Earnings Call Transcript
JPMORGAN CHASE & CO (JPM)
Earnings Call Transcript - JPM Q4 2021
Operator, Operator
Good morning, ladies and gentlemen. Welcome to JPMorgan Chase’s Fourth Quarter and Full Year 2021 Earnings Call. This call is being recorded. Your lines will be muted for the duration of the call. We will now go live to the presentation. Please standby. At this time, I’d like to turn the call over to JPMorgan Chase’s Chairman and CEO, Jamie Dimon; and Chief Financial Officer, Jeremy Barnum. Mr. Barnum, please go ahead.
Jeremy Barnum, CFO
Thank you, operator. Good morning, everyone. The presentation is available on our website, and please refer to the disclaimer in the back. It’s slightly longer this quarter to cover both our fourth quarter and full year results, as well as spend some time talking about the outlook for next year. Starting with the fourth quarter on page 1, the Firm reported net income of $10.4 billion, EPS of $3.33 on revenue of $30.3 billion, and delivered an ROTCE of 19%. These results included a $1.8 billion net credit reserve release, which I’ll cover in more detail shortly. Adjusting for this, we delivered a 17% ROTCE this quarter. Touching on a few highlights, as we suggested last quarter, we have started to see a pickup in loan growth, 8% year-on-year and 3% quarter-on-quarter ex-PPP, with a significant portion of this growth coming from AWM and Markets. But we’re also seeing positive indicators in card, as well as increasing revolver utilization and C&I. It was an exceptionally strong quarter for Investment Banking, particularly M&A, as well as another good quarter in AWM. On page 2, we have some more detail on the fourth quarter. Revenue of $30.3 billion was up 1% year-on-year. Net interest income was up 3%, primarily driven by balance sheet growth, partially offset by lower CIB Markets NII, and NIR was down 1%, largely driven by normalization in CIB Markets and lower production revenue in home lending, mostly offset by higher IB fees on strong advisory. You’ll notice that we’ve added some memo lines to this page this quarter to show NII and NIR, excluding Markets, as well as the third line of standalone Markets total revenue, which as we said before, is more consistent with the way we run the Company. We’ll be keeping this format going forward and you’ll see later that this is how we will talk about the outlook. If you look at things on this basis, the drivers are the same, but the numbers are a little different. NII, excluding Markets, is up 4%; NIR, excluding Markets, is up 3%; and Markets is down 11% on normalization. Expenses of $17.9 billion were up $1.8 billion or 11%, largely on higher compensation and credit costs were a net benefit of $1.3 billion, reflecting reserve releases. Looking at the full year results on page 3, the Firm reported net income of $48.3 billion, EPS of $15.36, and record revenue of $125.3 billion. We delivered a return on tangible common equity of 23% or 18%, excluding the reserve releases. And then, onto reserves on page 4. We released $1.8 billion this quarter, reflecting a more balanced outlook due to the continued resilience in the macroeconomic environment. Our outlook remains constructive, but our reserve balances still account for various sources of uncertainty and potential downside as a result of the remaining abnormal features of the economic environment. On the balance sheet and capital on page 5, we ended the quarter with a CET1 ratio of 13%, up slightly, and reflecting nearly $5 billion of capital distributions to shareholders, including $1.9 billion of net repurchases. With that, let’s go to our businesses, starting with consumer and community banking on page 6. CCB reported net income of $4.2 billion, including reserves releases of $1.6 billion. Revenue of $12.3 billion was down 4% year-on-year and reflects lower production margins in home lending and higher acquisition costs in card, partially offset by higher asset management fees in consumer and business banking. Many of the key balance sheet drivers are in line with the prior quarter. Deposits were up 20% year-on-year and 4%, sequentially, and client investment assets were up 22% year-on-year, about evenly split between market performance and flows. Combined credit and debit spend was up 27% versus the fourth quarter of ‘19 with each quarter in 2021 showing sequential growth compared to 2019. Within that, travel and entertainment spend was up 13% versus 4Q ‘19, but we have seen some softening in recent weeks contemporaneously with the Omicron wave. Card outstandings were up 5% year-on-year, but remain down 8% versus 4Q ‘19. However, it’s promising to see that while revolving balances bottomed in May of 2021, since then, they’ve kept pace with 2019 growth rates. In home lending, loans were down 1% year-on-year, but up 1% quarter-on-quarter as prepayments have slowed. It was another strong quarter for originations, totaling $42.2 billion, up 30% year-on-year. In fact, it was the highest fourth quarter since 2012, driven by increases in both purchase and refi volumes. In auto, average loans were up 7% year-on-year and up 1% quarter-on-quarter. After several strong quarters, the lack of vehicle supply resulted in a decline in originations to $8.5 billion, down 23% year-on-year. So overall, loans ex-PPP were up 2% year-on-year and sequentially, driven by card and auto, and expenses of $7.8 billion were up 10% year-on-year on higher compensation, as well as continued investments in technology and marketing. Next, the CIB on page 7. CIB reported net income of $4.8 billion on revenue of $11.5 billion for the fourth quarter. And for the full year, net income was $21 billion on record revenue of $52 billion. Investment Banking revenue of $3.2 billion was up 28% versus the prior year and up 6% sequentially. IB fees were up 37% year-on-year, primarily driven by strong performance in advisory. We maintained our number one rank with a full year wallet share of 9.5%. In advisory, we were up 86% and it was the third consecutive all-time record quarter, benefiting from elevated M&A volumes that continued throughout 2021, specifically for midsized deals. Debt underwriting fees were up 14%, driven by an active leverage loan market, primarily linked to acquisition financing. And in equity underwriting, fees were up 12%, primarily driven by our strong performance in IPOs. Moving to Markets, total revenue was $5.3 billion, down 11% against a record fourth quarter last year. Compared to 2019, we were up 7%, driven by a strong performance in equities. Fixed income was down 16% year-on-year, reflecting a more difficult trading environment early in the quarter, especially in rates, as well as continued normalization from the favorable trading performance last year in currencies, emerging markets, credit and commodities. Equity markets were down 2% on $2 billion of revenue, as continued strength in Prime was more than offset by modest weakness in derivatives. For the full year, equities revenue was $10.5 billion, up 22% at an all-time record. It was a particularly strong year for both Investment Banking and Markets. And looking ahead, we do expect some modest normalization of the wallet in 2022. However, for purposes of the first quarter in Investment Banking, the overall pipeline remains quite robust. Payments revenue was $1.8 billion, up 26% year-on-year or up 7% excluding net gains on equity investments. The year-on-year growth was from higher fees and deposits, largely offset by deposit margin compression. Security services revenue of $1.1 billion was flat year-on-year. Expenses of $5.8 billion were up 18% year-on-year, predominantly due to higher compensation as well as volume-related and legal expenses. Credit costs were a net benefit of $126 million, driven by the reserve release I mentioned upfront. Moving to Commercial Banking on page 8. Commercial Banking reported net income of $1.3 billion and an ROE of 20%. Revenue of $2.6 billion was up 6% year-on-year on record Investment Banking revenue, driven by continued strength in M&A and acquisition-related financing. Expenses of $1.1 billion were up 11% year-on-year, largely due to investments and higher volume and revenue-related expenses. Deposits were up 8% sequentially on seasonality. Loans were down 1% year-on-year and up 2% sequentially, excluding PPP. C&I loans were up 4% ex-PPP, primarily driven by higher revolver utilization and originations in middle markets and increased short-term financing and corporate client banking. CRE loans were up 1% with higher new loan originations, offset by net payoff activity. Credit costs were a net benefit of $89 million, driven by reserve releases with net charge-offs of 2 basis points. And then, to complete our lines of business, AWM on page 9. Asset & Wealth Management reported net income of $1.1 billion with a pretax margin of 34%. Revenue of $4.5 billion was up 16% year-on-year, as higher management fees and growth in deposits and loans were partially offset by deposit margin compression. Expenses of $3 billion were up 9% year-on-year, predominantly driven by higher performance-related compensation and distribution fees. For the quarter, net long-term inflows were $34 billion and for the full year were positive across all channels, asset classes and regions, totaling a record of $164 billion. AUM of $3.1 trillion and overall client assets of $4.3 trillion, up 15% and 18% year-on-year, respectively, were driven by strong net inflows and higher market levels. And finally, loans were up 4% quarter-on-quarter with continued strength in custom lending, mortgages and securities-based lending while deposits were up 15% sequentially. Turning to corporate on page 10. Corporate reported a net loss of $1.1 billion. Revenue was a loss of $545 million, down $296 million year-on-year. NII was up $160 million, primarily on higher rates, mostly offset by continued deposit growth. NIR was down $456 million, primarily due to lower net gains on legacy equity investments. Expenses of $251 million were down $110 million year-on-year. So with that, as we close the books on 2021, it’s important to take a step back and look at the performance over the last few years through the volatility of the COVID period, and then pivot to discussing the 2022 and medium-term outlook. So, turning to page 11, what stands out is the stability of both revenues and returns through a very volatile period, especially when you strip out the reserve builds and subsequent releases in 2020 and 2021. If you look at the revenue drivers on the bottom left-hand side of the page, you see overall revenue growth with some significant diversification benefits. NII, ex-Markets, was down nearly 20% on the headwinds of lower rates and card revolve that we’ve discussed throughout the year. This was partially offset by significant NIR growth ex-Markets, largely from higher IB fees and AWM management and performance fees. And we also saw strength across products and regions in CIB Markets, as the extraordinary market environment in 2020 did not normalize as much as we expected in 2021. So, when you look across the Company, we saw consistent modest revenue growth, as well as good performance in the areas that we control, notably, staying in front of our clients to serve them well and managing our risks effectively, resulting in quite stable returns, once again proving the power of the JPMorgan Chase platform. So, turning to the next page. The strong revenue performance and consistent returns have further bolstered our confidence in forging ahead with an investment strategy designed to ensure that we’re prepared for the long-term. On the left-hand side of the page, you can see the expense drivers from 2019 to 2021. The first bar is structural. And while the growth of 2% is modest over the two-year period, that includes some COVID-related effects that we would see as temporary including, for example, lower T&E spend and elevated employee attrition. We do expect some catch-up in those effects as we look forward. The middle bar is $3.4 billion of growth in volume and revenue-related expenses. Some significant portion of that is driven by increases in incentive compensation, primarily from Investment Banking, Markets and Asset & Wealth Management, the major areas where we have seen exceptionally strong results and where changes in compensation are more closely linked to changes in performance. And remember, we’ve seen a lot of market appreciation and strong flows in AWM and CCB. So, don’t assume all of this is CIB as you look forward because there are some versions of the world where the markets in fee wallet goes one way and AUM goes the opposite way. And then, this bar also includes volume-related non-comp expenses such as brokerage and distribution fees, some of which are true expenses and some of which are bottom line neutral because they’re offset with revenue gross-ups. Then, the last bar of $1.7 billion, as previewed with you this time last year, is a result of our investment agenda, which we’ve been executing largely according to our plans and consistent with our longstanding priorities. You can see the breakdown of the total investment spend on the right-hand side of the page, $9.6 billion growing to $11.3 billion across the categories that we’ve often discussed. We’re continuing to broaden our footprint and expand our distribution network. Then marketing, where the significant increase in spend as part of the reopening in the second half of last year resulted in a full year spend comparable to 2019. And tech, which we’ve broadened to include tech adjacent spend, reflecting our recognition, the tech means more than just software development and encompasses data and analytics, AI as well as the physical aspects of modernization such as data centers. And what’s really powerful to note here is our ability to make these investments, which are quite significant in dollar terms and are designed to secure our future while still delivering excellent current returns. So, over the next few pages, let’s double click into some of these investment areas to see what we’re doing, starting with examples of marketing and distribution on page 13. We’ve expanded our reach across the U.S. and are thrilled to be the first bank in all contiguous 48 states, an important milestone in our branch market expansion plans. We also continue to expand internationally, including 13 international markets as part of our Commercial Bank expansion, China in both our CIB and AWM businesses, and in the UK with Chase UK, where we’ve seen exciting progress since we launched in September, although we expect this to be a multiyear journey before having a measurable impact on the firm overall. We continue to hire bankers and advisors in investment banking, private banking and wealth management, really across all of the wholesale and consumer footprint where we believe we have opportunities to better penetrate geographies and sectors to continue to grow share. And as I just said, the point of our investment strategy is to secure the future of the Company. So, we’re not making short-term claims about share outcome causality. But as you can see at the bottom of the page, our market shares are robust and growing broadly across the Company. Turning to page 14. In addition to all of our distribution-related investments, a critical foundational component of our strategy is technology where we spend over $12 billion annually with about half of that being investments or as we sometimes call it, change the bank spend. It’s important to understand what’s in the investment category. About half of that is foundational and mandatory, which includes regulatory-related investments, modernization and the retirement of technical debt in addition to other key strategic initiatives to help us face the future. On the left-hand side, you can see some more detail around this. Modernization, which includes migrations to the cloud as well as upgrading legacy infrastructure and architecture, data strategy that enables us to extract the value that exists in our proprietary data set by cleaning it and staging it in the right ways and then deploying modern techniques against it, attracting and acquiring top talent with modern skills, and a product operating model, which is obviously a popular buzzword these days. But if you look through all that, it reflects the simple reality that the best products get delivered when developers and business owners are working together iteratively with end-to-end ownership. Underpinning all of this is our continued emphasis on cybersecurity to protect the Firm and our clients and customers as well as maintaining a sound control environment. Moving to the right hand side. The other half of the investment spend is to drive innovation across our businesses and with our client-facing products. We believe it’s critical to identify and resolve customer pain points and improve the user experience. We’re attacking the problem with a combination of building, partnering and buying. And so, a few examples of that. On the retail side, we’ve been able to digitalize existing product offerings with applications like Chase MyHome and launch a cloud native digital bank with our recent Chase UK launch. On the wholesale side, we continue to innovate on our Execute trading platform, commercialized blockchain through Onyx and are building out real-time payments capabilities. In addition, our modernization allows us to more efficiently partner with or acquire more digitally centered companies. You can see several examples of this on the page. So, taken together, our strategy and investments are critical to ensuring that we can compete with the most innovative players out there, whether we’re the ones pushing the envelope of innovation or responding quickly to the creativity of our competitors but doing so at scale. With that, let’s talk about the outlook and the year ahead, starting on page 15. As you’ll remember from Daniel’s comments in December, the 17% that we have talked about as a medium-term ROTCE target is not realistic for 2022. We do expect to see some tailwinds to NII, including the benefit of the latest implied and the expectation that card revolve rates will increase. But the headwinds likely exceed the tailwinds as capital markets normalize off an elevated wallet, and we continue to make additional investments as well as the impact of inflationary pressures. However, despite these potential challenges for the near-term outlook, we do continue to believe in 17% ROTCE as our central case for the medium term as rates continue to move higher and we realized business growth, driven by our investments. So, let us try to give you more detail around forward-looking drivers that could be headwinds or tailwinds. So first, the rate curve. Our central case does not require a return to a 2.5% Fed funds target rate as the current forward curve only prices in 625 basis-point hikes over the next three years. Assuming we realize the forward curve, from there, we see the outcomes as being relatively symmetric with plus or minus 175 basis points of ROTCE impact as a reasonable range relative to our central case. Of course, there are obviously any number of rate paths to get there, which could produce different outcomes over the near term. In this illustration, the downside assumes that rates stay relatively constant to current spot rates whereas upside would be driven by a combination of a steeper yield curve, more hikes together with a more favorable deposit reprice experience. And of course, what we are evaluating here is the impact of rates in isolation on NII, but for the performance of the Company as a whole, credit matters a lot. The reason why rates are higher will have an impact on that. In markets and banking, we feel good about the share we’ve taken, and there are reasons why the beginning of a rate hiking cycle could be quite healthy for fixed income revenues in particular, at least in the sense that it might provide a partial offset to what we would otherwise expect in terms of post-COVID revenue normalization. In our central case, markets and banking normalized somewhat in 2022 relative to their respective record years in 2020 and 2021, and resume modest growth thereafter. The downside case assumes a return to 2019 trend line levels with sub-GDP growth rates, whereas the upside case assumes continued growth from current elevated levels. As we’ve been discussing in consumer, the big surprise as we emerge from the worst moment of the pandemic was the lower level of card revolve, even as spend has started to return. In our central case, we assume healthy sales growth from the back of continued economic recovery and strong account acquisitions. That, combined with relatively constant revolve rates, generates a strong recovery in revolving balances. But there are those who worry about a permanent structural shift in consumer behavior, which could be a source of downside. In that scenario, revolving balances could stay depressed relative to the long-term pre-pandemic averages, resulting in approximately 50 basis points of downside relative to our central case. Of course, there could be an upside case where revolving balances recover much faster but we believe the risks here are more likely to be skewed to the downside. And then, let’s touch on inflation for a second, which is obviously increasingly relevant. On balance, modest inflation that leads to higher rates is good for us. But under some scenarios, elevated inflationary pressures on expenses could more than offset the rates benefit, which could represent around 75 basis points of downside. While it’s not on the page, another key driver is capital, where even though we remain hopeful, our central case assumes no recalibration of the rules and that we will operate at a higher CET1, reflecting that we finished the year in the 4.5% GSIB bucket which equates to a 1% increase from GSIB in the central case. Although as a reminder, that does not become binding until 2024. This is a good opportunity to point out that QE deposit growth and growth of the overall financial system proxy by GDP growth of the factors in the original 2015 rule release combined represent two full GSIB buckets. So, in the absence of those, we would still be in the 3.5% bucket. With that in mind, any recalibration could be a tailwind. Each 1% change in the CET1 level is worth about 150 basis points of ROTCE. To be clear, for simplicity, we’ve assumed a normal credit environment in the analysis on the page. So, when we take a step back, 17% remains our central case in the medium term. But over the next one to two years, we expect to earn modestly below that target. In light of all that, let’s talk about near-term guidance on page 16. We expect NII, excluding Markets, to be roughly $50 billion in 2022, up approximately $5.5 billion from 2021. As I mentioned upfront, this is a change relative to how we’ve previously guided as we feel that the ups and downs of Markets’ NII can be a distraction when the vast majority of that variation is likely to be bottom line neutral. Looking at the key drivers of that for 2022, there are a few major factors. Rates, with the market implied suggesting approximately three hikes later this year and the reason steepening of the yield curve, we would expect to see about $2.5 billion more NII from that effect. You can see at the bottom right, we’ve shown you the third quarter earnings at risk and an estimate of what we would expect to disclose in the 10-K, reflecting the year-end rate curve and changes in the portfolio composition. As we note in our quarterly filings, there are lots of reasons to be careful in trying to use EAR to predict NII changes under real-world conditions. But at a high level, if you look at the numbers on the bottom right and what’s happening to the yield curve recently, you should find the $2.5 billion increase relatively intuitive. Then, balance sheet growth and mix, where we are expecting higher spend and new originations to drive revolving balances back to 2019 levels, and also benefiting from securities deployment towards the end of 2021 and into 2022. Partially offsetting both of those factors is the roll-off of PPP. So, while we do expect NII to increase year-on-year, depending on the path of rates, it may take a couple of years to return to the full NII generating capacity of the Company. Turning to page 17. As we said at the outset of this section, we are in for a couple of years of sub-target returns. Despite this, we are going to continue to invest and we’re not going to let temporary headwinds distract us from critical strategic ambitions. And so, looking at adjusted expenses, we expect roughly $77 billion in 2022, an increase of about $6 billion year-on-year or 8%. Before we go into the breakdown, it’s worth noting, while the year-on-year increase is eye-catching, a meaningful portion of it is actually the annualization of post reopening trends from the second half of 2021 across various categories. So starting with the first bucket on the page, which is the structural expense increase. As I alluded to earlier, we are seeing some catch-up this year, both from the impact of inflation and our compensation expenses as well as higher non-comp expenses with the resumption of T&E. Then, volume and revenue-related expenses. Remember that this is both comp and non-comp. From a comp perspective, to the extent we are assuming some normalization of capital markets revenues, there should be a tailwind here. But keep in mind a couple of points. The normalization assumption for Markets and IB fees at this point is pretty modest. Our assumption for AUM is for modest increases. At the same time, we have the impact of volume growth on non-comp, both in wholesale and in consumer, which is offset by lower auto lease depreciation. Most importantly, we are adding another $3.5 billion of investments, which I would note includes the run rate impact of our acquisitions as well as some of the run rate effects that I just mentioned and reflects similar themes to the ones I discussed earlier. As I wrap up, it’s another good moment to stop and note how privileged we are to have the financial strength and the earnings generating capacity to absorb these inflationary pressures while also making critical investments to secure the future of the Company. So, in closing, on page 18, we’re happy with what we’ve been able to achieve over the last two years. Not only the business results, some of which are highlighted here on the page, but also continuing to serve our customers, clients and communities, and importantly, executing on our strategic priorities. As we look ahead, we will continue to invest and innovate to build and strengthen this franchise for the long term. While there may be headwinds in the near term as we continue to work through the consequences of the pandemic, we’ve never felt better about the Company and our position in this very competitive dynamic landscape. So, with that, operator, please open the line for Q&A.
Operator, Operator
Our first question is from Erika Najarian at UBS. Please go ahead.
Erika Najarian, Analyst
Hi. Good morning. Jeremy, my first question is for you, and it’s on page 16. It’s a two-part question on this guidance. The first is, could you help us size the timing and magnitude of deposit beta that you presume in this $50 billion number as well as the size of securities deployment? The second part to that question is, clearly, we’re missing that white box, right, in terms of CIB markets contribution. If you could give us sort of rails to think about CIB markets in light of your comments about more modest normalization versus the idea that this business is naturally liability sensitive?
Jeremy Barnum, CFO
Right. Okay. So, three questions in there. Let me take them one at a time. So beta, at the end of the day, the reprice experience is going to be a function of the competitive environment. For the purposes of working through the guidance, I can tell you that we’re assuming that this hiking cycle is going to be generally similar to the prior hiking cycle, all else equal. The environment is a little bit different in some important respects. I think the system this time around is flushed with deposits, is flushed with liquidity in a way that it wasn’t before. So, that could at the margin make the reprice a little bit slower. On the other hand, the competitive environment is different, especially with some of the neo bank entrants and that could go in the other direction. So, it will be what it will be. For the purposes of the guidance, we’re assuming a reprice experience that’s similar to what we experienced in the prior cycle. In terms of deployment, obviously, deployment is going to be a situational decision. If you’re looking at the $4 billion bar on page 16, securities deployment is a modest contributor to that $4 billion number. The bulk of it is the loan growth narrative, particularly in card. In terms of Markets NII, the whole point of not guiding explicitly to Markets NII is to avoid getting distracted by the noise there, which can come from a lot of really kind of relevant places, like interest rate hikes in Brazil and cash versus future positions, which is the example I’d like to give. But big picture, if you need something for your model or whatever, there’s a couple of things we could suggest. If you look at the supplement, we’ve actually been disclosing the Markets NII number for some time in the supplement. You actually have a pretty decent time series of that number over time. If you address that against the Fed funds rate, you’ll actually see that there’s a pretty clear negative correlation there. You can draw some conclusions from that.
Erika Najarian, Analyst
Very clear. Thank you. My second compound question is on capital. If you could provide us with an update, I know that January 1st is the adoption date for SA-CCR. Could you give us an estimate on the impact of CET1? Also, just to clarify, does the 17% medium-term ROTCE take into account that your GSIB surcharge is 4.5%?
Jeremy Barnum, CFO
Yes. So, let me do the second one first. So in short, yes. As I said in the script, we are not assuming any recalibration in that 17% target. That does mean 4.5% GSIB in the equity component of that number. In terms of SA-CCR, the impact of SA-CCR adoption was about $40 million of standardized RWA. So, I think if you do the math, that’s like 10 basis points of CET1.
Operator, Operator
Our next question is coming from John McDonald from Autonomous Research. Please proceed.
John McDonald, Analyst
Hey Jeremy, I want to follow up on that. Maybe a broader discussion on how you’re managing the capital constraints, the SLR and the rising GSIB. What does it mean for balancing share buybacks, which obviously reduced this quarter, preferred issuance and other levers that you have?
Jeremy Barnum, CFO
Yes. As you know, in terms of share buybacks, that’s at the bottom of our capital stack. Given the strong loan growth and other investment opportunities, including potential M&A, those will take precedence over buybacks. I don't want to comment specifically on our buyback plans for next year, as they are quite flexible depending on earnings generation and capital building. However, you can infer from our growth outlook and the loan growth, along with some investments we're making, that we prefer using capital in this way rather than for buybacks.
John McDonald, Analyst
Okay. And then, as the follow-up, maybe compound follow-up. The new CET1 target or where you expect to kind of run this year, if you could clarify that. And also, any color on the modest normalization of the FICC and equities wallets that you could flush out?
Jeremy Barnum, CFO
Yes. So, in terms of the target, I mean, I said previously that 12% was not off the table. That remains true. Depending on the outcome of the rule side, the Basel III endgame, and all the various components, you can see a world where 12% remains the minimum. As you can see, and as I said in response to Erika a second ago, the 17% target assumes something closer to 13% as a function of the expected increases in GSIB and some other factors. We’re going to operate in that type of range throughout the year with obviously the flexibility that we have. Then, sorry, you also asked about normalization of markets and IB fees. I mean, I would say, if you’d asked me in the middle of the year, we were talking a little bit about thinking that a reversion to 2019 run rate was a thing that could happen in theory. The way we feel right now, our central case is obviously that we will see some normalization from exceptionally strong performance, both in IB fees and in Markets. I think we’re expecting that normalization to be a little bit less, like we’re near all the way down to the 2019 levels, partially because the banking pipeline is really very robust. We feel good about the kind of organic growth in equities and some of the share gains there. In fixed income, we’ve already seen a decent amount of normalization there actually. As the monetary policy environment evolves next year, that could create some tailwinds for that business.
Operator, Operator
Next up, we have Glenn Schorr from Evercore ISI. Please go ahead.
Glenn Schorr, Analyst
Hi, thank you very much. I wonder if I could ask a little follow-up on the expense side. Slide 17 breaks a lot out. First, I’m curious, if I overgeneralize and say, 40% use called structural comp normalization, a 60% investment. Thank you, I just saw a further breakout in the bottom of the slide. But the question I have is how much of that 60%, the higher volume, the investments, have those investments made?. In other words, you made 11 either M&A deals or investments over the last 15 months. How much of that is related to that coming through the P&L, or straight-up new investments for ‘22 entering for all those items that you listed below?
Jeremy Barnum, CFO
Right. Okay. I think I get your question, Glenn. So, number one, to the extent that we’ve done some M&A over the last 15 months, as you allude to, and that that has introduced some expenses into the run rate, the run rate impact of that is in the $3.5 billion. It’s a relatively modest contribution. On the top of my head, I want to say it’s probably like $300 million or something like that. So, that’s one point. The other point is that there are different types of investments here. If you look at, for example, the change in the marketing expense and the marketing investments that come through marketing expense in card, a lot of the decisioning of that actually happened as part of the reopening in the middle of the year. So, that’s actually already in the run rate. Whereas other aspects of the investment agenda are obviously things that we’re executing now, expanding in places, hiring people, hiring technologists to do things that we need to do. So hopefully that answers your question.
Glenn Schorr, Analyst
And maybe if I could just ask a very general question, I think people get normalizing capital markets and a higher investment spend when it adds up to falling short of the 17% over time target. The simple question I have is the fact that you’ve mentioned multiyear shortfall, is that a function of timing of NII going full run rate with the timing of capital markets short off and the high denominator, as you just answered with John’s question?
Jeremy Barnum, CFO
The simple answer is yes. We’re sort of saying that as the environment continues to normalize in a variety of ways, so that includes policy rate normalization, rate curve formalization as well as run rate normalization and Markets revenues with the sort of some background expectation of growth in our Markets and Investment Banking revenues with the background expectation of growth, and when all that plays out and is finished playing out, we believe we should be back to 17%, all else equal.
Jamie Dimon, CEO
Glenn, I would just like to add, we don’t really know about 2023, and I’d be very cautious in that. Plus, I expect more interest rates increases in the implied curve. And obviously, the world is very competitive. I also want to point out that a 17% return on tangible equity, if you can get that to the rest of our lives would be exceptional.
Operator, Operator
Next question from Ken Usdin from Jefferies.
Ken Usdin, Analyst
I wanted to ask you just a couple of more questions on loans. You mentioned that you’re starting to see some better activity. I wanted to just ask if you can kind of just flesh out what you’re seeing across corporate lending, commercial lending, noticing that the wholesale-related commitments were actually down 3% sequentially. So, can you kind of just talk us through what clients are saying and doing? And just how strong can that rebound on the corporate and commercial side could we see as we go forward?
Jeremy Barnum, CFO
Sure. Yes. So, in terms of C&I loan growth, as I said in the script, we are seeing an uptick in revolver utilization rates, especially in the commercial bank. It remains sort of skewed to the smaller clients. But we are starting to see an uptick in that actually even in the bigger clients. That gets an encouraging sign. One of the things I’ve heard from the folks who run those businesses is that one driver of that is CEOs and management teams who’ve been burned by low inventory levels as a result of the supply chain problems, wanting to run higher inventories, and that is maybe driving higher utilization there. As a result, while it would, I guess, theoretically be a relatively permanent increase in utilization is not a thing that you can sort of project forward in terms of compounding the growth. We’re also hearing quite a bit of confidence in the C-suites and all else equal, that should be positive for C&I loan growth. The levels there are modest still in a world where capital markets have been exceptionally receptive to investment-grade issuance, in particular, and more recently, the high-yield issuance throughout the pandemic period. People are well-funded from capital markets issuance.
Ken Usdin, Analyst
Okay. Second question is just on fees. There are a couple of zigs and zags in mortgage banking, security servicing, which were both down a little bit more than expected. And card did get a little bit better. Can you just kind of give us a little bit of color on the drivers of each of those, please? Thank you.
Jeremy Barnum, CFO
Yes, certainly. There’s a lot to cover. Let me start with mortgage and cards. In the mortgage segment, if you attempt to calculate the margins by using the production revenue, you may notice a significant drop in margin. This can be attributed to a few factors. One reason is that margins were slightly higher in the previous quarter due to the timing of adjustments related to loan-specific pricing. Additionally, despite an overall strong quarter for originations and funded loans, we began experiencing higher rates towards the end of the quarter, which led to a decrease in saleable new lock volume. This also played a part. However, the overall mortgage environment remains healthy. Although we expect a downturn next year due to higher rates, we are still forecasting a robust $3 trillion mortgage market, which is strong by historical measures. In card, I imagine that you’re looking at the card income line where we had a significant drop last quarter. This quarter, the number is also sort of relatively depressed relative to what we had two quarters ago when it was quite high. For card income, we had a sort of one-off item last quarter, depressing the number. This quarter, we have another sort of one-offish type item, which is the impact of the Southwest co-brand renegotiation, which is public. That’s contributing to the card income line, the revenue rate a little bit. It’s important to note that in the background of all this is the impact of the customer acquisition amortization comfort revenue expense, which, as you know, amortizes over 12 months. As mentioned earlier, as part of the big sort of increase in customer engagement, part of the reopening in the middle of the year, we ramped that up quite significantly, 100,000 point offers in the market and stuff like that. That’s coming through the numbers. Looking at the sort of full year revenue rate for card of around 10%, we actually see that as a reasonable central case for next year with the sort of elevated marketing and customer acquisition amortization being offset, obviously, by expected growth in NII with the revolve narrative that we’ve laid out.
Operator, Operator
So, that question is from Jim Mitchell coming from Seaport Research.
Jim Mitchell, Analyst
You guys are doubling the investment spend. So clearly seeing success in the prior efforts. Could you just give us a little bit big picture discussion on what you’re seeing from a return on investment standpoint and what timeline? Because I think you alluded to 2023 still being a little bit subpar in return. Does that mean the payback is a little longer and you still expect significant growth in investment spend in ‘23?
Jeremy Barnum, CFO
Yes, sure. I mean, at some level, the question that you’re asking is this perennial question of how can we be sure that the investments that we’re making are paying back and on what timeline and how do we measure that? It’s interesting. We were just talking about card marketing. I think of that as a continuum. You have a continuum of investments that start with card marketing where every dollar that we put into card marketing investment as part of a very sophisticated, extremely data-driven, highly measurable set of decision making to ensure that all of those are accretive and we have sort of measurable outcomes in the short term. At the other end of the continuum is tech modernization type stuff, which is a big part of the theme right now. Those things are things that we obviously need to do them. If we don’t do them, we’ll be clunky and inefficient and hamstrung in the future when we’re trying to compete. It’s impossible to prove in some narrow financial sense that there is a tangible return payback from that, but we know that they’re absolutely mandatory.
Jamie Dimon, CEO
Some are very basic. Opening 400 branches, $800 million a year, obviously, the payback comes over time, adding thousands of salespeople kind of know pretty much what the payback is, but obviously, it comes over time. It’s a whole mix. Just think about it as expenses you should expect to go up a little bit in 2023.
Jim Mitchell, Analyst
That's helpful. I have a follow-up regarding the net interest income. I believe the futures markets are now forecasting four rate hikes, while your assumptions include three. If we do see four hikes starting in March, would this significantly change your net interest income outlook for this year in your models?
Jeremy Barnum, CFO
Yes. If you look at the bottom left-hand side of page 16, footnote 3, an extremely small print, you will note that the implied curve that we use is from January 5th. You can take that curve and whatever the current curve is and use the table on the bottom right and add a long list of caveats that I won’t give you and draw your own conclusions. But it should be a modest increase, modest additional tailwind.
Operator, Operator
We have a question from Betsy Graseck from Morgan Stanley.
Betsy Graseck, Analyst
Okay. So, a couple of questions. First, on the NII outlook. Could you give us a sense as to what’s embedded in that with regard to your thoughts on how balance sheet shrinkage at the Fed, right, the QT is going to impact the liquidity pool? How much of that liquidity pool you currently are assuming is going to get redeployed into more duration in your forward look?
Jeremy Barnum, CFO
Yes, sure. I mean, I forget exactly what the market is assuming about the start of QT at this point, QT2 as they’re now calling it. From us, I look closely, there was expected to be a pretty long lag between the end of the hiking cycle and the beginning of QT2. Maybe people are now starting to accelerate that. In any case, the important point is that as a result of the acceleration of tapering, the amount of balance sheet growth is ending pretty quickly. The impact on system-wide deposit growth should be quite modest this year. Our assumptions are consistent with that. In other words, we’re not assuming lots of deposit growth next year because ultimately that’s going to be primarily a function of the Fed balance sheet size. We are still assuming modest growth rather than reduction as a function of QT.
Betsy Graseck, Analyst
Okay. Thanks. And then, my second question is just on the investments, the $3.5 billion that you’ve got incremental here. I assume that this is built up, bottoms off from business unit leaders’ requests to do everything that you mentioned in the call. What percentage roughly like just got numbers, but what percentage are you giving them this year? In other words, do they ask for 7, you’re giving them 3.5 and we should expect another uptick materially in 2023?
Jamie Dimon, CEO
We do not sit at the table and tell people you can only do X. We sit at the table and ask people what do you want to do? Think of it as 100% within our capability because some things you just simply can’t do. You can’t attack 14 funds at the same time or something like that. We want to make those kinds of investments. Each one goes through a rigorous process as necessary. Some of them are table stakes. I do remember sitting around the table one day and people talking about digital account opening and do NPV. I was like just don’t do an NPV. Just get it done. That’s just serving your client properly. Like I said, a lot of this stuff is adding products and services and countries for the rest of our lives, okay? So, we are there for the long run.
Betsy Graseck, Analyst
But the step function we observe this year indicates that, considering the level of competition and the effects of the current situation, we might experience this kind of step function again.
Jamie Dimon, CEO
It’s possible. But if it happens, it will be for a good reason. And I read about the competition, the global competition, the nonbank competition, direct fiber lending competition, there’s Jane Street competition, the fintech competition, there’s PayPal competition, direct competition, it’s a lot of competition, and we intend to win. Sometimes you guys spend a few bucks.
Betsy Graseck, Analyst
All right. I got it. Thanks.
Jamie Dimon, CEO
I also want to emphasize, too, embedded upon that, as we’ve always said, we’re going to want to be very, very competitive and pay. There’s a $1 billion in merit increase. There’s a lot more compensation for our top bankers and traders and managers who actually say, by the way, did an extraordinary job in the last couple of years delivering this stuff. We will be competitive and pay. That squeezes margin a little bit for shareholders, so be it.
Operator, Operator
Next, we have Steve Chubak from Wolfe Research.
Steve Chubak, Analyst
I want to start off with a question on capital. Carlos highlighted in his one-song speech, the potential for Basel IV implementation, increasing capital requirements as much as 20% for select banks. While we haven’t seen a formal proposal from the Fed, I was just hoping you could provide just some preliminary thoughts how you’re handicapping the risk of higher RWA inflation ahead of Basel IV adoption? To what extent is that contemplated in the updated ROTCE guidance?
Jeremy Barnum, CFO
Yes. So Steve, this is fine. It’s a perfectly reasonable question. When you look at the current state of the so-called Basel III endgame or Basel IV proposals, and you look at the RWA components of them in isolation, you’ve got the change in the credit conversion factors, which all else equal is a tailwind. You’ve got the fundamental review of the trading book, which is quite complicated and it’s going to depend institution by institution, but it’s potentially for some folks a headwind. Then, you’ve got the introduction of operational risk capital into standardized RWA. If you look at sort of central case estimates of all those things in a simple way, you will conclude that there’s a bunch of RWA inflation. But, a couple of things. First, there’s all things play in the context of the global regulatory community or at least in the U.S. saying that the system has enough capital. It doesn’t actually need more capital. The point of all this is that there are more levers and tools here than just the overall RWA inflation. In the way we see the world, we don’t expect the Basel III endgame in and of itself to increase the dollars of capital that we need to carry as a company.
Jamie Dimon, CEO
We will very aggressively manage those things when we know the actual numbers, like very aggressively manage them.
Steve Chubak, Analyst
Just for my follow-up here, just for my follow-up on card payment normalization. How are you thinking about the trajectory for card payment rates? Just maybe to speak to your confidence level that we see card payment rates return to pre-pandemic levels, just given the emerging threats from BNPL that you cited and still elevated personal savings rates?
Jeremy Barnum, CFO
Yes, sure. I still, to be honest, get a little bit confused between payment rates and revolve rates and all these various ratios. But I think it’s a little bit simpler. If you just take a step back, you look at the revolve rate and you look at the overall level of revolving balances and what we sort of expect for that. So, there are a few things to note. The revolve rate having dropped quite a bit has more or less stabilized. There’s a little bit of a blip in the fourth quarter as a function of holiday spend and maybe some Omicron stuff. But broadly, it’s stabilized. In the meantime, the growth in overall Card loans has now, for several quarters in a row, produced modest growth in revolving card balances. Our central case for next year assumes that that trend stays in place. We’re not assuming some sort of aggressive return of the revolving rate to the pre-pandemic levels. We’re assuming that it stabilizes and that overall card loan growth contributes its fair share to revolving loan growth. The kind of central case that we put on the page for the balance sheet contribution to NII growth in 2022 has, very roughly speaking, revolving balances getting back to the pre-pandemic levels by the end of 2022, roughly.
Operator, Operator
Next, we have Matt O’Connor from Deutsche Bank.
Matt O’Connor, Analyst
Good morning. As we think about the 17% medium-term target, can you help frame what you think or what’s being assumed on the efficiency ratio, and then maybe on credit costs as well, please?
Jeremy Barnum, CFO
Yes, sure. In terms of credit cost, as I said, we’re assuming a roughly normal credit environment at that point. That would mean card charge-off rates back into the sort of low to mid-3s type of thing. As we said, pre-pandemic, we were assuming we would get to, especially as we underwrite some slightly higher loss vintages over time. Importantly, yes, exactly. I’d just broadly describe, and consistently with the way we’re describing it, which is kind of medium-term guidance in a normalized environment that the charge-off environment should, in turn, be normal. In terms of the overhead ratio a little bit, so personally, I kind of don’t love that measure. I think it’s more of an output than an input. It’s driven by revenues, not expenses. More often than not, in the short term, the revenue number that’s swinging is a function of the rate curve. The overhead ratio just becomes a proxy for the Fed funds rate, which makes it not a great management tool for the company. Having said that, in the assumptions that we’re using to build up that 17% rate, we do get back to something like a 55% overhead ratio. But as Jamie said before, if that number has to go up to deliver the right returns in the long term, it will.
Matt O’Connor, Analyst
Okay. Then obviously, the math implies to get back to 55%, you have kind of outside operating leverage for a few years, right? I think the efficiency ratio goes the wrong way again in ‘22 for the couple of years of pretty big operating leverage, right?
Jamie Dimon, CEO
You’ve got to do your own models, okay?
Jeremy Barnum, CFO
In a world where there are inflationary pressures, there are a lot of post-pandemic effects in the numbers, and we have some critical investments to make. The notion of operating leverage at the level of the Company’s overall numbers for me becomes just not terribly meaningful. I’m not criticizing your question. I understand what you’re asking, but it’s kind of another way you think about it.
Matt O’Connor, Analyst
Okay. I was just curious, Jamie, if you still think we will grow more than expected. Obviously, expectations have risen quite a bit. I’m just wondering what is influencing that opinion.
Jamie Dimon, CEO
First, we prepare for all eventualities here. We’re not kind of guessing at one. The consumer is very strong. Despite all the issues surrounding Omicron and supply chains, 2021 was one of the best growth years ever. 2022 looks like it will either be 3.5% or 4%, which is pretty good. The consumer is $2 trillion more in their balance sheet; their home prices are up, asset prices are up, jobs are plentiful, and wages are going up, which is good for them. Consumer spending is 25% more than they spent in pre-COVID. Businesses are in very good shape with cash, capability, and confidence levels are high. What they are seeing is a rise in order books for more homes and improvements, which represents demand. We have a shortage of homes in America. The conditions are favorable for growth, though inflation presents a downside. There’s a strong possibility that growth could exceed 4%. The macroeconomic environment and the demand for capital are likely to influence loan rates.
Matt O’Connor, Analyst
Can I just sneak in, based on all that, I was thinking, like the expense pressure or increase that we’re seeing at JPMorgan or expect to see in ‘22. Do you think this is indicative of the broader market as you talk to leaders outside of banks and they see the pipeline of volumes. Do you think there’s going to be material surprises on expenses for the broader market?
Jamie Dimon, CEO
Yes, I would expect that because almost every CEO is talking about wages and certain inflation and stuff like that. However, I don’t want to be complaining about wages. Wages going up is a good thing. Businesses must deal with price changes. If commodity prices go up, wages go up, and that’s how it’s done. Our job is to serve clients as best we can despite these factors.
Operator, Operator
Next, we have a question from Ebrahim Poonawala from Bank of America.
Ebrahim Poonawala, Analyst
Good morning. Just two very quick follow-ups. One, Jeremy, in terms of capital deployment. Just talk to us about inorganic growth. Is there any likelihood that you look at any larger M&A transactions, use your currency at any point this year? Should we see a slowdown or a let up in the pace of inorganic fintech investments that you’ve been on over the last year?
Jamie Dimon, CEO
So, the large transactions like over a billion are unlikely. But we always look. We’re looking all over the place for things that fit in. The pace of fintech investors, stuff like that, that won’t change at all.
Jeremy Barnum, CFO
Our version of that, which is consistent with Jamie’s, is that we continue to be interested in looking at M&A, and we’re doing that. As mentioned, very large deals aren’t realistic. The fintech investment part is definitely part of the stuff that we’re looking at when we look at deals.
Ebrahim Poonawala, Analyst
That’s helpful. I want to follow up on something you mentioned, Jamie. You noted that the exit of traditional banks has created opportunities for fintech companies over the past few years. Can you share your thoughts on how these investments will impact JPM in two or three years, especially in terms of competing with big tech and fintech directly?
Jamie Dimon, CEO
I think we’re in a great position. It’s a battle and competition is tough. Some of these competitors do a very good job. However, we have the capability, economies of scale, and we’re not going to hamstring ourselves to meet an overhead target. We have strengths and we intend to win against the competition. If we do a good job on the consumer front, we will retain our customers and gain market share.
Operator, Operator
Next, we have Mike Mayo from Wells Fargo Securities.
Mike Mayo, Analyst
Hi, Jamie, I hear that you’re ready to do an LBO on JPMorgan.
Jamie Dimon, CEO
Yes. I think you’d help me raise the equity capital.
Mike Mayo, Analyst
It’s a little frustrating this call because the guidance you’ve given has given all the bad news without any targets. You’re saying we have to wait two years for the 17% ROTCE despite the booming economy. You’re guiding for the second year in a row of negative operating leverage.
Jamie Dimon, CEO
Michael, I feel your pain and frustration. It’s very possible in 2023, we’ll have a 17% ROTCE. It depends on how we deploy our capital. It depends on fixed income markets. It depends on a bunch of stuff like that. But the 400 branches that we’re building, those things will get to contribution profitability just like we expect. The thousand bankers we’re adding in private banking and Chase Wealth Management, we expect they will contribute as well, but it takes a couple of years.
Mike Mayo, Analyst
I was just looking for what you expect from investments in terms of market share gains and revenues. Can you put some more meat on the bone here? At $5 billion of investment spent, it worked.
Jamie Dimon, CEO
We’re confident in our ability to contribute positively in all the areas we discussed. The consumer is strong, and customer engagement is at an all-time high across the bank. Our marketing is attracting new clients, which we expect to translate to market share growth.
Mike Mayo, Analyst
What are the new countries you’re likely entering?
Jeremy Barnum, CFO
We’re not going to disclose specific countries that we’re going into. However, we have made an investment in C6 in Brazil, which is quite interesting from a consumer banking perspective.
Mike Mayo, Analyst
What are your expectations for improved revenue growth with technology investments?
Jeremy Barnum, CFO
I wouldn’t describe retiring technical debt as playing defense. It’s a critical long-term investment that will position us to operate efficiently in the future. There are many projects being worked on across the company, and we aim to develop scalable processes.
Jamie Dimon, CEO
For example, we invested $2 billion on new data centers, which include cloud capabilities. All of these developments are designed to modernize how we operate, improve efficiency, reduce costs, and enhance customer experience.
Operator, Operator
That marks the end of your call for today. You may now disconnect. Thank you for joining. Enjoy the rest of your day.