Jpmorgan Chase & Co Q4 FY2020 Earnings Call

Please standby. We are about to begin. Good morning, ladies and gentlemen. Welcome to JPMorgan Chase’s Fourth Quarter 2020 Earnings Call. This call is being recorded. Your lines will be muted for the duration of the call. We will now go live for the presentation. Please standby. At this time, I would like to turn the call over to JPMorgan Chase’s Chairman and CEO, Jamie Dimon; and Chief Financial Officer, Jennifer Piepszak. Ms. Piepszak, please go ahead.

Thank you, Operator. Good morning, everyone. The presentation as always is available on our website and we ask that you please refer to the disclaimer at the back. It’s slightly longer this quarter, given we are not having Investor Day, and so after I review our results, I will spend some time on our outlook for 2021 as well as touch on a few important balance sheet topics that are top of mind for us. So starting on page one for the fourth quarter. The firm reported net income of $12.1 billion, EPS of $3.79 on revenue of $13.2 billion, and delivered a return on tangible common equity of 24%. Included in these results are approximately $3 billion of credit reserve releases. Before we get into more detail on our performance, I will just touch on a few highlights. First off, our customers and clients continue to demonstrate strong financial resilience in the face of an unprecedented pandemic as evidenced in our credit metrics thus far. We saw continued momentum in investment banking and grew our share to 9.2%. In CIB markets, revenue was up 20% year-on-year, driven by strong client activity and elevated volatility in the quarter. And in AWM, we had record revenue of 10% year-on-year. On deposits, we saw another quarter of strong growth, up 35% year-on-year and 6%, sequentially as Fed balance sheet expansion continues to increase the overall amount of cash in the system, while loan growth remained muted up 1% both year-on-year and quarter-on-quarter. On to page two for more on our fourth quarter results. Revenue of $30.2 billion was up $1 billion or 3% year-on-year. Net interest income was down approximately $900 million or 7%, primarily driven by lower rates and mix partly offset by balance sheet growth and higher market NII. Non-interest revenue was up $1.9 billion or 13% on higher IB fees, legacy investment gains in corporate, and higher production revenue in home lending. Expenses of $16 billion were down 2% year-on-year on lower volume and revenue related expenses, partially offset by continued investments. Credit costs were a net benefit of $1.9 billion, down $3.3 billion year-on-year, primarily driven by reserve releases of $2.9 billion that I will cover in more detail shortly. Turning to the full year results on page three. The firm reported net income of $29.1 billion, EPS of $8.88 on record revenue of nearly $123 billion and delivered a return on tangible common equity of 14%. Revenue was up $4.5 billion or 4% year-on-year as net interest income was down $2.8 billion or 5% on lower rates, partly offset by higher markets NII and balance sheet growth, and non-interest revenue was up $7.3 billion or 12% on higher markets and IB fees, as well as higher production revenue in home lending. Expenses of $66.7 billion were up 2% year-on-year driven by volume and revenue-related expenses, higher legal and continued investments, partially offset by lower structural expenses. And credit costs were $17.5 billion, reflecting a net reserve bill of $12.2 billion due to the impacts of COVID-19 and net charge offs that were down year-on-year. Now turning to reserves on page four. We released approximately $3 billion of reserves this quarter across Wholesale and Home Lending. Starting with Wholesale, we released $2 billion due to improving macroeconomic scenarios and the continued ability of our clients to access capital markets and liquidity. In Home Lending, we released $900 million primarily on improvement in HPI expectations and to a lesser extent to portfolio run-off. And in Card, we held reserves flat as we remain cautious about the near-term, especially with the number of unemployed still nearly two times pre-pandemic levels and potential payment shock coming to consumers from expiring benefits. And so, with the near-term outlook still quite uncertain, we remain heavily weighted to our downside scenarios, and at nearly $31 billion we are reserved at approximately $9 billion above the current base case. And to touch on net charge-offs for the quarter, they were down about $450 million year-on-year and remain relatively low across our portfolios. Looking forward, we still don’t expect any meaningful increases in charge-offs until the second half of 2021; and with the recent stimulus, it could be even later. Turning to page five. We have included here an update on our customer assistance programs and you can see the trends are largely similar to last quarter and further evidence of the resilience of our customers. The vast majority of what’s left in deferral is in mortgage with $10 billion of own loans and $13 billion in our service portfolio. And in terms of what we are seeing from our customers that have exited relief, more than 90% of accounts remain current. Turning to balance sheet and capital on page six. We ended the quarter with a CET1 ratio of 13.1%, flat versus the prior quarter on strong earnings generation largely offset by dividends of $2.8 billion and higher RWA. As we stated in our press release last month, the Board has authorized share repurchases and we plan to resume buybacks in the first quarter up to our Fed authorized capacity of $4.5 billion after paying our $0.90 dividend. You can see here on the page, we’ve have included the liquidity coverage ratio for both the firm and the bank, which we believe is important to look at together in order to better understand the liquidity profile of our balance sheets. The firm is at a healthy LCR of 110%; however, the bank LCR is 160% reflecting the extraordinary deposit growth that has meaningfully outpaced loan demand. Now let’s go to our businesses, starting with Consumer & Community Banking on page seven. In the fourth quarter, CCB reported net income of $4.3 billion and an ROE of 32%. Revenue of $12.7 billion was down 8% year-on-year, reflecting deposit margin compression and lower Card NII on lower balances, largely offset by strong deposit growth and higher Home Lending production revenue. Deposit growth was 30% year-on-year, up over $200 billion as balances remain elevated and as we continue to acquire new customers and deepen primary relationships. Loans were down 6% year-on-year with Home Lending down due to portfolio run-off and Card down on lower spend offset by Business Banking, which was up due to PPP loans. Client investment assets were up 17% year-on-year driven by both net inflows and market performance. On spend, combined debit and credit card sales volume in the quarter was up 1% year-on-year, which reflected debit sales up 12%, largely driven by retail and everyday spend, and credit sales down 4% largely driven by T&E. In Home lending, overall production margins remained strong. Total originations were down 2% year-on-year but were up 12% quarter-on-quarter both driven by correspondent as we lean into the channel after pulling back earlier in the year. For the year, total originations were $114 billion, including nearly $73 billion of consumer originations, both the highest since 2013. In auto, loan and lease origination volume was $11 billion up 29% year-on-year. And across the franchise, digital engagement continues to accelerate. Our customers use credit deposit for more than 40% of all check deposits, which is nearly 10 percentage points higher than a year ago. And in Home Lending nearly two-thirds of our consumer applications were completed digitally using Chase My Home and that has tripled since the first quarter. Over 69%, overall, 69% of our customers are digitally active with Business Banking at 86%, both higher than a year ago. Expenses of $7 billion were down 1% year-on-year and credit cards for a net benefit of $83 million driven by $900 million of reserve releases in Home Lending largely offset by net charge offs in Cards of $767 million. Now turning to the Corporate & Investment Bank on page eight. CIB reported net income of $5.3 billion and an ROI of 26% on revenue of $11.4 billion for the fourth quarter and an ROI of 20% on revenue of $49 billion for the full year. The extraordinary nature of this year has meant that we had records in almost every category for both the quarter and the full year. In Investment Banking, IB fees were up 25% for the year and we grew share to its highest level in a decade. For the quarter, Investment Banking revenue of $2.5 billion was up 37% year-on-year and up 20% sequentially. The quarter’s performance was driven by the continued momentum in the equity issuance market, as well as strong performances in DECM and M&A. In advisory we were up 19% year-on-year driven by the closing of several large transactions. The M&A market continued to strengthen this quarter and in fact announced volumes exceeded pre-COVID levels. Debt underwriting fees were up 23% year-on-year, driven by leveraged finance activity and we maintained our number one rank overall. In equity underwriting fees were up at 8% year-on-year, primarily driven by our strong performance and follow ups in IPOs. Looking forward, we expect IB fees to be up modestly for the first quarter and the overall pipeline remains robust. We expect M&A to remain active on improves overall CEO confidence and the momentum in equity capital markets is expected to continue, of course dependent on a successful containment of COVID. Moving to markets, total revenue was $5.9 billion, up 20% year-on-year against a record fourth quarter last year. Fixed income was up 15% year-on-year, driven by good client activity across businesses, particularly in spread products, as well as a favorable trading environment in currencies and emerging markets, credit and commodities. Equities was up 32% year-on-year, driven by strong client activity and equity derivatives and cash throughout the quarter across both flow trading and episodic transactions. Looking forward, we expect markets to remain active in the first quarter and we have seen strong performance since the start of January, but it’s obviously too early to predict the full quarter. And for the remaining quarters of this year and the full year, the comparisons will be particularly challenging given the extraordinary performance of markets in 2020. Wholesale payments revenue of $1.4 billion was down 4% year-on-year, primarily reflecting the reporting reclassification in merchant services and security services revenue of $1.1 billion was down 1% year-on-year. On a full year basis, the headwinds from lower rates were almost entirely offset by robust deposit growth. Expenses of $4.9 billion were down 9% compared to the prior year, driven by lower compensation and legal expenses. Now let’s go to Commercial Banking on page nine. Commercial Banking reported net income of $2 billion and an ROI of 36%. Revenue of $2.5 billion was up 7% year-on-year with higher lending and investment banking revenue, partially offset by lower deposit revenue. Records gross Investment Banking revenue of $971 million was up 53% year-on-year. And the full year was also record finishing at $3.3 billion surpassing our previously established $3 billion long-term target and given our investments in bank recovery, we believe there’s continued upside from here. Expenses of $950 million were flat year-on-year. Deposits of $277 billion were up 52% year-on-year and 11% quarter-on-quarter as client balances remain elevated. Average loans were up 1% year-on-year, but down 3% sequentially. C&I loans were down 4% on lower revolver balances, with utilization rates nearing record lows as clients continued to access capital markets for liquidity and CRE loans were down 1% on higher prepayment activity in both CTL and Real Estate Banking. Finally, credit cards were a net benefit of $1.2 billion driven by reserve releases. Now on to Asset & Wealth Management on page 10. Asset & Wealth Management reported net income of $786 million with pretax margin and ROI of 29%. And for the year, AWM generated record net income of $3 billion with pretax margin and ROI of 28%. For the quarter, revenue of $3.9 billion was up 10% year-on-year, as higher performance and management fees, as well as growth and deposit and loan balances were partially offset by deposit margin compression. Expenses of $2.8 billion were 13% year-on-year, primarily due to higher legal expenses related to the resolution of matters previously announced. But excluding this, expenses would have been up 4% year-on-year on volume and revenue related expenses. For the quarter, net long-term inflows were $33 billion positive across all channels, asset classes and regions and this was true of the $92 billion for the full year as well. In liquidity, we saw net outflows of $36 billion for the quarter and net inflows of $104 billion for the full year. AUM of $2.7 trillion and overall client assets of $3.7 trillion, up 17% and 18% year-on-year, respectively, was driven by net inflows into both liquidity and long-term products, as well as higher market levels. And finally, deposits were up 31% year-on-year and loans were up 15%, as clients continue to increase their liquidity in both for investment opportunities. Now on the Corporate on page 11. Corporate reported net loss of $358 million. Revenue was a loss of approximately $250 million relatively flat year-on-year. Net interest income was down $730 million on lower rates, including the impact of faster prepayments on mortgage securities, as well as limited deployment opportunities on the back of continued deposit growth. Declines in net interest income were largely offset by net gains this quarter of approximately $540 million on several legacy equity investments. And expenses of $361 million were roughly flat year-on-year as well. Now shifting gears, I will turn to our outlook for 2021, which I will cover over the next few pages, starting with NII on page 12. As you can see on the page, we expect NII to be around $55.5 billion in 2021 and this is based on the latest insights, which reflects the steepening yield curve we have seen over the past few weeks. You can see that we do expect to be able to more than offset the impacts of low rates in 2021 from continued deposit growth and higher markets NII. But it’s important to note that it takes loan growth to truly realize the benefits of a steeper yield curve. I will also just remind you that the increase in CIB markets NII is largely offset in NIR and this component is highly market dependent. And so as it relates to loan growth, while there should be some opportunities in AWM and Wholesale, we expect headwinds at least in the near-term as Corporate cash balances are at all time high, Card payment rates are elevated and there continues to be significant prepayments in Home Lending. But we do expect these to normalize and see loan growth pick up in the second half of the year, particularly in Cards. Therefore, our fourth quarter 2021 NII estimate of $14 billion or more is a reasonable exit rate. And notably, that’s in the zip code of our Q4 ‘19 NII, when rates were significantly higher than they are today. We have also included on the right side of the page some risks and opportunities, and obviously this isn’t an exhaustive list, but are the drivers that could be most impactful to this year’s NII outlook. Now turning to expenses on page 13. As Jamie mentioned last month, we do expect our expenses to increase in 2021 and based on our latest work, we expect that number to be around $68 billion, up versus the prior guidance of $67 billion, largely due to higher volume and revenue related expenses and the impact of FX, both of which have offsets on the revenue line, as well as the impact of expenses from our recent acquisition of cxLoyalty. Then taking a look at the year-over-year expense growth, you can see it’s primarily due to investments, which I will cover in more detail on the next page. Our volume and revenue related expenses are up slightly with some puts and takes there. That’s obviously market dependent, but remember any changes there do come with corresponding changes to our topline. And in structural, we expect a net reduction of approximately $200 million. Notably, this includes a decrease of $500 million, reflecting the realization of continued cost efficiencies in what is largely our fixed cost base. And you can see that it is partially offset by the impact of FX on our non-U.S. dollar expenses. It’s important to note that while structural is coming down, it doesn’t represent the full extent of our productivity, we are realizing efficiencies in each category here. For example, our software engineers are becoming more productive and we are reducing our cost to serve as we see more customers use our digital tools to self serve. Moving to page 14 to take a closer look at our investment spend. Over the past two years, our investment spend has been around $10 billion and we expect that to increase to nearly $12.5 billion in 2021. You can see that we have highlighted on the page the major areas of focus that we have been consistently investing in for years, which has continued to strengthen our franchise and drive revenue growth. Starting on the bottom with technology, this represents roughly half of the overall investment spend and these tech investments are across the board, as we look to better meet our customer and client needs, improve our customer’s digital experience, strengthen our fraud detection capabilities, as well as modernize and improve our technology infrastructure, cloud and data capabilities. Moving to non-tech investments, we expect marketing spend largely CCB to return to pre-COVID levels this year after being down in 2020. We continue to invest in our distribution capabilities across all of our businesses. This includes hiring bankers and advisors not only in the U.S., but also internationally, as well as expanding our physical footprint. We have been continuing to execute against our branch expansion plans in new markets having opened 170 branches so far out of our plan 400 and expect to be in all contiguous 48 states by mid-2021. And the other bucket on the page is a catch all for everything else, including real estate and other various investments across our businesses. These expenses were fairly stable the past two years and the increase in 2021 is largely related to our $30 billion commitment to the Path Forward, which includes promoting affordable housing, expanding homeownership for underserved communities and supporting minority owned businesses, and then as well as expenses related to our acquisition of cxLoyalty. So, in summary, you can see that we continue to invest through the cycles and it’s these investments that we believe position us well to outperform on a relative basis regardless of the environment. Now I will turn to a few balance sheet and capital related topics, starting on page 15. Over the next few slides, I’d like to provide you some insight on how recent monetary expansion and corresponding growth in the financial system is creating new challenges for bank balance sheets. More specifically, this expansion is putting significant pressure on size based capital requirements, which is likely to impact business decisions, including capital targets. We will start with what has happened this year. In response to the COVID crisis, the Fed’s balance sheet has significantly expanded, which has resulted in $3 trillion of domestic deposit growth across the U.S. commercial banks. What’s important to note is that this QE is unlike anything you have seen before. In the current QE, we have experienced a much bigger and faster expansion, and that expansion has come without meaningful loan demand beyond PPP, as you can see in the loan to deposit ratio on the page. This has resulted in bank balance sheets which are larger but more liquid and less risky. From a bank capital perspective, the key question to ask is how long will this persist? On the chart, you can see that the QE 3 unwind kept the Fed on pause for several years before a modest pace to reductions. So even if the Fed immediately signaled tapering, which of course is not the base case and follows the base case of the last unwind, it will take many years to return to pre-COVID levels. Of course, the unwind speed has risen, but I think we can all agree that bank balance sheets will remain elevated for some time. Now let’s go to page 16 and see how this will impact capital going forward. Two factors that are top of mind for us are GSIB, which we have been talking about for a long time and also SLR, which is not something we typically talk about, but given the overall system expansion now in focus. On the graph, what you can see here are the historical trends of GSIB and SLR base requirements overlaid with the task of the Fed securities holdings. You can see that during the original calibration of these rules, which included significant gold plating, the Fed’s balance sheet was notably lower. With the recent growth in the Fed’s balance sheet, we are seeing upward pressure and increases to GSIB requirements, as well as the SLR shifting from a backstop to a binding measures, which will impact the pace of capital return and these dynamics will likely persist for an extended period. The Fed temporary relief of SLR expires after March 31st. This adjustment for cash and treasury should either be made permanent or at a minimum be extended. With these exclusions, you can see how these remains a backstop measure not a binding one. Then on GSIB, there has been public dialogue about the need to index the score to GDP as a proxy to account for ordinary economic expansion over time and this was also cited by the Fed as a possible shortcoming of their framework. For 2020, GDP is clearly not the best proxy for system expansion, but the principle still applies. GSIB was designed as a relative measure between large and medium-sized banks, and therefore, it should certainly reflect an overall system expansion, which impacted small, medium and large banks alike. By future proofing GSIB and inception with the adjustments outlined on the page, you can see the resulting GSIB score profile, lower over time, but more importantly, flatter over the course of the most recent system expansion. While we recognize that prudent bank capital requirements to promote safety and soundness, satisfying these heightened requirements is certainly not costless which is why these two areas, GSIB and leverage are top of mind for us in 2021. Now let’s look at the impact of this on marginal deposits on page 17. In addition to what we have already discussed, there are two more building blocks required to see the full picture of marginal deposit economics, and they are interest rates and loan demand. We have experienced a combination of both lower interest rates and lower loan demand, which have reduced the NIM of marginal deposits to practically zero, which you can see here on the chart, and this is an issue for all banks, not just GSIBs or JPMorgan. However, what is specific to the larger banks that when the SLR becomes binding, we may be required to issue debt and retain higher equity, which ultimately makes the marginal deposit a negative ROI proposition in today’s ultra-low rate environment. The key question is, what could happen next. We could simply shy away from taking new deposits, redirecting them elsewhere in the system or we can issue or retain additional capital and pass on some of that cost, which is certainly something we wouldn’t want to do in this environment. And therefore, we strongly encourage a serious look at these size-based capital calibrations with an appropriate sense of urgency, as we will soon be facing this critical business decision. All of this can be addressed through a few simple adjustments, namely an extension of the SLR exclusions and the GSIB fixes we have spoken about over time. But to be clear, we believe the framework as a whole has made the banking system safer as we experienced in 2020. But we are also seeing evidence where the lack of coherence and recalibration is risking unintended consequences going forward. With all that said, before I close things out on capital, here’s how we are thinking about target CET1 levels. While GSIB pressure remains and the need for recalibration is high, our SCB optimization can provide some offset allowing us to manage to 12% CET1 target. The recent stress test showed an implied 20-basis-point reduction to SCB and we have continued our optimization efforts since the resubmission. So we are hopeful for lower SCB later this year, of course that’s scenario dependent. At this point, it’s too early to provide specific color on the impact of SLR. So it’s just important to note that in the absence of any adjustments to the measures, we may have to issue preferred or carry additional CET1 over the 12% target I just mentioned. We obviously can’t emphasize these key messages enough and these factors are clearly front and center as we think about managing our balance sheet and capital targets in the near- and medium-term. Now before we conclude, know that we have included a few additional slides on our businesses in the appendix to give you an update on their strategic highlights and performance, as well as provide the latest financial outlook. The themes and initiatives we talked about at last year’s Investor Day still remain our focus, and we continue to execute and make progress against them. So to wrap up, 2020 was an incredibly challenging year. But it also showcased the benefits of our diversification and scale, and the resulting earnings power of our company, while our employees relentlessly focused on supporting our customers, clients and communities. While downside risks do remain in the near-term and they could be significant, several recent factors help us feel more optimistic as we look ahead to the recovery in the medium and longer term. So with that, Operator, please open the line for Q&A.

Certainly. Your first question comes from the line of Steven Chubak with Wolfe Research.

Hi. Good morning, Jamie. Good morning, Jen and Happy New Year.

Happy New Year, Steve.

Thank you.

So I want to start off with a question on the NII outlook. The 2021 guide implies rather healthy step up versus the $54 billion, Jamie, that you had reiterated just last month. And your updated NII guide for ’21, what are you assuming regarding the deployment of excess liquidity given some of the recent curve steepening? And separately, what are your assumptions around the trajectory for Card balances and overall growth in ’21, especially in light of the expectations for additional stimulus, which we saw at least this past year could drive further consumer deleveraging?

Sure. So, I will start with excess liquidity. So I think there the theme is we are being opportunistic but patient. So, as you think about the recent moves that we have seen in the yield curve, in the grand scheme of things, those could be small moves, and as we think about managing the balance sheet, it’s not just about NII, of course it’s about capital. And so, there is risk in adding duration at these levels in a further sell off. So we are being very patient. But we have been and we will continue to be opportunistic, and you will have seen that we did add $60 billion to the portfolio in the fourth quarter, so that’s what we are assuming in the outlook is a very balanced view on deploying the excess liquidity. And then on card balances, it is quite extraordinary what we are seeing in terms of payment rates in the card portfolio, which of course is very healthy as consumers use this opportunity to deleverage, so there is an offset in the credit line, but we are expecting that to normalize in the back half of 2021 as spend recovers, but it is certainly a risk for us if they remain elevated. So that’s why everything listed on that page is a plus/minus because everything could be an opportunity and a risk.

Okay. Fair enough. And just for my follow up, I wanted to ask on capital, both the slides are really interesting highlighting the impact of QE on the leverage ratio and G-SIB scores. You have been critical of G-SIB surcharges and the need to recalibrate these coefficients for some time. We haven’t really seen much progress there. It kind of feels like waiting for the Fed. I think the Fed is slow to recalibrate the minimum leverage ratios to account for this QE-driven deposit growth. What mitigating actions can you take to ensure you are not capital constrained as balance sheet growth continues? And maybe any revenue attrition we need to contemplate as part of those mitigating actions?

Sure. So I will start with G-SIB, if we take that in turn. So starting with G-SIB, as I said, we do think that we have opportunity in the SCB. Of course, that’s scenario dependent and based on the Fed models, but we do think we have opportunity there based on the work that we have been doing. It will be very difficult for us to get back to 3.5% with the current expansion. So, we are expecting to remain in the 4% bucket. But as you know, that’s not effective until early 2023, so that gives us time to manage SCB, as I mentioned, as an offset. On the leverage issues, we can cure this through issuing preferreds, but we haven’t made that decision yet, as I said, because it is a critical decision for us to think about. And as you think about capital return, it would depend on where our stock price is as we think about the economic value of issuing preferred to buy back stocks. So there’s a lot for us to think about over the next couple of months.

Because you said the G-SIB fees, it’s very important. If we were on the international standard, our G-SIB fee would be 2%, not 4%. And we have been talking about they were supposed to adjust G-SIB before the growth of the economy and effectively the shrinking size of the banking system. Because the banking system itself is getting smaller as mortgages go to non-banks and private credit goes elsewhere, and the rest of the international, Chinese banks are growing, et cetera. So these adjustments should be made. We pointed out there is $1.3 trillion of liquid assets and marketable securities on our balance sheet which shockingly reached G-SIB 2. G-SIB has no risk weighted measurements to it, no diversification to it, no profitability to it. It just kind of these very gross measures, and it needs to be recalibrated and same with SLR. I mean, so do we expect it to happen? Probably not in our lifetimes, because we have politicized bank, detailed bank numbers and so on, and we can live with it for now. But in the long run, it’s not good for America and had been that much of a disadvantage to our competitors overseas.

Your next question comes from the line of Jim Mitchell with Seaport Global Securities.

Hi, Jim.

Sorry. Sorry. Hi. Sorry. I was on mute for a second there. Maybe just talking about loan growth? You saw a pretty nice improvement in the Wholesale side. You talked about some opportunities in ’21. It seems to be mostly coming out of the CIB. Is that sort of acquisition finance? What’s driving some of the improvement on the Wholesale side?

I would say acquisition financing is the opportunity on the Wholesale side. There may also be some opportunity in the back half of 2021 in C&I; that market seems to be returning to business as usual, but I think that will take some time. As I said, corporate balance sheets are at historic levels of cash, so outside of acquisition financing and C&I, growth will be challenging in the back half of 2021.

Okay. Fair enough. And then maybe on your expense assumptions for the $68 billion, you don’t really mention at all any of the CIB. You would think that if we are, as everyone assumes, coming off a record year in 2020 and 2021 and maybe markets and IB fees are lower, are you building in some lower comp or revenue-based compensation expense in that $68 billion, or is that potentially a positive?

So we capture that in the volume and revenue related, Jim. It just happens to be more than offset by volume and revenue related growth elsewhere.

I just point out the $68 billion. We don’t make commitments or promises, so that $68 billion, I would love to find $2 billion more of investments, literally. I mean, we are seeking every year find more to do to help clients around the world and stuff like that. So that’s kind of our current forecast. And fortunately, we found some more to do, including cxLoyalty and opening more branches and some of the technology we are building, et cetera. But I’d like to find more. It would be the best and possible highest use of our capital.

Your next question comes from John McDonald with Autonomous Research.

Hi, John.

Hi, Jen. Given the outlook for net interest income and expenses, it seems like the efficiency ratio is going to pick up a few 100 basis points this year in ’21 versus ’20. And I know you don’t manage it necessarily year-to-year, but just kind of overtime you seem to have a mid 50s efficiency target. Just kind of wondering how you put guard rails up for yourself in terms of expense discipline in managing over time to have positive operating leverage and an efficiency corridor?

Sure. So I will start by saying you are absolutely right that we don’t manage the efficiency ratio in any quarter or even any year and but operating leverage is very important to us. And then, we gave last year at Investor Day at about a 55% efficiency ratio. I will say in a normalized environment, we haven’t had anything that structurally has changed and so that should still be achievable for us in a normalized rate environment and otherwise normalized environment. And then as it relates to expense discipline, it is a bottoms up process. And so everywhere around this company, we are looking to get more efficient and holding people accountable to do just that, which is why I call out on the slide that structural is basically everything that is an investment or volume and revenue related, isn’t necessarily a representation of all of our expense efficiencies. So the discipline is everywhere and it’s the way we run the company, and we do believe in the importance of operating leverage through time, no doubt.

Okay. And then as a follow up, on the NII walk, you have got a $1 billion incremental NII expected in ’21 versus ’20 from CIB markets. Can that be true if markets revenues is down year-over-year? Can they both be true? Just maybe explain that?

Yes. It can absolutely be true. So markets is, I mean, in most of our businesses, we don’t run them NII versus non-interest revenue. It is an accounting construct. But markets is particularly true. So, yes, that is possible. In NII, the markets business, you can think about is liability sensitive. So you are going to see the benefit of lower rates in NII that doesn’t necessarily imply anything about the overall performance.

We have positive carry, the trading profit goes down and the carry goes up, the numbers in absolute terms are the same.

Your next question comes from Erika Najarian with Bank of America.

Hi, Erika.

Hi. Hi. Good morning. My first question is on the outlook for Card losses. The 2.17% net charge-off rate was certainly eye opening relative to what’s happened in 2020. And the discussions actually that I have been having with investors on the trajectory of Card is, do you think that the bridge that the government built is strong enough that we may not see a spike in losses in Cards like we are all expecting, and Jen, given your comments earlier, what would you need to see to feel more comfortable about releasing reserves from your Card portfolio?

Sure. So it’s interesting that you brought up the bridge being strong enough. It does feel like at this point in this crisis, that the bridge has been strong enough. The question that still remains is, is the bridge long enough. And so, while we just had recent stimulus pass, that makes us feel better about the bridge being long enough. But we have to get through the next three months to six months. So it feels like we have been saying that, since this crisis started, but I think it is particularly true at this point, obviously, given the vaccine rollout. So, consumer confidence is still low relative to pre-COVID levels. You can compare that to the Wholesale side, we are seeing confidence is up. That’s not true on the consumer side. And so the next three months to six months is going to be critically important for us to assess whether or not only is it strong enough, but is it long enough and do you see consumer sentiment pick up a bit. There’s also possibility for payment shocks as some relief programs, whether it be student loan forbearance or taxes owed on benefits received. There are things that could hit a consumer in the next three months to six months that we need to think about.

Right. I would just add, very different for subprime and prime. And if you look at our portfolio, it’s mostly prime. And the folks in the prime category have a lot more income, a lot more savings, housing prices are up. They did not lose their jobs. So the news there is actually rather good. On the lower quartiles it’s the opposite. Even now when we just did all the stimulus checks and we did about $12 billion of them, which have already been processed, the folks who had $1,000 in their accounts, where the accounts are coming down and they just got $1,000, they obviously needed. The folks in the higher end, they obviously don’t need quite as much. So it’s possible that losses do not spike in a dramatic way.

Got it. And Jamie, my second question is for you.

I’d say, we are making this point very important. We do not consider reserve releases recurring or core income. We don’t treat it as operational performance. We don’t consider it in the same way, particularly with the change in accounting rules.

Yeah. I think your investors appreciate that. And the second question I had for you, Jamie, is on last year’s Investor Day, it was clear to your investor base that you were looking to inorganically enhance your scale in AWM. What’s interesting is that, the discussion that I have been having with your investors more recently is them wondering whether or not you would consider a larger deal maybe in payments, given that a lot of investors and banks are thinking that that’s the part that seems to be potentially more vulnerable to technology competitors? What are your thoughts there? My own thought process has been tempered by Jennifer’s presentation on capital, but we wanted to get your thoughts there?

Again, we have plenty of capital we can deploy. If you look at what happened this year, our capital went from 12.4% to 13.3%. And by the more representative measures it will be 13.8% after adjusting. That’s after doing lots of loans, reserves, and paying dividends. We are in very good shape to invest. The most important thing we told management is we grow every business organically and we continue to invest in payments. We are quite good at it between credit card, debit card, Chase merchant services. But we are open to inorganic opportunities too. Inorganic shouldn’t be an excuse not for growing organically and it’s not just Chase or asset management; it will be any area where we could do that. cxLoyalty was a relevant strategic fit. We bought various capabilities; we will build or buy. We are open minded. We have the wherewithal, and we are always looking for ways to invest our capital intelligently. We have a tremendous set of assets and we must be prepared for competition from tech players.

Your next question is from Betsy Graseck with Morgan Stanley.

Hi, Betsy.

Hi. Good morning. Jamie a question on cxLoyalty, because I thought your loyalty program and capability set there in your payment space and your consumer facing space was quite good. So I am just wondering what the rationale was and is there an expectation that you are going to be leveraging that into non-Card portions of your business, was that part of the deal? What was the deal?

So, Betsy, I will take that one. We are really excited about this one and with any tech platform scale matters. So combining our scale with cxLoyalty’s innovative technology will be a win not only for our Chase customers but for cxLoyalty’s existing clients and suppliers. And then you are right to point out our existing UR platform, but that today is predominantly used as a points redemption portal. So there’s a huge opportunity to capture a greater share of our customer spend on travel, which is $140 billion both on and off us. So in addition to capturing the full economic value of the existing redemptions on the platform, we also have an opportunity to really turn it into a great place for our customers to book travel.

Okay. But still focused on the Card space as opposed to moving into other parts of your relationship with consumers?

It’s consumer focused and aligns well with our card franchise.

It’s not only Card; it has broader uses and we expect to leverage it across consumer interactions. It will also be beneficial to cxLoyalty’s existing clients and suppliers beyond Chase customers.

Okay. And then the follow-up question just on the technology budget increasing. I know this comes after a year of being somewhat stable year-on-year, and I just wanted to dig into the comment you made on the page around data analytics, cybersecurity, and artificial intelligence capabilities. Again, you have been a leader in this for a while. So the question is, where’s the whitespace that you are moving into? And can you give us a sense as to how important this is for some of the expansion that you are doing geographically in U.K. digital and in parts of the European footprint you are expanding into?

So, first of all, cyber we are going to do whatever it takes and we are going to do that in everything we do. We have built new data capabilities around the world which are more efficient. They are effectively our private cloud capability and when we move other stuff to public cloud, we are refactoring applications to get there. Data is the critical enabler for AI and machine learning – consolidating data and using AI/ML will improve customer experience, risk detection and operations. The cloud, speed, security and AI are real. Every business is involved: asset & wealth management, CIB, trading, commercial banking prospecting. It’s the tip of the iceberg. Ten years from now these capabilities will be vastly larger and we will spend whatever it takes to accelerate.

Your next question comes from the line of Ken Usdin with Jefferies.

Hi, Ken.

Hi. Thanks. Good morning. A question on capital return and capital usage, in the deck and in your press release, you mentioned that you are looking to get back into more return of capital, you mentioned $4.5 billion net and there’s still the net income test. And I just wanted to ask you to kind of walk us through how you think about full usage of that $4.5 billion and then how do you think forward vis-à-vis the comments we just talked about with regards to potential external opportunities and what’s the best use of that incremental capital, given that you still have a healthy amount sitting there?

Sure. So we always start in the same place, which is we would much prefer to do the things that Jamie’s been talking about rather than buy back our stock. So we would much prefer to deploy capital to organic growth or acquisitions. Having said that, we do have significant excess capital at this point. When we look at the first quarter, the Fed capacity was defined by the trailing four quarters of profits and so when you back out our dividend, that’s where you get to the $4.5 billion. So that is the capacity that we have for this quarter and we will do up to that amount, obviously, I don’t know that we will do the full amount, but we will certainly do some buybacks up to that cap. And then we are hopeful that we can go back to buybacks under the SCB framework beyond the first quarter as we think about buybacks. But we will wait to see what the Fed says at the end of the first quarter.

Okay. Great. Thanks.

If you can manage your capital down to the 12% target and get the Fed’s permission, that’s the right approach. We remain consistent with our capital priorities and would prefer to use capital for organic or inorganic growth rather than buybacks if those opportunities are higher return.

Yeah. I mean, we will always look at the effective return of us buying back our stock for our remaining shareholders and if we think it makes sense relative to the alternative we are going to keep doing it.

Your next question comes from Glenn Schorr with Evercore ISI.

Hi, Glenn.

Hello, there. Thank you. So I think it’s a good time of the year to get your mark-to-market on your thoughts on the competitive landscape and I know every business is competitive. But I am more curious on the new side of competitive and maybe I am talking more about the Consumer & Community Banking right now. But between all the neo banks that either want to pay much more than you guys on deposits or charge no fees, or the buy-now-pay-later models, or things where you also even play in banking-as-a-service in trying to provide banking products to big technology companies with big client footprints. I am most curious to see, is this just normal evolution and not changing things or is there something bigger going on here that you want to comment on? Thanks.

I think it’s more rapid and more intense competition than before. We have to be conscious of new entrants and tech players in payments and other consumer areas. We are competing — we have scale, distribution and product breadth, but we must continue to improve, accelerate and invest. We expect more competition from both fintech and global banks. We are comfortable but we keep taking our vitamins — i.e., keep investing in technology, data and distribution.

And it’s another reason our investments are going up as much, because we are very well aware of it.

Fair enough. Keep taking those vitamins. Maybe along the same lines, I think, you spoke about the power that the data of your own client footprints and franchises have. I am just curious, we haven’t heard that much lately about what you are collecting, how you can use it, how you can use it to enhance the customer experience accelerate growth. You have all this at your fingertips and people talk about data as being the new gold. I am curious on how you are thinking about it right now?

Yes, yes and yes. Data and AI are central. We use data in marketing, risk, fraud, cyber, client experience. We have more restrictions than some tech competitors, but we can still use data to create better experiences and better protection for our clients. It’s a huge opportunity and we are only at the beginning.

Your next question comes from Mike Mayo with Wells Fargo.

Hi. I'll ask my question and then go back in the queue. I guess I missed your Investor Day. We have four slides to talk about that. If your capital cup runs over, maybe your expense budget could run over too. Spending is certain; returns are uncertain. It seems there are more questions this year than in the past. You did get positive off the leverage last year during the pandemic. So yes, you have earned the right to go ahead and spend more. I think most people would agree. But there are still many questions, so I'll ask about CCB. It looks like slide 16. You mentioned going to all 48 states by mid-2021. I didn't really get all of that. How many states have you been in, and by the time you get to 48, how much spending is that? What's the game plan? What's your plan with branches? Others are shutting branches after the pandemic, but you are expanding. Could you give some color on that, or if Gordon's on the call, we can hear from him too?

We have been expanding thoughtfully. We’ve closed many legacy branches over time but opened new-format branches in targeted markets — Boston, Philadelphia, D.C. — and we see strong engagement in these new markets. Branch usage has declined but remains meaningful — nearly a million visits a day historically — and small businesses still need branches. We’re not planting flags randomly; we pick major markets where we can scale. The expansion pays off across cards, consumer, investments and small business.

Mike, I can just add a little bit of color on the numbers. So we had said that we were going to open up 400 new branches in market expansion. So we have done 170 so far. Importantly, in 2020, we did fewer than 90, and in 2021 we are going to do 150. And so, of course, by 2022 or 2023, that’s going to start to sunset. So there are multiyear investments in the numbers that are ramping in 2021 but will ramp down later. In tech as an example, 10% to 20% of that number in any given year is completed which gives us capacity to reinvest. And the franchise value from opening branches in new states is extraordinary and often underestimated because it enables broader product and municipal relationships.

I’ll add quickly: the Commercial Bank expansion is similar. We set targets when we acquired businesses historically and have hit and exceeded many of them. Branch expansion is strategic and creates durable franchise benefits.

Your next question comes from the line of Brian Kleinhanzl with KBW.

Hi, Brian.

Hey. Good morning. Just a quick question on the expense outlook. I noticed there was a small piece in there related to the workforce optimization, but I guess thinking in the broader context, as we get through COVID-19 and move to the post-COVID-19 world, the general thought process was that there would be this big expense save opportunity coming from that, work-from-home environment. But it doesn’t really show in your expense outlook. Is it something that you didn’t expect to see beyond 2021? Is this a step down in expenses?

Yes. Structural changes take time. There are people expenses, real estate costs, and you can make them more efficient, but it’s not an immediate game changer. We can’t move our footprint quickly; we must do it thoughtfully.

In the big picture there are people expenses $33 billion and real estate expenses of a few billion. It can be more efficient over time but not transformational in one year.

And then just a follow up, on the international, I saw still the billion hopes of additional revenue on the international. Just give an update on how that’s tracking so far?

From an expense perspective, our international expansion rides existing rails in the CIB so incremental expense is manageable. We are hiring bankers and generating client relationships. The business is still investing and we are seeing progress.

We had the best year ever in Asia; that region continues to grow faster than many others and is a key area of focus. The international expansion is country-by-country and we’re setting it up to be sustainable.

Your next question comes from Gerard Cassidy with RBC Capital Markets.

Hi, Gerard.

Hi, Jennifer. Hi, Jamie. Can you guys share with us, obviously, there’s been a change in the administration in the Senate and a number of our regulatory body heads are going to be replaced this year, including the Fed and the Consumer Protection Bureau. Can you guys give us some color what you are thinking about what may change from a regulatory standpoint with the different political party controlling Washington now?

Our focus is always the same: serve our clients, communities and satisfy regulators. We expect a new set of regulators and potential new priorities — climate, inclusion, consumer protection — and some will be more demanding. That’s fine; we operate globally and work with regulators everywhere. We want the new administration to be successful and we’ll work constructively with them.

And then following up, Jennifer, you talked about on page 17 of your slide deck, the issue with deposits and the marginal benefit of these deposits and you guys are wrestling with this issue? Can you share with us how this is going to be managed over the next 12 to 24 months, because long-term you want that branch expansion, but simultaneously, as you have pointed out, you may be getting a negative ROI, if you don’t get relief on the SLR? And is there a chance that you will get that extension on the SLR from the regulators?

We remain hopeful for an extension of the temporary SLR relief. From a branch expansion standpoint, near-term rate headwinds are considered, but the marginal branch decision is not driven solely by deposit economics. Branches provide broader franchise value — municipal business, deeper relationships — so they remain a strategic priority despite near-term rate pressures.

We have significant levers to manage deposits; we reduced deposits by about $200 billion quickly when needed. This is not likely to be a crisis for 2021, but it is a dynamic we manage closely.

The next question comes from the line of Matt O’Connor with Deutsche Bank.

Hi Matt.

Hi. Maybe a bit of a basic question, but why are markets revenues and trading so good still, not just for you, but the overall wallet? I gather it to be investment banking activity, liquidity, but of course rates are near zero, budget tight, volatility is low. Just conceptually it’s been very strong. What’s really driving it?

There is an enormous amount of global financial assets and activity — hedging, financing, FX, pensions — and central bank balance sheet expansion has increased liquidity and activity. When DCM, ECM and M&A increase, trading activity and client flow go up. Technology and scale also help banks handle more volume, and those factors together drove the strong markets performance.

And obviously, the question is how sustainable is this, and I guess, one argument could be that technology has allowed banks to increase the velocity. Do you think that is a structural change that will benefit the businesses and specifically for you guys over a long-term period?

We believe scale and technology matter and can sustain a higher base level of activity than prior cycles. We expect competitive dynamics and volumes to evolve, but we are positioned to compete and potentially grow share over time.

Your next question comes from the line of Charles Peabody with Portales.

Hi Charles.

Good morning. I have a couple of questions related to fintech. How dependent is the fintech world on the banking system, as I understand they lay on top of the pipes and plumbing of the banking system. Do you have any leverage in a competitive world against the fintech world? And then, secondly, I noticed that the OCC gave banks the green light to use public blockchain networks and stable coins. Can you explain what important that has to JPMorgan?

That guidance enables offerings of stable coins on a public blockchain. That doesn’t impact JPM Coin. JPM Coin is about tokenizing deposits for client payments and making those payments easier. We will assess use cases and customer demand; it’s early to say where this goes for us.

We are using blockchain for sharing data with banks and are at the forefront of some efforts. Fintechs are strong competitors; many ride the rails of banks or white label banks. We bank and partner with many fintechs. We will have to compete, improve, and be quicker. We have to be prepared for intense competition over the next decade and we intend to win.

Thanks. So do fintechs need the banking system to complete their loop of service or can they work completely outside banks?

Many fintechs currently rely on banks in some way, though some will seek alternatives. Regulators and market structures may evolve, and some fintechs use white-label banks, which effectively makes them banks for practical purposes. We need to focus on competing and adapting, and on ensuring appropriate regulation and controls, particularly around KYC/AML and data use.

Your next question comes from the line of Andrew Lim with Société Générale.

Hi Andrew.

Hi. Good morning. I wanted to pick your brains on inflation. If we look at rates and inflation indicators, a lot of people are discussing reflation. What are you seeing in the real economy, in Commercial Banking or Investment Banking, that might indicate inflation is becoming a theme? Are there signs manifesting in markets that you see?

We don’t have much more insight than you. There are signs in commodities and certain goods and supply chain dislocations. With very large fiscal and monetary stimulus, we must consider scenarios of higher inflation — 3% or 4% — as plausible and plan for them. It’s not the worst outcome; the worst is lack of growth. Risk management should include higher inflation scenarios.

Great. For my follow-up, you mentioned you resolved excess deposits in the past by pricing them down by about $200 billion. Why not do that now?

We can reduce deposits, but the capacity in the system to absorb that is different today. It’s a system-wide issue and not something we can simply make disappear without market impacts.

Your next question comes from Betsy Graseck with Morgan Stanley.

Hi. Just a couple of quick follow-ups, one, Jamie, on the topic of payments and competition. Facebook’s initiative is rebranding and seeking to create a global payments network. I am wondering does the OCC stable coin approval do anything for you? You already have JPM Coin for internal use. Is there any benefit to the OCC guidance with regard to competition coming from large tech players like that?

I don’t think it changes JPM Coin. We expect stable coin initiatives and digital currency developments, but as long as competition is safe and regulated, it’s fair. We’ll watch and adapt.

And Betsy, just to reiterate, it does not impact JPM Coin. JPM Coin is different; you should think about it as tokenizing deposits to make payments easier for clients.

Right. The follow-up was on slide 14 and the 'other' area moving up year-on-year, in part due to the $30 billion commitment to the Path Forward initiative. Jamie, can you describe the time frame for that $30 billion and where the money is going? How do you think about outcomes for that investment?

We believe inequality is a real problem. The $30 billion is a multi-year commitment focusing on affordable housing, expanding homeownership for underserved communities, supporting minority-owned businesses, small business lending, and workforce development. We’ve committed mortgage financing for underserved neighborhoods, funding for entrepreneurs of color, and branch and community investments. It’s a five-year commitment, includes hiring, capital, and programmatic work designed to create measurable outcomes and we will report progress.

Your next question comes from the line of Mike Mayo with Wells Fargo Securities.

Hi. Just following up more on the market expansion. In Commercial Banking, could you just drill down deeper on the international part of that expansion and what’s left to be done in U.S.?

For Commercial Banking, we’ve targeted major U.S. markets and are deepening coverage of middle market clients. Internationally, we’re adding bankers and products to cover subsidiaries and headquarters of companies we already serve. It’s more about depth and coverage than an entirely new footprint. The investment is focused and tied to client needs and typically starts as an expense that we expect to convert into revenue over time.

From an expense perspective, international work rides on existing CIB rails, so incremental expense is manageable.

Okay. And then just a follow-up on the fintech valuation question: fintech firms like PayPal, Stripe have high valuations relative to banks. How do you respond to the market saying the fintechs win and banks lose?

We’ve done a lot and will keep improving. Fintechs are formidable and often richly valued. But we have scale, regulatory capability, client trust, and a diverse set of products. We need to be quicker and more innovative, and we are investing heavily to do so. We have the resources and the talent to compete and win.

Your next question comes from the line of Gerard Cassidy with RBC Capital Markets.

Hi, Gerard.

Just one follow up. Can you share about servicing on the mortgage side and the impact of forbearance programs? Is the servicing economics positive or negative as a result?

When we give customers help and the programs bridge them to the other side, that’s positive for customers and ultimately beneficial. I don’t have a precise quantitative answer for the servicing economics here, but helping customers avoid default is better than having them default.

The cost of servicing a defaulted mortgage is substantially higher than normal servicing costs. Helping customers stay current avoids much higher costs down the road.

Okay. Thank you. I appreciate it.

Folks, thank you very much for spending time with us. We will speak to you all soon.

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