JPMorgan Chase & Co., Q2 2020 Earnings Call, Jul 14, 2020 - NYSE:JPM

NYSE:JPM

Jennifer A. Piepszak, Co-Chief Executive Officer of Commercial & Investment Bank at JPMorgan Chase & Co., provided extensive commentary during the Q2 2020 earnings call. Below is a detailed summary of her statements:

Opening Remarks

• Presentation Overview: She thanked the operator and began the presentation, guiding attendees through the slides available on the company’s website. She mentioned the disclaimer at the back of the presentation.

• Q2 2020 Highlights:

  • Net income of $4.7 billion, EPS of $1.38, and record revenue of $33.8 billion.
  • Return on tangible common equity of 9%.
  • Significant items included a credit reserve build of $8.9 billion, $700 million gains in the bridge book, and $500 million gains in Credit Adjustments & Other.
  • CIB reported its highest quarterly revenue on record, with IB fees up 54% and Markets revenue up 79% year-on-year.
  • Record consumer deposit growth of 20% ($130 billion year-on-year).
  • Firm-wide average deposits were $1.9 trillion, up 25% year-on-year and 16% quarter-on-quarter.
  • Average loans up 4% year-on-year and quarter-on-quarter, reflecting COVID-related loan growth in March.
  • Loans down 4% quarter-on-quarter due to revolver paydowns and lower balances in Card and Home Lending, partially offset by $28 billion of PPP loans.
  • Increased CET1 ratio by approximately 90 basis points in the quarter after building approximately $9 billion of reserves and paying nearly $3 billion of common dividends.

• Business Activity Metrics:

  • Wholesale: Record levels of debt and equity issuance as clients paid down revolver draws and shored up liquidity.
  • Consumer Spending: Debit and credit sales volume trended upwards since the trough in mid-April, down just 4% year-on-year in the last two weeks of June.
  • Retail spending showed a strong recovery in card-present volume in the second half of the quarter and consistently strong growth in card-not-present volume.
  • Improvement in overall sales growth flattened out, notably in states with increasing COVID-19 cases.

• Consumer Demand for Credit:

  • Auto: Lowest level of loan and lease originations in April since the financial crisis, followed by a sharp rebound in May and June, with June being the best month for auto originations in the company’s history.
  • Home Lending: Retail purchase applications recovered to well above pre-COVID levels in June due to a strong and broad market recovery.

• Customer Assistance Program:

  • Provided assistance for nearly 1.7 million accounts, representing $79 billion of balances across both owned and serviced portfolios.
  • A large percentage of assisted accounts made at least one payment while in forbearance, with just over 50% in both Card and Home Lending.
  • In Card, less than 20% of accounts requested additional assistance after completing the initial 90-day deferral period.
  • In Home Lending, approximately 40% of extensions were still current.

• Second Quarter Results:

  • Revenue of $33.8 billion, up $4.3 billion or 15% year-on-year.
  • Net interest income down $600 million or 4% on lower rates, mostly offset by higher Markets NII and balance sheet growth.
  • Noninterest revenue up $4.9 billion or 33% driven by CIB, Markets, and IBCs.
  • Expenses of $16.9 billion, up $700 million or 4% year-on-year on revenue-related expenses, partially offset by continued reduction in structural expenses.
  • Credit costs were $10.5 billion, including a net reserve build of $8.9 billion and net charge-offs of $1.6 billion.

• Reserve Build Detail:

  • Net reserve build of $8.9 billion for the quarter consists of $4.6 billion in wholesale and $4.4 billion in consumer, predominantly Card.
  • The reserve increase in Q1 was predicated on an acute but short-lived downturn with a solid recovery in the second half of the year.
  • While positive momentum was seen in the economy, significant uncertainty remained around the path of the recovery.
  • The base case assumes a more protracted downturn with a slower GDP recovery and an unemployment rate remaining in double digits through the first half of 2021.
  • Given the increased uncertainty, more meaningful weight was placed on the downside scenario this quarter, preparing for something worse than the base case.

• Balance Sheet and Capital:

  • Ended the quarter with a CET1 ratio of 12.4%, over 100 basis points above the new SCB-based minimum of 11.3%.
  • SLR ratio of 6.8%, but without temporary relief, it is 5.7%.
  • The Board intends to maintain the $0.90 dividend in Q3 unless circumstances change meaningfully.
  • Strong and steady earnings stream generates over 60 basis points of new CET1 capacity per quarter.
  • $34 billion of reserves and $191 billion of CET1 capital, with $16 billion excess over regulatory buffers.
  • $51 billion of capital available to prefund stress at any time, and $54 billion from the GSIB surcharge.
  • The extremely adverse scenario assumes an even deeper contraction of GDP, down nearly 14% at the end of 2020, and reported unemployment ending the year at nearly 22%.
  • Under this scenario, the company would end the year with a CET1 ratio above 10% and would be bound by advanced, so the regulatory minimum would be 10.5%.

• CCAR and Capital Framework:

  • CCAR is not predictive of actual results but ensures banks can handle extreme stress.
  • Opportunities exist to rationalize the overall capital framework, including GSIB, to foster a higher pace of economic growth without compromising financial stability.

• Business Performance:

  • Consumer & Community Banking (CCB):

    • Net loss of $176 million, including a reserve build of $4.6 billion.
    • Revenue of $12.2 billion, down 9% year-on-year.
    • Deposit margin down 108 basis points year-on-year on a sharp decline in rates.
    • Deposit growth was a record 20% year-on-year, up over $130 billion.
    • Auto loan and lease originations down 9% year-on-year.
    • Home Lending total originations down 1% year-on-year.
    • Total CCB loans down 7% year-on-year.
    • Expenses of $6.6 billion, down 3%.
    • Credit cost included the $4.6 billion reserve build and net charge-offs of $1.3 billion driven by Card.

  • Corporate & Investment Bank (CIB):

    • Net income of $5.5 billion and an ROE of 27% on revenue of $16.4 billion.
    • Investment Banking revenue of $3.4 billion, up 91% year-on-year.
    • IB fees up 54% year-on-year.
    • Markets revenue of $9.7 billion, up 79% year-on-year.
    • Wholesale Payments revenue of $1.4 billion, down 3% year-on-year.
    • Security Services revenue of $1.1 billion, up 5% year-on-year.
    • Credit Adjustments & Other was a gain of $510 million.
    • Expenses of $6.8 billion, up 19%.
    • Credit costs of $2 billion reflect the net reserve build.

  • Commercial Banking:

    • Net loss of $691 million, including reserve builds of approximately $2.4 billion.
    • Revenue of $2.4 billion, up 5% year-on-year.
    • Gross Investment Banking revenues of $851 million, up 44% year-on-year.
    • Deposits of $237 billion, up 41% year-on-year.
    • End-of-period loans up 7% year-on-year but down 4% quarter-on-quarter.
    • Credit cost of $2.4 billion included the reserve builds mentioned earlier.

  • Asset & Wealth Management:

    • Net income of $658 million with a pretax margin and ROE of 24%.
    • Revenue of $3.6 billion, up 1% year-on-year.
    • Expenses of $2.5 billion, down 3% year-on-year.
    • Credit costs were $223 million driven by the reserve builds.
    • Net long-term inflows of $29 billion.
    • AUM of $2.5 trillion and overall client assets of $3.4 trillion, up 15% and 12% year-on-year, respectively.
    • Deposits up 20% year-on-year on growth in interest-bearing products.
    • Loans up 12%, with strength in both Wholesale and Mortgage Lending.

  • Corporate:

    • Net loss of $568 million

James Dimon, Chairman & CEO of JPMorgan Chase & Co., made several comments during the Q2 2020 earnings call. Here’s a detailed summary of his remarks:

Opening Remarks

• Capital Strength: Dimon emphasized the company's strong capital position, highlighting that they can absorb losses and quickly replenish capital in times of stress.
• Capital Buffer: He mentioned that the company has a strong capital buffer and is prepared to handle a downturn without needing to dip into regulatory buffers.
• Dividend Policy: Dimon explained the rationale behind maintaining the dividend, stating that the company can handle very tough times without cutting the dividend.

On Extreme Adverse Scenarios

• Reserve Increases: Dimon clarified that the company can bear another $20 billion in loan loss reserves, which aligns with an extreme adverse scenario.
• Capital Actions: He noted that the company would take actions to avoid using advanced CET1, which is pro-cyclical.
• Dividend Consideration: Dimon stated that the Board would consider cutting the dividend if the economy enters a materially and significantly worse scenario than the extreme adverse case.
• Credit Losses: He emphasized that the company's estimates of credit losses are not based on CCAR-type stress tests.

On CCAR and Regulatory Capital Framework

• CCAR Misalignment: Dimon criticized CCAR for not being predictive and for overstating potential losses, pointing out that the company's actual experience in past crises was much better than CCAR projections.
• Global Market Shock: He used the global market shock component of CCAR as an example of misalignment, stating that the actual results in 2020 were significantly different.
• Regulatory Capital Reform: Dimon advocated for reforms to the capital framework, suggesting that changes could foster economic growth without compromising financial stability.
• SCB and GSIB: He discussed the Stress Capital Buffer (SCB) and Global Systemically Important Bank (GSIB) surcharges, suggesting they should be recalibrated to better reflect risk and actions taken by the bank.

On Balance Sheet Management

• Liquidity Buildup: Dimon mentioned that the liquidity buildup on the balance sheet is a natural consequence of the Federal Reserve's actions and will likely end up in securities.
• Securities Portfolio: He noted that the securities portfolio is being managed prudently and that the bank can further reduce credit exposure if necessary.
• Trading Risk Management: Dimon stated that the trading book is being managed tightly, with a focus on serving clients and being cautious.

On Public Policy

• Mortgage Market: Dimon advocated for changes in the mortgage market to reduce costs and improve access, suggesting that regulatory changes could make mortgages more affordable, especially for lower-income borrowers.

On Future Outlook

• NII Guidance: Dimon commented on the net interest income (NII) guidance, suggesting that the trading NII may help offset the pressure on NII from lower rates.
• Trading Environment: He advised that trading revenues should be expected to fall by half from the record levels seen in Q2 2020.

On Capital Planning

• SCB Recalibration: Dimon stated that the bank will not go back to the Federal Reserve regarding the 3.3% SCB but will look at ways to reduce it through internal planning.
• GSIB Surcharge: He expressed a desire for recalibration of the GSIB surcharge, suggesting that it should better reflect the bank's systemic risk and actions taken to mitigate risk.

On Social Justice and Policy

• Banking and Society: Dimon discussed the importance of banks being part of the solution to societal issues like inequality and social justice, emphasizing the bank's commitment to responsible practices and community service.

Closing Remarks

• Preparedness: Dimon reiterated the bank's preparedness for various scenarios and the commitment to serving clients and communities through thick or thin.