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JPMorgan Chase (JPM) Earnings Report: Q1 2016 Conference Call Transcript

first-quarter 2016 earnings call.

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This call is being recorded. (Operator Instructions) We will now go live to the presentation. Please stand by. At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon; and Chief Financial Officer Marianne Lake. Ms. Lake, please go ahead. Marianne Lake (CFO): Thank you, Operator. Good morning, everyone. I'm going to take you through the earnings presentation which is available on our website. Please refer to the disclaimer regarding forward-looking statements at the back of the presentation. Starting on page 1. The Firm reported net income of $5.5 billion, EPS of $1.35, and a return on tangible common equity of 12% on $24 billion of revenue. And despite the general market backdrop and energy, our results this quarter were quite good, and pretty straightforward. Consumers remain on solid footing, leading to robust growth in business drivers and strong financial performance. In Consumer we saw double digit growth in deposits year on year, healthy loan growth across products driving 17% core loan growth for the Firm, and high single digit card sales volumes. The wholesale businesses performed in line, or better than expectations expressed at Investor Day, and delivered decent financial results in challenging markets with significant volatility and global macro uncertainty. The Firm's results included one significant item, [$713] million of wholesale credit costs, of which $529 million related to oil & gas reserves and $162 million in metals and mining reserves, which were generally in line with [our guidance]. But we also experienced some charge-offs this quarter in these sectors totaling $48 million, (technical difficulties) guidance of up to $4.75 billion of charge-offs this year. While oil prices have improved somewhat in March, they do remain near historically low levels and the market is not expecting the recovery to be strong. Further natural gas, which is a meaningful portion of our portfolio, does remain depressed. We don't feel that current prices are sufficient to [spare] a meaningful restart of production. And many of the cost reductions and conservation actions that have been taken are not easily and quickly reversed. Therefore, the impact of oil prices is somewhat asymmetric on credit costs. Reserves are main specific. They're based on downgrades reflecting the actual financial condition and the [crediting] position of borrowers. As such, we likely will see some incremental reserve builds for the rest of the year, but they will be increasingly situation specific and our ability to estimate them will improve over time. However using reasonable stress assumptions, on draws, downgrades and considering spin-over effects to closely related companies, those incremental reserves could reach $500 million, plus or minus, this year but with a very high degree of variability around that number. We continue to believe overall our client base is relatively well positioned to weather this downturn. And we will be there to support them whenever feasible. We also monitor for contagion. And aside from experiencing a couple of main specific issues in very closely related companies and observing some general stress in oil regions, we are not seeing anything broad based and would not expect losses to be significant. Moving on to page 2. Pausing on this page for just a moment, a few comments from overall revenue and expense. We told you that the first rate hike, together with our strong loan growth, would drive 2016 NII higher by $2 billion. And the $700 million increase in net interest income year over year that you see here is in line with that. However sequentially NII was only up slightly as expected, given the absence of certain securities gains that we had in the fourth quarter, as well as day count.


Non-interest revenue was down $1.5 billion year on year, primarily driven by the market environment in both the Corporate & Investment Bank as well as Asset Management, with the biggest drivers being lower IBCs and fixed income markets revenue. In both case versus a very strong prior year. Adjusted expense of $13.9 billion was down 2% year on year on lower performance-based compensation while continuing to self-fund incremental investments and growth.

Turning to page 3. The Firm's fully phased-in advanced fee ET1 ratio was 11.7%, with standardized at 11.9%. The improvement to both ratios was driven primarily by net capital generation. Recall that we ended the year with very low levels of inventory, and as expected we did see that reverse with our spot balance sheet up $70 billion quarter on quarter reflecting growth in deposits and an increase in trading assets and secure financing activity. This also drove a slight increase in RWA, net of run-off and model calibration. Firm SLR improved to 6.6%. And we returned $3 billion of net capital to shareholders this quarter, including $1.3 billion of net repurchases and common dividends of $0.44 a share. Lastly, the Fed did not object to a $1.9 billion increase in our capital plan, giving incremental capacity for repurchases next quarter. Moving onto page 4 and Consumer and Community Banking. You'll notice that we consolidated Consumer into one page, and for your reference we've included the old pages in the appendix. CCB generated $2.5 billion of net income and an ROE of 19% with strength across all lines of business. And TNS just announced that for the fourth consecutive year we are the Number One consumer retail bank, reflecting our ability to attract, satisfy and retain customers. The fundamental business drivers remain strong, with average loans up 12% year on year and core loans up 25% driven by mortgage and auto but with strength across products. And we saw record deposit growth of $50 billion, up 10%. We added over one million households since last year. And our active mobile customer base was up 19%. Revenue of $11.1 billion was up 4% year on year, and up 1% sequentially if you exclude from last quarter nearly $200 million from the Square IPO and a branch sale. In Consumer & Business Banking revenue was up 4% year on year reflecting that record deposit growth I mentioned, as well as higher account and transaction volumes, and investment revenue up 4% despite the challenging environment. Mortgage revenue increased 7% on higher MSR risk management and strong loan growth, partially offset by lower servicing revenue. Card Commerce Solutions and Auto revenue was up [2%] on strong auto loan and lease growth, 8% growth in card sales and 12% in merchant processing volumes, all of which more than offset the impact of card renegotiations. Expense was down 2% year on year with an overhead ratio improving to 55% as we continued to make progress against our commitments, more than offsetting $200 million in incremental marketing and auto lease growth. Finally, credit trends in the Consumer businesses continue to be favorable. Now turning to page 5 and the Corporate and Investment Bank. CIB reported net income of $2 billion on revenue of $8.1 billion and an ROE of 11%. In banking, IB revenue was $1.2 billion, down 24% year on year driven by lower equity and debt underwriting fees, but in line with the market which was down 27%. We continue to rank number one in global IBCs and rank number one in three regions: North America, EMEA and LatAm. It was another strong quarter for advisory, up 8%, versus a wallet that declined 15%. We gained share, ranking number one, as we benefited from a number of deals that were announced in 2015 and closed this quarter. Equity underwriting fees were down 49%, in line with the market, as volatility kept issuers on the sidelines. We maintained our number one rank globally and increased our lead. Debt underwriting fees were down 35%. And while we were down more than the market, it can be explained by a tough comparison with several large acquisition finance deals in the first quarter of last year, as well as being conflicted out of several large deals this quarter. In terms of the outlook we expect a sequential decline in M&A to be more than offset by an increase in debt and equity underwriting, if the recent market improvements continue. Treasury services revenue was down 5% driven by business simplification. Lending revenue was down 31% primarily reflecting mark-to-market changes on both hedges of accrual loans and securities received from restructuring.


Moving onto markets. Markets revenue was $5.2 billion and was down 11% year on year, reflecting decent performance given the environment and especially in light of the strength in the [first] quarter of 2015 where we saw elevated client wallet and trading, particularly in January last year particularly around the Swiss franc event. In fact if you indulge me, adjusting for our outperformance year over year results would have been down by mid single digits.

Fixed income revenue was down 13%. The first couple of months of this quarter, as you know, were challenging across markets, but is some stability returned in March. And overall I would characterize the quarter as seeing reasonably solid client activity, but given the market backdrop it was more difficult to monetize flows. We saw better performance in rates and lower performance across other asset classes. Equity markets revenue was down 5%. And although flows were steady, idiosyncratic events and sharp moves were tough for our clients, both on the way down and back up. Asia equities continued to outperform, driven by market volatility particularly in Japan. With respect to the second quarter, the relative stability we saw in March has continued into April so far; however, it's also the case that markets are still quite illiquid in certain parts and will be prone to somewhat [abrupt] corrections. So while investors have started to deploy cash and capital markets are wide open for well understood names, there is still remaining caution for more challenging issuers. Although there's been noise in the data globally, there is an emerging belief that it's fundamentally better but we need to continue to see no downward surprises. And as such, we remain somewhat cautious about the second quarter. Security services revenue was $881 million, in line with guidance. Credit adjustments and other was a loss of $336 million, mainly driven by CVA on spread widening. Credit costs of $459 million were driven by reserve builds for oil and gas and metals and mining, as discussed earlier. Finally, expense of $4.8 billion was down 15% year on year driven by lower performance-based compensation and lower legal expense, with a comp-to-revenue ratio for the quarter of 32%. Moving onto page 6 and Commercial Banking. The Commercial Bank generated net income of $500 million on revenue of $1.8 billion and an ROE of 11%. Outside of credit costs for oil and gas the first quarter was very solid performance. Revenue was up 4% year on year, driven by higher loan balances and deposit net interest income offset by lower IB revenues versus a record last year. Expense of $713 million was up 1% year on year and down 5% quarter on quarter, but in line with recent trends if you exclude the impairment taken on leased corporate aircraft last quarter. We saw strong growth in our loan book with average loan balances up 13% year on year and 3% quarter on quarter, and with portfolio spreads relatively flat for a couple of quarters now. Our commercial real estate business continued to exceed the industry with growth of 18% year on year reflecting superior execution while maintaining credit discipline. In C&I loans were up 9% year on year driven by robust originations in corporate client banking. Finally on credit, we added $300 million to reserves, mostly related to oil and gas, but we continued to see very low net charge-offs. Moving onto page 7, and Asset Management. Asset Management reported net income of $587 million with a 30% pretax margin and 25% ROE. Revenue of $3 billion was down 1% year on year driven by weaker markets and lower brokerage revenues. Excluding the impact of the sale of an asset this quarter which contributed $150 million to the revenue number, adjusted revenue AUM and client assets were down each generally in line with lower markets. Expense of $2.1 billion was down 5% year on year largely driven by lower performance-based compensation. Despite these lower markets we saw positive long-term flows of $12 billion this quarter with strength in fixed income multi-assets and alternatives, and including the benefit of a large mandate being partially offset by outflows in equity products given volatility. Our long-term investment performance remains strong, with 80% of mutual fund AUM ranked in the first or second quartiles over five years. Loan balances of $110 billion were up 7% year on year, with record mortgage balances up 20% and solid growth in traditional lending. Before I move on, as you're aware the Department of Labor issued the final fiduciary rule last week. It's a long and complex set of requirements and details will matter. It will take time to fully digest.


On first read there are no significant new provisions from the proposal that would change our position, which is that we've been a fiduciary for over 150 years. And based on our current advisory business we are confident in our ability to adjust and be successful. Perhaps one of the biggest positives is the longer time to implement, which allows us to be even better prepared.

Skipping page 8, as we actually have nothing significant to call out on Corporate and I will move onto the outlook on page 9. We've included our guidance from Investor Day on the page. It's unchanged, so I won't go through it. Just two new points to highlight, for Asset Management. The first-quarter revenues adjusted for the $150 million were a little over $2.8 billion. And assuming relatively constructive markets we would expect those revenues in the second quarter to be flat to up, but to be less than $3 billion. And obviously expense will also be flat to up in line with those revenues on performance-based compensation. In the Commercial Bank we expect revenues will be up modestly on continued loan growth, but we also expect expenses to increase to about $725 million as we add bankers and execute on our technology and product investment strategies. The upshot of which is we expect pre-provision net revenue for the Commercial Bank to be relatively in line with the first quarter. Before moving to Q&A, I want to make a few comments about the news this morning regarding living wills. Obviously we were disappointed with the conclusion reached by the joint agencies on our resolution plan. We have taken this planning process very seriously, and we believe we've made substantial progress. Having said that, the most important thing is we work with our regulators to understand their feedback fully and in more detail. And we are fully committed to meeting their expectations. So wrapping up, despite challenging market conditions we delivered really quite good performance in the quarter with diversification allowing us to perform well in difficult environments and be there for our clients. Operator, you can open up to Q&A. QUESTIONS & ANSWERS Operator:

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(Operator Instructions) Matthew Burnell. Matthew Burnell (Analyst - Wells Fargo): Good morning. Thanks for taking my questions. Marianne, maybe a couple of questions on energy. You noted that the provision was slightly above your guidance this quarter relative to what you mentioned you thought it might be in late February. I guess I'm curious in terms of what your expectations are in terms of your guidance relative to potential draw-downs, particularly in the $10 billion of high yield loans that you have undrawn? And what your ability is to potentially mitigate potential draw-downs based on the financial condition of your borrowers? Marianne Lake (CFO): So the first thing I'd say is with respect to oil and gas, obviously I think $529 million is pretty close to $500 million, plus or minus. So that was pretty much in line. But you are saying it'll be a little bit higher with metals and mining. We were expecting close to $100 million and there were a couple of extra downgrades that came through in the quarter, and that kind of timing is going to happen. It doesn't change the overall sort of perspective for us. With respect to draws, when I gave some sort of indicative guidance about what you might expect to see potentially in the rest of the year in terms of reserve build, we do try to take into consideration the likelihood that we will see incremental draws. And clearly we will work with borrowers to try and help them such that that may not be necessary, and in other cases we can reduce our exposure in redetermination cases. But we will expect to see draws and that's contemplated in our guidance. And I want to make sure that everyone understood that we tried to be very complete. So this is not just oil and gas and metals and mining, as the [Mace] Code would suggest. We've looked at very closely related companies in shipping and marine transportation and the like. So we're trying to be very complete. Jamie Dimon (Chairman & CEO): We've yet to take a loss. Marianne Lake (CFO): We have taken a couple. Not very much. Matthew Burnell (Analyst - Wells Fargo): Fair enough, that makes sense. But that dovetails nicely actually into my follow-up. In terms of the wholesale non-accrual balances, those are up about $1.2 billion quarter over quarter.


Can you give us a sense as to how much of that was energy and metals and mining? And were there other areas of the portfolio that added to that? And what's your outlook for wholesale non-accruals over the course of the next couple of quarters?

Marianne Lake (CFO): So of the $1.2 billion, $1 billion was a combination of oil and gas and metal and mining, so the vast majority and outside of that, consistent with my comments on contagion, there's not any sort of thematic other noteworthy thing to mention to you. And obviously as we continue to watch the cycle play out over the...


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