JPMorgan Chase's CFO Presents at Barclays Capital Global Financials Conference - (Transcript)

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JPMorgan Chase & Co. (NYSE:JPM)

Barclays Capital Global Financials Conference

September 09, 2013 01:10 PM ET


Marianne Lake - CFO


Jason Goldberg - Barclays

Jason Goldberg

He has global control over the investment bank from 2007 to 2009 which is obviously tell anyone in the room will certainly an interesting time but before that role she was in the Corporate Finance Group managing global finance infrastructure and financial controls and prior to that before she was seeing financial office for the company in the UK and before JPMorgan, she spent some time at PricewaterhouseCoopers. So I have got you will see it’s a knowledge and experience shining out through today through their presentation. Without further ado, let me turn it over to Marianne.

Marianne Lake

Thanks Jason. Good afternoon everyone. I don’t know if you heard Jason at the beginning say that if you don’t have copies of the presentation, we have about copies at the back so if you feel free to go and get those. So our presentation is available on the webcast through this conference and also on our website and I will take questions at the end for about 15 minutes or so and as always we have included the disclaimer regarding forward-looking statement at the back of the presentation.

So with that I am going to kick this off on page one.

So I am going to talk on the number of things this afternoon I think are going through on your minds right now. First, I am going to start with few comments on the performance of the company. Secondly, obviously give you an update on capital and leverage and a detailed look at our balance sheet. I will spend some time reviewing the impact of arising rate environment on the firm’s result over the time, provide you with an update on credit and expenses and then make a few comments on the board and governance announcement that we made this morning.

And as I go through the presentation, you are going to see that I am updating plenty of guidance, just given that we are close to quarter end and that summarize in an outlook page in its presentation which we’ll cover as well.

So moving on to Page 2, as you know three years of record net income leading up to a record first half year in 2013, consistently delivering returns on tangible common equity as our target levels in the mid-teens while strongly building capital and liquidity and while these results do include sizeable credit reserve releases, they also includes sizeable litigations and other expenses.

The charts on the bottom of the page demonstrates the diversification of the firm both in terms of a mix of our businesses and also in terms of the mix of our revenues with over half of our revenues being fee related. And obviously given low rates over the last few years, NII has been (precious) despite very strong growth in both loans and deposits. However, with rates being higher recently and expected to continue to rise over the next couple of years, NII should benefit strongly. Later, I am going to show you stimulation of the impact of rising rates on our results over a multi-year period.

Returning to Page 3 on Slide 3, as a consequence of the strong and consistent financial performance we delivered through the cycle, we continue to grow tangible book values strongly year-over-year-over-year. We have added $85 billion since 2006 and more than doubled our tangible book value per share in the process. And during that time, we have been building litigation reserves continuing to invest in our businesses and returning close to $60 billion of capital to investors.

Turning then to Slide 4, what we are most proud of is the excellent performance that each of our businesses is delivering in terms of underlying business drivers as well as customer experience being ranked number one and customer satisfaction among the largest banks.

We have remained focused on serving our clients and growing and improving our businesses and it’s showing up in the numbers you see here on the page. So deposit rates in the retail businesses has been close to 10% or twice the industry and consistent, it’s reflected not only of our new branches but also of our vote from customer experience and we have historically high customer retention levels at this time.

Retail client investment asset is growing very strongly and our customers continue to use our credit cards at record levels with consistent double-digit growth in sales faster than the industry. We also saw, as we expected, that card low level stabilized and we expect modest growth for the rest of the year.

We continue to be ranked number one in global IDCs as well as number one in market revenue share and in both we have gained shares year over year. And the performance in CIB has been strong and consistent with returns in the mid to high teens in both 2011 and in 2012 excluding DDA which is reflective of a client-driven nature of our business and the diversification.

In asset management, we have had 17 consecutive quarters of positive long term slows and for the first half of 2013, our asset management business ranked number one in active managed mutual fund place in each of the three regions.

So just before we leave this page, I am going to make this a brief comment on loan growth in the commercial bank. As you know, in 2012 year-over-year growth is very strong across the industry and we were able to catch a share that growth has leveled up recently as you know across the industry. The CNI in particular is slowed over the last few quarters and has remained soft in the first quarter. However we have seen consistent growth in real estate in 2013 posting growth every month this year, where market fundamentals are strong and our pipeline is indicative of increased level of activity. So given that, we would expect total commercial loans to be up slightly through year-end.

So to switch gears, let’s spend some time on capital and leverage on Page 5. So I’m going to spend a reasonable amount of time on the slide just given all of the purchasing, getting the interest that we’ve been showing. We are still working towards our year-end target of 9.5% Basel III Tier 1 common, and today we are expecting a forward looking Basel III Tier 1 common target for the Firm of 10% to 10.5% or a buffer of 50 basis points almost. That target reflects the capital risks associated with the combination of AOCI, leverage, capital conservation buffers and ongoing (stress test). We expect to be around 10% plus or minus by the end of next year which is worth noting is twice the level of capital that we had entering this crisis. And finally, before I move on to leverage, we put in the blue box at the top there, Basel III Tier 1 common ratio under the standardized approach estimated at 9.7% at the end of the second quarter.

So moving on to leverage, and just a reminder that when we talk about leverage here in our disclosures we’re talking about proposed U.S. rules and not the Basel committee proposals. So first for the holding company at the Firm level, a 4.7% we’re only 30 basis point away from the minimum at 5%. And leverage ratios are also impacted by AOCI, buffers and (stress tests). So consequently we are setting a target, we intend to run the Firm at the leverage ratio of 5.5% and expect to reach 5% by early 2015.

As you can see in the table, our leverage assets right now are about two times our risk weighted assets. So a leverage ratio of 5.5% is very consistent with a Tier 1 capital target of 11% or more. So the Bank, we've added the Bank here for you. The ratio at the end of the second quarter was 4.3%, so it’s little lower than the holding company, and as you know with the higher minimum. The two principal reasons for that; firstly, we hold most of our available resources including all of our press at the holding company, and secondly the most of the Firm’s relevant of balance sheet exposure derivatives and commitments are also at the Bank. This is a factor of historical legal entity and booking strategies. So we intend to close that gap, the gap to 6%, over the next two plus years and we’ve started the work to do it which will take both capital actions but also some leverage asset actions. But none of that we think will hurt our client franchises. The industry comments are due by October both on the U.S. rules, the proposed U.S. rules, and also the Basel committee proposals. So, we do remain hopeful that there might be some refinements as the industry comments are taken onboard.

So, on this page, we’ve laid out various capital targets that we intend to achieve over time and which we think are prudent and adequate, and we think they coexist well together. What that may leave you thinking and is our feeling that the 2014 and perhaps even the 2015 CCAR could impact (inaudible) binding constraint particularly if measured under the Basel III framework. We will be pushing all of these targets down throughout the Firm, and so all other things being equal if we’re holding 10% more capital. You could imagine that our targets will go down by up to 10%, our return targets. And it seems that that’s what current analyst’s models assume. Current analyst’s models have about 10.5% capital by the end of 2014 and returns is up 14%. So while we do acknowledge that there may be some impact, we will optimize at the business level, at the product level and at the client level. And so we would not expect any impact to be proportionate and not particularly over time as we optimize.

So just before I leave this page just given where we are in the months, couple of quick comments on the status of CCAR resubmission. As you know, we’ll be resubmitting our CCAR before the end of September off the Board approval. And we’ve had over 500 dedicated resources and many thousands more working on this project over the course of the last four or five months been an enormous undertaking. But we’ve made significant progress and our processes have been made better. So we are looking forward to receiving feedback from the Fed in the fourth quarter.

So moving on to Page 6, and the balance sheet, just a couple of quick points on this page, if you start at the bottom right in gray with available resources we have $475 billion of equity and long-term debt and more than 24 months of holding company prefunding and as we told you and in the second quarter we became complaint with the LCR ratio, with the ratio of 118%. And if you look at the table on the top right circled in red, we have approximately 19% of available resources relative to our RWA. So in advance of rules being final, we feel good about that in the context of orderly liquidation.

Moving to the left side and to the asset side of the balance sheet, we have over $800 billion of cash and high quality asset, of which 454 represent HQLA. Of that $279 billion is in cash, eligible cash mostly held at (inaudible).

We found our $700 billion loan book deposits which continue to grow strongly, and we moved down to the brown $600 billion of capital market and trading assets are essentially not funded. The shipping is both in the balance sheet and capital; I would like to talk about the firm in the context of the rising rate environment.

On Page 7; so let me start with the impact on the mortgage market which we’re already seeing. In the second quarter we told you that if rates remained at those levels we would expect volumes to reduce by 30% to 40% in the second half of this year versus the first half, on the back of dramatic reduction in refi volumes.

This is indeed what's paying out right now and what we're experiencing, and all of (Fannie Freddie) and the MBA agreed that the volume reduction will be 35% plus. So you can see on the left hand side of the chart the primary and secondary mortgage rate increased rapidly from May to July by over 100 basis points. And the chart on the right shows the corresponding drop of more than 60% in refi applications from that May peak.

And although the purchase market continues to grow and we continue to expect it to grow it won't make up those volumes in the near-term. Importantly, during the second quarter we also guided you that the reduction profitability would be challenged in the second half of the year, and I want to get more specific on that for you.

So first order impact, is a pure volume impact, if you have loss down by about 35% or so that in itself is a big impact on revenues. And that's before you see margins compressing, revenue margins are compressing given competitive pressures and changes in mix and higher secondary rates that further reduces revenue. So you have those two impacts.

And then finally there is a lag in terms of adjusting capacity and taking expenses out of the system. And while we're being aggressive and taking the appropriate actions that you would expect us to take, this process will take some time to get through our run rate. The impacts which won't be fully realized until exit Q4, couple of quarters.

So consider expenses to be relatively flat in the third quarter relative to the second, and down from those are still elevated relative to revenues in the fourth quarter. So what does that mean for mortgage production pre-tax? What it means is that all other things being equal, we expect pre-tax margins and pre-tax income to be slightly negative in each of the next two quarters.

I do however want to emphasize that although this may have happened sooner than we had expected, we did concentrate on more normal rate environment in our longer term targets. And as a result our longer term targets and mortgage production pre-tax of $1.5 billion still holds.

Turning to Page 8, you can see on the chart from the left that the refi opportunity has in fact come down dramatically, down by over 50%. And although improvement that we’re seeing and we hope to continue to see in HPI will add to the refi eligible population that will also take time.

So we continue to be focused on capturing the remaining opportunity and growing our purchase markets share. And as you can see from the chart on the right we're making good progress. We've been investing in our platform in bankers, in technology, in our operating processes and also have a best-in-class distribution capability and brands.

And we have momentum in the corresponding channel; we have lower underlying cost structures more scalability and a higher mix of purchase to leverage this environment.

So with that turning to the impact of rising rates on our net interest income, if you move to Page 9; first let me say that an environment where interest rates start to normalize, coupled with a broader base economic recovery is what we will be waiting for and is ultimately a very good thing.

And there have been traditions to take advantage of higher rates and have given up NII over time to do so. So what you see on the page here, what you see on the charts on the left is our earnings at risk. And these numbers are disclosed in our Q. And they represent our best estimate of the incremental NII that we would earn in the next 12 months on an instantaneous interest rate event.

And the number with our models, using both historical behaviors as well as some forward looking assumptions, but they do represent our best estimates and we believe they are both directionally correct and of the right order of magnitude. So if you focus on 200 basis points parallel, an instantaneous move across the curve that would show circle in red, the firm will expect to earn a little less than $4 billion of incremental NII in the next 12 months. And this number would grow in subsequent years as you get cumulative benefits of investing at higher rates.

In the third point, a rise of this magnitude would generate a reduction in NCI of around $15 billion pretax or about 60 basis points of capital. But it's worth remembering that the firm generates over 100 basis points of capital through core earnings each year. So with that as a backdrop, if you turn page 10, what I want to show you here is a simulation that incorporates both the impacts of mortgage production as well as NII, incremental NII, and capital on the firms results over three-year period.

So couple of health warnings, it is a simulation and depends on a specific scenario and in this case of scenario is 200 basis points rise in rates across the curve and also depends on models and assumptions. So we did feel that it was instructive and thinking through how all of these things could play out over three year period in our results. So as you look at the table just the first column represents our second quarter 2013 annualized. The first row represents incremental NII and shows again that we would earn that little bit less than $4 billion in the first 12 months but thereafter that would be in our run rate and growth contributing $17 billion or so of incremental NII over three years.

The second row shows the challenges that the mortgage production our business would face. As revenues would obviously be lower and the lag in expenses I’ve talked would be there. So for the purpose of this simulation, we have the production pre-touch reverting to our longer term through-the-cycle target by the exit of year three. And in fifth row, AOCI, as we discussed you see here that quick hit to capital of around $15 billion pretax. And again to stress the arising rate environment and a broader recovery would also lift our earnings and those numbers are not reflected here.

So although this is a simulation, the conclusion we think you should drawn from it are still valid; being the capital impact are very manageable particularly in the context of running at a buffer and more importantly the incremental earnings impact is significant. So turning the page, and moving on just for a minute to credit trends particularly in the consumer businesses. The positive trends in charge-offs continued in the first half of the year and as you see on the chart we have a total of $19.4 billion in reserve including 5.7 billion related to mortgage purchase credit and (paired) loans and I’m going to come back to that in a minute.

So if you look at the table of numbers here, a couple of quick comments just on (loss) rate. For mortgage you see that although loss trades continue to improve steadily, they remained substantially above our through-the-cycle expectations. So we expect those improvements to continue over the next couple of years. And in cards, we’re seeing a little bit of the reverse. We continue to see (low) rate improved setting historical lows each quarter reflecting very strong asset quality, but we do expect that at some point this find a level and ultimately over the longer term start to increase.

So before I dive into the card mortgage, just a final comment on wholesale before we leave the page. In wholesale, credit quality remains strong, charge-offs remain low, and reserve levels remain relatively stable. We’re diving into card. In cards, right now there are two primary drivers of reserve releases. The first is very low levels of delinquencies and the second is the declining impact of modified loans. So the graph on the left deals with delinquencies and shows a continued improvement in new delinquencies, which reflects a very strong quality and improving quality that I’ve talked about.

The (go forward) losses during the recession together with the improving economy are driving these historic lows both in delinquencies and losses. There are 20 year lows for delinquencies across the industry, and at the same time we shifted our customer mix to a higher proportion of engaged customers who use their cards more frequently driving our card sales volume that I have talked about being in double digits and they tend to have better credit quality.

On the right hand side of the page, this is where you see our trouble debt restructuring. There are modified loan balances and there are three points on that chart. The first is that you see that the absolute level is down from a peak of almost $11 billion to $4 billion in a middle of 2013. Secondly, the loans have a much longer pay history. So you’re seeing the positive signs of seasoning with almost half of the loan having paid for over two years today compared to less than 10% back in 2010.

Then finally within each of the bands, the loss rates have also improved essentially driving an overall lost rate reduction down from 22% to 12%. So it’s given both those factors both lower delinquencies lower new delinquencies together with low and more matured modified loans that are driving reserve releases. And we expect $500 million plus or minus of additional reserve releases in the second half of 2013.

And before I leave this page, we have been talking about cards losses bottoming out now for over a year and as I’ve said earlier we do expect that that will happen at some point, but what we have done on the chart on the left for illustration circled is if those loan rate improvements don't stop in 2014 you may see further reserve releases. Turning to mortgage on page 13, in mortgage I've expected credit trends continue to improve steadily with a continued reduction in delinquencies and with SPI year-over-year of almost 10% driving severities down substantially. Our previous guidance relating to the Q3 charge off, was that there would be less than $250 million, but just given how the quarter is playing out, we currently expect charge offs at around $200 million for this quarter and at or around that same number in the fourth quarter of this year. And as these improvements also driving (low and low) forecasts, again primarily severity we also expect to release $500 million plus or minus of reserves this quarter for the non credit and (inaudible) portfolio, in terms of further reserve releases looking forward, if these trends continue and we believe that they will, expect reserve releases to continue in 2014, ultimately leveling off with reserve levels of between $1 billion and $1.5 billion by the end of 2015, and that's down from 3.3 billion at the end of the second quarter.

So taking a moment and turning the page to 14, and the purchase credit impaired portfolio, the first time in a while that we talked about this portfolio and the good news is, for the right reason. Clearly the positive trends I just talked about, again particularly (inaudible) severity are also leading to improvements in performance in this portfolio. As a result we're revising downwards our lifetime loss estimates for the PCI portfolio this quarter and just a reminder about the accounting; in addition to the original credit market that we took we took $5.7 billion of reserves for these loans through provision expense. So any reduction in loss estimates will first reduce those results with a corresponding release also going through provision expense, rather than an increase in yield over time, and as you see from the charts HPI is playing out significantly better than we have modeled in 2011, that was the last time we took an impairment action. Given these things we expect to release $750 million plus or minus of reserves to the PCI portfolio this quarter.

We don't expect this to recur, we don't expect this to be a quarterly event, however clearly if there are significant further improvements over current expectations you may see more releases over time. Turning to expenses on page 15, just wanted to give you a brief update on how our expenses are tracking for the year, and in order to do that I'd like to take you back to Investor Day, when we last spoke about this.

And at that time we showed you on the left, about $60 billion of adjusted expenses for 2012, and just to remind you our definition of adjusted expense excludes corporate litigation and foreclosure related matters, importantly does not exclude other non corporate litigation or CIB compensation.

At that time we estimated total adjusted expenses to 2013 of $59 billion or so, but what you see here on the chart is that in the first half of the year, year to date, we've incurred a further $500 million of expenses primarily from non corporate litigation. We do not consider these needs to be run rate longer term.

In addition, we've been investing heavily in our control and designs agenda, in response to the challenges we're facing and the commitments that we've made to the regulators. So those two things together mean that we believe our adjusted expenses are likely to be between $59.5 billion and $60 billion for the full year.

And just on the right, a moment on the control agenda, it is our number one priority and is a significant focus of the whole operating committee of the firm. We've dedicated significant resources to 23 meaningful streams of work and added about 3000 people across control functions whether that's finance, risk, audit, legal, compliance, technology, in order to execute on that agenda.

And it's a lot of hard work, but it's worth it because it will make us even better, we're making significant progress and remain committed to operating the safest and sound, (inaudible) operating environment.

But we haven't lost focus on why we're here, which is to provide excellent service to our customers to build best in class franchises and we're doing a great job of that as I showed on the driver page. So with that on page 16 we sum it all up in our outlook slide, but there are just a couple of additional items that I want to highlight.

Certainly market revenues in CIB, so they're trucking well versus the third quarter of last year. But September last year was particularly strong and we're not necessarily expecting it to be as strong this year. So while we still have three weeks to go and that can actually be important we currently expect markets revenues (at TDA) to be flat to down 5% year-over-year. Secondly, on this page, on the top right, we do expect to add to litigation reserves in the quarter which will more than offset the 1.5 billion or so of consumer reserve releases that I just spend some time telling you about and I know that you are all going to wants more details on litigation and as a limit to what I’ll be able to share with you. But I do want to mention that this addition to reserve covers a number of different matters some of which you have been reading about that’s been a crescendo of activity in past weeks and we are reacting to that where it makes sense to do it and in the best interest of shareholders.

We are trying to put some of this behind us and hope to taking these reserves will go long way towards that. And we are still finalizing the number which is why we are not able to give you a precise number today but we intend to feel appropriately reserved from the matters as we know them right now and again things are still evolving in three more weeks.

So, before I leave this page on the middle right capital and leverage, we reiterated here our target and I want to just leave you with the fact that we are confident in achieving those targets over time that they (should position us) with the necessary capital and liquidity to satisfy our regulators and we are confident in being able to achieve them while maintaining the ability to continue to return capital to shareholders.

So before we go to questions, just one brief comment on the announcements today. As you saw, we are delighted to announce that we will have two new members joining our board, Linda Bammann and Mike Neal. We expect Linda will join our board next week and Mike in January.

We also announced certain other changes to board governance some of which are new and some of which are will co-defined or formalized in practices that we already had. But all of which we think are additive and responsive to investor feedback. So thank you for joining me this afternoon and with that happy to open after questions from the floor.

Question-And-Answer Session

Unidentified Analyst

Thank you Marianne, I think that’s a world record for new information in a less than 30 minutes of time span.

Marianne Lake

It was more, I hope it was. I am instructive.

Unidentified Analyst

That it was. One of the comments you made was getting to a I think10% (inaudible) ratio by end of next year. So when you talk to you know in lot of that statement as well as in continued elevated legal costs and what might have had there just in terms of how you think about capital redeployment in that estimate more or less change in the current environment?

Marianne Lake

Obviously we have to go through process towards the end of the year and as the (fee contract) to be able to finalize our capital plan but when we done all of those look forwards and again I said 10% plus or minus; they do contemplate both the ability and the desire to want to continue to return capital to shareholders. So without going into specific numbers they do, we said before that we would like to continue to increase dividends and we would like to have the ability and capacity for continued to repurchase our share to make sense. So that is contemplated in both statements.

Unidentified Analyst

Can you give us any inkling of how the incremental capital might be allocated across businesses should we expected to be allocated proportionally somewhere to let the capital as allocated now, do you foresee certain business requiring, specifically requiring more capital as you move forward?

Marianne Lake

We are working through all of that now and as you know we usually do capital uptake, once a year at the beginning of the year and then maybe those on investor days which will be our practice again today. We will undertake a similar process as we have historically so you should imagine that all of those targets are going to be pushed down based upon our assessment of the relative risk for the business.

As you know we always had the CIB capitalized at a higher levels than any other businesses just given the competitive landscape and the risk associated so, it’s likely to follow a similar pattern and there may be some capital that we chose to retain at corporate we will be transparent about that historically it’s only ever being to do with run off portfolios where we understood the run off over the course of the next year or so all to do with enhancement and (model) that we have confidence and being able to deliver. There are also challenges around operational risk being incredibly backward looking and not necessarily reflective of the current business mix. So we are currently working through what the best way to think about that in terms of allocating businesses.

Unidentified Analyst

You have anticipated my next question, thanks.

Marianne Lake

Fine, so on the operation, we are working through that right now. But that would be the one area where I would say, if it’s the way it’s done, it (does not) affect your current business mix, your current position necessarily, very backward looking.

Unidentified Analyst

You have formulated sort of the role of hybrid capital going forward, I know there is still a lot of legacy issues out there, they don’t have kind of the structures they past (inaudible) with the regulators any more, where are you with that, with the regulators and internally?

Marianne Lake

So, we don’t disclose our treasury strategy obviously but we have an optimized strategy over the course of the say next two years to incorporate all assets of capital. I have made to the comment on my best.

Unidentified Analyst

Hi. Could you just clarify again what you’re talking about, was it for the individual divisions or the ROE targets for the Firm when you talked about the disproportion or non-disproportionate return levels based on higher capital required? Thank you.

Marianne Lake

So, just to clarify, my first statement was (inaudible) segment to (inaudible) which is all other things being equally to holding more capital you might expect returns would be impacted. We are certainly not giving up on our return targets and we do believe that once we get these down into the hands of the operators, the traders and at the client product and business level that we’ll be able to optimize and increase profitability and bridge that gap over time certainly. But when I made comments about the fact that targets could be impacted as we are doing that, that could be at the individual business level but also at the Firm level. But we’re not giving up our return target. So, at this point, we’re just looking through the work to get those push down and then optimize. And if you hit three of any indicator of the future we’ve grown our capital I mean I mentioned earlier we have twice the capital now that we had going into this crisis and our returns three years of record, the first half record in the mid-teens. So if our history is an indicator of future we should be successful at being able to mitigate that.

Unidentified Analyst

Well, it’s early and we don’t have a whole lot of information on with the Fed’s mentioning that they might use their balance sheet to become a repo participant in the market. Wondering if you could give us any of your thoughts of, not only effects it might have on your business but also do you think this might be something that entails systemic risk reduction or increase or any thoughts you have on that appreciate.

Marianne Lake

So I don’t I think (inaudible) started communicating clearly with the market and is operating within that contrast there shouldn’t be any real belief that it would systemic risk and I think all irrational volatility.

Unidentified Analyst

Yes. I guess in response of two questions that you talked about not wanting to give up on the return targets and I guess in your prepared remarks you mentioned return targets to reduce by around 10% as far as (can you just).

Marianne Lake

So again to clarify I don’t want anyone to be confused. If you hold (returns in more) capital and if nothing else changes, your returns will go down by (commensurate) might go down by a (commensurate) amount. And in some way and this more than seems this year, we’re not giving up on our return target. We don’t think that they should go down proportionately to the increased capital holding if at all particularly as we have the chance having pushed all of those targets down to the hands of the people who are doing business and who can optimize the capital we’ll be able to mitigate those risks if not fully at least substantially, so we’re looking to all of that now and that’s what they’ll with you at Investor Day.

Unidentified Analyst

You spoke about crescendo of legal cost coming up in the last few months. I’m curious is it hitting mark a high water point or we do expect things to get better and to become less expensive across until 2014?

Marianne Lake

I wish that I would be able to give you a forecast on litigation expenses it would my strong desire to do it but it’s unfortunately not that straight forward, these things can be very lumpy and they can have a long tail, and issues evolves not only within years but within quarter and within weeks. So at some point and I think we showed this consistently. At some point, we do expect that this will run down and our litigation expenses will become more normal and much lower. I just don’t know that I can call out for you right now. I will say that you noticed about us that when we think about reserving for litigation within the contrast of the accounting framework of probable (inaudible) losses we always like to feel like we’re appropriately reserved considering all of the issues that we face and everything that we know about them at any point in time. And we’ve seen significant bills so there are reasons to be hopeful that, that will happen.

Unidentified Analyst

Hi. In the last few weeks we’ve seen lots of different papers from different regulatory bodies the Fed paper on CCAR, the Basel papers about supplemental leverage, the financial stability board paper on (reforms). Can you give us any sense of when this barrage of regulatory proposals might be coming closer to an end?

Marianne Lake

I’ll give you my thoughts and I can’t be sure that I am 100% right. First of all just a note on the Fed’s white paper on CCAR, I thought that was actually very helpful, it would have been very helpful if we had that a year ago and we would all have a bit of a clear understanding of what they consider to be bad practice, notwithstanding that I thought it was a helpful, we thought about most of those things going through already submissions. I think the U.S. rules the Basel committee proposals are out for discussion and we would expect that to come to fruition sometime in near future.

We have had some progress on QRN, we expect to get some progress but I can't pull the specific dates OLA entitled to over the course of the next several months, equally we expect this has been perpetually delayed to get to the final. So there are reasons to say like a lot of those issues might become clearer if not before the end of the year in the early part of next year. And clarity as long as it's not at risk of that outcome. Clarity in and of itself is very helpful.

So I think 2014, if not the rest of this year will be very, very constructive in terms of getting some of these things behind us. Hopefully, with good outcomes, but in any case with the ability to actually react to them and actually get back to the business of running our business in the context of all of those rules.

So I am hopeful that the first half of '14 will bring that, maybe not so old items, certainly we know we'll be working through the Durban questions over the course of the next year or more, as I said looks slightly to appeal.

Unidentified Analyst

A question actually going back to the bank subsidiary and particularly your corporate clients that have cash balances. I am just wondering given the large amount of cash you have got from deposits, how much of that you expect over the next three years to eventually leave the bank as that gets deployed, I am wondering if that, you can discuss kind of how you incorporate those thoughts the stickiness of those deposits in your funding strategy going forward.

Marianne Lake

So I think just on a very short term side we see some relatively reasonable level of volatility anyway in the corporate cash. And so when we talked in the second quarter about running our LCR ratio at a target above 100%, it reflects in some parts, the fact that we expect that to be volatility in deposit growth. That said we also expect that over the course of the rate cycle that we're facing right now, that we would expect some portion of those deposits to flow out particularly the non-operational deposits that are not part of the quarter and business.

They are not the majority of our deposit, so they are not as (inaudible) as you might think. But we do factor that together with our understanding historically of customer behavior or client behavior on cash in our funding strategy with the concerned advice.


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