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

All right. Well, thanks, everybody. Welcome back. I have a disclaimer and then we'll get into it. For important disclosures, please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and the use of recording devices is not allowed. If you have any questions, please reach out to -- talk to your Morgan Stanley sales representative. Okay. With that out of the way, I am so delighted to introduce you to Troy Rohrbaugh, Co-CEO of JPMorgan, CIB. Troy, thank you so much for joining us today.

Thank you very much, Betsy, for having me here.

Okay. And it was a pleasure to hear you at JPMorgan's Investor Day. Was that just a couple of weeks ago?

It feels like it was a lifetime ago, but I think it was May 20, something like that.

Yes.

Not just a couple of weeks ago.

Not too long ago. And I have several areas of follow-up questions to dig into from your presentation then.

Looking forward to that.

Okay. Great. I also want to make sure everyone knows that Troy is a member of JPMorgan's Operating Committee. So there's quite a breadth of knowledge that you have on the organization, clearly, that you're able to leverage into your world.

Yes, we definitely. The way Jamie runs the company is everyone in the operating committee sees everything, which is selfishly -- like just makes the job even more exciting, but also puts a little more pressure on you to be focused on all parts of the firm.

And is that at every Tuesday morning?

Every Monday morning at 10 a.m.

All right. So yes, I'll be sending you good vibes for next Monday at 10 a.m. All right. Now there was recently an organizational change. JPMorgan combines the Corporate & Investment Bank with the Commercial Bank into a new segment now called Commercial & Investment Bank, which is the CIB that you co-head, right? Could you help us understand what drove that change and what opportunities a combined segment provides?

Sure. We tried to make it simple. It went from CIB to CIB, just a different word. So I guess the way I think about it is we had 2 incredible franchises, the Commercial Bank run by Doug Petno and the CIB run by Daniel Pinto for the last decade. They both were best-in-class franchises on their own right. So you could either ask 2 questions, why combine them at all? Or why didn't you do it sooner if it's the right thing to do? And I think the answer to the latter one is probably the way we think about it is why didn't you do it sooner. And I think in the early days of the CB, the idea was to not dilute the focus on middle market and commercial banking clients. Historically, when you combine them in a like investment bank, those clients often get overlooked. And I think Jamie and the management team at the time was just very, very focused on making sure that did not happen. And as a result, it has been extremely successful, and Doug has grown middle markets and commercial banking significantly. We felt that it gotten to the point where by combining them, you weren't going to lose that focus. We're going to keep that momentum, but get a lot more synergy across what we could provide from a holistic client coverage basis. For large parts of the CIB, it isn't really that meaningful of a change, Securities Services, Markets are broadly unchanged. But when you think about our banking franchise, it gave us an opportunity to really create 1 organization from just above Business Banking, which is done in the Chase brand, all the way up to the largest corporates covered by the Investment Bank. And while both sides worked very well together, and they did coordinate, anytime you have 2 separate organizations, you get some friction. And this puts us in a position to remove all of that and our mind, move clients seamlessly across the spectrum.

Okay. And as a result, you anticipate getting more wallet share with clients?

That's the goal. I think that our #1 priority is to grow with clients. I mean that's our focus in all parts of our business.

Number of clients.

Number of clients and like the wallet share of the client. So you can have a lot of clients, but don't penetrate them very well. And we want to do both, of course. So I think we've never suffered from a lack of volume of clients. And our structure today brings in like lots of ability to contact clients. We have in middle markets or in the old CB alone, we have 50,000 prospects. So it's not a question of client access. It's really a question of like how deep can you penetrate these clients. And we feel like this new organization allows us to penetrate them early, get deep with them. And as they grow and become more complex, we're their bank of choice.

So if I recall correctly from the Investor Day, I think one of the changes is to have 1 industry coverage across all 5 companies in that industry. Is that?

Sure. We still segment, right? So we still have middle markets and maybe it helps just to describe how we're organized in banking. So Doug and Filippo will run what we call global banking. But there's 3 segments within that. There's middle markets or what we now call the Commercial Bank, which are middle markets and our real estate portfolio. There's the GCB, which is Commercial Bank plus the Global Corporate Bank that used to sit in the CIB and then there's traditional Investment Banking. We have always been organized broadly by industry coverage like most people in the Investment Bank. We also had industry coverage in both the GCB and the Corporate Bank. And what we've developed over time is actually industry-specific coverage even down into middle markets. So if you're a middle-market client, you can be covered by an industry or depending on your size and complexity, you might be just covered by a regional banker. The idea is because we're 1 organization now, that client can get industry-specific coverage benefiting from the real specialist further up the chain at a very early stage. And that helps us deepen that relationship. It helps the client. And that way, as they grow, they become more complex, need more products, go to capital markets. We are their port of call.

Got it. So if I read you correctly, expectations for faster expansion of wallet as you're combined now.

Correct, yes.

Okay. And is there any integration with the corporate bankers and commercial market bankers? Or they're still being kind of managed discretely?

So I think the biggest integration -- so middle markets is still being run by middle markets by John Simmons, reporting to Doug and Filippo. And then Doug and Filippo's day job in addition to running the global banking organization is to run what we would call the traditional Investment Bank. And then we have a woman named Bregje de Best and James Roddy, our co-heads of what we call the GCB. So there's really 2 integrations. There's the CB into what was the CIB or the Investment Bank. And then there's the combination of the old Commercial Bank and the old GCB. And that's probably where you get the most integration, the most combination of individuals potentially doing similar jobs. And that's also probably where, in our view, one of the biggest opportunities are. The CB was growing internationally at the smaller segment. The GCB had grown significantly. And when you think about like the opportunity in corporates, which we think is one of our largest areas for potential growth, that's the area that I think has the most opportunity for it to come from. And so we're going to have to integrate the old Commercial Bank and the GCB. They're making real progress. They've always worked closely together, but that's where you get the most work in terms of like a merger.

Okay. Great. Two more questions on the integration, and then we'll move on to markets and banking. But you're sharing the CEO role with Jen Piepszak, correct?

Yes.

Okay. So could you give us a sense as to how you're allocating responsibilities? How is that partnership? How have you both determined how to split it up? And yes, let's start there.

Sure. I mean I think at a lot of firms like they create co-heads, and it turns into a cage match. That's definitely not how JPMorgan works. I think historically, our view is that hopefully, when you put 1 plus 1 together in 2 people, you get not 2, but you get 3. And so we think about how do we leverage ourselves in that structure. You get the ability to be in 2 places at once. You can make individual decisions on the things that are day-to-day business. But then you get 2 different perspectives that hopefully create a more valuable or a better decision on the more strategic questions. So how do we divide it up? So far in the first 5.5 approaching 6 months, we're doing a lot of stuff together because you're making a lot of what I would say are more strategic or bigger people decisions. It's not my term, but the way she and I think about it is -- it's not Jen's term either, but 1-way or 2-way doors. So if it's a 2-way door where it's a regular way decision, and that if we decided that it wasn't the right decision, it doesn't work out the way we want, and we can relatively easily reverse it. That's a decision either one of us will make on our own. If it's a one-way door where that decision is significant and very hard to go back on, i.e. strategic, then we would make that decision together. We also talk about like points of escalation. I mean I have a markets background. So on a day-to-day basis, I'll be the first point of escalation for markets, she will be for banking, and we do payments broadly together. That said, if I'm on a plane, then everyone in markets will call Jen and she'll make the decision. And Jamie will hold us jointly responsible for the outcome and anything that is truly strategic.

Super. Okay. That's helpful. I hear you can get phone calls on the planes now, too.

Jamie can get you anywhere.

Okay. And then just lastly, the Commercial Bank expense ratio was -- has been super industry-leading, right, at 35%. And so can you maintain that efficiency as a combined organization?

Yes. I mean I think we in the CIB, we're always incredibly jealous and impressed with Doug's performance on the overhead ratio. It was 35% last year. We would have expected it to normalize on its own. So without any combination, I think it would have drifted towards the high 30s, maybe 38% to 40%. And last year was like unique in that we had, because of the regional bank crisis, a large influx in deposits, we overearned on rates. And as a result, the overhead ratio was truly fantastic. That said, overall, it would continue to be, in our view, best-in-class at just below 40%. The combined entity, we would expect the expense ratio to continue to be, in our view, very good. It's obviously going to be higher than the CB1 stand-alone, because of the expense base of the historical CIB. But we would expect the expense ratio to be in line with what you would have expected in terms of combination and still hopefully industry-leading.

Okay, great. Let's move over to markets. And as you indicated at the Investor Day last couple of weeks ago, JPM has been taking share in markets. And over the last decade, you're coming in at what, 240 basis points in share, right, over the last decade. And coming in at 11.5% or so of market share across.

All our markets like 11.3%, I think.

Right. Okay.

11.4%.

Right. Now there has been some movement in actors and players over the past several years. So with stabilization, is it -- should we still be expecting that kind of share gain to persist?

So fundamentally, the answer -- short is yes. But we think it's just going to be much more difficult to get that share growth and it will be slower. If you look at the past decade, we've had moments where we've lost market share. So while the overall trajectory is very strong, like it's not been a straight line. And it's certainly not a straight line in every individual business. Also, I think we attacked a lot of the low-hanging fruit. Our equities business was subscale a decade ago, and we meaningfully closed the gap and hopefully put ourselves solidly in 1 of the top 2 or certainly top 3 spots on a perennial basis now. And so a lot of our market share gains over that period of time have been just catching up in equities. In fixed income, I would say the growth in market share was maybe front weighted in that period of time. And then you had a big spike in COVID, which has subsequently normalized, which we talked a little bit about Investor Day. So there isn't an obvious gap anymore. There isn't a significant product suite that we don't have. There's not a geography that we're not in. There's generally not clients that we aren't speaking to. So the market share growth gets more difficult from our starting point today, but we believe strongly that we can continue to grow. The other piece you mentioned is in the early part of that decade, particularly in fixed income, our European peers were in a much weaker position than they are today. And I think as a result, while not as many of them as there used to be, they're certainly the ones that remain or are very strong and coming back, deploying balance sheet. They're very aggressive in their home market, but they're expanding again. And with the wallet growth in markets being so significant and everyone making more money, that's giving them capital to invest. And we would expect that to continue, again, making not impossible to grow market share but making it more difficult. The other piece that I think that we spend a lot of time thinking about is nonbank financials, like they've become an increasingly important part. They've grown share. Now I know people don't normally talk about them. They compare banks to banks. But when you think about the overall wallet, they've definitely taken some of that share. And so as a result, the competitive environment is just significantly more aggressive than it was at the beginning of that decade. But again, we believe we can grow. It's just going to be more difficult.

Can you talk a little bit about your expectations for today and growth in wallet? Let's talk about equities and fixed income and maybe first start off with how do you define the wallet.

Sure. I mean we look at our share of 2 wallets. The wallet that I think everyone normally refers to and that we're measured to ultimately is the revenue wallet. And then the second one is our share of the client wallet. And when you think about like -- not to backtrack too far, but if you look at our market share growth, while in say fixed income has gone down since 2020, in the peak of the COVID crisis, it's continued to go up on the client side in institutional financial clients. So ultimately, we look at both. We feel very comfortable we can continue to grow the client wallet. It will be a percentage or a direct reflection of the total wallet. But we feel very comfortable that, that's the part that we're most focused on growing, because that really underpins our Markets franchise. And then the total wallet is just that wallet plus the trading environment. And that's the part that we think can vary a lot. You have an environment where that's very closely tied to volatility. Volumes are then driven off the back of that. The nature of the moves in the market. I always joke that when Jeremy calls me or previous CFOs, and they asked whether it's good volatility or bad volatility, I always say, well, good volatility it just means we're making money and bad volatility means we're losing money. But ultimately, we are correlated to volatility. I think the market and that wallet on the revenue side will stay well above the pre-COVID level. How far, it's just really hard to know. Is it likely to be above that COVID peak in the short term? No. But it definitely should remain above the pre-COVID level. How far, it's a bit of a guess.

Okay. Well, your guess is a good one to lean on. So...

Look, I think -- we think it will be roughly around where it is now. If you were to get a substantial drop in volatility or a Fed that just gradually lowers rates, then the wallet should shrink a little bit in fixed income, but that could potentially be very good for equities. So again, I think it's in the range of where we are today depending on market circumstances.

Sure. Okay. I know market has been looking for a reduction in volatility as that elusive rate cut schedule comes out. We get thrown a few curve balls every once in a while, including this morning. So never a dull moment in financial markets.

We had Friday where the payrolls outperformed, the inflation underperforming. Like my view is that, just a personal view of markets, we'll see who's right is that the Fed is just unlikely to cut at the rate the market is pricing. I think that the cuts will continue to get delayed or pushed out. Obviously, the market is just giving you the probability that cuts are the most likely next move, which I think no one would disagree with. I think the band of possibilities is probably much wider than the market is actually pricing now, which could be good for us.

That should be opportunity for you.

Absolutely.

A wider band of outcome. Let's shift gears to banking: M&A underwriting, advisory, First, let's start off with your strategy internationally. I just want to understand geographically speaking, are there any areas that you're looking to lean into?

Sure. If we just do it geographically, I would say there's really 3 areas that probably stand out. I mean there's opportunity everywhere. And I think it was Filippo on stage that had the 84 boxes and subcomponents. And there are international opportunity included in that list. But if I take 3 large geographic areas that we're focused on: India, the Middle East and Japan. We think all 3 of them have like a significant potential of banking and really probably more broadly for our franchise. Japan is in potentially a generational shift to normalizing rates and inflation. If I think about everyone's Japan business, it's sized for what we've seen in the last 10 years, not what we saw in 30 years ago. And I'm not saying it's going to go back to 30 years ago, but there's real opportunity there if Japan normalizes from a rate policy perspective and inflation perspective. And you've also seen a shift in sort of corporate governance, which could significantly change the banking wallet in Japan. And this is not news to -- everyone is focused on this, but we believe it's a real opportunity. And we think that we can really build on what is already a very good franchise there. India, I mean it's growth. It's the world's largest democracy. It's going to continue to grow. It is uniquely positioned geopolitically. And we just think like over time that where people were predominantly focused on China and Asia -- and not that, that focus is going away, is India will continue to grow and in many ways, potentially be as big of an opportunity. And then lastly, the Middle East, they're going from an exporting hydrocarbon economy to a place to go find investors to potentially drawing in capital. And I think that's going to continue to grow. And being there early and we've been there early is an opportunity for us on the banking side.

Okay. And then the other question I wanted to just dig into a little bit was on the private credit business. And I know that was a topic that was discussed a bit a few weeks ago at Investor Day. But maybe you could help us understand speed with which you are leaning in and how you're servicing that side of the business?

I see we only have 11 minutes. We can spend like an hour on this topic. It's pretty close to my heart. I joked that when you're a banker in New York City, you get asked 2 questions at a cocktail party. Where your kids go to school and what do you think of private credit. So definitely excited to talk about this one. The -- I think we're just absolutely uniquely positioned. I think that there are potentially other people that will absolutely compete in pockets. But I think very few people can put all the components together in the way we can. And I'm like truly excited about it. And not just because of the new combination, I've been excited about it for years at JPMorgan. And I think the new combination even makes our potential stronger. We have been lending against private credit portfolios in the financing space for a decade. If not the first, we were certainly among the first banks to even do that product. We've expanded it significantly. And I would argue we are on the bank side, the largest lender into the space. And we plan to continue to compete there. When you hear other people talking about growing their financing business, often this is what they're talking about. And I feel like we are already there at scale and can continue to grow. And as that market grows, which I think it will continue, that just naturally will grow that business. So again, a real opportunity for us there. Secondly, we publicly stated that we would put $10 billion of capital to work on our balance sheet in direct loan format to corporate borrowers. And we've put like a significant amount of that to use already. We've also said publicly or Jamie said publicly that -- I mean, there's nothing stopping us from doing more. Now I don't think it's really a question of how much we would ultimately do. It almost doesn't matter whether we do 10 to 20 or 20 to 30. It's a $1.7 trillion market and growing. Whether we do 10, 20, 50, it doesn't matter. It's very small. That's not going to be the place that we make the biggest impact. The reason we're doing that is to be in the ecosystem of the lenders. And when we're in the ecosystem of the lenders, then we can have the right dialogue with our borrowing clients, but also be involved in helping whatever structure or structures develop, whether that's co-lending format, whether that's a distribution format. And we have the best middle markets franchise on The Street. We have the best DCM franchise in our view and that you combine the 2 of them, and we can go to a corporate client and be truly agnostic to what they want to do. We can say, here's a direct loan, here's a private credit solution, here is a broadly syndicated loan. And our goal is to be able to go to our buyers and with some of our own balance sheet and then other distribution partners to be able to say, here are your options and be at the center of that ecosystem. And I think we can do that and be a great partner to the people who are also on the lending side. So we spend a lot of time thinking about this between using our own balance sheet to be deeply involved in the ecosystem, partnering with lenders, having strategic relationships with them, being one of the largest financiers of the space, we're just uniquely positioned to be in the middle of all of it. And I think it's going to continue to grow, and I think we have a competitive advantage there. One thing and I'll stop on it is I think a lot of people spend a lot of time saying about how adversarial it is with like, say, the largest direct lenders versus the banks, the banks want to do this, the direct lenders want to do this. I just don't view it as adversarial. Like the market is big enough that both sides can succeed. And our strategy is about partnering with both sides. First, it's through our borrowing clients. They're our core client base. But the lenders are also huge clients of ours. And ultimately, while we may compete on a given deal here or there or several deals, like we're going to be a place where they can come to source assets. And I think that is ultimately the winning solution.

Okay. And these revenues will be showing up in CIB net interest income, if it's a non-balance sheet opportunity that you're leaning into. But you could also see it in fixed income fees?

Yes. So the financing piece of these portfolios will show up in Markets under fixed income. And then depending on how we structure it, obviously, the lending fees will show up in the lending line. And then depending on like how we structure it, how it's distributed, it could be in both places, Banking and in Markets.

Right. It's important to lean on that just a little bit because, again, going back to the question I get a lot from investors, lower vol environment, lower fixed income revenues, but the private credit activity is a counterpoint to that.

Correct. I mean I think financing in general is a counterpoint to that. And we didn't speak specifically about the opportunities in Markets, but financing more broadly is one of them. To your point, it's the counterpoint to lower our volatility.

Okay. And you're everywhere you want to be in private credit, right? There's no white space?

I mean it's early innings in my view. So I think -- I feel comfortable where everywhere we should be now. But that can evolve very quickly.

Okay. And then you also mentioned at Investor Day opportunities to expand your client franchise and deepen relationships in the commercial real estate space. Could you just explain that a little bit?

Sure. What we don't mean is suddenly change our risk appetite in commercial real estate. I think in real estate, the one thing I've learned is that it matters who your clients are. And client selection is extremely important. And we're quite comfortable that we have the right mix of clients. There's an opportunity, in our view -- when we say commercial real estate, I think everyone thinks about the problematic areas, which generally is office. But there's multifamily, there's data centers, there's cold stores. There are lots of areas that are very robust in the space. And with the right client selection, with the right risk metrics, we feel like there's opportunity to grow without changing our credit box or lowering our standards. So that's one piece of where we will plan to grow. The second piece is we're integrating First Republic. And that's been a significant integration effort. There's been opportunity there. It's increased the size of our portfolio. And again, like it just proves out our view that without changing our risk appetite, we can continue to grow the core traditional business. And then the last thing, I think, which is really important is, historically, this has been more of a lending product and we can deepen our relationships and grow the wallet we have with these clients by doing what would be deposits and payments, like a more traditional like Treasury Services business. And we think there's real opportunity to grow that part of the business with this existing client franchise.

Okay, great. Two last points I just want to ask you about. One is, before we leave Markets in total. During Investor Day, we did hear that banking was trending up mid-teens year-on-year. And that Markets -- do I have this right, up mid-single digits year-on-year?

Yes.

Any updates to those?

Sure. So markets were trending slightly better, but still single digits. So as you said, we gave guidance up mid-single digits year-on-year. It's slightly better than that, but still in the single digits. In banking, we guided up, as you said, in mid-teens year-on-year, and it's looking closer to up 25% to 30% right now.

What happened in the last 3 weeks?

A significant good news story. Capital markets continues to be extremely robust. The overall franchise has improved and saw better results than we were expecting on Investor Day, but capital markets has been particularly strong.

Okay. And then lastly, I know Basel III end game has not yet been released, but you do have business activity in U.K. and Europe. And we've heard from Chair Powell's last press conference, I haven't heard today's yet. But they're looking to align with other jurisdictions. So when you think about that as a potential outcome, is there room for you to lean more into your business lines as that gets resolved?

It's too early to tell. I mean we talked about it briefly before we walked up here. It's -- we had done a lot of planning for Basel III. And clearly, it's going to be better than it was expected before. But we don't really know the breakdown. We don't know the breakdown for markets or specifically within markets how the new rules will play out. And while it could look like Europe. So far, historically, it's never really looked exactly like Europe. So again, even using Europe as a benchmark is a bit more of a guess. We do expect it to be lower. We haven't changed what we're doing at all. I think that basically, in our view, is while we were planning for the worst case outcome, we hadn't adjusted our business meaningfully other than things that were longer dated or extremely high uses of capital. I do think if we get the rules where we would hope they are, it will give us an opportunity to lean in, in some spots. I think financing is one of them. There will be other parts of the franchise where I think it will be quite accretive for our overall client deepening efforts that we can lean in on a bit more balance sheet. But it's a multifactor model. It's G-SIB, it's liquidity, it's balance sheet. So we'll just have to see where it plays out. I'm hopeful you're right. And if the opportunity presents itself, we have lots of opportunity to deploy capital above hurdle, and we will definitely do that.

Super. Well, on that, thank you very much, Troy, for being with us this afternoon. It's been a delight to host you here at Morgan Stanley's Financial Conference.

Thank you.