JPMorgan Chase : 1Q23 Earnings Transcript

1 Q 2 3 F I N A N C I A L R E S U L T S

EARNINGS CALL TRANSCRIPT

April 14, 2023

MANAGEMENT DISCUSSION SECTION

......................................................................................................................................................................................................................................................

Operator: Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's First Quarter 2023 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. 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, Jeremy Barnum.

Mr. Barnum, please go ahead.

......................................................................................................................................................................................................................................................

Jeremy Barnum

Chief Financial Officer, JPMorgan Chase & Co.

Thanks, and good morning, everyone. The presentation is available on our website, and please refer to the disclaimer on the back.

Starting on page 1, the Firm reported net income of $12.6 billion, EPS of $4.10 on revenue of $39.3 billion and delivered an ROTCE of 23%. These results included $868 million of net investment securities losses in Corporate.

Before reviewing our results for the quarter, let's talk about the recent bank failures. Jamie has addressed a number of the important themes in his shareholder letter and a recent televised interview so I will go straight to the specific impacts on the firm.

As you would expect, we saw significant new account opening activity and meaningful deposit and money market fund inflows, most significantly in the Commercial Bank, Business Banking and AWM. Regarding the deposit inflows, at the Firmwide level, average deposits were down 3% quarter-on-quarter while end-of-period deposits were up 2% quarter-on-quarter - implying an intra-quarter reversal of the recent outflow trend as a consequence of the March events. We estimate that we have retained approximately $50 billion of these deposit inflows at quarter-end.

It's important to note that while the sequential period-end deposit increase is higher than we would have otherwise expected, our current full year NII outlook - which I will address at the end - still assumes modest deposit outflows from here. We expect these outflows to be driven by the same factors as last quarter, as well as the expectation that we will not retain all of this quarter's inflows.

Now back to the quarter, touching on a few highlights. We grew our IB fee wallet share, consumer spending remains solid with combined debit and credit card spend up 10% year-on-year, and credit continues to normalize, but actual performance remains strong across the company.

On page 2, we have some more detail. Revenue of $39.3 billion was up $7.7 billion or 25% year-on-year. NII ex. Markets was up $9.2 billion or 78%, driven by higher rates, partially offset by lower deposit balances. NIR ex. Markets was down $1.1 billion or 10%, driven by the securities losses previously mentioned as well as lower IB fees and lower auto lease income on lower volume, and Markets revenue was down $371 million or 4% year-on-year.

Expenses of $20.1 billion were up $916 million or 5% year-on-year, driven by compensation-related costs reflecting the annualization of last year's headcount growth and wage inflation. These results include the impact of the higher FDIC assessment I mentioned last quarter which, of course, is unrelated to recent events. And credit costs of $2.3 billion included net charge-offs of $1.1 billion, predominantly in Card. The net reserve build of $1.1 billion was largely driven by deterioration in our weighted-average economic outlook.

On to balance sheet and capital on page 3. We ended the quarter with a CET1 ratio of 13.8%, up about 60 basis points, which was primarily driven by the benefit of net income less distributions and AOCI gains. And in line with what we previously said, we resumed stock buybacks this quarter and distributed a total of $1.9 billion in net repurchases back to shareholders.

Now, let's go to our businesses starting with CCB on page 4. Touching quickly on the health of U.S. consumers and small businesses based on our data. Both continue to show resilience and remain on the path to normalization, as expected, but we continue to monitor their activity closely. Spend remains solid and we have not observed any notable pullback throughout the quarter.

Moving to financial results, CCB reported net income of $5.2 billion, on revenue of $16.5 billion, which was up 35% year-on-year. In Banking and Wealth Management, revenue was up 67% year-on-year, driven by higher NII on higher rates. Average deposits were down 2% quarter- on-quarter, in line with recent trends. Throughout the quarter, we continued to see customer flows to higher yielding products as you would expect, but we're encouraged by what we are capturing in CDs and our wealth management offerings. Client investment assets were down 1% year-on-year, but up 7% quarter-on-quarter, driven by market performance as well as strong net inflows. In Home Lending, revenue was down 38% year-on-year, largely driven by lower net interest income from tighter loan spreads and lower production revenue.

2

Moving to Card Services and Auto - revenue was up 14% year-on-year, largely driven by higher Card Services NII on higher revolving balances, partially offset by lower Auto lease income. Credit card spend was up 13% year-on-year. Card outstandings were up 21%, driven by strong new account growth and revolve normalization. And in Auto, originations were $9.2 billion, up 10% year-on-year. Expenses of $8.1 billion were up 5% year-on-year reflecting the impact of wage inflation and higher headcount. In terms of credit performance this quarter, credit costs were $1.4 billion, reflecting reserve builds of $300 million in Card and $50 million in Home Lending. Net charge-offs were $1.1 billion, up about $500 million year-on-year, in line with expectations as delinquency levels continue to normalize across portfolios.

Next, the CIB on page 5. CIB reported net income of $4.4 billion on revenue of $13.6 billion. Investment Banking revenue of $1.6 billion was down 24% year-on-year. IB fees were down 19%. We ranked number one with first quarter wallet share of 8.7%. In advisory, fees were down 6% compared to a strong first quarter last year. Our underwriting businesses continued to be affected by market conditions with fees down 34% for debt and 6% for equity.

In terms of the outlook, the dynamics remain the same: our pipeline is relatively robust, but conversion is sensitive to market conditions and the economic outlook. We expect the second quarter and the rest of the year to remain challenging.

Moving to Markets, total revenue was $8.4 billion, down 4% year-on-year. Fixed Income was flat. Rates was strong during the rally early in the quarter, as well as through the elevated volatility in March. Credit was up on the back of higher client flows and Currencies & Emerging Markets was down relative to a very strong first quarter in the prior year. Equity Markets was down 12%, driven by lower revenues in derivatives relative to a strong first quarter in the prior year and lower client activity in Cash.

Payments revenue was $2.4 billion, up 26% year-on-year. Excluding the net impact of equity investments, primarily a gain in the prior year, it was up 55%, with the growth driven by higher rates, partially offset by lower deposit balances. Securities Services revenue of $1.1 billion was up 7% year-on-year, driven by higher rates, partially offset by lower deposit balances and market levels. Expenses of $7.5 billion were up 2% year-on-year as higher headcount and wage inflation were largely offset by lower revenue-related compensation.

Moving to the Commercial Bank on page 6. Commercial Banking reported net income of $1.3 billion. Revenue of $3.5 billion was up 46% year-on-year, driven by higher deposit margins. Payments revenue of $2 billion was up 98% year-on-year driven by higher rates, and gross Investment Banking revenue of $881 million was up 21% year-on-year on increased M&A and bond underwriting from large deal activity.

Expenses of $1.3 billion were up 16% year-on-year, largely driven by higher compensation expense, including front office hiring and technology investments, as well as higher volume-related expense. Average deposits were down 16% year-on-year and 5% quarter-on- quarter, predominantly driven by continued attrition in non-operating deposits as well as seasonally lower balances.

Loans were up 13% year-on-year and 1% sequentially. C&I loans were up 1% quarter-on-quarter, with somewhat different dynamics based on client size. In Middle Market Banking, higher rates and recession concerns have decreased new loan demand and utilization, which is also leading to weakness in capex spending.

In Corporate Client Banking, utilization rates increased modestly quarter-on-quarter as capital market conditions led more clients to opt for bank debt. CRE loans were also up 1% sequentially, with higher rates creating headwinds from both originations and prepayments. And given the recent focus on commercial real estate, let me remind you that our office sector exposure is less than 10% of our portfolio and is focused in urban dense markets; and nearly two-thirds of our loans are multifamily, primarily in supply constrained markets. Finally, credit costs of $417 million included a net reserve build of $379 million predominantly driven by what I mentioned upfront.

Then to complete our lines of business, AWM on page 7. Asset & Wealth Management reported net income of $1.4 billion with pre-tax margin of 35%. Revenue of $4.8 billion was up 11% year-on-year, driven by higher deposit margins on lower balances and a valuation gain on our initial investment triggered by taking full ownership of our Asset Management Joint Venture in China, partially offset by the impact of lower average market levels on management fees and lower performance fees. Expenses of $3.1 billion were up 8% year-on-year, predominantly driven by compensation, reflecting growth in our private banking advisor teams, higher revenue-related compensation and the run-rate impact of acquisitions.

For the quarter, net long-term inflows were $47 billion, led by Fixed Income and Equities. And in liquidity, we saw net inflows of $93 billion, inclusive of our ongoing deposit migration. AUM of $3 trillion was up 2% year-on-year and overall client assets of $4.3 trillion were up 6% driven by continued net inflows into liquidity and long-term products. And finally, loans were down 1% quarter-on-quarter, driven by lower securities-based lending, while average deposits were down 5%.

Turning to Corporate on page 8. Corporate reported net income of $244 million. Revenue was $985 million compared to a net loss of $881 million last year. NII was $1.7 billion, up $2.3 billion year-on-year, due to the impact of higher rates. NIR was a loss of $755 million compared with a loss of $345 million in the prior year, and included the net investment securities losses I mentioned earlier. Expenses of $160 million were down $24 million year-on-year. And credit costs of $370 million were driven by reserve builds on a couple of single name exposures.

3

Next, the Outlook on page 9. We now expect 2023 NII and NII ex. Markets to be approximately $81 billion. This increase in guidance is primarily driven by lower rate paid assumptions across both consumer and wholesale in light of the expectation of Fed cuts later in the year, as well as slightly higher card revolving balances. Note that in line with my comments at the outset, recent deposit balance increases are not a meaningful contributor to the upward revision in the NII outlook given that we expect a meaningful portion of the recent inflows to reverse later in the year.

I would point out that this outlook still embeds significant reprice lags: we think a more sustainable NII ex. Markets run-rate in the medium-term is well below this quarter's $84 billion, as well as below the $80 billion that is implied for the rest of the year by our full year guidance; and while we don't know exactly when this lower run-rate will be reached, when it happens, we believe it will be around the mid-70s.

And, of course, as we mentioned last quarter, this NII outlook remains highly sensitive to the uncertainty associated with the timing and the extent of deposit reprice, investment portfolio decisions, the dynamics of QT and RRP, the trajectory of Fed funds, as well as the broader macroeconomic environment - including its impact on loan growth. Separately, it's worth noting that Markets NII may start to trend slightly positive towards the end of the year as a function of mix and rate effects.

Moving to expenses, our outlook for 2023 continues to be about $81 billion. Importantly, this does not currently include the impact of the pending FDIC special assessment. And on credit, we continue to expect the 2023 Card net charge-off rate to be approximately 2.6%.

So to wrap up, our strong results this quarter once again highlight the earnings power of this diversified franchise. We have benefited from our fortress principles and commitment to invest, which we will continue to do as we head into an increasingly uncertain environment.

With that - operator please open the line for Q&A.

......................................................................................................................................................................................................................................................

QUESTION AND ANSWER SECTION

Operator: Please stand by. The first question is coming from the line of Steve Chubak with Wolfe Research, now open.

......................................................................................................................................................................................................................................................

Steven Chubak

Analyst, Wolfe Research LLC

Hey, good morning.

Q

......................................................................................................................................................................................................................................................

Jeremy Barnum

Chief Financial Officer, JPMorgan Chase & Co.

Good morning, Steve.

A

......................................................................................................................................................................................................................................................

Steven Chubak

Analyst, Wolfe Research LLC

Q

So, Jamie, I was actually hoping to get your perspective on how you see the recent developments with SVB impacting the regulatory landscape for the big banks. In your letter you spent a fair amount of time highlighting the consequences of overly stringent capital requirements, the risk of steering more activities to the less regulated nonbanks. But what are some of the changes that you're scenario planning for - whether it's higher capital, increase in FDIC assessment fees? And along those same lines, how you're thinking about the buyback given continued strong capital build, but a lot of macro uncertainty at the moment.

......................................................................................................................................................................................................................................................

Jamie Dimon

Chairman & Chief Executive Officer, JPMorgan Chase & Co.

A

Well, I think you were already kind of complete with answering your own question there. Look, we're hoping that everyone just takes a deep breath and looks at what happened and the breadth and depth of regulations already in place. Obviously, when something happens like this, you should adjust, think about it. So I think down the road there may be some limitations on held-to-maturity, maybe more TLAC for certain type-size banks, and more scrutiny on interest rate exposure, and stuff like that. But it doesn't have to be a revamp of the whole system, just recalibrating things the right way.

And I think it should be done knowing what you want the outcome to be. The outcome you should want is very strong community and regional banks. And certain actions are taken which are drastic - it could actually make them weaker. So, that's all it is. We do expect higher capital from Basel IV, effectively and, obviously there's going to be an FDIC assessment - that'll be what it is.

4

......................................................................................................................................................................................................................................................

Steven Chubak

Analyst, Wolfe Research LLC

Got it. And just in terms of appetite for the buyback, just given some of the...

Q

......................................................................................................................................................................................................................................................

Jamie Dimon

Chairman & Chief Executive Officer, JPMorgan Chase & Co.

Oh, yeah.

A

......................................................................................................................................................................................................................................................

Steven Chubak

Analyst, Wolfe Research LLC

...elevated macro uncertainties.

Q

......................................................................................................................................................................................................................................................

Jamie Dimon

Chairman & Chief Executive Officer, JPMorgan Chase & Co.

A

Well, we've told you that we're kind of penciling in $12 billion for this year. Obviously, capital is more than that, but - and we did a little bit of buyback this quarter. We're going to wait and see. We don't mind keeping our powder dry, and you've seen us do that with investment portfolios, and we're also going to do that with capital.

......................................................................................................................................................................................................................................................

Steven Chubak

Analyst, Wolfe Research LLC

That's great. I'll hop back into the queue. Thanks so much for taking my questions.

Q

......................................................................................................................................................................................................................................................

Jamie Dimon

Chairman & Chief Executive Officer, JPMorgan Chase & Co.

Okay.

A

......................................................................................................................................................................................................................................................

Operator: Thank you. The next question comes from the line of Ken Usdin with Jefferies. You may proceed.

......................................................................................................................................................................................................................................................

Ken Usdin

Analyst, Jefferies LLC

Q

Hey, thanks. Good morning. Hey, Jeremy, I was just wondering if you can just give us a little bit more detail on those lower funding expectation points that you made, just in terms of is it because of what you can offer the client that might allow you to kind of keep that beta lower? And maybe you can just kind of wrap it into what your overall beta expectations are in that revised update? Thank you.

......................................................................................................................................................................................................................................................

Jeremy Barnum

Chief Financial Officer, JPMorgan Chase & Co.

A

Yeah, sure. So let me just summarize the drivers of the change in the outlook. So the primary driver really is lower deposit rate paid expectations across both consumer and wholesale, which, as you mentioned, is driven by a couple factors. So, the change in the rate environment, with cuts coming sooner in the outlook, all else equal, does take some pressure off the reprice. And as you said, we're getting a lot of positive feedback from the field on our product offerings. The short-term CD, in particular, is really getting a lot of positive feedback from our folks in the branches. It's been very attractive to yield-seeking customers. So that's kind of working well. And then on the asset side, we are seeing a little bit higher Card revolve, which is helping.

And I'll just remind you that at a conference in February, I suggested that we were already starting to feel like some of the uncertainties we mentioned when giving the guidance had started all moving in the same direction, and that was one of the things that contributed to the upward revision, like all of the uncertainty kind of went the same way. But as Jamie's pointed out - those uncertainties are all still there, we highlight them on the page, and as we look forward to this year and to next year and the medium-term we remain very focused on those.

......................................................................................................................................................................................................................................................

5