JPMorgan Chase & Co. (JPM) Management Presents at Morgan Stanley Virtual US Financials Conference (Transcript)

JPMorgan Chase & Co. (NYSE:JPM) Morgan Stanley Virtual US Financials Conference Call June 9, 2020 3:15 PM ET

Company Participants

Gordon Smith - Co-President and Co-Chief Operating Officer and CEO, Consumer Bank

Conference Call Participants

Betsy Graseck - Morgan Stanley

Betsy Graseck

Good afternoon. Thanks everybody for joining me and Gordon Smith, Co-President and Co-Chief Operating Officer, as well as CEO of the Consumer Bank. Gordon, thanks so much for joining us this afternoon.

Gordon Smith

Oh, you're welcome. Thank you very much for doing this Betsy in a COVID environment. It would be so much nice to be sitting on the stage with you as we’ve done previously.

Betsy Graseck

Next year, next year. There's always next year. So Gordon, I wanted to kick off by just asking about how in this COVID environment you're managing the line? I mean, what are you looking for from your team? And really, the underlying question is, do you keep the budget that you had at the beginning of the year or do you throw it out the window and rewrite the whole thing?

Gordon Smith

Well, we never throw it out. Clearly, you know, we've had to make, you know, a number of adjustments. We focused on, you know, the expenses that we would want to deal with quickly. So, for example, you know, simply bringing down travel and entertainment, reducing the need for contractors just rigorously going through the expense statement and say, you know, what would be no regrets, cuts in this environment, but what we also want to do, and this again, comes back to the plan, is we want to continue to invest heavily in all of the things that we originally had, had put into our financial plans.

You know, I think, I've said to you before, Betsy, we have this strategic offsite with Jamie each summer, and we kind of laying out the plans for the future kind of 12 to 24 months. And I think, you know, one of the really reassuring pieces from this whole exercise, if I should possibly call it an exercise this whole situation, has been that those plans that we put in place are the ones that have, you know, stood up to, you know, this environment and we’re continuing to invest in pretty much everything that we laid out.

Betsy Graseck

Okay, so maybe you can give us a sense as to what some of the biggest opportunities are that you see for yourself over the next, you know, 12 months or so 24 months post COVID environment?

Gordon Smith

By the way, one other thing I would say on expenses is clearly if we reach a point, and we'll talk more about this over the next half an hour, but if we reach a point where we think things could get much worse, then obviously there's a great deal more expense that we could take out of the business that we have not at this point. In terms of, you know, the big opportunities, you know, we laid out at Investor Day, Betsy and I, for everyone listening, we're just saying, right before we came on air, the Investor Day, which was in February for JPMorgan Chase, just now seems like a 100 years ago, but some of the big investments that we laid out were marked expansion in the retail banks, that momentum has really been terrific.

We continue to invest heavily there. Digital and mobile capabilities, we continue to invest heavily there and actually, you know, I maybe come back Betsey in a moment or two and just describe some of the adjustments that we made in digital and mobile that have also served as well, but largely kept our focus on the plans that we laid out. And then deepening relationships with customers, you know, huge opportunities that you know, we take customers [who are totally check-in] customers adding savings, adding credit products like credit card, auto finance, mortgages, and wealth management.

So that's really significant opportunity and all engineered through the customer experience. How do you build an experience that just makes it easier for the customer to have multiple product relationships with JPMorgan Chase or integrated through mobile and digital capabilities?

Betsy Graseck

Now, there must be some challenges that this environment brings anything you want to highlight?

Gordon Smith

Well, you know, if we go over, my guess it's been maybe 10 weeks or 12 weeks. We've had the whole team dispersed, and you know, I think our technology team just did an astounding job getting people up and running from home environment. Call centers were tough initially, and, you know, we've deployed tens of thousands of desktop capabilities so that people can work from home. The branches to make sure that our customers and our bankers are safe.

We closed about a thousand branches and have been progressively reopening those. Use of [indiscernible] big screens inside the branch have been installed, and all the things that you see in other retail outlets making sure that customers and our teams stay six feet distant. And so all of those have really kind of moved through, I think, you know, quite, quite successfully. And, you know, I have to say, you know, we've worked very, very efficiently working from home. One of the early challenges, of course, was bringing up the PPP program, which I think you know, was really a success on all fronts.

Although it was a tough start, we were building the product as it was announced, but I think you know partnering with small business administration, partnering with treasury, you know, we I think got an awful lot of money to a lot of small businesses actually quite quickly. And we all read about, you know, a number of complaints industry-wide for small businesses who are looking for money. It took about 10 days to 12 days to build the technology, and then our numbers over the course of about 24 hours; we were able to submit and then fund about 220,000 loans in basically a 24-hour window, having built the technology with the SBA, and with the help of treasury. So, I think that ended up being a really positive program.

Betsy Graseck

Coming through all this, are there any strategic opportunities that you're looking for in times like this, sometimes you've got opportunities to acquire that you didn't have in the past, or maybe you have new functionality you would like that you weren't thinking of before?

Gordon Smith

I think the answer is, yes. We're always looking. Nothing's really got to be inexpensive in this environment, which is interesting, but, you know, I think if we could find synergistic opportunities like we did with WePay where we were, you know, acquiring a great leadership team really good technology capabilities and a great infrastructure, we would absolutely do that. I think in the Wealth Management space there's opportunities for us to do acquisitions there too, obviously from a deposit cap perspective, there would be nothing in the direct retail banking space, but I would say in Technology Building capabilities and in the Wealth Management spaces, the opportunity that we would be most focused on, on the consumer side of the business.

Betsy Graseck

Got it? Okay. All right, let's turn to some of the client insights that you're getting from how you know, your consumers are behaving. Just want to get an update on spend patterns and borrowing patterns. Is there any differences in spend on geography, FICO, or employer? And maybe you can give us a sense on the borrowing side as well. Is demand coming from existing or is it more coming from new?

Gordon Smith

Yeah, the year started so strongly. And, you know, we talked internally about what would the next downturn be driven by and in many conferences people talked about, you know, it's we're in the late cycle, I don't think anything, anyone expected it to be a pandemic. And if we look at debit and credit card growth, in January and February, we were, you know, solidly at 9% growth. That dropped to about 5% in March and in April consumers really retrenched aggressively debit and credit spend down for us 23%.

We then, as May began to progress, began to see some improvements. We were down – these numbers are year-over-year, [Betsy] we were down 15% year-over-year. And, you know, in the first week of June, we're down 12%. The states that are opening up are modestly and only modestly better. But I think that that's just very, very early. So, my observation of customer behavior is that people have been very careful. They have retrenched. They are carefully managing their balance sheet where people are spending, it's on the rent payments, their mortgage payments, on, you know, essentials around, you know, food and so on. So, I think, you know, I've seen the consumer just be very prudent in their actions.

In terms of as we think about the different asset classes, demand for borrowing in the credit card space is very low, very weak right now, which is exactly what you'd expect because it you know, it sits in parallel with consumer spending on credit cards. So, you know, people have pulled back and credit card is very low demand. Also, we've started to see really from the last week of May and first week of June, a real improvement. Now whether two weeks a trend, who knows? But, obviously, sales have been very weak for 8 or 10 weeks. People weren't going out to car dealerships to where they were either open to buy cars. And in the last couple of weeks, we've seen sales on a year-over-year basis, up about 15%.

So, I think I would mark that down as an encouraging early sign. And it's true on the – on mortgage originations. In terms of purchase, just obviously heavily suppressed over the course of the last 8 to 10 weeks, starting to look like it's coming back. Refi, of course, with rates at this level has been extremely strong. But that's kind of how I would look at the asset classes, and now with New York, New Jersey, Connecticut, the tri-state area really beginning to pick up or to open up. It'll be interesting over the next 30 days to see what type of momentum we begin to drive there. I think there are definitely early signs of optimism.

Betsy Graseck

Just turning to the forbearance requests, maybe you can give us a sense as to what you're seeing there? I think, Jamie mentioned that a third of the customers who asked for forbearance aren't using it. And I'm wondering why you think that is and how you expect that's going to track over the next few months here?

Gordon Smith

Well, again, I would just go back to my comment. I think, consumers have just been very prudent in managing their finances. And the ability to take a forbearance program was there for people. And I think if customers didn't fully need it, they thought – I'll take the opportunity for one of those programs, so that I can assess the situation and see how the world evolves over the course of the next few months, because none of us knew what June was going to look like when we were at the end of March there.

In terms of our numbers, we had about just a shade over 1.5% of our credit card accounts went into some type of forbearance program, around 7% for auto and about 6.5% roughly for home lending. And just, again, it's still too early, but I think kind of quite encouraging, the very first tranches of credit card customers, which I think is a good early read. About 80% of customers made a payment, and 20% asked for some additional level of help. So, I think that's actually pretty positive.

Betsy Graseck

And then how are you thinking through the benefit that customers are getting, consumers are getting from the fiscal support here, right? We've got the unemployment and plus 600 a week, and we've got the check that came through 1000-plus. And I asked, because there's an end point on this, at least, the end of July for the extra on the unemployment side. You guys see your numbers and you dig into the weeds on, on all of this. How do you think that’s impacting the consumer? And do you anticipate any change in your customers’ behavior as those [programs sunset]?

Gordon Smith

Yes. I think they're affecting the consumer positively. Those payments are helping customers to pay their rents, to go to the grocery stores, to pay their mortgages where they are on a forbearance program, so they have helped. And interesting and, of course, so many of these programs are still maturing through so to really see the out – what the outcome will be. But in terms of kind of the, sort of earliest waves of payment, what we see in terms of, as we looked at kind of Chase Bank account of customers who had their payment deposited into a Chase Bank account, about almost 30%, in fact, actually kind of right on 30% of the funds are still either in checking or savings. So again, I look at that quite positively.

Betsy Graseck

Got it. All right. Let's move towards credit and how you're thinking about the reserving as we go forward here over the next couple of quarters. Just wanted to understand how you're thinking about that, because unemployment hovering at 13%. Or if you include the shadows 16%, seems like it would drive a bigger reserve, then you might have done so far given that supposed to be 9% back in March, but at the same time, as you indicated, you've got consumers behaving in a very positive way here. So, can you give us a sense as to what kind of unemployment rate you think your current reserve reflects? Or maybe said another way, how you anticipate moving the reserve here over the rest of the year?

Gordon Smith

Yes. Well we'll make a decision on second quarter reserves when we get through to the end of June. But let's just talk about credit for a moment. If I look at the underlying performance of, I’d say that, I like to sit and look at what are the roll rates as customers, accounts move from current to 30, 30 to 60 and so on.

The performance that we see in those delinquency buckets is meaningfully best – meaningfully better than what you would have expected with unemployment anywhere close to these levels. And again, the things that we've been discussing here in the last 15, 20 minutes around all of the government stimulus is clearly having a really meaningful effect.

So the factors that we have to balance when we get to make the decisions about, so now what should we do for reserves going forward? Start to look at the facts that say, well, today, credit performance looks to be a lot better than one would have expected with unemployment at the levels that we're seeing.

We're beginning to see an opening up that looks really encouraging. Will that continue? Will there be a resurgence in COVID cases? And if there is, how meaningful will that be? So, with all these things you've got the sort of absolute of what the numbers are telling you today. And typically, in all the recessions I've been through and now with so many decades in this industry, it's been a lot. You could with us fairly good degree of accuracy and be able to kind of run the numbers all the way through what we thought ultimate loss rates would be, but there is a wide range of potential outcomes from this point forward.

Obviously, from very positive, we talked about a number of those factors. Some of them we haven't yet covered that a number of them. And then there's – there – there's a scenario that says that we see a flare up in cases that's really meaningful that it begins to put more stress back on to the healthcare system, we start to see a closed down, again, and the situation could get much worse.

I think simply as I would think about reserves, I would want to be reserved all the eventualities. And so you're much more likely to see us be more on the conservative side as we move into the second quarter. And by, I think the – by the end of the third quarter, we would – we'll have a much better view of how this pandemic – how this pandemic is really going to play through.

Betsy Graseck

Got it. Okay. And then as we're thinking about what the ultimate reserve ratio could be, I know it's in play, it's hard to forecast specifically right now, but investors look at some of the prior stress tests that you've run like 2019, 2018, trying to assess those scenarios and that kind of consumer reserve loss rate that might occur. How do you think about this current environment versus those kind of stress tests that you've run in the past?

Gordon Smith

Yes. Well, I think, obviously, the first quarter or two wasn’t we’d expect. But I think with a probability that the following seven quarters or so could actually be much better than we might expect. So, at this point, I feel much more and hopefully, you hear that in the comments that I've made that I feel actually much more optimistic and pessimistic about what the next number of quarters are going to look like.

I think there are some challenging areas for – in the consumer space, particularly in travel and entertainment. And so, the question is going to be how quickly will consumers begin to start travel, stay in hotels, and go to restaurants and all of those things will have a factor of what losses ultimately look like over the course of the next multiple quarters.

Betsy Graseck

Got it. Yeah. No, that makes sense. Just lastly, on this topic, credit extension, are you underwriting to your own customers only or do you bring on new customers in this environment?

Gordon Smith

We will be – we are bringing on new customers in this environment, but at a much lower level. Obviously, our primary focus has been to make sure that, we're meeting the needs of our existing customers. We're still in business in the credit card space. But it's true in this recession and it's been true in every session that I've been – recession that I've been in, in this business.

Demand for credit in credit card shrinks dramatically in recessionary times and we’ve talked a little bit about that. And we're seeing home lending, both for customers and for new customers and also finance for new and existing customers, both increasing quite quickly over the course of the last kind of three weeks or so. So, we're open for both, but obviously, primarily want to make sure that all of our existing customers have their requirements met.

Betsy Graseck

So then just turning to competitive dynamic, and I really wanted to ask you primarily around the FinTech competitor, mainly because digital has obviously become more important and consumers now realize how easy it is to use digital. And this opens the door for potentially a thinner branch network, but at the same time, also potentially reduces barriers to entry for FinTech. So, could you give us a sense as to how you're thinking about that dynamic? And how you're positioning yourself to compete against FinTech? Where should you do better? And where are you maybe not getting credit for the work you're doing already?

Gordon Smith

Betsy, I think with the FinTechs over the last many years now, I think they've helped us get better and better at a more rapid pace. And I think if I look back over the last three or four years, maybe it's four or five at this point, that we've had no challenge competing with anyone. And I think, what the FinTechs have helped us do over time is really focus on the mobile side of the customer experience and make some dramatic improvements. So, I think, we have no problems at all competing with any of the FinTechs.

As we think about the issue around retail banking, obviously, going to watch traffic very carefully, but just an interesting observation from our data. As if we've looked over the last 12 weeks or so and we look at the behaviors of our existing clients, then the number of mobile and digitally active customers has edged up minimally, but when I take the [mobily] and digital digitally active customers, they're doing much more on those devices. And so the – but the interesting takeaway is, consumer behavior can sometimes take a long time to change. And so, obviously, the outcome of what I just described is that customers were not [mobily] active. The majority of them are still not [mobily active], even as we go through this pandemic experience.

So, I would expect to see that branch traffic will drop, will stay down, obviously, but for some period of time, and then how far it normalizes, we'll obviously watch. But I still think, we'll see meaningful traffic through the branch network. I really do. And in terms of, particularly what I think we've learned over the course of the last 8 to 10 weeks is, we've seen a speed of decision-making really accelerate. And so it's just some good learning’s for us, because you're obviously – we've been managing a crisis situation.

I think, we just really picked up the speed of our decision making and development. And I mentioned earlier that, you know, we've made a couple of changes to our approach to the digital development area, and that was really taking areas that customers needed to call into Chase or to visit a branch, and making sure that we quickly and by quickly, I mean, literally in hours and days, deploy that same capability on the mobile device. And then do we get credit for it? You know, I really think we do. We’ve gained market share in our key businesses, almost every year for the last decade. So, you know, I think, I think the momentum and the results are there.

Betsy Graseck

You talked in the beginning about how – with the PPP program, there were some expenses that you had to, you know, gin up to, you know, invest in the technology platform in order to get that done, and I'm sure there was some other expenses associated with moving people to work from home environment. Is that an expense level that you know, we're going to see in the numbers or do you have some other offsets that you think are going to make up for that? Just wondering, it's a question that came in over the web.

Gordon Smith

Yes, we have offset and so if we think about kind of PPP, all the development work that we've been doing, communicating with customers, all of those things, you know, we're probably all in somewhere close to $200 million, but, you know, as I've said, we've been going through, obviously, the expense space very, very quickly to you know, eliminate expense that we can, and, you know, [Gen guided to], you know, less than 65 billion, and that's about where we expect to be.

Betsy Graseck

Got it. Okay. And then…

Gordon Smith

Which effectively, just think about flat to 2019.

Betsy Graseck

Right, so you're trying to, you know, find offsets for the one-timers that you've got coming at you from this crisis?

Gordon Smith

I’m still continuing to do, Betsy, all the things that we've described that we want to keep doing, expanding the retail network and growing the mobile and digital capabilities, all those things still be managed to.

Betsy Graseck

Just as we think about, you know, the post-COVID environment here and positioning Chase for growth, you know, which business lines within consumer and community banking, are you looking for to generate that growth going forward?

Gordon Smith

Yeah, you know, I, obviously, retail banking will be challenged with interest rates, but we'll keep aggressively growing in that business, because, you know, I've said, a decade now, that deposits are merely an outcome metric. What we want to be is the primary bank for our customers. Once we do that, they take credit cards, they take wealth management, you know, home financing, and auto. So, you know, each of those core businesses, it's many years now since, you know, we stepped away from areas like student lending, just a business that we didn't feel like we wanted to be a leader in.

And so, we stay true to these businesses that make up consumer and community banking now since 2011. And I think every one of them have got tremendous opportunity to grow inclusive of the Wealth Management Businesses, led by Mary Erdoes, and Kristin Lemkau in the U.S.

Betsy Graseck

And you have your branch expansion also in some of the, you know, new locations that aren't just around Universities, and well, you know, strongly performing cities, but also in some of the locations that haven't had branches in a while, could you give us a sense as to how you anticipate that impacting your growth going forward?

Gordon Smith

You know, before COVID and obviously, with branches being closed and so on, you know, it's a different scenario, but before COVID, all of our branches in the branch expansion space was significantly outperforming our business case. They were really delighted with the momentum that we were gaining. I think we'll continue to gain once we – once, you know, the market starts to open up. So, very encouraged by that first real 12 months of market expansion.

Betsy Graseck

Okay, great. Well thank you so much Gordon for joining me this afternoon. Appreciate your thoughts and insights.

Gordon Smith

Thank you, Betsy. You too. Stay safe.

Betsy Graseck

All right. Take care. Bye, now.

Question-and-Answer Session

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