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

Yes. And that's why I say the capital market is complex. It's really the whole competition as well. .

Yes, exactly. .

So your marginal margin based on the number you just gave is on that? And so how is -- why is that as good as it gets? Are you referring to the revenue environment, maybe as good as it gets, Jamie? Or are you just being conservative or what?

I just think we're in a very healthy active exuberant market with very high prices and very high volumes, and we benefit from that. We just don't know how long it will continue. Could it get a lot better than this, it can get better. But how much better, I don't know. .

And then the second question does relate to the management changes and Troy taking over the consumer bank and we don't know Troy as well as we did Marian, and you have a lot more information internally. But to oversimplify and exaggerate, and we have FX trader now selling mortgages, credit cards and deposits. And I'm being simplistic for a reason, but what gives you confidence that Troy is the right person to run the consumer business when he doesn't have that experience in the past?

Yes. Mike, it's a great question. First of all, like I mentioned how you evaluate people, if they're analytics, is the brain power EQ, it's their heart, they're sold, the culture carrier. Can they walk into operating -- so he's exhibited that in markets in investment banking, they remember even the IP is an extensive operations function and our back office function technology function where he's exhibited great expertise. We're completely comfortable with that. I do think it's very important that people have experience across the company. . And when I've seen investment banks, big banks taken over by soon only from the investment bank who only cares about the investment bank, believe me, the rest of the franchise can suffer. You need to respect for the rest of the franchise. So I think it's great for him. It's great for the company. He's already excited. He's always been to branches and out and about. And he'll take it hopefully upward on and upward. .

And Mike, just a minor correction, Troy, with no offense intended to my old good friends who are foreign exchange spot traders, but Troy was actually an options trader, which is also where I started. So I think you would want me to correct the record on that. .

Our next question comes from Saul Martinez with HSBC.

I have a broader question on AI. And it is -- is there an argument that we're vastly underestimating the potential benefits to efficiency and its impacts on how companies can run their businesses. I know block is a really different animal than you are on a lot of levels, but they argue they cut 40% of their workforce at given the advancement in AI tools, it look at their organizational structure with a blank sheet of paper they can be much leaner and not sacrifice on product velocity and commercial outcomes. And I guess I'm asking if you think there could be a parallel with banks where you can operate with a different structure, be much more agile, be more efficient over time? I know it's a sensitive topic, but curious how you think about these questions and how you're positioning yourself for this world.

So it's not a sensitive topic at all. We are going to use AI to do a better job for our clients. That's our job. We fully expect it will have huge efficiency in certain parts of the company -- and we analyze it all the time. I think we've mentioned in the past, we spent quite a bit of money on it. We have a lot of NPVs that we know we have the whole company is working at this at this point, and there are -- I think there's almost 1,000 use cases today, though, we say that really important ones are 50-50 across risk, fraud, marketing, hedging, prospecting, not taking, idea generation, document reading, and it's kind of just starting. So we do expect that. I think you have to put in the back of your mind that there are areas where we may just accelerate what we do that we want to get done anyway. Think of a certain applications and customer-facing things and stuff like that. We are preparing to make sure we can retrain our people. And we have had discrete areas where we did reduce jobs by 30% or 40%. And most of those people offer jobs elsewhere. So we do expect that. I also think that over time, remember, this will be offered to smaller competitors to through Fiserv and FIS and other fintech kid companies. And over time, we've been doing this nonstop for 25 years. We just large computers and mainframes and APIs and various tools and tricks for us have always been trying to create more efficient and stuff like this. This will be faster. This would be dramatic. The whole company is involved in when we have our upside in July, you can imagine this is a big topic everywhere from front office to mid-office to back office to marketing to risk, you name the subject and -- more to come, but we're kind of in the midst of this mini revolution, and we'll report to you. But I do also want to point out maybe you could be ahead of other people kind of -- but what always happens is the benefit accrues to the customer, not to the JPMorgan in this case. -- because other people are doing the same thing and presuming at least to lower cost and lower error rates and a bunch of things. You can't just say, well, you're always going to go to 50% stay there. if we had a 50% ROE growing at 10% a year, you probably have 50 or 60 years, you'd probably be 100% of the GDP of the United States of America.

Yes. Yes. Okay. A follow-up on equities. And I think, Jeremy, you said, if I recall correctly, that the particular set of things that happened this quarter are difficult to see repeated. Can you just maybe elaborate on what was most exceptional this quarter. I think some of your peers have talked about Asia, prime brokerage there. And I think you mentioned derivatives and cash being strong, but is there any areas or products or geographies that were particularly noteworthy in terms of the strength this quarter that may be difficult to sustain going forward? .

Yes. I mean there's really not a lot like behind my comment. It's essentially what you would get from asking any of the commercial AI models, this question and the 2-year-old -- 2 stages, old version of the model. In other words, it's all the obvious stuff that's been heavily reported, like -- we had some major IPOs. We had some major index rebalancing. We had some very complicated dynamics in Korean equity market. There's been a lot of activity in Asia. The overall environment has been dynamic and interesting across a whole variety of dimensions. The clients have been extremely active. So it's like -- it's all the headlines basically that have driven the market. And of course, that could obviously repeat, but I just think like statistically, it seems improbable that particular combination of effect to repeat itself .

And you guys -- those who pay attention, you can see most of this on a daily basis from volumes in the New York Stock Exchange, the CME buying through hedge funds, Hikari's not a secret, margin loans, you can see a lot of it taking place during the course of the quarter. .

Our next question comes from Ebrahim Poonawal with Bank of America.

I guess maybe a lot of discussion on the strong Wall Street backdrop. Maybe, Jeremy, just talk about the main street part of the U.S. economy. -- there is a sense that there's a fragility when you look at housing, real estate rates potentially could go higher. Give us a sense around what you're seeing from on the consumer side, the ability to sort of pull forward and resiliency if rates go up? And are you seeing any broadening in CapEx beyond AI? Or is it very AI-centric in terms of what you're seeing on even commercial lending activity. .

Okay. Let me do those in reverse order, actually, because I'll just address your AI CapEx question quickly. We do see some decent kind of CapEx and associated loan growth across the franchise. And at least on the surface, some of that does not appear to be AI related However, I was a little reluctant to draw that conclusion too strongly just because the AI team has started to proliferate in so many different parts of the economy, right? It's like the comments about data centers wind up breeding in limes and electricians, right? So you wind up seeing it in sort of slightly nonobvious places. And so any given bit of loan growth or CapEx that you see that doesn't superficially look like it's AI-related might still be. But on the other hand, it might not.

To give you a big number, I think CapEx is about $4 trillion a year and AI went from $400 billion last year to $700 billion this year, people project, which so do our people, it will be like a little over 1 trillion next year and maybe a little reduction in the non-AI CapEx -- but that's hard to figure out because the same people -- some of the same people doing the same .

Yes. I now starting to draw our comments the other day about like the CapEx impact of chipset and some of that's going to roll off and it's getting replaced by more direct AI stuff. So it's a little bit hard to untangle the whole thing. -- going to the consumer for a second. So a few things, I guess, I've kind of already covered. But so number one, spend is kind of fine robust and across income segments, seems like a bit of a tailwind there from tax refunds. Delinquencies are a little lower than we expected. And again, that's a better performance. You see pretty much across the board by kind of FICO score. There's some of that economic heterogeneity data came out from the Fed recently which also, I think, doesn't give a lot of support to the K-shaped narrative essentially. So again, we think about this, we worry about this. We look at it. But from our perspective, from all the various dimensions, there's not like that much there in terms to support the narrative. Now to your point about fragility in rates and housing and stuff like that, it is, of course, we are in a slightly higher than normal inflationary environment. I think Marianne had made some comments at some point about a cohort of consumers who are experiencing negative real wage growth and not potentially creating some distress for those folks. Now some of that statistically is kind of always going to be true at any moment in time in any cohort, but that's probably a watch area. And I think generally, obviously, it's been a long expansion that's gone on for a long time. I think the economy is surprised on the upside on some more strength, a surprise on the upside. And that inevitably everyone worry about fragility and about the thing that could change it -- but as I always say, when it comes to consumer credit performance, it's just about the labor market. And so you're not going to hear anything from me that's new or differentiated about the labor market, like we all see the same numbers and it's been surprisingly resilient. So for now, that's a narrative. .

Got it. And I guess just a follow-up. On the capital front, you have excess capital, strong ROEs. But I guess the question would be why buy back stock here at 3x tangible book when things are so good bad things could happen. Why not just have some even more excess capital for a rainy day if things go south? Just talk to us in terms of how you're thinking about buybacks at these levels? And I know Jamie talked about potential M&A at some point, maybe asset management, fintechs, but would love to leave us with that.

So before I answer that, I want to, I always enjoy reading your weekend notes. They're insightful and sometimes quite funny. So thank you for that Look, you're absolutely correct. I mean we've always said we want to buy back less stock as the price goes up and more stock as the price goes down. We had a lot of excess capital. And so we were struggling with that. If you talk about 2 years ago, we still think the number used just approximately $40 billion. And I think we now think we actually deployed it over time. the world has gotten bigger. It's got more complex. I just got back mature of Europe. Our security resilience initiative, the hyperscalers, the needs are just big, and it's not just AI, our global infrastructure, the remiliatrization of the world, the reduction of trade is taking place, the enormous need of our governments. You have global deficits are almost 4.5% or 5%, which is a very big number competing for the same capital. So we do think we'll deploy and that has consequences. And we're not going to tell the market we're going to do, but I -- we agree with you, generally. And if we think we can deploy, it's very different than buying back stock. I've also never thought that by -- I actually want to get rid of that number money returned to shareholders. I just don't even like seeing it because buying back stock is not returning money to shareholders. And you're making an investment decision, you're not making a return money to shareholder decisions. I actually went out of all our reports. And so you can see changes taking place. We're just not going to tell you what they are. And I made a mistake last time mentioning at $20 billion. We could obviously do far more than that or nothing at all. What I was trying to point out is we have huge opportunities for organic growth in every single business we're in. Organic growth is hard. Its technology is people, it's systems, it's branches, it's bankers, it's hiring, it's training and recruiting -- but I was surprised to find out in parts of Europe that when we doubled our share in certain areas, they think that we could do a lot more there. And country by country, including countries that they aren't doing particularly well. And -- and I think the true here, we have our branches in the United States. We've got a credit card business. We've got the app arsenal, the Apple business at 1 point, which we have pretty high hopes for, if we come up with better products and better services. And so yes. So the goal is to deploy our capital at a 17% return. That is the goal and which we think we can do over time. We should always be looking at inorganic what we don't want to do is look at inorganic as a sign of weakness of organic in which I think companies do some time the busied about M&A when they should be focusing on why they're not doing particularly well in the area or something like that. And we have a lot of competition, by the way, and we had pointed that out before. Very good competition, not just Goldman Sachs who's doing a great job if you didn't read their numbers this morning because I did. But you got Stripe and PayPal and cash and block and Chime and Sofa and Revolut, and they're good. And we have to make certain investments to keep up with them or to hopefully do a better job so of them. And so we're doing all of that. But you should always be looking at things that could be good for your company inorganically. And so -- and we've done a bunch of deals this year. Most were goods, a couple weren't particularly good. And we're going to be looking and we're open-minded. It wasn't any particular thing or any particular place. It might be adjacencies. It might be data-related, -- it might be a whole bunch of areas. We have a bunch of skunkworks going on we hope, Chase U.K., we continue to build that in a way that becomes a great European digital bank over time. It could take a lot of time and effort to do that. So you raise a good point.

Our next question comes from Glenn Schorr with Evercore. .

Just 2 quick follow-ups. One, in the last couple of times you talked publicly, you had a couple of comments on the Smart Cash tool that you're working on. I know you said it's nascent and early, but sometimes technology moves fast. So curious status of the tool, when you might roll it out into who and maybe a little more on your comments on you're going to have to pay more for money over time. Just curious.

Yes. So this kind of relates to Jeremy or talking about before about the velocity of money and how it's going to move in a new world. So we are kind of prepared for that. So this is still a test case. Banks -- people are in a different position. And if you actually look at accounts, these tons don't like every account, they relate to a narrow segment accounts and where you're competing for their investment business and their deposit business. So what you're going to see is certain tests coming out and then you'll find out about what we can do, what we can't do. And we're going to learn a lot by doing some of that. And we think it could be good for customers and good for us. We're not just buying way to waste money.

Okay. So of this year thing, I take it?

Yes, you'll see something this year. .

Cool. One follow-up on -- you just touched briefly on it. I'm just curious of how you'd state your European consumer banking aspirations, you mentioned opportunities. You do plenty of business there, but you mentioned opportunities in each country by country, but maybe you could just sum it up in aggregate of -- what are you trying to be as a consumer bank across the major markets in Europe? .

Yes. So we didn't -- when we were talking about just bricks and mortar, we were going to try to compete because we couldn't have with local banks, their brands and capabilities. And unlike the United States, over there, we have to add all the overhead in different languages and different regulatory regimes, et cetera. And we have no real reason to when digital may have changed that. So we started Chase U.K., I've got like 5 years ago it was a complete start-up. And we made a little bit of fits and starts, but we have. I think, almost 3 million or 2.5 million customers and in the U.K. We have -- we've opened up in Berlin. We've actually done much better in Germany than we thought we're going to do, though it's not quite profitably yet. So what you got to look at there is you have a platform, the platform costs money as you can distribute of course, more and more clients and more and more countries, you can get to the point where you're breakeven and then hopefully profitable. And so we've added the investment products in the U.K. you can assume we're going to try to add them elsewhere and probably credit card. And hopefully, the dream would be there would be a pan-European successful digital bank, building off of JPMorgan Chase's stress. We are a private bank. We do have an upscale, a huge business here. We've got a lot of clients that go across border. We've got a lot of training capability and underlying capability and research capabilities. So but it's still adjusting over time. We always call this like this is -- it's not income. It's not a brand-new thing, but it's developing over time. I have high hopes for. And we -- the management team is doing great. We tell them constantly come in and tell us what you want to do when you want it differently what we've learned, and we're kind of patient kind of...

Our next question comes from Gerard Cassidy with RBC.

Jamie and Jeremy, you guys have talked about you've seen some excesses in underwriting and credit late last year. I think it was Jamie. Jeremy, you talked about risk on in the capital markets. What are you guys seeing in credit underwriting from your competitors. Is it getting crazier or no, it's still pretty good? And what's the outlook there, please?

I mean crazy is a strong word, but I spent some time looking into this issue like a week ago. And we did hear some examples. I mean I don't know for whatever reason, I think the data center underwriting space is 1 that resonates with me as a kind of bellwether for what people are doing. And we passed on some deals that obviously when you look at the data center stuff, the key question is like what happens with power supply, what happens with tenants, what happens -- it's a well-discussed thing. And we have a pretty precise framework to govern what we're willing to do and what we're not willing to do in that space across those types of risks. And we saw some deals come through where we were just like, yes, we're not doing that. So it's normal, I guess, it's competitive, and people are eager to be involved. And in some cases, there's ironically some element of like relationship lending that's happening through the data center space, when it's kind of a start-up entity that's building the data center. So that's part of the story a little bit, too. But I don't think we're screaming from the rooftops that underwriting is underwriting loss, but I think you see normal pressures, and we're navigating those in the way that we do, which is we do flag in some moments for particularly important in situations where we feel like it's the right thing to do. But in general, we try to be the 1 that holds the line and make sure that we're guided by our own risk appetite on kind of appropriately skeptical view of the environment.

We didn't talk about a huge deterioration in credit underwriting stars. I think we talked about it as a very mild one, but it's across sales spectrum, which is people assumptions on revenue growth or add back of expenses, more PIK, weaker, some weaker -- and this is not across the board, but it's more of some players than others. We have some weaker covenants some people taking more rollover risk. And by that, I mean, if rates go up, how much interest rate exposure you're taking as opposed to underwriting exposure and it's just things like that. But it is across the spectrum. You've seen a little bit of weakness. And the only point we're always trying to make is when there's a credit cycle and there will be a credit cycle, how will everybody perform -- and I don't think it's going to be like a bell curve of performance. I think there'd be some pretty -- there'll be some outliers out there just like the , by the way, in the great financial crisis.

I totally agree with you, Jamie, on that. I don't want to sound pollyannish, but on a question regarding the regulatory outlook. Obviously, we've got Basel III in game, hopefully, be codified maybe by the end of the year. I know you guys have put out your remarks on it. And next year, hopefully, we get tailoring. Could you envision a period where and again, I don't want to sound pollyannish, but a period where the regulators are just set where do you go? Because the last 20 years, there's been constant change with the regulators affecting the banking industry. Could we enter a period where we have a stability in the regulatory environment, which could enhance valuations possibly for bank stocks?

Well, I would break the question down into 2 parts, like could we envision stability and impact on valuations. On the [indiscernible] stability, I mean I don't think it's pollyannaish to say that regulatory stability is a desirable thing. And I actually think it's a relatively nonpartisan idea, like I think it's understandable and correct that there would have been a big reaction to the crisis and then maybe a reaction to the reaction and the sort of amplitude of those oscillations might be decreasing, and we get to a place where we've got about right. And frankly, we get to a point where banks are primarily focused not on complying with regulatory constraints of various types, which should probably in general, operate as backstops or rather thinking about what their own standards are and what their own risk appetite is and have that be kind of the true north of any given type of decisions. And I think we're getting closer to that stage, which will be good. whether achieving that state would be particularly supportive of bank stock valuations. I'll leave that question to you. But at least, I think, for banks like us, I'm not convinced that's a major drag right now, to be honest, that it has been in the recent past.

Yes. And I would just add, there's one legislator at Supreme Court decision that makes it less likely that we wouldn't have flip-flopping, which is a present to remove a lot of people more easily. But I'm hoping -- I mean what really should happen now is when they write legislation, they could be more clear about their intent and what they want because they could have said we want this independent or only replace so many or we don't want to flip flop in regulations. But I really like the fact that Mickey Bowman and Kevin Warsh are taking a step back and looking at the broad range of changes, which have been extensive over 20 years and never ended. And often with no ultimate intended consequence where they want in an system and outside and system makes it safer. So I actually believe it would make the system much safer, much safer. And that should be their mill goal, not just adding layer on layer bureaucratic reporting -- the -- some of the regulators said that from now on, they're going to focus on safety and soundness, they do that. We would have no MRAs because none of them related to our safety insentive related to other issues. And I think have you related to safety and soundness, Silicon Valley Bank and First Republic wouldn't have happened simply upon they were taking to much is rate risk, which was disclosed. But one thing -- and so I just think the goal should be to take a step back, look at these things in the open light, be very honest about what worked and what didn't work like resolution did not work. Resolution recovery does not work. People should we should look at the discount window differently. And anyway, if those things are done, I think we have a safer banking system where we don't have to be breathless every time a bank fails. You guys -- are the guys who know so much about this, they should be making some of these recommendations to regulators. It's in all of our interest is just to be better. not any one of us, all of us. .

For our final question, we'll go to the line of Manan Gosalia from Morgan Stanley. .

Jeremy, as we think about the various expense buckets you called out at the start of the year, the volume-related expenses, bankers, tech, marketing -- the majority of the increase in the expense guide is coming in the revenue-related line. But are you also bringing up some of the other categories, maybe pulling forward any tech or marketing spend given the environment?

Yes. There's some of that stuff going on. So I'm trying to sort of keep it simple and disproportionately focus on the big driver, which is obviously volume and revenue-related expense. But -- as is always the case, there are some ups and downs, which -- some of which relates to things like our marketing strategy, which I probably don't particularly want to disclose. But I think one topic which is not financially meaningful this year, but which I think is interesting and maybe come in the future is the question of token expense, because that is something that we're spending a bunch of time on. I think as probably pretty much everyone in corporate America is. So just for the avoidance of doubt, it is a trivial number for the first half of the year we are forecasting some meaningful acceleration of that number for the second half of the year. But still nonetheless, the full year contribution of that is still trivial. And obviously, we had budgeted some of that. So it's not in any way a meaningful driver of the current outlook or the revision on the outlook. But obviously, when you listen to the Frontier Labs talk, they talk about the exponential and the acceleration of usage, which is obviously driving their revenues and someone's paying those bills. And we're in a sense, like a representation of the economy as a whole that we're probably lagging a little bit some of the cutting-edge adoption and usage as we should, given who we are as a company. But it is an important question for us as we go into next year and the subsequent years. And I think the good news is that we've done a lot of really high-quality thinking on this and a lot of the infrastructure that we've built over the last couple of years is going to position us to be quite sophisticated about using the right models for the right purpose. I mean just to use 1 sort of topical example and no events intended to those of you who tend to write slightly long reports. But as you can imagine, sometimes people like to summarize those reports, using AI tools. And as you know, the tools are quite good at doing that. And you really don't need the latest cutting-edge incredibly expensive model to summarize analyst report. So the idea is use the right model for the right purpose, be smart about open source where appropriate and ensure that you're getting value out of it, ultimately, in the end, either we're going to have a lot more capacity or we're going to have a lot more efficiency or both or we're going to have better revenue outcomes or we're going to compete more effectively, and we just need to be disciplined about how we handle that. So that's a body of work that's happening right now.

Got it. Very helpful. And then maybe on CIB and the increased capital allocation there. I guess, how nimble do you expect to be there? Do you think we're at peak allocation here? Are there any internal limits that you might be ramping up against? Or is there room to keep allocating more balance sheet to the business if the environment remains where it is?

I mean, I'm definitely not going to get into discussions with you about like internal limit management. I guess it was on the press call, so maybe you didn't hear this, but I did get a question about this. And I think the right -- and I think you said this correctly, but I just want to -- on the side of being precise here. Sometimes people think about capital allocation almost as if it's a hedge fund where you're like giving a pot of people, some capital and telling them to go use it, that's not the way it works. It's the opposite of that. In other words, we have demand from clients to support them in various ways. And to be clear, we also have some, what you might describe as passive effects, like obviously, when volatility is higher, margin risk capital goes up possibly and simply the appreciation of global equity markets increases the RWA associated with things like the prime business. So you've got active and passive FX, but the active effects are us responding to client needs -- and obviously, we've got a ton of access as a company. And as Jamie said, our primary goal is to deploy that organically. So when our CIB clients want us to serve them, -- and we can do that in ways that make sense for us from a risk appetite and from a returns perspective, we've got plenty of capital to do that, and so we do that. Sometimes there are other financial resource constraints, and that's part of what we do for a living is trying to manage that stuff. And I talked a little bit at the company update, if you recall about the system and the fact that the system is currently quite flush with capital but at the margin, less flush with liquidity, and that's obviously an area of advocacy, especially in light of the stated goal to reduce the society balance sheet, you really need to reduced bank demand for reserves to get that done. And so that in turn probably requires some adjustment to liquidity regulation. So that's the next thing on the agenda.

Great. But our risk standards haven't changed. It's possible some of these things change because people self-select and pick somebody else, and that would be fine with us. .

We have no further -- Thank you all for participating in today's conference. You may disconnect at this time, and have a great rest of your day.