and a small business will be very happy and the client may be very happy. Well, that's kind of a win-win, right? And so that could be for big companies. It could be for small company. We have deals with some big companies already, and we could partner with people. And so it's anywhere. Small business, I think there's -- I've always looked at small business as an area that we will be -- we should be able to do more to make their lives easier. A lot more. And you see it with things like Toast. But the things that we can do to or working with the Toast, embedding payments or something like that. Medical, let's say, it's going to be a huge area, medical payments. So each year, we go through each one, and we expect the teams to be thinking adjacencies, data, customer service, OSAT scores that are faster, quicker, cheaper.

So in your Chairman's letter, you talked about the role of private credit. And maybe just give us a little bit of thoughts on how much of that is a threat to banks, is an opportunity for banks, a little bit of both?

It's a little bit of both. So first of all, I'm trying to be neutral -- not neutral, but like really assess it as opposed to just have a knee-jerk reaction to private credit. I already mentioned there is this issue about stuff going private. So private companies, private equity, private credit. And that's -- there's a policy issue that's good for the country in the long run. We're the most transparent market the world has ever seen. By that transparency is rule of law, research disclosures, ratings, it's not just one thing. And it's also access to investments. So as they go private, there's less and less access. And then you have to ask the question about do you want to give access to retail clients of some of these less liquid products? Well, the answer is probably. But don't act like there's no risk with that. So I will make a prediction on that one. So now private credit, yes, it's in some way, there's a lot of good stuff. These folks came forward, direct lending, private credit. Like they'll sign a unitranche deal. They will do the covenants differently. They'll moderate it, modify it for the owner or stuff like that. They know the business. They might be a long-term investor. They're not going to be asking the business to do stupid short-term things to meet covenants. It could be good owners. It could be a good thing. And the fact they could stay private for longer is probably a good thing. The fact you could raise private capital when you're a private company is probably a good thing. The fact that you can get -- so that's all good. But not all the people doing it are good. And so I think some of these people are brilliant. I mean, I know them all, we bank a lot of them, they're clients of ours, but they're not all good. And the problem in financial markets are often caused by the not-good one, the people who make the mistakes in that you have illiquid products, maybe they're not properly marked, they have not been stress tested. Do people really fully understand what I said about interest rates affecting what these things are worth? Do they? And if a little old lady finds out that she can't get her money back. And there may have been disclosures there saying this money is locked up for 5 years. But you know what? Retail clients tend to circle the block and call their senators and congressmen and could be hell to pay. And the transparency around the marks and the lack of research, the lack of rating sometimes. Even -- I've seen a couple of these deals that were rated by a rating agency, and I have to confess, it shocked me what they got rated. So it reminds me a little bit of mortgages, okay? And then they're going to blame the banks on the mortgages. And so the rating agency rating them. They said they're AA or AAA, but they effectively weren't because the analysis about their sub-prime component. So there may be problems here. I don't think it's systemic, but I do expect there to be problems. I also expect there will be problems when you mark these things, like they have not been really tested. During COVID, if you -- during those really bad months, they wrote down, if you remember correctly, some of these things are written down 10%. I would tell you the number should have been 20%, okay? So -- but that only lasted for a month. What if that lasts for a year? And what are the discrepancies? You had this with private equity, discrepancy that one person marks a loan and another. And now they're coming closer. We've seen a whole bunch of dealers go from the private market to the syndicated market. You know why? It's 200 basis points cheaper. And when rates went up, it matters. Maybe it mattered less at low rates. So we're going to compete. We can do direct lending off our balance sheet. We can do direct lending and syndicate it. So we -- and we also want to be agnostic, which is you're the client. We'll do A, we'll do B, we'll do C. We'll tell you the pros and cons of each. So we're in the mix. And we haven't yet -- a lot of these people raise these big funds and stuff like that. We haven't done that yet. And what asset management does is completely separate. This is all about what our Investment Bank is going to do, and middle market, to compete. So we're comfortable we can compete.

So two updates on your business lines...

By the way, with our balance sheet and capital, we can put $100 billion into it, $200 billion. But I'm not afraid about that if you think it's good credit. The other thing that always is surprises me. It's two -- right -- I don't know what the price is today because it literally changes every day. It's 200 basis points more expensive. And for JPMorgan, I kind of like the 200 basis points, and we get other revenues. And one last problem. When the s*** hits the fan, and it will one day, we don't know when, there will be a lot of stranded borrowers because some of these people simply cannot roll over loans like we would because they have a fiduciary responsibility to book the new loan at par on their balance sheet. To do that when things are bad, they're going to have to book -- then it's got to be a 13% yield, and the company won't be able afford it. So there'll be people saying I can't help you. And that may be a little bit of a problem, too, particularly if it starts to affect smaller businesses, who call their congressmen also.

Can we a quick update on the build-out of the consumer bank in the U.K. and Europe?

Yes, it's generally going -- I think we have -- I think we said we have $16 billion of deposits. It's generally going to plan. It's a good product. People like it. If you actually go there, they're good at it. They do like it. It was always -- it's always been a skunkworks things for us because digital banking may make us able to do consumer in Europe. And it was never just Chase U.K. So we wanted the Chase U.K. right before we attack another country or something like that. And there are other things that we have to deal with. We have ring fencing, what products we add or don't add, how we look at the profitability a little bit. But it's generally going according to plan. I think companies should always be -- we have other skunkworks that are there which you don't know about. I think we should always be doing stuff like that. So I'm optimistic about it. And at the point it gets to breakeven, which I think we told you it's going to be 4 years from now -- rather 3 years from now. Once it gets effectively to breakeven, then we have something we can toy around with for a decade. And I don't know why we couldn't compete with any digital bank out there if they're making money. And some of them aren't now, you have a bunch of them actually making money. Some of it because they're putting risky assets in the balance sheet, but some are making money not doing that.

And can we get an update, too, in terms of the efforts to integrate a wealth offering into the consumer business at Chase? What you're doing there and how you feel that's going?

It's going great. I mean, God, we started only a couple of years -- I forgot how many years ago, but it's $200 billion. It's almost -- I think it is probably close to $1 trillion with the First Republic deal. We're adding Chase Wealth Management in the branches. We're getting better at it. We're enhancing the products, their services. Our market share is small in that segment, and we have very big aspirations. And like Charlie was talking about, it's different distribution. We have Chase Wealth Management, self-directed investing, private banking. We do not do with a third-party, with a co-independent stuff. But -- and we have JPMorgan advisors now, which is kind of the creme of the creme of how we handle the top financial advisers there, who are great. And we're getting better at doing that. And I tell them that we want the best people, best products, best services, best comp, best research, access to JPMorgan for their clients who need certain private banking services or investment banking services and there's overlap. So -- and we're trying to -- JPMorgan private client branches, which will be 20. And if something like that works, it can be 100 or 200 down the road. I think they will work, by the way. It's just a different way of running the business. So we have to make sure it works with the customer, not for us.

Okay. We've got a couple of more minutes. Maybe just the ROTCE target of 17%. You've been doing 20% ROTCE for a few years, talking about overearning a bit on deposit margin. Just how do you contextualize the through the cycle 17%? And where you might be over and underearning today in different areas?

Well, I mean, I do think we're overearning. We want to be honest about that, on NII a little bit, on credit a little bit. Credit, shall I use the word benign? I'm going to use another word. It's the best it's ever been. Everwhere, any time, ever. Middle market losses have been 0 for years. Credit card, if we sat here with credit card, which obviously is a big number, we would have told you, I think that through the cycle is 3.5 or 3.75. And if you ask, what's the lowest it can get in the best quarter ever? I would have said 2.5, 2.25. It hit 1.5, and because the government gave $6 billion to people. And so large corporate has been very good. It's that -- you can see it in credit spreads, but middle market has been very good. Mortgage has been 0. Auto has normalized a little bit. So it has to normalize. And NII, we're not quite sure and stuff like that. So -- and then there's competition. JPMorgan did benefit a little bit from COVID and other things, but the competition is fully back. And you -- and I spoke about Wells Fargo has got good bones. They're getting their act together. Goldman Sachs has been kicking our b*** in certain areas. I mean, you got to like -- you can't just act like the world is a static place. So -- and then Basel's going to add more capital. So roughly 17%, still there. The best chart I like is the one that Jeremy Barnum showed you that shows potential outcomes under various adverse scenarios, which is what I always worried about. I want to earn good money. Our best year ever, our finest year ever, '09, our ROTCE was 6%. That was the best year we ever had. I mean if we could earn 7%, 8% in really terrible times, God, I'd love to -- then the business has become a really good business. Remember, a lot of companies went bankrupt. So I did this -- I made Mikael Grubb do this when we have our -- look at, if you take who the 12 competitors are in our proxy, how many earned more than 17% in a year in the last 10 years? That's 120 company years. How many earned 17% or more? I think it was 7 times. JPMorgan was 3 of them. Goldman was 1 or 2, Morgan Stanley is 1 or 2, and Cap One was 1 or 2 or something like that. 7 times. How many earned less than 6% in a year? I think the number is 30 or 40, okay? So let's not act like we're going to up that target, okay? We're in a competitive environment, okay? And so -- and then I also went back to 10 years before that, how many earned over 17% in the 10 years before that? It was like 30 or 40 out of 120 years. And how many earned under 6%? It was like 30 or 40. But of the 30 -- of the people who earned over 17%, most of them went bankrupt. So you got to be really careful when you analyze a business and you start changing forecasts, stuff like that. If we can earn 17% for the rest of my life, I'd push that button right now. I wouldn't even think about it. I would have no debate. I mean, can you -- and if you can compound the 17%, if you can reinvest half your money and compound it 17%, you'll own the world in about 50 years.

All right, Jamie, we're out of time. We're going to leave it there. Thanks so much.

Thank you. We'll see you all soon.