JPMorgan Chase's (JPM) Management Presents at Morgan Stanley Financials Conference (Transcript)

| About: JPMorgan Chase (JPM)

JPMorgan Chase & Company (NYSE:JPM)

Morgan Stanley Financials Conference

June 14, 2016 08:00 AM ET

Executives

Marianne Lake - CFO

Analysts

Elizabeth Lynn Graseck - Morgan Stanley

Elizabeth Lynn Graseck

Thanks everybody for joining us today at the 7th Annual Morgan Stanley Financial Services Conference. Before we kick-off our keynote address this morning, I do want to ask the audience a couple of polling questions. We're going to ask the audience a few polling questions regarding your outlook for financials, for rates, for the stock and then we'll kick-off with Marianne Lake, CFO of JPMorgan.

Okay, so you can see on your -- in front of your chair you've got a polling device, so first question is what is your current allocation to the financial sector. Are you A, overweight. B, modestly overweight. C, equal weight. D, modestly underweight or E, underweight.

So you can select which rating you currently have to the financial sector and we're going to count down here. You can probably start to countdown clock while I'm talking because people can do it while I talk. Okay, so the group is very interesting overweight, modestly overweight and equal weight. I guess that’s why you're all at financial conference. That’s perfect. So nice to see little bit of a positive skew here in the room.

Okay, next question. Do you expect to change your current financial sector allocation through year-end. A, increase. B, decrease, no stable. So A, B, C -- up, down, sideways. Answer is -- stable wins with a slight bias to up.

Okay, let's get it through the next one. What would be the primary driver for the financials in second half 2016. A, rising short term rates. B, yield curve slope. C, capital return. D, expense management. E, accelerating consumer spend and lend.

So the primary driver for second half for financials. Rates, curve, capital, expenses, consumer spend. Great, we're looking for rising rates.

Okay, next question. When do you next expect the Fed to raise rates? So we have five cases. A, June or July. B, September. D, first-half '17 and E, second-half '17. So A is June and July. B is September, C is December, D is first-half '17 and E is second-half '17. And it shows that September December split to it before and after the elections. Okay, so our answer here very much skewed this year. So really September wins.

Okay, let's see the next. Where do you see the 10 year at year end? The yields on the 10 year. A, below 150. B, 150 to 175. C, 175 to 200. D, 200 to 250. So 10 year yields -- they have to say we did change these numbers a little bit over the last week. I'm sure you can imagine we had to have an A in there. Okay, so between 175 and 200, which is obviously an uptick in yield from where it is right now.

Alright, let's go to opening remarks. Well I did just do that. Thank you very much for joining us today. We're pleased to have with us Marianne Lake, CFO of JPMorgan. Marianne do you want to come up and sit on your right. We do have a couple of questions, polling questions for JPM and then I'll join you in a sec.

The first polling question that we have for JPM specifically has to do -- oh we don’t have polling. Yes we do, yes we do, here we go. Alright sorry. Alright so here's the two polling questions for JPM. One, other than higher rates what do you think will be the biggest driver for JPM shares over the next two years. Accelerating capital return, A. B, expense management. C, stronger capital market. D, stronger loan growth, and E, fee growth from consumer and investment management. And people in the front row we can give you this, you don’t have to write it down.

Okay. The answer is C, is what people are looking for the most from JPM, stronger capital markets followed by accelerating capital returns. So something to set the stage for our discussion here. The next polling question, JPM’s 2015 net payout ratio was 50%. So the question is after the Fed fully incorporates the GSIB buffer into CCAR, think about this is like 2018, ’19, ’20 somewhere in that range, when they fully incorporate that into CCAR, where do you think JPM’s net payout ratio will be, versus today at 50 will it be below 50, 50 to 60, 60 to 70 or 70 and above. So that’s A is below 50, B is 50 to 60, C is 60 to 70 and D is 70 and above.

Wide range of answers, we know what your goal is, but thought we’d get audience views here, 50 to 60. Okay, well that is an interesting answer. Your range is 55 to 75, right.

So that’s, if you executed the mid to high end of your range, you outperformed group expectations here.

Marianne Lake

That is right.

Elizabeth Lynn Graseck

That would be nice.

Marianne Lake

Yes, that would be nice. And then as – hi, it is great to be here by the way. Thanks for having me. It would be nice and as you know, we did something at Investor Day and we are obviously limited in what we can do, and we have to use analyst estimates and everything else. But even with a meaningful increase in our minimum capital [Indiscernible] as long as the phase in period is reasonable, there is no reason to necessarily raise the compliances, it’s served us quite well in the past. So we would like to move up in our range for sure.

Question-and-Answer Session

Q - Elizabeth Lynn Graseck

And I guess part of the question is getting at what do you think the Fed is going to have in there and the G-SIFI surcharge, and we all know that I think that governor Tarullo mentioned, that the whole thing will go in but there will be some offsets. So how should we think about how you handle the whole coming rule set?

Marianne Lake

Yes. I mean, actually it’s quite a good thing. So it has been something we’ve been talking about as an industry now specifically for the G-SIFI for well over a year. So in fact both governors [Hal] [ph] and Tarullo spoke and the silver lining as far as I am concerned is they confirmed what we have believed that while there was a near zero if not zero probability that the minimum is going to remain unchanged, that there would be reasonably meaningful increases that would be offset. And the recognition that those offsets were in part because of the conservatism that is already built into the existing taxing. So it’s been I believe that while the minimum would increase that would be offset. The three primary opportunities anyway, so considering offsets, the obvious one is curtailing buybacks and you can think about that as the periods that are [approved] [ph] the whole thing and that’s reasonably meaningful. And then the other two are the large counter party and the double count between the market [shock] [ph] and market revenues. Depending on what the choice of those assets are they could be very meaningful. So we’ve been understanding that this was a likely outcome for a while, it is one of the reasons why we have to at Investor Day give you sort of corridor of expectations over the next few years that recognized the likelihood that we would have to accrete more capital. Whether 12.5% is the right number, whether it’s more than that or not it still is sort of basing off stimulation gives us really, really respectable returns.

Elizabeth Lynn Graseck

So when people think about, I mean it’s relatively easy for us to see the buyback impact, not as detailed as you see it obviously. But the single counterparty default and then the G-SIB market shock on top of the other market shock. Can you give us a sense as to, if those two were to go away what the benefit is or maybe a range of relative to the buyback going away?

Marianne Lake

I mean obviously it can change year-over-year depending on the facts and circumstances and to be just technical for a second, there is an opportunity to eliminate the double count in the market shock, now it is just very, very difficult to meet the standards to be able to do that. So that is something worth noting. But I would say that this combination of them - between them is between 50 and 100 basis points. So it’s not insignificant.

Elizabeth Lynn Graseck

All of them together?

Marianne Lake

No, the large counter party and the market shocks double count. Between the two of those 50 to 100 and then the buyback as you say…

Elizabeth Lynn Graseck

Okay.

Marianne Lake

…would be incremental to that. So as I say the levers are not inconsequential; I’m not necessarily suggesting by the way that they will get fully pulled. And so we looked at ranges of different outcomes. But again you heard Tarullo say that while no decisions have been made that they were going to put out the proposal and it is possible if not likely that it won’t be in the 2017 CCAR and phase ins are a possibility. So I do think that and time is our friend, for sure, on some of this stuff. And we continue to optimize [albeit] [ph] that we’ve talked a lot about there is no low hanging fruit, you can’t necessarily expect us to do unnatural things to make such changes unless it’s really compelling to do that. And we don’t need to rush so we’re going to optimize the heck out of it.

Elizabeth Lynn Graseck

And then your range of potential payout ratios between 55% and 75%, that range is a function of how much capital you think you need to grow your balance sheet?

Marianne Lake

The combination of how much capital we need to grow our balance sheet and where we think we need to end up with in terms of [indiscernible]?

Elizabeth Lynn Graseck

So at 75% payout ratio, how much are you growing your balance sheet?

Marianne Lake

It’s consistent with sort of about 5% growth.

Elizabeth Lynn Graseck

Five, okay, so that brings us to kind of one of the topics I want to hit on, which is returns ROE versus growth and just so the audience knows we’re going to spend a little bit of time on the ROE versus EPS growth outlook and then I’ll turn it over to see if you guys have questions, because I want to make sure that we get this to be very interactive, so think about what you’d like to ask over the next 5 or 6 minutes here. So as we’re thinking about ROTCE versus EPS growth, I mean your ROTCE range between 12% and 15%, 13%-15% you’re kind of at the lower end of that range right now. How do you think about where you want to be spending your money, where you want to be spending your investments, do you want to be driving up balance sheet growth which seems like it’s hard to drive up ROTCE but maybe I am wrong there, or you are more focused on EPS growth?

Marianne Lake

So I would say not to sort of state the obvious but I’d say they all matter. When we talk about our ROTCE target or expectation, it’s calibrated based upon the mix of businesses we have and the opportunities that we see out there. So it’s still the case that we have a mid-teens expectation that our operating model ought to be able to deliver with a slightly more normal environment particularly with rates but it’s also the case at 13% ROTCE in 2015 considering the environment that we’re in, I think that’s really quite respectable and significantly above hurdle. So when we think about sort of optimizing albeit that we have our through the cycle expectations for ROTCE in mind, it’s really about dollars of SVA. So we don’t want to grow our ROTCE at all cost, we don’t want to grow our EPS at all cost because they might have some unintended incentives, it’s really about understanding are we adding shareholder value in terms of absolute SVA dollars and we showed you we do have a path that we believe will get us to 15% or close to 15% because we will focus on generating high ROA business on the fee growth, on expense efficiency but also on lending and other balance sheet growth too.

Elizabeth Lynn Graseck

So to get to that 15, do you need higher rates, I thought that was part of the equation?

Marianne Lake

Yes, I’d say I mean so I just want to say one thing about rates because I think people consider -- specially you heard the audience say and I would concur that if not in June or July not never and we think this year but certainly it’s closer in front of us now than possibly it’s ever been. So we feel quite good about that. Secondly, it’s not passive, so we spend a lot of our investments over the course of the last decade building branches, acquiring customers, growing deposits and all the things that are going to generate the upside. So we want to take full advantage and credit for it, but you are right, if you were to look at simulation that we had, there were I would say 4 primary categories. So we believe that straight down the middle we can generate another $2.5 billion of net income on NII growth and when that is with a reasonably conservative assumption around capital market wallet growth or if that capital market is over that horizon and mortgage expense efficiency is a very big part of the story, so we outlined between the two bigger businesses, a growth expense initiative that was $5.5 billion and more than half way there but that means we have almost half way still to go and our plans mature we’re in execution so I would call that not in the bag but certainly again straight down the middle.

And then we had a few headwinds that we talked about in the card, co-brand space and everything else and then that’s right, so based upon the implied at investor day which are quite closely implied today that that’s still meaningful. So even without an increase in rates from here or very little we should still get a significant amount of upside just because of the previous rate rises whether it is mix of our balance sheet and the loan growth that we’re delivering. So if it’s not, $30 billion because of the timing of rate rising it will be a little less than that and maybe it will take longer to get to 15, [indiscernible] apart and if nothing else happens maybe it will be a 15 minus not 15 dead-on but I think we’re certainly going to get some of the benefit regardless. But I was really pleased to see that everybody is optimistic on rates.

Elizabeth Lynn Graseck

Okay. What about on the EPS growth side, so last year was around 4% EPS growth, is that right?

Marianne Lake

Core.

Elizabeth Lynn Graseck

Core, right yes on the core side. This year consensus is looking for 7 but it’s quite a wide range, we’ve got between 2% and 13%, so you’re really seeing some -- and you see that in the second quarter numbers as well, you have got a really wide range of outlook for EPS and just kind of thinking through what do you think the street might be missing in having that wide of a range?

Marianne Lake

So, it’s not absolutely related, because by the way for us to see at least over recent periods a fairly wide range and if I take the second quarter or the full year and just really thematically for a second, the low end of the range is usually described by people with a somewhat bearish outlook for capital markets or markets revenue in particular, that tends to be the driver towards the low end. The very high-end of the range are people who have a healthier point of view on the CIB revenues, market revenues in particular but also a very optimistic view on expenses, so I just want to take a moment on both of those things if that’s okay.

So I am certain that somebody is going the ask for sort of outlook and guidance, you heard Daniel talk about trading revenues for the quarter in the mid-teens that was only a couple of weeks ago, nothing has changed so we’re still looking for mid-teens year-over-year up albeit against not especially strong second quarter last year, but if I look at overall revenues, year-over-year they are more flat and that’s because the upside that we’ve got in market is offset by lower fees in CIB and low asset management in card, it’s not new news, it’s all the stuff we talked about; about expenses we had a - Jamie said two weeks ago reiterated our $56 billion, so when you look at the high end of consensus of the range and estimates I would say the median is $55.4 billion [Indiscernible] for the year, the low end is 55 or even in some cases slightly below. And we keep saying 56, so I am going to tell you why we say that and then you could make up your own determination. We had $13.9 billion of expenses in the first quarter. First quarters are generally on the lower side both in terms of legal expenses and marketing, usually a little bit skewed to the second half of the year, plus we're growing auto leases. And so as we grow our revenue we grow our expenses and importantly we still expect the FDIC surcharge to kick-in in the second half of the year.

So what's happening in some cases is people are taking a nice [low] [ph] third quarter, taking it down even and annualizing it. We're still calling for $56 billion. And the other 2 things I think are driving the range and one of them is I am very empathetic, people have different points of view on credit, we can talk about but the tax rate. So, we've had a lot of discrete tax benefits over the course of the last several years that have muddied the ability for people to be clear on what the managed effective tax rate will be. There will be less of those going forward than there have been in the past, so we will have less of those discrete benefits and in addition the UK bank surcharge increased this year, and so we're looking for our managed effective tax rates to be close to 36% and 35% and that's not something that’s been modelled yet.

Elizabeth Lynn Graseck

Okay and that is kicking in now 2Q.

Marianne Lake

Right.

Elizabeth Lynn Graseck

Right. Okay, anybody in the audience have a question they want to raise at this stage or we will move over into. Okay. All right. So a couple of things that maybe we could dig into based on what you just mentioned. So on trading still up double-digits year-on-year because it sounded like Jamie kind of back paddled from that a little bit, but that's not…?

Marianne Lake

No, I mean, so mid teens is what we're looking forward to -- I mean Jamie made, I think was just trying to make the obvious point that we have a month to go, this is a month that we're looking for fed meeting and the fed has been unpredictable, so the so the fed meeting this week and Brexit is dampening a little bit of activity but nothing that would change the outlook so they should be mid teens, so.

Elizabeth Lynn Graseck

Okay. So that's flat.

Marianne Lake

Yes.

Elizabeth Lynn Graseck

And then the other side is really partly from as you indicated the card revenues has been down a little as a function of the renegotiations and the retention of some of the clients that you have, right?

Marianne Lake

That’s right. So we've talked about we renegotiated sort of meaningful part of our co-brand partnerships which is for us strategically important. It is defensive, it is offensive. And while it is reducing [indiscernible] are still accretive in absolute terms, so -- but from a revenue perspective we'll have to cycle through that this year.

Elizabeth Lynn Graseck

Okay. And then on the loan growth side maybe you could speak a little bit to that because loan growth has been accelerating sort of if you could talk to where you see pockets of opportunity from here on?

Marianne Lake

Sure. So I would and we have actually seen nice core loan growth across pretty broad base, across all businesses, possibly with the section of middle market which has not been as strong but generally speaking across our businesses and business banking and even in card we’re seeing loan growth and commercial real estate were growing nicely, mortgages were adding to our portfolio quite strongly. So we've been seeing pretty consistent core loan growth and we expect to continue to see that demand hasn’t softened for us, so we feel pretty good about the outlook for core loan growth which we stated at 10%, 15% but had been running at the high end of that. [Indiscernible] determination on how much to retain the mortgages.

Elizabeth Lynn Graseck

Is there any -- yes and so that's another thing resi mortgage obviously up roughly 20% year-on-year. So bull there or the pro-con on that is that you're getting some nicer returns versus holding potentially in securities, but there is a little bit more risk and also there is some duration issues, so could you talk through how large you are willing for that portfolio to go?

Marianne Lake

Sure, so, I mean we've been talking pretty consistently over the course of the last couple of years about our strategy for mortgage to have a smaller higher quality, less volatile mortgage business. And so when you look at our originations, we've been originating more than 0.5% of our originations have been in jumbo space and these are customers that we like they are and we obviously want to be able to offer them the product, so that's our first priority. And we have ample capacity to be able to do that. And when we think about retaining versus distributing first of all, it is best execution so we do obviously look at that, and when we look at the impact of adding for mortgage portfolio has on the overall situation of the Company, we've been able to manage that through our security strategy, so it hasn't prima facie necessarily changed our positioning for the Company. And so if you look back may be a couple of years, I would say it was a little bit relative to our peers, we were less concentrated in mortgage portfolios and we were coming down and running off the legacy portfolios and now we have our mortgage is about 10%-11% of total assets which still are fine. So while at some point you would see that growth in terms of adding portfolio slow, if not in the very near future.

Elizabeth Lynn Graseck

And then, as we think about just loan growth in general every time you put a dollar of loans on, you have to support it with the capital and the liquidity requirements and all of those goals and regs there. So, if it's a static equal to the current composition of your loan portfolio then your ROE is not potentially going up that much, so should we expect that you are going to skew towards some of the higher richer margin loans as time goes on or are you comfortable with the loan mix as it is right now?

Marianne Lake

Right, just to talk about the jumbo mortgage for a second, jumbo mortgages are accretive to our returns on both a standardized and advanced basis at the moment and you may have seen that we did mortgage securitization take mortgage trust, and that has allowed us to actually improve the sort of capital efficiency of retaining those mortgages. So I would say that they are generating very healthy returns and again these are customers that we want to be able to provide that capability to. And it comes back to the earlier question that we had, we would like to add a every high quality loan with every good borrower that is strategic to our business as long as it is either individually or in tandem with all of the business that we’re getting driving adequate return for us and so we price for risk-adjusted returns?

Elizabeth Lynn Graseck

Okay, so just here I will pause again to see if there is anybody in the audience who has a question? All right, maybe we can move to expenses and then I want to get into some of the alphabet soup around capital. So on the expense side, you highlighted 56 billion and that’s for this year. In the past, you’ve indicated and you've done a tremendous amount of work on cost phase and bringing down the core cost of the institution, is this a pause in terms of expense flattening out here or is there more that you think you can do going forward?

Marianne Lake

So just a reminder because when we say $56 billion and customize and you think that that is flat year-over-year, I want to remind you that we significantly increased our expectations for investments in our businesses most notably while maintaining the strong investments in the technology space, but also increasing meaningfully our marketing investments the customer acquisition in consumer and then also self-funding, not insignificant amount of FDIC surcharge, so I would say that we are still on a very strong improvement trend for core efficiency. And we’ve always been willing to invest for long-term value, and so these investments we believe will be will grow our probability in the future. And so we will continue to make them and we continue to deliver best in class return so I think it’s a great trade.

In terms of is there more to go, earlier I told you that now to go gross and not net, we're sort of a little more than halfway through our expense journey in the CCB and the CIB space. So those were not aspirational, but nevertheless they were inconsequential targets. So we need to deliver on those, that is also the number one priority. But some of the investments that we’re making in technology in particular will continue to provide opportunities to automate and become increasingly efficient, so I wouldn't -- we'll never stop trying. We'll never stop improving. But we don’t have another sort of big program of work to announce. It is kind of finish what we started, finish it really well and keep going.

Elizabeth Lynn Graseck

Right, okay. The investment spend is very compelling and you’ve got about I think what is it 9% of revenues that you’re spending on Tech and IT and that is probably close to double what the rest for the industry does. And I guess the underlying question is, with about one-third of that being spent on new products and new initiatives, how effective and how do you see those projects getting approved may be there is a difference there as to how JPM views the ROIC versus peers? And maybe you can talk a little of bit to how you translate some of that investment spend today into the business as usual products tomorrow?

Marianne Lake

So you’re right, so $9 billion of technology spend about $3 billion. And when we say -- I wouldn’t necessarily over imply the word new, a lot of the things that we’re working on, we’ve been working on. So the things we are familiar with the digitizing all of our businesses so whether that is Chase Pay, whether it's Digital Wealth Management, whether it's Market Execution Services in the CIB, it's also making things in terms of our operating modular workflow like Mortgage Express. So we continue to evolve the platform and it’s also launching new products as well obviously. When we think about sort of investing the money, I mean obviously we have a sort of traditional business take process where we expect people to look at the investment in an expected range of outcomes and that we would want those investments to improve the customer experience first and foremost and the profitable overtime at least.

And so we do have that discipline of course, but it’s also the case that because we try to keep the control of the expense dollars quite high up in the organization that we’re not frightened to pay some strategic bets where the payoff is uncertain. Because they are defensive and the option cost is worth it. So we talked a lot before about Chase Pay is providing our customers whether it’s merchants or consumers with choices and a great experience, but it could also be an amazing outcome for us at work, it’s a great customer experience that cost us a little bit money at best it could be a very big deal. And the same is true in the CIB space and in asset management.

So we’re willing to invest to stay ahead of the curve even if in the final analysis that some of that money, we built the product with service that wasn’t needed. Because we can't wait to know what the outcome, and the end game winner looks like because the environment is moving so fast. So we’re willing to take some strategic -- I wouldn't call them bets but some strategic initiatives that we think will be important to customers, customers who want great services and obviously the world is becoming increasingly digitize and electronic, and technology is going to be a material part of enabling all of that. And then there is massive infrastructure efficiency, cloud technology, big data, private security is huge as well of course.

Elizabeth Lynn Graseck

So you're a leader in payments with clear exchange, you're a leader in some for the blockchain work you are doing. You're a leader in on some of the work that you're doing on the wealth management side. I guess the question is how much of that do you feel you’re investing for yourself versus you've realized you're investing to give some of it away to your competitor so to speak because if you create a blockchain that works, it only works because you’re bringing in others.

Marianne Lake

That’s right. So, yes, I mean the nature of that kind of technology is, you can’t be see a first mover in a vacuum, it’s all about the network effect, it’s all about the more participants that join the better the benefit, but it is definitely the case that a more efficient, more electronic, more digital environment will make market more efficient and will make cost of execution lower and it’s better for our clients if it is better for our client then it is good for us. So, we’re not sort of frightened of competition, we’re not frightened because we believe that our operating model and our scale is a differentiating factor. And so customers should have choices and we should win for the right reasons.

Elizabeth Lynn Graseck

And you invest today let’s say in blockchain, what’s the timeframe for getting some of that efficiency out of the organization?

Marianne Lake

Yes, I mean it’s obviously very exciting and it could be transformational, but it’s very early days yet. So I do think that we'll as an industry have a much clearer understanding of the used cases and the leveragability of new technology broadly defined including blockchain over the course of the next year or two not necessarily the next three, four or five. It’s going to move quite fast. But it’s still we're still in used case scenario. So I would say, it will be over the short-to medium-term that we find out which of these things are going to be most important, not necessarily over the next one or two years.

Elizabeth Lynn Graseck

I mean, how do we think about regulatory [Multiple Speakers]?

Marianne Lake

And remember we need to -- it needs to go -- obviously it needs to have that network effect, it needs to have participants which means -- I don't know if you were going to go there, it needs to be clearly acceptable to our regulators and the legal standards and all the. So as you know with blockchain while it's exciting and it maybe transformational some of trade-off of transparency versus data privacy still not completely cracked. Scalability is still not completely cracked and sort of regulatory and legal safe harbours are not completely understood.

Elizabeth Lynn Graseck

So my next question is a little bit more mundane about the some regulatory costs that have increased at JPMorgan maybe 100% or so, compliance staff and everything else that you’ve done, I know you have talked in the past about potentially automating some of that as you move forward, is that something that can provide some operating leverage over the next year or two?

Marianne Lake

I will talk more specifically about it in a minute. The answer is yes and it's fully embedded in the plans that were outlined to you all. And so when we talk about our net expense story this year or our growth phase and we talk about trending to a 55% plus or minus overhead ratio over the medium-term, that contemplates all of our expense initiatives including continuing to optimize on the control agenda. Very specifically, and first of all the cost of controls and the regulator compliance is a price of admission and so we intend to have a very sound and strong foundation of risk governance and controls broadly. That is critical to our business, so that was the reason for the significant investment. You spoke about it, it was $3 billion.

So the good news is, it peaked in 2015 and we are expecting to see that bend downwards over the course of the next several years as part of our overall plan. I will tell you that is where the world is static, so we're automating. We have gotten out the full consent orders. We’ve reduced the number of regulatory issues we have. We’ve gotten through backlogs we are automating new processes. We are working on industry utilities, all the things that will make ultimately the ability to do that job more efficient and to do an even better job. So not more efficient and a less good job, but the environment is also not entirely static.

So where the environment is static, you could see meaningful portions of that cost come out. But as you know we think pretty clear we’re continuing to up our investment inside the security which I think is also very critical. Resolution planning is not going to come at zero cost, so it’s not a static equation, which is why we don’t really now cut out and talk about it as an isolated thing because it moves up and down. It’s much more important that you understand the overall objective for our growth and net expenses and it's contemplated in them.

Elizabeth Lynn Graseck

Okay, great. Any questions from the audience, because I am next going to go to a bit of a lightening round on capital and then credit and then some business outlook. Okay. So alphabet soup on capital regulation, we already went through the G-SIB surcharge, so I appreciate that. But we get things like the FRTB [indiscernible]. Just want to understand what's on your plate or what’s next with these rules? And how do you assess trying to deal with them in particular FRTB because it does seem like it’s a tough rule and I know you’ve indicated that it's manageable, maybe if you could give us some color on why you used that word?

Marianne Lake

So we'll do the sort of the FRTB Basel IV thing first and then go to sort of other BAU evolution and capital and liquidity. So I don’t want to mislead you when I say that for JPMorgan Chase relative to our starting point, the impact of FRTB as we estimated is modest and manageable, that continues to be the case. That doesn’t mean we don’t think that the rule is extraordinarily tough and could have consequences for parts of the market and particularly securitizations and the ability to fund consumer lending as well as parts of rates and equities as well. It just happens to be the case that for JPMorgan in particular, we had limited use of advanced models for securitization as we sort of entered into the QIS, and so as a relative matter, the significant rules that are more significant for others is just relatively starting point. So when we say modest and manageable, I don’t want you to misunderstand that, but we don’t think that there is a need for there to be very close observation and hopefully recalibration of that over the course of the observation period and beyond, and we hope so that is the case for a healthy, functioning part of the market.

Other than FRTB as you look at the Basel IV, it's still in flux. So there are some proposals out on standardized credit there are some proposals that are on standardized operational risk. There is the acknowledgement that there is going to be a calibration in terms of a floor that's not yet been entirely sized. And if you listen to the commission, they talk very consistently about their objective is not to increase capital in the system, but it is to increase the degree of standardization and consistency and make the use of models a little bit more challenging, but to have standardized rules that have a better reflection of gradated risk. And so in general, how could you not be supportive of that.

So I think the devil is always in the detail, we've seen the FRTB come out as quite a difficult rule and on an absolute basis. And there are some factors in the current credit proposals that we strictly to U.S. institutions that are challenging, but at the end of the day it's really going to come down to how the floor is set, how it's calibrated and then how it's got in the U.S. So we're early days in terms of that and we know we can't really get ahead of it. So hopeful that there will be some recalibration and we will get to the right place.

BAU capital and liquidity, we talked about CET1 will likely, if not certainly going to be bound by CCAR with the G-SIB surcharge in the minimum. So we will continue to focus on what that looks like, what that should actually look like. And when we understand the calibration, the timing, the phase-in and all of those things, and we did show you sort of capital corridor and the impact, and you can do the math on that. And LCR, NFSR, we are compliant. We have been compliant as best we know for a period of time, so I would say BAU that's kind of not -- you never say the word optimized, but somewhat. But we're continuing now to work through what impacts resolution planning might, if any have on that. So, we’re building and seeing across the board.

Elizabeth Lynn Graseck

Because resolution planning somewhat requires you to run your business for an event, right. I mean you have to have trapped more trapped liquidity than you would otherwise, is that a statement or no?

Marianne Lake

Yes, you know, so let's start with the regulators would like to see financial, legal, contractual, operational resolvability and multiple cost resolution, no matter what the proposed strategy is, no what matter your capital liquidity starting point is? And you know that's not an unfair ask to be able to demonstrate multiple ways that the term could be resolved. And so the good news in terms of resolution feedback and there really is, I think some good news is that, we now have some quite specific feedback and it's kind of CCAR like once we understand what success looks like, we're very committed to achieving it and generally fairly good at it we certainly we will try a very hard if not to test them, and to do everything we can to meet those objectives and those expectations. And so there will be some a lot of hard work, not just for October, but also through July and even beyond.

So again think of it, and I am thinking of it very CCAR like that we will try very hard to meet the objective for October, but there are further objectives for July and then we need to continue to raise the bar and it will continue to be raised on us. And yet there were comments about reconsidering, the degree of repositioning for liquidity and potentially for foreign jurisdictions and our entities there, material entities there as well as more work on the legal entities strategy. So there is a lot of work and there will be some implications, there probably won't be entirely free, we are still working through it.

Elizabeth Lynn Graseck

Okay. What about op when you got the RWAs that are associated with market risk, with credit risk and with operational risk, right? The Investor base, is kind of wondering does operational risk, RWAs ever go away, is there anything you can do to reduce the op-risk charges that you've gotten, it doesn’t matter because it's not really in the CCAR process?

Marianne Lake

Well so I mean the operational risk that we're evaluating right now it does not assure term path to have it meaningful reduced, for a couple of reasons. One is that, it's very-very backward looking and even talking back to the new sort of standardized proposals even under the new proposals coming out the sort of backward looking loss component of them rather than a really current state of environment forward-looking. So there is lot of short-term paths to reducing operational risk and RWA, but we continue to evolve the scenario analysis and obviously as we cycle through some of these losses, and you get them out of your history, which has a longish tail ultimately the quality of the business that we're doing today will pass-through in the form of the time to operational risk capital being lower. But you're right, as right now today, we're bound by or if not currently very imminently bound by standardized RWA and by CCAR. CCAR, let's not forget, the amount of CCAR, it is not only CCAR, operational risk, just operational losses are very prevalent in CCAR, so it's not that they are not there.

Elizabeth Lynn Graseck

On credit, could you just give us a couple of thoughts on credit the question is obviously on energy oil price is up, but does that mean that the reserves are done, I mean you could speak a little bit to that, people are a little nervous about creating and what's going on in some parts of commercial real estate generally. And then the consumer, we have better unemployment but then the jobs numbers beginning to phase, so is there any cracks that you’re seeing in the consumer side?

Marianne Lake

Okay. Let’s start with consumer and then we’ll go there. So the May jobs reports creates a degree of uncertainty not clear whether it is sort of correct to know is accelerated hiring in the first quarter because of weather impacts or whether it’s land effect of lower capital spend and manufacturing. But at the end of the day it’s one basis point so I think it’s a little premature the rest is consumer data is still strong. So we still think there will be good growth that will anchor unemployment firmly below 5%, the consumer spend will continue to sort of rise, the consumer credit environment ex sort of energy space is really quite good, so we consider the consumer to be in reasonably good shape.

With respect to commercial real estate, obviously, one to watch. But when we look at our business and the things that drove the bigger losses and more stress in the portfolio previously we changed the underwriting standards, we’ve exited some of the more volatile markets permanently. We’ve either eliminated or reduced our regional homebuilder exposure, our construction loan exposure. And we have done some things that mean the future won’t necessarily look like the past. And we stick to our bread and butter as well.

So if you think about commercial term lending where we’ve been growing faster than the industry, it speaks to the streamlined execution we have, the certainty of execution, and our process not our risk appetite. And so again we stick to our bread and butter. For us it’s about small loan sizes, densely populated, rent control stabilized, low supply areas. So we feel good about the growth that we’re putting on there.

In terms of energy, so there is no doubt that $50 oil is better. So clearly there is no doubt. Unfortunately it’s yet to materially change the cash flow profile of the industry as a whole. If you think about why we have that $50 oil at least impart it's the price disruption not necessarily material changes in demand. And if you think about what that means it means that it will stop more people becoming stressed and hopefully reduce the pipeline. But people who are already there will continue to have to work through the process. And E&P companies are still conserving cash and not increasing capital spend, which in turn is meaning oilfield services are not getting the benefit of that. So it hasn’t meaningfully changed, there’s still some asymmetry, but it's obviously a good thing.

And so as we look and then if you look at our portfolio, so you asked about our outlook for reserves. It's beneficial but it doesn’t change the near term we gave sort of guidance that the first quarter that we would expect there to be more losses. That’s still the case, for reserve build. That’s still the case in the rest of this year. We gave a number of $500 million plus or minus the large degree of variability, the reason for that is it becomes much more name specific as we sort of get to a better level of energy prices, but that’s still what we are expecting. And remember that a reasonable portfolio, a portion of our portfolio, about 40%, is natural gas and we haven’t seen the same phenomenon there. So definitely hoping that higher oil prices, now that oil continues to be stable and get better. But it’s not going to have a step change in our expectation for losses.

Elizabeth Lynn Graseck

And on the flip side, are you seeing any reserve release in any other parts of the portfolio still in mortgage for example, or is that all done?

Marianne Lake

So there is a little bit more. We were seeing, like pretty systematic releases in card and mortgage, running up into 2015 and we are at the tail end of that. There is still more potentially to go in mortgage, not in card, so I’d say where the tail end and it’s not a significant number, and it will be a little bit more asset flow based.

Elizabeth Lynn Graseck

So when we look at and think about what the provision line should look like over the course of the next or, the rest of this year. How would you characterize those?

Marianne Lake

Well, we’ve said related to -- let’s talk about charge off for a second because maybe I shouldn’t have gone into we try to take charge offs some reserves. And so we’re expecting our charge offs to be below 4.75%, that’s still the case for the year. Even with energy charge offs that we would be expecting, so no change there. And then in terms of reserves, we feel what we build already in the wholesale space. We talked about $500 million, plus or minus, for the rest of the year, no change there. And I would say we’re seeing pluses and minuses across the rest of the portfolio but nothing meaningful.

Elizabeth Lynn Graseck

Okay just static stable.

Marianne Lake

Yes.

Elizabeth Lynn Graseck

Okay. And then if there were to be a little bit of an uptick say over the next year or so. What kind of leverage do you have to offset that to EPS? Do you have any, or should we just assume that EPS flows with provision increase?

Marianne Lake

Well, so I mean everything is going to move in tandem. So, obviously, we continue to grow pretty strongly all of the underlying drivers of the business, so whether it’s deposits, whether it’s loans, whether it’s transactions across our businesses which will drive non-interest revenue or fee revenue growth. We continue to execute on expenses. We are very disciplined on loan credit. So while we’ll see some, growth we’ll see some potential revenue outside to that too. So that’ll move in tandem.

Elizabeth Lynn Graseck

Okay, and then just lastly as we think forward, I just wanted to hit on one of the things that you’ve mentioned at the Investor Day or that JPM mentioned at the Investor Day, which was that you wanted to own the future of wholesale and retail payments. And so those are big words. And just wanted to get a little bit of color behind the outlook there and what you’re doing to achieve that?

Marianne Lake

Okay. So payment you know I think what -- payments are essential to everything we do a very fast moving environment we’ve been investing very heavily in the space will be defined over the last couple of years. And we’ll continue to make those investments and capitalize on what we think are a pretty unique set of assets across our businesses in the payment space, but we have more work to do. So it’s not a new thing, but it’s now deriving the sort of full benefit of the trisect to that is merchant acquiring services are the largest wholly owned merchant acquirer. ChaseNet which is pretty unique, Chase Pay we have 90 million accounts, 36 million that are in credit payments a day. So we start from a position of strength on the consumer side we are launching new products, we have a pipeline for more new products, we’re investing in our online and mobile. So really broadly across the consumer space we have what we think are pretty unique assets. And we continue to build on that foundation.

And the same is true in the wholesale space. We are already at scale. We moved $5 trillion of money around the world a day. We now, over the last couple of years, built out the capabilities through asset payments in 135 currencies where we previously didn’t have it. And so we’re looking for a faster payment experience for global consistency for the client experience. So no matter what country, currency, or products you’re in, we’re looking to add value through the ability to prioritize payments net, aggregate broad prevention. So it’s really building out hopefully I would say foundationally without is why we did said there is a good growth ahead.

Elizabeth Lynn Graseck

Well, thank you very much.

Marianne Lake

We have to leave.

Elizabeth Lynn Graseck

Marianne, thank you very much for joining us today, I appreciate you coming for today.

Marianne Lake

Thank you very much.

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