Edited Transcript of JPM earnings conference call or presentation 16-Jul-19 12:30pm GMT

Q2 2019 JPMorgan Chase & Co Earnings Call

NEW YORK Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of JPMorgan Chase & Co earnings conference call or presentation Tuesday, July 16, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Dimon

JPMorgan Chase & Co. - Chairman & CEO

* Jennifer A. Piepszak

JPMorgan Chase & Co. - CFO

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Conference Call Participants

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* Betsy Lynn Graseck

Morgan Stanley, Research Division - MD

* Eric Compton

Morningstar Inc., Research Division - Equity Analyst

* Erika Najarian

BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research

* Gerard S. Cassidy

RBC Capital Markets, LLC, Research Division - Analyst

* Glenn Paul Schorr

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst

* James Francis Mitchell

The Buckingham Research Group Incorporated - Research Analyst

* John Eamon McDonald

Autonomous Research LLP - Senior Analyst Large-cap Banks

* Kenneth Michael Usdin

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Matthew D. O'Connor

Deutsche Bank AG, Research Division - MD in Equity Research

* Michael Lawrence Mayo

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Saul Martinez

UBS Investment Bank, Research Division - MD & Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Second Quarter 2019 Earnings Call. This call is being recorded. (Operator Instructions)

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.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [2]

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Thank you, operator, and good morning, everyone. Before I get started, I'd like to thank Marianne for nearly 7 years as CFO and for her support of me over many years, but particularly her support during my transition into this role. So a huge thanks to Marianne.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [3]

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Yes. And I just want to add my thanks, too. I think Marianne, as you all know, did a great job, smart, honest, thoughtful, helped make the company a better company. So all the thanks goes to Marianne, and we also all know that Jenny will do a great job, too.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [4]

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Thank you, James. Okay. So now onto the presentation, which, as always, is available on our website and we ask that you please refer to the disclaimer at the back of the presentation.

Starting on Page 1, the firm reported record net income of $9.7 billion and EPS of $2.82 on revenue of $29.6 billion with a return on tangible common equity of 20%. Included in these results are tax benefits of $768 million related to the resolution of a number of tax audits. Adjusting for this as well as a few other notable items that largely offset, we delivered an 18% ROTCE this quarter.

Underlying performance for the quarter was strong with highlights including client investment assets in Consumer Banking up 16%, largely driven by net new money flows; in Card, 11% growth in sales and 8% growth in outstanding; #1 in Global IB fees year-to-date, gaining share across all products and regions; steady results in the Commercial Bank with net income of $1 billion, while continuing to invest in the business; and in Asset & Wealth Management, record long-term inflows, AUM and client assets.

Overall for the firm, total loan growth was 2% year-on-year, but down 1% sequentially. Important to note here that these variances include the impact of loan sales in Home Lending as we continue to optimize our usage of capital and liquidity across the firm. Credit performance remained strong across businesses and we delivered another quarter of positive operating leverage.

Now on to Page 2 and some more detail about our second quarter results. Revenue of $29.6 billion was up $1.2 billion or 4% year-on-year as net interest income was up approximately $900 million or 7% on balance sheet growth and mix as well as higher rates. And noninterest revenue was up approximately $300 million year-on-year, largely driven by the absence of the card rewards liability adjustment we took in the prior year.

Excluding that variance and the other offsetting notable items I mentioned, noninterest revenue was about flat, with strong performance in Consumer across Auto lease, Home Lending production and Consumer & Business Banking, offset by lower Markets revenue and IB fees as previously guided.

Expenses of $16.3 billion were up 2% related to continued investments in our businesses, partially offset by a reduction in FDIC charges of approximately $250 million. Credit remains favorable with credit costs of $1.1 billion, down 5% year-on-year. In Consumer, credit costs of $1.1 billion were flat, but higher net charge-offs were offset by net reserve releases. And in Wholesale, credit performance remains favorable with a net charge-off rate of 8 basis points, which was fully reserved for in prior quarters. Once again, we do not see any signs of broad-based deterioration across our portfolios, both Consumer and Wholesale.

Now on to balance sheet and capital on Page 3. We ended the second quarter with a CET1 ratio of 12.2%, up more than 10 basis points versus last quarter. In the quarter, the firm distributed $7.5 billion of capital to shareholders, and as you know, the Fed did not adjust to our 2019 CCAR capital plan. We are pleased to have significant flexibility with gross repurchase capacity of up to $29.4 billion over the next 4 quarters and the Board announced its intention to increase the common dividend to $0.90 per share, effective in the third quarter.

Now on to Page 4 and Consumer & Community Banking. CCB generated net income of $4.2 billion and an ROE of 31%. Loans were down slightly year-on-year driven by Home Lending down 7% reflecting the loan sale I just mentioned. However, Card loan growth was healthy, up 8%. Business Banking loans were up 2% and Auto loans and leases were flat.

We saw strong deposit and investment growth year-on-year, with deposits up 3% and client investment assets up 16%, growing across both cyclical and digital channels. Card sales were up 11% as growth remained strong across key products. And across the franchise, active mobile users were up 12% year-on-year given continued engagement in our new features. For example, customers have opened over 2 million checking and savings accounts digitally, activated over 60 million Chase offers and our enrollment in Credit Journey now exceeds 18 million.

Revenue of $13.8 billion was up 11%. This increase included 2 notable items that largely offset. First, the current quarter includes a negative MSR adjustment in Home Lending, driven by updates to our model inputs and in the prior year, as I mentioned, we had a rewards liability adjustment in Cards of approximately $330 million.

Consumer & Business Banking was up 11% on higher deposit NII driven by margin expansion.

Home Lending was down 17%, although excluding the MSR adjustment I just mentioned, revenues would have been up 4% driven by higher net production revenue on better margins and higher volumes, largely offset by lower NII on spread compression and lower balances.

In Cards, Merchant Services & Auto was up 18%. Excluding the previously noted rewards liability adjustment, revenue was up 11%, driven by higher card NII on loan growth and margin expansion and the impact of higher Auto lease volumes.

Expenses of $7.2 billion were up 4%, driven by continued investments in the business and higher Auto lease depreciation, largely offset by efficiencies and lower FDIC charges. Of note, the overhead ratio was 52% and we delivered significant positive operating leverage.

On Credit, this quarter included a reserve release in the Home Lending purchase credit-impaired portfolio of $400 million, reflecting improvements in delinquencies and home prices, which was partially offset by a reserve build in Cards of $200 million. This is primarily driven by growth and to a lesser extent, mix as the newer vintages naturally season and become a larger part of the portfolio.

Net charge-offs were up $212 million. Excluding the recovery on a loan sale in Home Lending in the prior year, net charge-offs were up $80 million driven by Card as we continue to grow the portfolio.

Now turning to the Corporate & Investment Bank on Page 5. CIB reported net income of $2.9 billion and an ROE of 14% on revenue of $9.6 billion. As a reminder, our performance was particularly strong last year, which featured record or near-record revenues in overall IB fees and Equity Markets. With that in mind, for the quarter IB revenue of $1.8 billion was down 9% year-on-year in a market that was also down.

Advisory, debt underwritings and equity underwriting fees were down 16%, 13% and 11%, respectively, reflecting lower levels of deal activity as well as a 10-year record share in equity underwriting in the prior year. It's worth noting on a year-to-date basis, we continue to rank #1 overall and have gained share across all products and regions, benefiting from our continued investment in bankers.

In advisory, we grew share in announced deal volumes and announced more deals than any other bank. In debt underwriting, we also ranked #1, benefiting from our strong lead-left position in leveraged finance, and in equity underwriting, we have seen significant pickup in activity since the first quarter and we continue to benefit from our leadership positions in tech and health care where there has been some robust activity.

Looking forward, the overall IB pipeline is healthy, though lower compared to the elevated activity we saw last year and with fewer acquisition financing and refinancing opportunities in debt underwriting. Dialogue with clients remains active and we expect strong deal flow to continue.

Moving to Markets. Total revenue was $5.4 billion, which was flat year-on-year. Our results include a notable gain in fixed income from the IPO of Tradeweb. Excluding this gain, Markets' revenue would have been down 6% year-on-year against a strong second quarter performance last year.

Fixed Income Markets was down 3% on an adjusted basis, with relative weakness in EMEA, partially offset by increased client activity in North America rates and agency mortgage trading due to the changing rate environment.

Equity Markets was down 12% against a record second quarter last year. Subdued client activity and a tough compare contributed to a year-on-year decline in equity derivatives. That said, cash and prime remained stable with client balances in prime reaching an all-time high.

Treasury Services and Securities Services revenues were $1.1 billion and $1 billion, down 4% and 5% year-on-year, respectively, with organic growth being more than offset by deposit margin compression. As a reminder, similar to last quarter, deposit margin was primarily impacted by funding basis compression rather than client betas, and at the firm-wide level, there is an offset. Sequentially, Treasury Services was flat and Securities Services was up 3% on higher balances and fees.

Finally, expenses of $5.5 billion were up 2% compared to the prior year with higher legal expenses partially offset by lower performance-based compensation expense. And the comp-to-revenue ratio for the quarter was 28%.

Now moving on to Commercial Banking on Page 6. Commercial Banking reported net income of $1 billion and an ROE of 17%. Revenue of $2.2 billion was down 5% year-on-year, predominantly driven by lower investment banking activity due to our outperformance last year and lower NII on slightly lower deposit balances. Also worth noting here, Gross IB revenue of $1.4 billion was up 8% year-to-date on strong syndicated lending and M&A advisory activity and we continue to (inaudible) toward our long-term $3 billion target.

Deposit balances were down 1% year-on-year, and importantly, up 1% sequentially as balances have largely stabilized in total, although we continue to see migration from noninterest to interest-bearing deposits. Expenses of $864 million were up 2% year-on-year, driven by ongoing investments in banker coverage and technology.

Loans were up 1% and C&I loans being flat were up 3% adjusted for the continued runoff in our tax-exempt portfolio. The story here remains unchanged. We saw solid growth in areas where we've been investing, including expansion market with specialized industries, offset by lower acquisition-related and short-term financing activity.

CRE loans were up 2% with modestly higher activity in Commercial Term Lending where clients are taking advantage of lower long-term rates, offset by declines in Real Estate Banking where we continue to be selective given where we are in the cycle.

Finally, credit costs were $29 million with a net charge-off rate of 3 basis points.

Now on to Asset & Wealth Management on Page 7. Asset & Wealth Management reported net income of $719 million with pretax margin and ROE of 27%. Revenue of $3.6 billion for the quarter was flat year-on-year as the impact of higher average market levels was offset by lower investment valuation gains.

Expenses of $2.6 billion were up 1% year-on-year as continued investments in advisers and technology were partially offset by lower distribution fees. For the quarter, we saw record net long-term inflows of $36 billion driven by fixed income and we had net liquidity inflows of $4 billion.

AUM of $2.2 trillion and overall client assets of $3 trillion, both records, were up 7%, driven by cumulative net inflows into long term and liquidity products as well as higher market levels globally.

Deposits were up 2% sequentially and up 1% year-on-year and similar to the Commercial Bank, balances in total have largely stabilized.

Finally, we had record loan balances, up 7% with strength in both Wholesale and Mortgage Lending.

Now onto Corporate on Page 8. Corporate reported net income of $828 million, including the vast majority of the tax benefits that I mentioned earlier. Revenue was $322 million, up $242 million year-on-year due to higher net interest income, driven by higher rates and balance sheet mix, partially offset by net losses on legacy private equity investments versus net gains in the prior year. And expenses of $232 million were down $47 million year-on-year.

Finally, turning to Page 9 and the outlook. On this page, I'll just comment on NII, which should not be surprising given the changes to the rate environment. As you can see, we're updating our 2019 full year NII outlook to about $57.5 billion. The reduction is based on multiple scenarios, which assume, among other things, lower long-end rates and up to 3 rate cuts this year, which is consistent with current market sentiment. And as a reminder, this compares to a rate scenario that has seen 0 cuts at the time of first quarter earnings.

So to wrap up, the U.S. consumer remains healthy. Overall, credit is in great shape, and the earning power of the company is evident. We delivered strong returns this quarter and the diversification and scale of our business model positions us well to outperform in any environment. Understanding there is some macro uncertainty and potential headwinds from the rate outlook, we still expect to grow the franchise and we'll continue to strategically invest in our businesses in technology, bankers and beyond.

And with that, operator, please open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jim Mitchell of Buckingham Research.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [2]

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I noticed that Card loan growth was particularly strong this quarter. I just want to get a sense as to what you feel is driving that uptick. And do you think -- how sustainable is it at your 8% year-over-year growth?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [3]

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Sure. So on current loan growth, we feel very good about what we're seeing there. As we talked about at Investor Day, we have a real opportunity with our existing customers. And we talked about how our existing customers have about $250 billion of borrowing off us, about $100 billion of that is squarely within our existing buyback. So you can think of this as highly targeted to high-quality existing customers, and for the first time, we're actually seeing loan growth in Cards, the majority of it coming from existing customers versus new customers. And so we're really shifting the paradigm there and we feel great about being able to harvest the opportunity that we talked to you about at Investor Day.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [4]

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All right. Should we expect just sort of you to continue to reduce the mortgage footprint in this rate environment?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [5]

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So on the Mortgage business, I would say, it was a good quarter on the back of the rally, and so we did see volumes increase and we saw some margin expansion as well, and so obviously, highly rate dependent. But I would say the structural challenges in that business remain unchanged. And so we continue to focus on optimizing the balance sheet across capital and liquidity. And so looking at loan sales and thinking about derisking the portfolio from a servicing perspective. So good quarter on the back of the rally, but it doesn't change the overall structural challenges.

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Operator [6]

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Our next question is from Erika Najarian of Bank of America.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [7]

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So I just wanted to go back to what you were saying earlier in that your guide or your guide lower is including up to 3 rate cuts this year, which would suggest to me that your net interest income is quite defensive in the face of rate cuts. I guess my first question is, could you give us your primary assumption for that $500 million swing, particularly on deposit pricing?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [8]

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Okay. Sure. So first, I'll take you back to the first quarter, where our guidance was $58 billion plus and we talked about some pressure on the long end at that point. That pressure has persisted and, in fact, increased, and so we pulled the impact of the long end through in terms of our outlook. And then on the short end, the range of outcomes are obviously quite broad, and so we thought about a range of outcomes of 1 to 3 rate cuts. And so you can think about if it's 1 cut, $57.5 billion plus, and if it's more, $57.5 billion minus. And then based on current advice, you can think about the third quarter being $100 million to $150 million below the second quarter and then a bit more than that in the fourth quarter given we would have a full quarter at that point.

Oh, and then in terms of betas, I mean largely speaking, you can think of betas as being symmetric, and so on the Consumer side, we saw little reprice on the way up, and so there is not a lot of opportunity on the way down. On the Wholesale side, if you look at large institutional businesses, like Treasury Services and Securities Services, we are largely at full reprice there, and so there should be opportunity there. And then in places like the Commercial Bank and Asset & Wealth Management, we are still ahead of what the model would have assumed, but we have started to see reprice tick up there. But importantly, I would say, we're not going to lose any valuable customer relationships over a few ticks of beta, and so we'll see how it goes.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [9]

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It's all embedded in your assumption.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [10]

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And it's all embedded in…

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [11]

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Okay. Got it. And just going back to Jim's question, I noticed that investment securities balances continue to go up and mortgage loans were down another 5%. Should we think about this as part of the overall, you were saying optimizing capital and liquidity, and therefore, as we think about it going forward, we could also expect to see perhaps some release in RWA growth and some release in the -- continued reserve release as part of the optimization?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [12]

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Sure. So on the RWA side, yes, that is precisely why we are doing it, and so when you see the loan sales in Home Lending, yes they are offset in securities purchases, which are more efficient from a capital perspective as well as a liquidity perspective. So, yes.

Having said that, on reserves, I mean, reserves are not necessarily going to be impacted directly by that because, of course, that will depend upon the environment and the mix of the portfolio that remains.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [13]

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And I would just say that our standardized capital ratio is at 12.2%, advanced is 13%. Advanced is obviously a far more important relevant economic number. It simply does not make sense to own all mortgages when you can frame by standardizing and you can't securitize.

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Operator [14]

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Our next question comes from Mike Mayo of Wells Fargo.

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - Senior Analyst [15]

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So the efficiency ratio went from 56% to 55% year-over-year, and I guess that's with some accelerated tech spending. So do you plan to keep this pace of tech spending going? And what's the current update on that tech spending? Where is it connecting? Where is it not connecting? Because I think you said it accelerated for a couple of years and maybe we'd see more results in 2020, 2021?

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [16]

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So can I just take that one? So it's about $11.5 billion today. I think it was a little bit lower last year. If we had to say where it is today, for next year, it would be something like $11.5 billion, and I think it's becoming -- always becoming more efficient. But what you really have in tech, it's something that's becoming cheaper all the time, and then you're also investing money all the time, which we're going to do regardless of the environment. So we're not going to cut things we're trying to build like my reward programs and change my loan and the Credit Journey because there's a resumption to something like this. So Daniel and Gordon will tell you right now that they think they'd get more efficient spend and that we shouldn't tell people, in fact, we're doing well. We will -- we have to spend to win in this business and we're very efficient. We're very cautious about how we spend in technology. We're going to do it regardless of the environment and we'll try to get more efficient in tech spend, too.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [17]

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That's right, and our investments in technology create capacity in terms of productivity to continue to invest and we've talked a lot about AI and machine learning. It's early innings there and there's a lot that we're going to be able to do assuming that's there and become more productive and then cloud -- developers can become more productive using the cloud.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [18]

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Look, it's amazing, our forward costs with all the things going on in the world today are down because of techniques with AI and big data and stuff like that. And so it's hard to complete. In fact, in You Invest, you look at our client investment asset grew 16%, a portion of it is You Invest, and obviously, You Invest requires hundreds of millions of dollars to build. So you've got to put all these things in perspective about how you try and make the decisions going forward.

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - Senior Analyst [19]

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And then follow-up, Jamie, you mentioned the environment, all the things taking place in the world, how is the environment now? I mean on the one hand, you have trade war, you have lower interest rates, you have capital markets which are down for the big banks, you have a lot of pessimism. On the other hand, you highlighted your results. What's -- when you take the temperature of the environment, what's the temperature?

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [20]

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It's not that bad. Uncertainty is a constant. The one thing in life, as you know, there's going to be uncertainty going forward. And geopolitical tension is kind of a constant. Those things may be a little bit higher now than normal. But we -- I think we see is global growth is north of 3%. You're kind of expecting, I think, be 2.5% this year. The consumer in the United States is doing fine. Business sentiment is a little bit worse, mostly probably driven by the trade war. And if you travel around the world, you know that Japan is growing and Europe is growing a little bit and Brazil's gone from negative 4% to 0%. A lot of countries have opportunity to expand. They are doing great, but they should be doing better over the next [20, 30]. So I wouldn't get too pessimistic yet. And obviously, the Fed will react to -- with the data they say, and they always say it's more important at this point on than just what the Fed does. If the Fed's cutting rates and we're going into recession, that's not a good rate cut. If the Fed actually raises rates one day because we're booming, that's not so bad.

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Operator [21]

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Our next question comes from Glenn Schorr of Evercore ISI.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [22]

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I'm not sure if I missed it, but I think total average loans were up 2% year-on-year, but that was impacted by the loan sales. Can you tell us either size of loan sales or what average loan growth was up year-on-year without that?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [23]

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So yes, there's a few things going on in loan growth, as you say, Glenn. So we have the loan sales, we also have the runoff of the tax-exempt portfolio. So you can think about loan growth probably closer to 4% if you adjust for those items. And importantly, as we always say, loan growth is an outcome, not an input, and we feel good about the loan growth that we're seeing in terms of the areas where we're investing. And then -- and for the full year, you can think about a number if you adjust for the loan sales and ex CIB of 2% to 3% full year.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [24]

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Okay. Appreciate that. And then just curious on the noninterest-bearing deposits only being down 2% year-on-year, we've seen a lot bigger numbers at some peers. Is that just strength of JPMorgan franchise? Or are you doing anything actively to manage that lack of mix shift?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [25]

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So as I said, we are seeing balances stabilize in the Commercial Bank and AWM. We are still seeing some migration from noninterest-bearing to interest-bearing, but largely, we're seeing those balances stabilize. And then we do, of course, have continued growth in the Consumer Bank. And the second quarter is typically seasonally high in the Consumer Bank. So we have some growth in noninterest-bearing there. And even in the Consumer Bank, where we've seen growth decelerate, that's largely as a result of consumer spending. So that feels healthy as well.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [26]

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Okay. Maybe last one on -- appreciate the guide on 2019. Because it's a half, if you looked forward into 2020 with no incremental rate cuts, is it remotely linear? In other words, if we think about if the ongoing rate and curve environment persists into next year after the 2 or 3 cuts this year, are we looking at $1 billion? Or is it way too complex to oversimplify like that?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [27]

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Yes, it's probably more complicated, Glenn. And so just given the range of outcomes are as broad as they are and, importantly, if we're looking at cuts that are insurance cuts that sustain the expansion versus cuts that may be in response to a broader economic slowdown, there are other things that we would be talking about. So we're not going to give further guidance on 2020 until we know more.

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Operator [28]

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Our next question is from Gerard Cassidy of RBC.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [29]

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When you take a look at your Merchant Services business, you had some really strong growth year-over-year. I think it was up 12%, and then your Card volumes, excluding the Commercial Card, were also up very strong. Can you share with us what's driven that strong growth, that double-digit rate of growth?

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [30]

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Thanks for noticing.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [31]

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I would say that is firing on all cylinders. So it's brand, it's people, it's products. It does certainly help to have the backdrop of a healthy U.S. consumer as well and, in fact, retail sales this morning looked strong. So we can expect that to continue.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [32]

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Is it more the market -- as you just referenced the retail sales, they were strong, is it more that or are you guys also seeing gains in market share that gives you an added boost?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [33]

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Yes, we have taken share in -- a little bit of share in Card. As you know, we're #1 in sales there. I think, importantly, what's helpful in Card is that we don't even need to take share to grow just given the secular tailwind that we have in the Card business on the electronification of cash.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [34]

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And we're taking share in merchant acquiring.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [35]

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And we're taking share in merchant acquiring, yes.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [36]

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We expect to do -- take more share in the future.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [37]

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Speaking of the future, can you guys give us some color on what your first read of Libra is, that -- the Facebook announcement about the process -- payments system that they're going to initiate?

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [38]

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Yes. So just to put it in perspective, Gerard, we've been talking about blockchain for 7 years and very little has happened and they're going to be talking about Libra 3 years from now. So I wouldn't spend too much time on it. We don't mind competition, and the request has always been the same. The governments are -- where they can see -- we want a level-playing field, and governments are going to insist that people who hold money or move money, all the liquidity in the world where they have the right amount of controls in place, no one wants to aid, in fact, terrorism or criminal activities and that's going to be true for everybody involved in this, not only basically doing either KYC, BSA for a long period of time and those fears I think would just become for everybody at one point and they should.

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Operator [39]

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Our next question is from John McDonald of Autonomous.

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John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [40]

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I wanted to ask about the CCAR and you've got a big authorization this year. How did you approach the CCAR plan this year in relation to your long-term CET1 target of 11% and 12% that you talked about?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [41]

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Sure. So as we think about capital distribution first, we would start by always saying that we prefer to use our capital to invest and grow our businesses and then to have a competitive and sustainable dividend and only then to return excess capital to our shareholders. And so we are pleased with the approval and the additional capacity to return that $29.4 billion to shareholders.

Having said that, we are still targeting the upper end of the 11% to 12% range. We're always going to want to have a management buffer because, as I had said, our first priority will always be to invest and grow our businesses and then, of course, there remains a lot of uncertainty in terms of the regulatory capital framework. And then importantly, we wouldn't actually need to make that decision for a few more quarters, given the way the capital distribution plan is laid out over 4 quarters. But as of now, we are still targeting the upper end of 11% to 12%.

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John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [42]

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Okay. And any updated thoughts on CECL? Or could you remind us of what your thoughts are on initial impact there?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [43]

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Sure. So it hasn't changed from Investor Day. Our range continues to be $4 billion to $6 billion, then we're prepared for the January 1 implementation.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [44]

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Just to take a chance. So CCAR is 1 test a year on stress. We do 120 a week, and so we are always prepared for stress. CCAR has us losing $20 billion or $30 billion over 9 consecutive quarters. I just want to remind you all that the 9 quarters after Lehman, the real stress event, we made $20 billion or $30 billion. And CCAR assumes you're going to grow your balance sheet, it assumes you're going to continue your dividends and stuff like that. We have plenty of capital. I mean our capital cup runneth over, and we prefer to deploy that capital. And remember, things like all these branches, every branch will eventually use $10 million of capital. So 400 branches of them should be $4 billion in capital. So restraints on growth, also restraints on capital usage and ability to finance the U.S. economy. So we're really optimistic about our ability to somehow use our capital, including our InstaMed acquisition we just did, which I think closes sometime soon, so.

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Operator [45]

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Our next question is from Betsy Graseck of Morgan Stanley.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [46]

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Jamie, you mentioned about blockchain. We've been hearing about it for 7 years and not much has happened. But I think you at JPM have built a blockchain solution for at least your correspondent banks. And I guess I wanted to understand where you think you're planning on taking that right now, just a AML and KYC use case. But is that something that you think you could deliver more functionality over time?

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [47]

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So we think the blockchain is real, and the reason it takes so long is you have to -- people agree to the protocol, people write a lot of code to get into it. But the one you're referring to, IAN, is -- think of it information network of banks. So right now, banks transfer a lot of information among each other, think of trade finance and correspondent banking and stuff like that. So I think we have like 120 banks signed up. We're going to have 400. So right now, it's for bank wholesale use to have -- needing information. We all have the same information. You can move things. But eventually, you'll be able to move money quicker with data. So yes, we're optimistic about that, and we're going to roll it out as soon as we can and constantly test it to make sure it's secure and all that.

I remind people, when it comes to moving money, JPMorgan Chase moves $6 trillion a day quite securely and quite cheaply. You've got to look at the problem you're trying to solve, but people would generally say, well, they didn't have real-time payments. That was true, and now we do effectively sell from P2P and now we do effectively (inaudible) they're called RTP, real-time payments in TCH. So we are building the things that the future is going to want, APIs, blockchain ledgers that have much more data, a real-time movement of money that also goes through floor checks, et cetera. So we're quite optimistic about it. It will just take a while to get everyone using it. One day it will have to be opened up to a broader customer set possibly.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [48]

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So one of the things that's coming out in the Senate and House, financial services, banking committee meetings is this desire for real-time payments, desire for a cheaper solution for payments. And that's supposedly what Libra is going to offer. But to your point, it seems like you're already doing that. The question is, how do we think about the outlook for interchange? And is there -- what's your strategy towards interchange pricing here as we go over this period?

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [49]

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[It's interesting to raise]. There is real-time, P2P free, safe and secure called Zelle. So when people say, you can do it, that's already done. That's not cross-border. So there are people who might want to do that across border. Remember, cross-border remittances are much, much smaller than actual use of debit card, credit card payment systems here. And there, you see built in real-time payment solution actually already in use. And to me, the issue there is diminish fraud. You have to make sure that in real-time payments, that you also put it through effectively a real-time floor checks and stuff like that. So in the United States, credit cards, debit cards, these are -- people love these cards. The beneficiary's the consumer. You guys remember that's who we're here to serve. And someone is going to pay eventually for services provided, but people like their credit cards. They use their credit cards far more than they use their debit cards, right? I don't remember the last time I used my debit card.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [50]

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Yes, when you get rewards, it's great. Okay.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [51]

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And JPMorgan, now you're getting more free stuff. You get free -- you can buy and sell stock for free. We just gave you a very good -- it just got rolled out and we only have a few accounts, but global investing, very cheap, very clear. So we're going to take and give our clients more and better and faster and cheaper all the time, and now we package that with Sapphire Banking and Sapphire card or discounts on mortgages that are not always made to be seen, but the future is very bright because if we can do more for our customers, that's a very good thing.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [52]

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And don't forget, on credit cards, you get charge-back rights and you get the flows.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [53]

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Right, and you get -- you're going to want -- if you're a Chase customer, you get your FICO score for free. You're going to be able to -- you got -- we're going to tell customers they're great for financial education, how they can improve their FICO score. You get offers like the Chase (inaudible) end users. I mean you really don't really market it, but it's really taken off.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [54]

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Sure, so the Chase offers, we talked about that at Investor Day. It's like a really powerful flywheel where we can -- we can deliver value to our large merchant clients in terms of being able to bring a very large customer base to them and then we can deliver that value to our customers at 0 cost to us. And so as I said in the presentation, we've had over 60 million Chase offers activated and so this is really powerful and benefits not just our consumers, but our large merchant clients and at 0 cost to us.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [55]

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So a message of more efficient, less cost maybe needs to get heard on the hill as well.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [56]

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Yes. And we talked about it a lot of time and a lot of people understand that, and of course, we always want to do a better job for consumers, which we have been referring.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [57]

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Yes, I guess the final question here is just on the under-banked. Is there something or is there an offer that you have for them? Are you considering that? Because that, I'm just thinking about where fintech's trying to exploit you and I know it's a catchphrase under-banked that is being used by Libra, it doesn't necessarily to me seem like it's solving anything for them, but maybe you've got a better solution that we just don't focus on.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [58]

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Yes, so we have -- so talking about this thing and what JP has, I think 25% of our branches are around my neighborhoods. When we go to those neighborhoods, we do some (inaudible). We're doing more and more financial education which I think this is really important. I just mentioned the FICO score, but maybe there might be other things we can do, we do Chase chats to get people into the branch, educate them about saving, FICO scores. What you need to do to get a mortgage or buy a house and stuff like that. And then we have a product, which really is great called Secure Banking and think of it as a card where it's the full thing. You can overdraft, I think it's $4.95 a month. You can use ATM, you can have direct deposit, you can do online mobile payments and stuff like that. So we think that's a great product for the under-banked and I think that's going to have 25% or -- and we'll kind of push that a little bit more. So we always [kind of come with the bank]. And then we also have special, I call it venture banking, the Entrepreneurs of Color Fund. We're making loans to entrepreneurs of color which are not traditional bank loans that help you grow your businesses. We're finding a lot of ways to do it and there'll be a lot of (inaudible) standard. I would say we're at the forefront of that.

Fintech, of course, all these firms are trying to eat your lunch. And I think that's good, it's called American capitalism and we have to stay on our toes to compete, but we are. Like Jenn was just -- cards and she rolled out last year -- announced it last year, My Chase Plan, Chase My Loan, so that people can view their credit balances immediately to do what they want to do and do it well. We rolled out Zelle P2P that's good for everybody. So if you have a bank account, you can move money to your friends and relatives rather than pay the $10 money changer fees and stuff like that. So we're already trying to do a better job for the American consumer. We think we do a great job for them and when they do have complaints, we'll fix it.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [59]

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That's right, and you mentioned the 25% in LMI (inaudible) in terms of our branch footprint, in our expansion market, that's 30%.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [60]

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Right.

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Operator [61]

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Our next question is from Ken Usdin of Jefferies.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [62]

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Just wanted to ask on the balance sheet, last year so you've seen a huge jump in the trading-related assets and I know you had the accounting change that you mentioned in the supplement, but could you talk about, is that related to market share gains? Is it related to just specific strategies with regard to managing liquidity? And it doesn't seem to be equally growing on the asset side in the trading liability. So just can you explain the dynamics behind that and how that adds to the net interest income story?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [63]

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Sure. So in terms of the balance sheet growth that you saw quarter-over-quarter, that was primarily related to our balance sheet and tens of businesses in Markets businesses. And then we were down on a spot basis quarter-over-quarter. But we start with deposit growth, and so we have had strong deposit growth, and so you see that reflected on the balance sheet side as well as you would have seen securities balances as well and some of that is adding duration and some of that is short-duration securities that are higher yielding than IOER, and yes, so.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [64]

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Okay. So it is part of the liquidity management strategy. Okay. Jenn, did you say what the amount of the gains that you had on the loan sales this quarter?

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [65]

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Just a quick one; if you get a higher return on REIT body, you get IOER, you're going to do that. If you get higher returns using standardized capital on securities than you are on the home loans, you're going to do that, and that's what we're seeing in some of these banks.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [66]

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That's right, the Street. I should have mentioned about home sales and home lending.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [67]

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Right. Okay. Got it. That makes sense. And did you say what the amount -- can you tell us what the amount of the gains on the loan sales this quarter were if they were above trend?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [68]

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We haven't disclosed the amounts of the gains and we had some loan sales in the fourth quarter, the first quarter and the second quarter. The first and second quarter, in terms of the notional amount, the first quarter was about $7 billion and the second quarter was about $9 billion, so just a little bit more.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [69]

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The gains in the second quarter that were -- they show up in different places, but not much -- not material.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [70]

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Yes. Yes.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [71]

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Got it. And lastly, just any thoughts on the Investment Banking pipeline and just a continuation of the outlook across the buckets there of banks?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [72]

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Sure. So in terms of the Investment Banking pipeline, I'll just remind you that the third quarter is typically a seasonally lower quarter, and so sequentially, you should think about IB fees being down a bit. That said, the pipeline is healthy, although off a record performance last year, which is assumption of a reversion to more normal levels of activity as well as some overhang from macro uncertainty. In M&A, still feels very healthy and it's still a stage where companies are looking for synergistic opportunities for growth, especially in North America; perhaps Europe, a bit more muted. ECM, we had a very strong second quarter. So that will taper off in the second half a bit. But I would say deals are getting done well in the current environment. And then DCM, DCM will be more subdued reflecting a slowdown in acquisition financing activity as well as refinancing opportunities, but albeit with a good backdrop for new issuance given the rate environment.

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Operator [73]

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Our next question is from Matt O'Connor of Deutsche Bank.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [74]

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So I realize rate expectations can change quickly, but how do you think about managing the company in a rate environment that follows the curve that's out there for 3 to 4 cuts? And you said earlier, you wouldn't cut back on technology, but are other areas in expenses you think about managing the balance sheet and liquidity a little bit different?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [75]

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Sure. So in terms of balance sheet management, we manage the balance sheet in both directions. It's a negatively convex balance sheet, and so all else being equal, as rates are declining, we would naturally drift shorter driven both by assets and liabilities. So you would expect us to add duration, which we did this quarter. But we're not going to change the way we run the company because of the rate environment. We're going to continue serving our clients, investing with discipline and managing the balance sheet across all dimensions, that being capital, liquidity and duration.

And then in terms of expenses, again, we're not going to change the way we run the company because of an interest rate environment. And I'll just say again that the range of outcomes are very broad here. And so if we end up with insurance cuts, it's a temporary headwind; and if we end up with cuts in response to a broader economic slowdown, there will be a lot more to talk about. But as Jamie always says, we're not going to change the way we run the company because of the macro environment.

That said, in a broader slowdown, obviously, there are natural levers on our volume-related expenses and we redecision a large part of our investment portfolio on an annual basis. We will always continue to invest in the things that we think are important, but we would have that opportunity depending upon the opportunity to take a look at that.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [76]

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Remember, in a real recession, there are always opportunities to reduce your costs and vendors fall all over themselves to give you better deals and stuff like that. There are also huge opportunities to spending money wisely. Our Sapphire card was birthed in '09, and you could imagine that this healthy growth might be another great opportunity, but we're not going to take it. And so I think you've got to be very careful. Where there's marketing money, it's usually better spent in a downturn; the returns on it immediately double.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [77]

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And you talked about the capital and your thought process there. Obviously, the authorization of the buybacks is a very big number. Is it your expectations that you'll use it all or is that still to be determined based on balance sheet growth, stock price and the environment?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [78]

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I would say still to be determined. Our first choice will always be to use our excess capital to invest and grow our business, so still to be determined. And as you know, it's over 4 quarters, and so we have time to think about it, but obviously, we have the flexibility.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [79]

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Is the timing of that even, or is there a flexibility there too?

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [80]

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It has been in the past, but we can change that every day.

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Operator [81]

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Our next question is from Saul Martinez of UBS.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [82]

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Couple of questions. First on the NII outlook beyond this year and I fully appreciate you're not giving guidance beyond this year. But you do have the guidance from Investor Day out there of a sustainable NII of $58 billion to $60 billion that was set in a very, very different rate environment. If we were to see multiple rate cuts, how do we think about that guidance and how -- I mean what are some of the moving parts that might get you perhaps to the lower end of that $58 billion to $60 billion? Is it simply dependent on how the economy responds, deposit pricing? If you can just kind of outline what you think some of those moving parts are?

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [83]

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Sure. So the guidance we gave at Investor Day steady-state $58 billion to $60 billion, I would say, largely still stands. Importantly because when we talked about that at Investor Day, we weren't assuming any further benefit from rate. So we were assuming that any incremental increases in rates would be offset and repriced, and so the majority of that growth was going to come from balance sheet growth and mix. And if you remember the slides, there were a number of arrows on the slide. Even at that time, which was obviously a different rate environment, we were implying that there were a number of different paths to get there. And so that obviously continues to be true. And so there may be a different path to get there, it may take a little bit longer, but we still believe in that steady-state number because we still believe in the growth of the franchise.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [84]

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Okay. Okay. That's helpful. If I could change gears a little bit, you recently announced that you're closing Finn or you closed Finn, and I think the stated logic is you learned that millennials don't need a separate brand or experience. But can you just elaborate on the logic there and what you learned from that experience? Because it does seem to maybe fly in the face of what some other entities or financial institutions are doing with their digital banking strategy?

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [85]

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Go ahead, Jenn.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [86]

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I was just going to say, we learned a lot in Finn. You said it, that we learned that importance of power to change brands certainly means that we don't need a separate brand. We also learned about a number of features that our customers love and we were able to reuse those features and port them over to the Chase mobile app. And so I think we always need to be testing and learning and doing things like this and not afraid to shut them down when we've learned what we needed to learn and can serve our customers through the primary Chase mobile app.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [87]

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We've learned a lot like that and how to do digital account openings only digital because we do it out of a retail banking center, the line that you already have, so there's a lot of lessons there. We're always going to be learning some kind of skunkworks and learning from things like that. And so we don't look at those kind of things like failures at all. That is how you learn. And Jeff Bezos will tell you, "Mistakes are good, mistakes are what make you smarter and better," and so I hope we make some really good mistakes that can teach us and all of our business at one point.

The people doing Finn did a great job, they're embedded. And by the way, you can open a Chase account now and never go into a branch and you could open an account, it only takes minutes to open an account. So we've got much better at digital only, but we got it separated from the physical branch system.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [88]

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Yes, the digital account opening is now about 25% of our new account activity.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [89]

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And we'll be doing this in small business and merchant processing and all these various things.

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Operator [90]

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Our next question is from Eric Compton of Morningstar.

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Eric Compton, Morningstar Inc., Research Division - Equity Analyst [91]

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This question kind of ties into some of the items already mentioned, longer-term kind of tech-focused and also related to Finn. So there has been some press recently about reasons for closing down the Finn app and one of the items that was mentioned was some of the difficulties banks can potentially run into with their legacy platforms, which, for the most part, are built on COBOL, which has been around since the '60s and depending on who you talk up to, these legacy platforms can either be like huge problems for banks or not really a big deal. So I guess from the outside, at least for me, it can be kind of hard to tell what really is going on there. So my question is, as you compete with fintech firms who are building new platforms from scratch, how do you strategically view dealing with your own legacy platforms? Is there a need to kind of redo these things eventually in order to actually compete with newer tech over time? Do these legacy platforms really hamstring you in any way? Or is the hype around those issues really overdone? And if so, why?

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [92]

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The hype has been around now for the better part of a decade, right? And we seem to be doing fine. But it is true -- and some of these legacy platforms are also the reason why we have 50 million customers. But it is true that over time, these platforms would be reformulated and refactored to be cloud eligible and things like that. And those things are more efficient. So your costs will go down, your error rates will go down.

So the way I look at it a little bit is we run like 6,000 or 7,000 applications. Over time, those will be modularized and being refactored to be cloud eligible, that's either by private cloud or a public cloud. And yes, they will be more efficient. But we also have tons of new digital platforms, AI built around these things that do the customer service upside that they see. They go over accounts in minutes. You get your free Credit Journey, you get -- we can modify so many things in days and weeks as opposed to years because you're not mucky with the old legacy system. And so it's a little bit of both.

But those numbers are embedded in our tech spend. The refactor rate, embedding data centers, getting better and AI, already in those numbers.

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Operator [93]

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And we have no further questions at this time.

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James Dimon, JPMorgan Chase & Co. - Chairman & CEO [94]

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Well, thank you very much. Jenn, you did a great job. We'll talk to you all in a quarter. Thank you.

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Jennifer A. Piepszak, JPMorgan Chase & Co. - CFO [95]

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Thanks, everyone. Thanks, James.

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Operator [96]

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Thank you for participating in today's call. You may now disconnect.