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Edited Transcript of JPM earnings conference call or presentation 13-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 JPMorgan Chase & Co Earnings Call

NEW YORK Apr 13, 2017 (Thomson StreetEvents) -- Edited Transcript of JPMorgan Chase & Co earnings conference call or presentation Thursday, April 13, 2017 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 and President

* Marianne Lake

JPMorgan Chase & Co. - CFO and EVP

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Conference Call Participants

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* Betsy Lynn Graseck

Morgan Stanley, Research Division - MD

* Eric Edmund Wasserstrom

Guggenheim Securities, LLC, Research Division - MD and Senior 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, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst

* James Francis Mitchell

The Buckingham Research Group Incorporated - Research Analyst

* John Eamon McDonald

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Kenneth Michael Usdin

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

* Marlin Lacey Mosby

Vining Sparks IBG, LP, Research Division - Senior Analyst

* Matthew D. O'Connor

Deutsche Bank AG, Research Division - MD in Equity Research

* Matthew Hart Burnell

Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity 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 First Quarter 2017 Earnings Call. This call is being recorded. (Operator Instructions) We will now go live to the presentation. Please stand by.

At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon; and Chief Financial Officer, Marianne Lake. Ms. Lake, please go ahead.

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [2]

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Thanks, operator, and good morning, everyone. I'm going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation.

Starting on Page 1. We're off to a good start this year with net income of $6.4 billion, EPS of $1.65 and a return on tangible common equity of 13% on revenue of $25.6 billion with a continuing momentum from last year driving strong performance across all of our businesses. Highlights for the quarter include: average core loan growth of 9% year-on-year, reflecting broad strength across products; continued double-digit consumer deposit growth; strong card sales up 15%; and merchant volume up 11%.

In addition, we achieved a number of records across our businesses, most notably net income and IB fees for our first quarter in the CIB; net income and revenue for the Commercial Bank; and asset under management and banking balances in Asset & Wealth Management. Overall, the credit environment remains benign. In Consumer, there were no reserve actions taken across our core portfolios, while in Wholesale, we had a net reserve release of about $90 million driven by energy, resulting in net releases in both the CIB and the Commercial Bank.

You see no significant items here on the page, but there are a few notable items in our results that I'll highlight here for you. The first is a tax benefit of a bit less than $400 million, and the benefit relates to the difference in stock price between vesting date and grant date for our employee equity awards. And while such an adjustment is business as usual, the recent appreciation in our stock price has caused the benefit to be outsized this quarter, with the largest impact occurring to the CIB and to a lesser extent, Asset & Wealth Management.

Second is a write-down of our student loan portfolio of approximately $160 million after tax as we move these loans to held for sale and explore alternatives to that portfolio. And last is firm-wide legal expense of around $140 million after tax relating to a number of matters across businesses, some positive, some negative, and with the most significant impact being in the AWM business.

Moving on to Page 2 and some more detail about the first quarter. Revenue of $25.6 billion was up $1.5 billion or 6% year-on-year, with the increase evenly split between net interest income and noninterest revenue. NII reflected the impact of higher rates and continued growth and NIR reflected higher CIB revenues, partially offset by Card acquisition costs and lower MSR risk management. Adjusted expense of $14.8 billion was up 7% year-on-year, mainly driven by higher compensation on increased revenue and higher auto lease depreciation. In addition, the combination of the impact of the FDIC surcharge as well as a foundation contribution this quarter accounted for nearly $200 million of the year-on-year expense change. Adjusted for the student lending write-down I just mentioned, credit costs of $1.1 billion would be down approximately $700 million year-on-year as higher charge-offs in Cards were offset by a Wholesale net reserve release this quarter versus a sizable build in the prior year.

Switching to balance sheet and capital on Page 3. We ended the quarter with both standardized and advanced fully phased-in CET1 of 12.4%, in line with our expectations and overall driven by net capital generation. We continue to manage our balance sheet with discipline. Total assets returned to above $2.5 trillion, reflecting the continuation of strong deposit growth as well as our trading balances normalizing from very low levels at the end of the year. From a liquidity perspective, HQLA was flat to year-end, and the firm remained compliant with all liquidity requirements. We continued to grow tangible book value per share while returning $4.6 billion of net capital to shareholders in the first quarter, which included $2.8 billion of net repurchases and common dividends of $0.50 a share. And it's $4.6 billion compared to $3.8 billion return last quarter. As you know, we've recently submitted the 2017 CCAR capital plan to the Federal Reserve. And as you would expect, we have no feedback to give you for now.

Moving on to Page 4 and the Consumer & Community Bank. CCB generated $2 billion of net income and an ROE of 15%. Core loans were up 11% with strength across products. Mortgage was up 15%, Cards up 9%, Business Banking up 9% and Auto loans and leases up 12%. Deposit growth continued to outperform the industry, up 11%, with about half of deposit growth from existing customers as we continue to deepen relationships. We continued to see very strong growth metrics in Cards for the quarter, with sales up 15% and new account originations up 9%. Merchant processing volumes were up 11% year-on-year and active mobile customers up 14%. Revenue of $11 billion was down modestly.

Consumer & Business Banking revenue was up 8% on strong deposit growth, and we are starting to see the long-awaited improvement in deposit margins. Mortgage revenue was down 18%, driven by lower net servicing revenue, reflecting lower MSR risk management as well as portfolio runoffs. And Cards, Commerce Solutions & Auto revenue was down 3%, driven by continued investment in Cards' new account acquisitions that will provide long-term value, which was predominantly offset by net interest income on higher loan balances as well as higher auto lease income. Expense of $6.4 billion was up 5% year-on-year on auto lease depreciation and continued business growth.

Finally, the credit trends in our core portfolio remain favorable. Net charge-offs increased year-on-year, primarily driven by a $470 million write-down of our student loan portfolio, against which we released $250 million of reserve. And card charge-offs were up in line with expectations and in line with guidance. Moving to mortgage and auto credit, our portfolios continue to perform very well.

Now turning to Page 5 and the Corporate & Investment Bank. CIB delivered a strong result with a reported ROE of 18% and net income of $3.2 billion. But remember, a significant portion of the tax benefit on the stock update is reflected in these results. Revenue of $9.5 billion was up 17% year-on-year, and IB fees of $1.8 billion were up 37%, partly due to a weak first quarter last year but also given strong absolute performance this year. In banking, IB revenue was up 34%, driven by higher overall issuance, especially in ECM, including a strong IPO market. And remember, the first quarter of '16 was particularly strong in M&A and weak in DCM for us. And this quarter, share normalized.

Overall, we gained share and ranked #1 in Global IB fees and #1 in North America and EMEA. Looking forward, sentiment is positive, the market remains broadly constructive and across products, we expect decent deal flow and the pipelines are healthy. Treasury Services revenue of $981 million was up 11% year-on-year, driven by higher rates and operating deposit growth. Lending revenue of $389 million was up 29% year-on-year on higher gains from securities received from restructuring.

Moving on to Markets & Investor Services. Markets revenue of $5.8 billion was up 13% as investor data market was characterized by low volatility and subdued client activity, leading us to be somewhat cautious. March ended up being stronger than expected, reflecting some recovery in volatility but also clients responding more to market themes, including European elections and to a lesser degree, a stronger U.S. rate outlook. Fixed income revenue was up 17% with Credit and Securitized Products as key drivers on stronger client activity and significant spread tightening broadly. Rates was also solidly up as the market reacted to central bank actions and we saw a pickup in flows in EMEA. We had a decent quarter in equities, with revenue up 2% year-on-year in somewhat quiet markets broadly, with corporate derivatives and prime being brighter spots. Securities Services revenue was $916 million, in line with guidance. And finally, expense of $5.1 billion was up 7%, driven by higher performance-based compensation and a comp-to-revenue ratio for the quarter was 29%.

Moving on to Page 6 and Commercial Banking. Another excellent quarter in Commercial Banking with a 15% ROE. Revenue grew 12% year-on-year due to higher deposit NII and continued loan growth as well as some strong IB revenues, up 34%, making this the third consecutive quarter of IB revenues of over $600 million. Expense of $825 million was impacted by a $29 million impairment on leased assets. Excluding this, we saw expense increase slightly above guidance as we made great progress on the pace of investments, which will continue to drive strong top line growth. Looking forward, we expect our underlying expense trends to be relatively flat.

Loan balances of $191 billion were up 12% over the prior year. Consistent with the industry broadly, we have seen a slowdown in C&I growth, with our loan balances remaining relatively flat sequentially, although up 8% year-on-year. There are a number of factors likely contributing, including potential noise in the data from large acquisitions in prior periods and a resurgence in capital markets activity, particularly in DCM, including high yield. Though not to dismiss the importance of the trends, we do need to weigh all the facts, and against that, other macro indicators remain supportive of the economy broadly, including CapEx data and surveys as well as very high levels of business optimism, all of which should be supportive of solid demand for credit over time.

In Commercial real estate, we saw sequential growth of 3%, slightly ahead of the industry but below the pace of prior quarters, impacted both by higher rates as well as a prudent approach to new originations, given where we are in the cycle, and maintaining discipline on risk-adjusted returns. Credit performance remained strong, with a net recovery of 2 basis points reflecting continued stability in both our C&I and CRE portfolios, and overall, a net release of loan loss reserves driven by energy.

Leaving the Commercial Bank and moving on to Asset & Wealth Management, on Page 7. Asset & Wealth Management reported net income of $385 million, with pretax margin and ROE each at 16%. Revenue of $3.1 billion was up 4% year-on-year, driven primarily by higher market levels and strong banking results on higher deposit NII. Recall that last year's first quarter included a one-time $150 million gain on the sale of an asset. Expense of $2.6 billion was up 24% year-on-year, predominantly driven by higher legal expense.

I want to emphasize that the underlying core business results remain very strong. In fact, in line with the strongest performance of the business ever. This quarter, we saw net long-term inflows of $8 billion, with strength in fixed income and multi-asset being partially offset by outflows in equity. Assets under management of $1.8 trillion and overall client assets of $2.5 trillion were both up 10% year-on-year, reflecting higher market levels and net inflows into both liquidity and long-term products. Finally, banking balances continued to be strong, with loan and deposits up 7% and 5%, respectively.

Moving on to Page 8 and Corporate. Corporate generated $35 million of net income for the quarter. Treasury and CIO's results improved, in part reflecting the benefit of higher rates, and Other Corporate benefited from the release of certain legal reserves.

Finally, turning to Page 9 and the outlook. With the addition of the March rate hike, we've updated our NII scenarios as follows. Rates flat from here, so the full year NII would be up around $4 billion. Based on the implied, NII would be up by around $4.5 billion. And of course, the Fed dots would imply the possibility of 3 rate hikes this year, which is not fully priced in. So expect second quarter NII to be up sequentially, approximately $400 million, consistent with what we saw this quarter.

To wrap up, these results reflect strength broadly across our businesses. We remain well positioned to benefit from client flows and a healthy economy as we serve our clients and communities, and we look forward to continuing to grow our business.

With that, operator, you can open up the line to Q&A. Operator?

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Questions and Answers

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Operator [1]

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Our first question comes from John McDonald with Bernstein.

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [2]

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So I had a question about any early signs of deposit beta and elasticity. I guess, on the consumer side, in your retail banking area, are you seeing customers increasingly ask for higher rates in their deposit accounts or any activity where they're moving from kind of checking to savings and kind of early signs of pressure on deposit pricing?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [3]

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So in the retail space, the answer is no, not really. And to be completely honest, we've been pretty consistent that we would not really have expected there to be much in terms of deposit reprice at absolute levels of rates that are still quite low. And so with IOER at 100 basis points, we're still in that sort of realm of the atmosphere, and so we would expect that to start happening a couple of rate hikes from here maybe. We'll have to wait and see. We've obviously never really been through exactly this before. On the other side of the equation, in the Wholesale space, we are in the process of seeing a reprice happen.

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [4]

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Got it, okay. And in terms of customers, they're not really asking yet or behaving in a way that they're looking price-sensitive, you're not seeing early signs of it yet?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [5]

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No.

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Operator [6]

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Your next question comes from Glenn Schorr with Evercore ISI.

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Glenn Paul Schorr, Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst [7]

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I wanted to maybe get out in front of what could be some brewing issues in retail land. And the perspective I'm looking for is you have plenty of gross exposure to retail and retail-related. However, there seems to be plenty of collateral, and you're typically at the top of the capital structure, too. So can you talk about both direct exposure in some of the problem retail areas and the related exposure in, like, commercial real estate and on the mall side?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [8]

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Yes, so I don't have all those numbers directly in front of me. I know that in the Commercial Bank, our exposure to mortgage is really pretty modest, it's around about a total of $3 billion in the commercial real estate space. And I would tell you that while there obviously is a lot of discussion around retail, and with some merit, it's very case-by-case, location-by-location-specific. And I kind of liken the discussions a lot to discussions we have around our bricks-and-mortar banking businesses, which is consumer -- the way consumers engage with retail isn't changing, it doesn't mean they will stop engaging with retailers. And so it will be very specific with respect to location and tenants. And it doesn't necessarily mean that retail is going to be in as much potential trouble as I think people are talking about. So we remain cautiously watching it but also cautiously optimistic that it's not -- that it's a bit overblown.

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

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And you should assume that we've looked at not just direct retail or retail-related real estate, and all the vendors to any potentially covered retailers. When you put it all together, it's a little bit like there'll be something there, but it's nothing that will be dramatic when it's happening.

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Glenn Paul Schorr, Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst [10]

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Is the main reason you're positioned in the stack, meaning I notice you have a lot of collateral against your exposure, and like I said, you tend to be at the top of the stack. Is that the main issue? I remember doing this with you guys 2 years ago in oil, while oil was dropping, and it turned out you barely came out with a few cuts and bruises. There seems to be more collateral here, but I don't want to put words into your mouth.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [11]

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Are you talking about real estate related to retail? Or are you talking about retailers?

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Glenn Paul Schorr, Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst [12]

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I'm talking both because you do have hundreds of billions of direct retail exposure plus the commercial real estate exposed to it. I'm just thinking you have...

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

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No, you're way out of line. I mean, direct retail exposure, we're very careful. The retail business has always been violent and volatile. You can look back through our history, and half of them are gone after 10 years. That's the normal course. So we're usually senior, we're very careful with stuff like that. And then you go to real estate, okay, most of our real estate has nothing to do with retail. So we do have some shopping centers and malls and buildings and stuff like that. But those are generally high on the stack, well-secured and not relying on single retailers, et cetera.

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Glenn Paul Schorr, Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst [14]

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Okay, I was just looking at taking a temperature.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [15]

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It will be like oil and gas for us, it won't be a big deal.

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Operator [16]

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Your next question comes from Gerard Cassidy with RBC.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [17]

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Can you give us some color on the credit card area in terms of -- I know you upped your credit card losses earlier in the year at the Investor Day in the fall of last year. What's your guys outlook for the credit losses in the credit card portfolio? Where would you tolerate it to? And at what point do you really change the underwriting standards if you need to?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [18]

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Yes. So look, I know that -- so one of the things that we want to remind everybody before we talk about the trend is that the credit card losses are still at absolutely very, very low levels. And notwithstanding whatever we would have done or have done or continue to do with our credit books, we would ultimately have expected them to normalize to higher rates regardless, so -- and then for -- obviously, the first quarter hasn't been that...

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [19]

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It's probably just the previous cycle stuff.

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [20]

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Yes, exactly. And obviously, first quarter has some seasonality. So I would just start by saying that the charge-off rates we're seeing are completely in line with our expectations and guidance that we gave you at Investor Day both in terms of 2017 being below 3% and over the medium term being between 3% and 3.25% for all of the reasons we articulated. A combination of positive credit expansion that took place over the last couple of years and the performance of those newer vintages is in line with our expectations and with high risk-adjusted margins. So it's not really about tolerating the charge-offs as long as we're getting paid properly for the risk, which is the case. And obviously, as we see those charge-off rates both normalize and reflect those newer vintages, they will go up modestly over time. And we expanded our credit in a targeted way, but it wasn't a significant expansion. And we will respond in our credit and risk appetite to whatever we're seeing in the environment. But it won't necessarily be predicated by charge-offs rates as long as (inaudible).

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [21]

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Got you. And as a follow-up, obviously you had very strong investment banking on the FICC trading side, very strong capital market numbers. Are you guys seeing further evidence of taking more market share from your competitors in any of the product lines, whether it's investment banking or FICC trading or equity trading, et cetera?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [22]

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So I would say if you look back over 2016 and even 2015 and '16, it's true and clear that we gained share, not just in fixed income -- reasonable share not just in fixed income but also in equities. And our business performed well last year. And I would suggest to you that we will defend that share. But the competition is back and healthy. And you can't expect us to continue to gain share at those kinds of levels. We want to defend it, but it's a healthy competitive market right now. So I would say not really.

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Operator [23]

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Your next question comes from Betsy Graseck with Morgan Stanley.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [24]

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A couple of questions, one on Card. How large are you willing to be in Card? I think on various metrics, you're between 15% and 22%, depending on if you're looking at things like merchant acquiring or the balances in Card in general as a percentage of total outstandings in the country?

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [25]

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We have a ways to go before we're concerned.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [26]

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I'm asking because in the last cycle, you were really nimble. And do you still feel that you can be nimble at this market share?

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [27]

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For merchant processing, there's a lot of share you can gain. And that's not even close, because you give products and services and a change in technology. And I think we're way, way in credit card when you say, "Well, that's too big for JPMorgan Chase." There is a point where it's going to be a good question, but it's not even remotely close to this one.

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [28]

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And I would also say that Cards continue to be a very competitive space. So we will continue to try and provide our customers with significant value and have deep, engaged relationships. But I don't think you're going to see material shifts in share in the short term.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [29]

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And we also look strategically at credit card, debit card, online bill pay, P2P as all one big thing to do a great job for the client.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [30]

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And then when you're thinking about the credit box, I know a while back, you mentioned, okay, we widened the box to 680. Is there any interest in widening it further?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [31]

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Not particularly at this point. I think we're very happy with the performance of the portfolios, with the growth rates we're getting. You saw that our core card loans were up 9% year-on-year. We're getting a lot of NII benefit from that. So I think we're pretty well positioned at this point.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [32]

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So loan growth should probably stay in line with where it is or slow down, is that how should we be thinking about it?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [33]

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Yes, I would say loan growth should be in the mid- to higher single digits.

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Operator [34]

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Your next question is from Jim Mitchell with Buckingham Research.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [35]

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I'm going to follow up on the NII question. I think your implied guidance of $4.5 billion higher than 2016 is now $500 million from where you were at the Investor Day. Is that the lower deposit beta experience? What's driving, I guess, the modest increase? And then just as a follow-up on that, in terms of if we do -- the implied curve, I think, has about one more rate hike in June. If we were to get another one realized, a dot plot, say we get another one in September, would that be a material increase in that expectation or just incremental or just how do we think about that?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [36]

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So obviously, when we give you guidance, we give you sort of reasonably rounded numbers. So actually, the impact of current implied is a bit more than $500 million more than it was at Investor Day. But in the law of big numbers, that's a pretty reasonable amount. Yes, there is an element, of course, as we talked about, in the Wholesale space, where we are seeing reprice happen, and it does reflect our estimates of what we expect to see over the course of the year in cumulative deposit bases. And with respect to if there was -- and you know that the implied has priced in 1.5 more hikes, so it's -- obviously, March is earlier, so longer, there's a little bit more rate benefit. But it's sort of in line with our expectations. And if we had another rate hike, it would likely be later in the year, and ultimately have a relatively modest impact on this year but obviously be important going forward.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [37]

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Okay. So anything in September would be sort of incremental?

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

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You should be able to extrapolate those numbers on your own.

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Operator [39]

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Your next question is from Ken Usdin with Jefferies.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [40]

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Marianne, you had noted the obvious slowdown we've seen in C&I, and Jamie, in the press release, you talk about the consumers and businesses being healthy and the pro-growth initiatives. Since the Analyst Day, we obviously had Obamacare not go through, and then there's been some doubts on tax reform. So just wondering, can you help us understand just where you're seeing that slowdown in C&I? And how would -- where are we in terms of that confidence turning into real results? And how much is just the wait and see versus where the economy actually is?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [41]

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I think it's important to put that slowdown into context. I mean, we did have 8% growth year-on-year in C&I. We're just saying sequentially, things are a bit quieter, and there's a whole bunch of reasons that could be driving that. And importantly, you mentioned it, when we're in dialogue with our clients, they are optimistic and they are thinking about growing their businesses and hiring, and all of those things are true. And so putting aside those that have access to capital markets for a variety of reasons in newer bank loans, it's completely understandable that optimism would lead actions. And so as to what that lag will look like, we'll wait and see. But fundamentally, a pro-growth series of policies will be constructive to the economy, to our clients, and ultimately, will end up in them hiring, spending, and they already are, and we'll see that translate into loan growth. Whether that's in the second half of this year, we'll see.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [42]

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I would just add that I wouldn't overreact to the short term in the loan growth because there are so many things that affect it. When you go through the episodic part, if you look at CIB, I wouldn't look at loan growth at all, because companies have a choice of doing loans and deals and -- or bonds, something like that. Look at credit card looks okay. Mortgage is obviously affected by interest rates. Autos is obviously affected by auto sales. And middle market was okay. It was like it was slow, but it was okay. So I wouldn't overreact to that. And the second thing is you all should expect as a given that when you have a new president and they get going, that the 9 months after the 100 days is going to be a sausage-making period. There will be ups and downs, wins and loss, stuff like that, okay? But it is a pro-growth agenda, tax, infrastructure, regulatory reform. And that is a good thing, all things being equal. And we think that if that took place, it would be helpful to Americans. But to not -- to expect it to be smooth sailing, that would just be silly.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [43]

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Yes, fair points. And just one quick follow-up, just on the deal making side. M&A has slowed a little bit, but I'm assuming it's the same point, Jamie, just in terms of just pipelines and expectations that corporates have about transacting. Does that fit into that same vein? Or is there anything different in terms of just companies getting -- strategics getting more aggressive in terms of acquiring and adding to their businesses?

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

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It looks fine. And of course, it's episodic.

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [45]

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Yes. And I would also say that while, of course, people's dialogues include a degree of discussion around regulatory reform and tax reform and the like, it isn't stopping the strategic dialogue and it isn't stopping people from -- or boards from considering strategic deals partly because of what you said, partly because there is a recognition that these things will take some time to ultimately get finalized, and that they don't want to put their strategic agenda on hold. So in some ways, you get both sides of the equation. People aren't going to wait indefinitely to get certainty on issues when there are good strategic deals that can be done, and that's past the dialogue. So not to say it has no impact, but it's still quite healthy.

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Operator [46]

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Your next question is from Marty Mosby with Vining Sparks.

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Marlin Lacey Mosby, Vining Sparks IBG, LP, Research Division - Senior Analyst [47]

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I wanted to focus on deposit pricing in the sense that before the Feds started moving up, deposit rates and the Fed funds rates were right on top of each other, around 15 basis points. Now the effective Fed funds rates is around 90 basis points and deposit costs are only 20. So that 70 basis points on your $1 trillion of deposits basically gives you about $7 billion worth of incremental revenue that's needed to cover the cost of branches and other things for those deposit franchise. At what point do you hit a targeted kind of spread? And where is that where you begin to at least breakeven on those costs versus revenues?

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [48]

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Can I just answer that? Marianne has given you guys some very specific guidance on interest rates. When interest rates got to 0, remember that when it floored, those -- no one expected the first 25 to 50 basis point to necessarily be paid out, because of the cost. Marianne also gave you at Investor Day a very forward-looking view of that, where it kind of normalizes, okay? And it's different for every different type of deposit. For wholesale deposits, commercial credit deposits, company deposits, treasury deposits. They're all different. So it's hard summarize it all. But at one point, you're going to go back to kind of a normalized spread, and in terms of just retail, I would say that's like 3%.

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [49]

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Maybe a little less than that.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [50]

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Maybe a little less.

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [51]

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And I would also just say, I am glad that you brought up one point because it's something that I'd like -- a point that I'd like to make, which is when people think about the benefit we get from NII on rising rates, there's an element of people making it sound very passive. Yes, you're correct, we did build those branches, we acquired those customers, we built the product, we invested in the customer service to be able to enjoy the industry-leading deposit growth that we're having. But I would also make the -- and so as margins improve, then, we will obviously enjoy the benefit of that. And to your point, we invested to be able to. But I will say that if you -- we look at the performance of our branches every single week, month, individually, put together by market, and the very, very, very vast majority of them, meaning that only a handful do not, are profitable in their own right today at these spreads on a marginal basis. So the branches are doing very well.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [52]

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There's another number we give you all that you should look at. We give you what we expect normalized margins and normalized returns to be in Consumer, Card, all these businesses. Those numbers include normalized credit card charge-offs, like the credit card, the number we now use is for in a quarter, something like that, and in retail, going back to normal spreads. That's what those numbers include. And of course, it all bounces around. But we kind of look at them to be priced for normalized results. We don't price for them to be overearning or underearning or to have too much credit or too little. And that's kind of how we run the business.

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Marlin Lacey Mosby, Vining Sparks IBG, LP, Research Division - Senior Analyst [53]

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A follow-up to that is really what I'm getting at is last year, everybody was assuming through the cycle kind of betas, and we were saying that they were going to be much lower early on. We do think once you get to a certain target, usually about 100 basis points of spread, you start to see a little bit more pricing pressure starting to kick in, just like you were saying, Jamie, in the sense of different products...

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [54]

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We've built that into every number we've given you. We've always told you the beta and gamma.

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [55]

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Yes, I can point you to a presentation in May of 2014 where we showed exactly what we expected the complexity of deposit reprice to look like based upon historical moves. So what we have actually seen to date looks incredibly similar in terms of realized reprice. You're absolutely right. I will tell you though that history may not be a precise predictor of the future because we've never really been in this exact position before and other things play into the equation, including the fact that the industry, but us specifically, have significantly invested in other customer service products, items like digital and the like, which will change the dynamic one way or another on reprice. So you're right, historically, 100, 150 basis points should dot [ph] see some movement, we'll see.

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Marlin Lacey Mosby, Vining Sparks IBG, LP, Research Division - Senior Analyst [56]

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And the last component of this is the balances continue to grow. So as long as we're seeing double-digit kind of sequential, annualized and year-over-year growth in deposits, that provides a little bit cover in a sense of what you're talking about as well. We may see a little bit more lag just because we're still continuing to get deposit growth.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [57]

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Yes, but I'd be a little cautious there, too. I mean, we feel great about the deposit growth and the account growth. So you have new accounts that are growing and existing accounts are growing. Remember, there you also -- history -- you've got to be very careful, because if rates were higher, people do different things with their money, like CDs. And then how they view the stock market, that money -- some of that attracts lenders to the market. So we're always conscious of the fact those flows kind of ebb and flow, and history is only somewhat of a guide to that.

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Operator [58]

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

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [59]

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I had a few questions on deregulation. Jamie, in your shareholder letter, you dedicated a lot of time on mortgage and having -- opening that up for banks to originate more of the percentage of mortgage in the United States. As we look forward, do we need legislative change for the banks to gain more market share from nonbanks and mortgage, like clarity in QM or the CFPB? Or would a change in supervisory attitudes be enough for that to shift on the mortgage side?

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

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So I picked that category out precisely because it didn't take legislation and it was very important. And my point isn't about banks versus nonbanks. My point is about the United States of America and what these things did to the availability of credit to a certain class of people. I was very specific, and we actually published a research report in mortgage land, which you can go get, by Mr. Jozoff, that really breaks it out. But because of the cost of servicing delinquent accounts, $2,000 a year, because of the additional cost of origination, because of the potential litigation, because of the not clarity around the QM, because of the forward claims that the consumer's both paying more and the credit box is wider than it would otherwise be. And that we actually believe that credit box is hurting first-time buyers, younger, self-employed, prior defaults, someone who when they defaulted passed his reserve, who always say deserves a second chance. So that policy has restricted that. And the shocking thing to me is the absolute size of that, which we think could be $300 billion to $500 billion a year. That one thing alone could have added -- because of a secular stagnation, could have added 0.3% or 0.4% a year to growth. So if you'd changed it 5 years ago, you're talking about a lot of growth, a lot of jobs, a lot of new homes, a lot of young families into homes and a very positive thing without taking a lot of extra credit risk. It's not -- it was about America, is why I wrote it. I could care less whether the banks and nonbanks do it. My point about that was how it's hurting the growth of America and hurting that class of citizens. And I really think some of you should be writing about that more because that's how important it is. That was one example.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [61]

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That's clear. And the follow-up to that is a couple of -- a week ago or so, there was a lot of talk from Washington about the current administration potentially supporting Glass-Steagall. And of course, a lot of your investors called in concerned. And Jamie and Marianne, a 2-part question, I'm wondering if that's a real worry for JPMorgan's shareholders? And second, Marianne, maybe at an Investor Day 2 years ago, you mentioned that the capital and the cost that a breakup would save was not that much. And I'm wondering if you could also, if you remember, refresh us on that analysis.

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [62]

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Okay. So I would just start by saying we've been consistent that our operating model, including the diversification of our businesses, has been and was a source of strength not just for us but also for the financial markets during the crisis. And there is strength in the way the company operates that can't be discounted. I would also say that the commentary feels unnecessary given where the industry stands on capital liquidity and regulatory reform broadly. And I would just point, as I'm sure you all read, to most recently, Governor Tarullo making comments about this but historically, other thought leaders in the financial stability space talking about it. And I would further say that it doesn't feel, for the reasons that you just articulated in terms of structural reform or structural change in the model of banks, that, that would be consistent with a level playing field and pro-growth agenda in the U.S. So that's kind of how we feel about it. I can't give you specific reasons to not continue to monitor the situation. But it doesn't feel consistent with the rest of the objectives of the administration. And with respect to Investor Day a couple of years ago, lots of things have fundamentally changed since then, but the ultimate conclusion hasn't, which is that we believe that there's significantly more value for our shareholders, and as I said before, for the economy with this company the way it is today than in some other form.

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Operator [63]

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Your next question comes from Matt O'Connor with Deutsche Bank.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [64]

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We've obviously seen quite a bit of flattening of the yield curves. And it could reverse pretty quickly if there is progress made on the pro-growth agenda. But just talk about at what point does the flatter yield curve start to impact NIM. And I guess I'm thinking specifically if we get a couple of more hikes on the short end, but the long end either doesn't move or the long end comes down more, how do we think about the breakpoint in terms of NIM benefiting the short end being offset by the flatter yield curve?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [65]

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First of all, we don't overthink the shape of the curve or the process of normalization in any one period. We think about the reason for the actions. And ultimately, as long as they're kind of growing, you'll see both of the short and the long end of rates ultimately go up. And even though I know that it's lower than what we've broken down, broken below a little bit of the lower bounds, it's been in the kind of 2.30%, 2.60% range for a while, so we're still within -- largely speaking, within the range. And our central case is that we're going to see the 10-year higher by the end of the year. And if you look at our earnings and risk disclosures, we're much more sensitive to -- as a pure NII, NIM matter, to the front end of rates. And so not to say it would not have an impact, but it would take a while for that to have an impact that would meaningfully offset any of the benefit of higher short-end rates.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [66]

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Okay. And then separately, as we think about central banks winding down, some of the QE and the Fed actually shrinking their holdings, how do you think about that impacting your businesses? And obviously, there might be a rate impact. I think you talked about your rate expectations quite a bit. But just how do you think it might impact, say, the markets business with potentially more assets kind of out there to be purchased and sold?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [67]

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Well, I mean, ultimately, sort of any actions by central banks, any change in the shape of the yield curve, anything that is presenting an opportunity for clients to transact and trade is an opportunity for our businesses. So as long as it happens in a reasonably rational fashion and there are no significant events, it should create an opportunity for clients and an opportunity therefore for us.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [68]

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Always keep in mind that why they do something probably is more important than the what they do. So if they are doing it because the American economy is getting stronger, that is more important than the direct effect of adding -- letting securities mature, et cetera.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [69]

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I guess there's 2 thoughts on -- there's the impact of QE on the economy, and then the impact of QE on some of the markets businesses that maybe there's been a crowding out from all the QE, so as they unwind, that it could actually boost activity levels.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [70]

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It could, I just wouldn't put that in your models.

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Operator [71]

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Your next question is from Eric Wasserstrom with Guggenheim.

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Eric Edmund Wasserstrom, Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst [72]

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Just a couple of questions on consumer. We've talked a lot about card losses. But one thing that seems to be a little bit unusual is that a lot of the commentary across many of the card issuers is for the expectations of losses to be higher in the first half than the second half. And I just wanted to get your perspective on the likelihood of that trajectory.

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [73]

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So well, I mean -- so in terms of rates, obviously, the loan balances are seasonally low in the first quarter and charge-off rates are higher in the first quarter. But overall, we're not expecting to see abnormal patterns in our charge-offs.

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Eric Edmund Wasserstrom, Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst [74]

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Got it. And then just to follow up on auto, your release alluded a little bit to the impact of declining residual values, which has been, of course, a focus for the past couple of years. Was there anything unusual in your view about the pace of decline in resid values in this first quarter?

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [75]

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Because it happens every 5 to 10 years, so why would anyone be surprised? And we've always been very conscious of this and very careful about how we do leases, we do them conservatively, we've got...

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [76]

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But we only do them to our strategic manufacturing businesses.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [77]

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And only to strategic manufacturers, and we properly account for it. And we have loss mitigation. That's pretty important. So no, we're not surprised, it's going to happen every now and then.

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Eric Edmund Wasserstrom, Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst [78]

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But in terms of the pace of resid values from here, similar or different in your view?

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [79]

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I have no idea.

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Operator [80]

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Your next question comes from Matthew Burnell with Wells Fargo Securities.

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Matthew Hart Burnell, Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst [81]

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Marianne, let me start with a question on the net revenue rate in the Card Services business. That's been relatively steady, a little over 10%, for the last couple of quarters. I presume, given your outlook, that, that would stay pretty close to the 10.1% level that you reported for the last couple of quarters? Or are you thinking about a change there as you slightly change your marketing strategy?

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [82]

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So it's actually got somewhat less to do with our marketing strategy than it has to do with the fantastic success we've had with the new products, particularly Sapphire Reserve, in the fourth quarter and in the first quarter of this year. But fundamentally, if you go back, I think, to a conference that Kevin Watters spoke at last year sometime in, I think, September, he said, look, we're going to see the revenue rate be lower about 10% and some for the couple of quarters while we acquire all of these accounts. Once we've hit a pace, we should see it middle out at 10.5% the full year of 2017, so the first quarter lower and subsequent quarters continuing to now start rising back up towards the 11.25%, which was our ultimate run rate target. And that's still fundamentally what we're expecting to see, which is we're at a -- assuming that our expectations of what we're going to see in account growth over the future period continues to hold, we would expect to see an increase from here in the second quarter, the overall year, to be sort of finish the mid-10s and the year 11-ish, and then go back to 11.25% over the course of the next couple of years.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [83]

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(inaudible)

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [84]

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And we have great new products.

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Matthew Hart Burnell, Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst [85]

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Fair enough. Jamie, a question for you, just another one on the regulatory landscape. There are a number of open positions inside the Beltway at a number of the primary bank regulators, and I'm just curious in terms...

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [86]

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I said I'm not interested. I'm kidding.

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Matthew Hart Burnell, Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst [87]

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Well, somebody should fill those spots if it's not you. And I'm just curious what you're thinking is of the timing of those appointments and how quickly those could get filled and what benefit that might provide to the banking industry.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [88]

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Look, I've been clear. I think that Gary Cohn and Steve Mnuchin are doing the right thing. They want to find the right people for those jobs. They're talking about -- I gather they're talking to lots of people. But even after they announce it, remember, they need to be vetted and confirmed, and that's -- that normally could take 90 days. Well, the sooner, the better, but I think getting the right people is as equally important.

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Operator [89]

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And we have no other questions in queue at this time.

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Marianne Lake, JPMorgan Chase & Co. - CFO and EVP [90]

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Okay. So just, Glenn, I don't know if you're still on. I've got a couple of numbers for you in terms of retail exposure. Our direct retail exposure in the wholesale space is about $20 billion, 70% -- more than 70% investment grade and more than 15% secured. And in terms of commercial real estate, about $11 billion, largely ABL, picked the right names, structural protection, all the things you talked about. So not that it's nothing, but it's -- in the context of our overall wholesale lending portfolio, it's not as concentrated, I think, as perhaps you were implying. So if you want to call Investor Relations and let us know what you were looking at, we can try and reconcile those numbers for you. Okay. Thank you, everyone.

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James Dimon, JPMorgan Chase & Co. - Chairman, CEO and President [91]

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Thank you.

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Operator [92]

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Thank you for your participation. This does conclude today's conference call, and you may now disconnect.