Ebrahim Poonawala: That’s helpful. And just tied to that, as we look at commercial real estate, both for JP and for the economy overall, is higher rates alone enough to create more vulnerabilities and issues beyond office CRE? Like, how would you characterize the health of the CRE market? Thank you.
Jamie Dimon: Yeah. So, I’ll put it into two buckets. First of all, we’re fine. We’ve got good reserves against office. We think our multifamily is fine. Jeremy can give you more detail on that if you want. But if you think of real estate, there’s two pieces. If rates go up, think of the yield curve, the whole yield curve, not Fed funds, but the 10-year bond rate, it goes up 2%, all assets, all assets, every asset on the planet, including real estate, is worth 20% less. Well, obviously, that creates a little bit of stress and strain, and people have to roll those over and finance it more. But it’s not just true for real estate. It’s true for everybody. And if that happens, leveraged loans, real estate will have some effect. The second thing is, why does that happen?
If that happens because we have a strong economy, well, that’s not so bad for real estate because people will be hiring and filling things out and other financial assets. If that happens because we have stagflation, well, that’s the worst case. All of a sudden, you are going to have more vacancies. You are going to have more companies cutting back. You are going to have less leases. It will affect, including multifamily, that will filter through the whole economy in a way that people haven’t really experienced since 2010. So, I just put it in the back of your mind, why is important, the interest rates are important, the recession is important. If things stay where they are today, we have kind of the soft landing that seems to be embedded in the marketplace, everyone will — the real estate will muddle through.
Obviously, it would be idiosyncratic if you are in different cities and different types of B versus A buildings and all that, but people muddle through. They won’t muddle through under higher rates with the recession. That would be tough for a lot of folks and not just real estate if, in fact, that happens.
Ebrahim Poonawala: Helpful. Thank you so much.
Jeremy Barnum: Thanks, Ebrahim.
Operator: Thank you. Our next question comes from Erika Najarian with UBS. You may proceed.
Erika Najarian: Hi. Good morning. Given that your response to Betsy’s question is that, 15% CET1 today prepares you for Basel III endgame as written, you earn 22% on without the FDIC assessment. Ahead of Investor Day, I guess six weeks from now or a week from now, if we think about that 17% through the cycle target, if you are at the right capital level per you guys, where are you over-earning today?
Jeremy Barnum: Right. Interesting framing of the question, Erika. So, I think we have been pretty consistent about where we are over-earning, right? So, obviously, one major area is that we’re over-earning in deposit margin, especially in consumer. That’s sort of why we’re expecting sequential to coincident NII, why we’ve talked about compressing deposit margins and increases in weighted average rate paid. So, I think that’s probably the single biggest source of, let’s call it, excess earnings currently. You’ve also heard Jamie say that we’re over-earning in credit. I mean, wholesale charge-offs have been particularly low, but we have builds for that. So, in the current run rate, a bit less clear the extent of over-earning. And in Card, of course, while charge-offs are now close to normalized, essentially, we did go through an extended period of charge-offs being very low by historical standards, although that was coupled with NII also being low by historical standards.
So, from a bottom-line perspective, it’s not entirely clear what the net of that was. But broadly, it’s really the deposit margin that’s the biggest single factor in the over-earning narrative. Embedded in your question, I think, is a little bit of the, what are you thinking about the 17% CET1 in light of the current level of capital and so on, and you did talk about Investor Day. I was hoping that we would have interesting things to say about that on Investor Day in light of potential updates of the Basel III endgame, given that the single most important factor for that 17% is how much denominator expansion do we see through the Basel III endgame. At the rate we’re going, we won’t actually know that much more about that by Investor Day. So, we might not have that much more to say, except to reiterate what I’ve said in the past, which is that whatever it is, it’s going to be very good [indiscernible] terms and absolute terms, very good in relative terms.
We will optimize. We will seek to reprice. We will adjust in various ways to the best of our ability. But given the structure of the rule as proposed, at least, a lot of this cannot be optimized away. And so, in the base case, you have to think of it as a headwind.
Erika Najarian: Got it. And just as a follow-up question, you mentioned that the current curve that you set your NII outlook upon is stale. I guess, does it matter that — it seems like the market is now pricing in, obviously, no June cut, no September cut, a toss-up in December, which should matter for this year. As we think about that $90 billion, if the price rate cuts out totally, does that matter much, given that it seems like June is the only one that would…
Jeremy Barnum: Yeah. Sorry, Erika. So, just quick things on this. One, let’s focus on NII ex, not on total NII. So, I’d anchor you to the $89 billion. Number two, if you want to do math for like the changes of the average fund rate for the rest of the year and multiply that times the EAR, be my guest, it’s like as good as an approach as any. But I would just, once again, remind you of the $900 billion of deposits paying practically zero, that very small changes there can make a big difference. And we’ve got other factors. We’ve got the impact of QT on deposit balances, et cetera, et cetera, et cetera. So, we want to make sure that we don’t get too precise here. We’re giving you our best guess based on a series of assumptions. And it’s going to be what it’s going to be.
Jamie Dimon: Which we know are going to be wrong.
Erika Najarian: Thanks.
Operator: Thank you. Our next question comes from Ken Usdin with Jefferies. You may proceed.
Ken Usdin: Thanks. Good morning. Jeremy, I was wondering if you could expand a little bit on one of your prepared comments. When you talked about, we all have hopes and expectations for the Investment Banking pipeline to continue to move along. We obviously saw the good movement in ECM and DCM and the lag in Advisory. Can you just talk about that? You mentioned like potential cautiousness around the election. Just what are you hearing from both the corporate side and the sponsor side with — relates to M&A on like go, no-go type of feel and conversation levels? And then, what do you think we need to have to kickstart just another good level of IPO activity in the ECM markets? Thanks.
Jeremy Barnum: Sure. Yeah. Let me take the IPO first. So, we had been a little bit cautious there. Some cohorts and ventures of IPOs have performed somewhat disappointingly. And I think that narrative has changed to a meaningful degree this quarter. So, I think we’re seeing better IPO performance. Obviously, equity markets have been under a little bit of pressure the last few days. But in general, we have a lot of support there and that always helps. Dialogue is quite good. A lot of interesting different types of conversations happening with global firms, multinationals, carve-out type things. So, dialogue is good. Valuation environment is better. Like sort of decent reasons for optimism there. But of course, with ECM, there’s always a pipeline dynamic and conditions were particularly good this quarter.
And so, we cautioned a little bit there about pull forward, which is even more acute, I think, on the DCM side, given that quite a high percentage of the total amount of debt that needed to be refinanced this year has gotten done in the first quarter. So, that’s a factor. And then, the question of M&A, I think, is probably the single most important question, not only because of its impact on M&A, but also because of its knock-on impact on DCM through acquisition financing and so on. And, there’s the well-known kind of regulatory headwinds there, and that’s definitely having a bit of a chilling effect. I don’t know. I’ve heard some narratives that maybe there’s, like, some pent-up deal demand. Who knows how important politics are in all this.
So, I don’t know, we’re fundamentally, as I said, I think, on the press call, happy to see momentum this quarter, happy to see momentum in announced M&A. A little bit cautious about the pull-forward dynamic, a little bit cautious about the regulatory headwinds. And in the end, we’re just going to fight really hard for our share of the wallet here.
Ken Usdin: Got it. And I guess I’ll just stick on the theme of capital markets and not surprising at all to see a little bit tougher comp in FIC. I think you guys have kind of indicated that maybe a flattish fee pool is a reasonable place, and I know that’s impossible to guide on. But just — maybe just talk through some of the dynamics in terms of activity across the fixed income and equities business? And do you feel like this is the type of environment where given that lingering uncertainty about rates, clients are either more engaged or less engaged in terms of how they’re positioning portfolios? Thanks.
Jeremy Barnum: Yeah, a really good question. I would say in general that the sort of volatility and uncertainty in the rate environment overall on balance is actually supportive for the Markets revenue pool. And I think that, together with generally more balance sheet deployment, as well as sort of some level of natural background growth, is one of the reasons that the overall level of Markets revenue has stabilized at meaningfully above what was normal in the pre-pandemic period. And while that does occasionally make us a little bit anxious, like, oh, is this sustainable? Might there be a downside here? For now, that does seem to be the new normal. And I do think that having rates off the lower zero bound and a sort of more normal dynamic in global rates that not only affects the rates business, but it affects the foreign exchange business.
It generally just makes asset allocation decisions more important and more interesting. And so all of that creates risk management needs and active managers need to grapple with it and so on and so forth. So, I think that — those are some of the themes on the Market side at the margin, and, yes, we’ll see how the rest of the year goes. But it sort of seems to be behaving relatively normally, I would say.
Operator: Thank you. Our next question comes from Mike Mayo with Wells Fargo. You may proceed.
Mike Mayo: Hi. Jamie, I’m just trying to reconcile some of your concerns in your CEO letter. I’m sure the 60 pages, I can see you put a lot of effort into that, and it’s appreciated. But you talked about scenarios, tail risk, macro risk, geopolitical risk, and all that over several years. It’s not weeks or months. I get it. On the other hand, the firm is investing so much more outside the U.S., whether it’s commercial or some digital banking, consumer, or wholesale payments. So, I’m just trying to reconcile kind of your actions with your words, and specifically, how is global wholesale payments going. You mentioned you’re in 60 countries. You do business a lot more. How is that business in particular doing? Thanks.
Jeremy Barnum: All right, Mike. So, I’m sorry to tell you that Jamie actually left us because he’s at a leadership offsite. That’s why he was here remote. So, I think he left the call in my hands for better or for worse. So — but let me try to address some of your points and without sort of speaking for Jamie here. I think that when we talk about the impact of the geopolitical uncertainty on the outlook, part of the point there is to note that the U.S. is not isolated from that, right? If we have global macroeconomic problems as a result of geopolitical situations, that’s not only a problem outside the U.S. That affects the global economy, and therefore the U.S., and therefore our corporate customers, et cetera, et cetera. And in that context, keeping in mind what we always say, that we invest in the cycle, that we don’t go into countries and then leave countries, et cetera, obviously we adjust around the edges, we manage risks, we do make choices as a function of the overall geopolitical environment, but broadly the notion that we would pull back meaningfully from one of the key competitive strengths that this company has always had, which is its sort of global character because of a particular moment geopolitically would just be inconsistent with how we’ve always operated.
And in terms of the wholesale payments business, it’s going great. We’re taking share. There’s been a lot of innovation there, a lot of investment in technology, a lot of connectivity to payment systems in different countries around the world. And, yeah, I’m sure we’ll give you more color in other settings on that, but it’s a good story. It’s a nice thing to see.
Mike Mayo: Just as a follow-up to that then. Why is it doing great in terms of wholesale payments given such the dislocations in the world from wars to supply chain changes, everything else, why is wholesale payments doing great?
Jeremy Barnum: Well, I think one of the things about payments businesses is that in some sense, I mean, recession proof is probably the wrong word, and in any case we’re not dealing with a recession, but we’re talking fundamentally about moving money through pipes around the world, and that’s a thing that people need to do more or less no matter what. So that’s one piece. But I think the other piece is that our willingness to invest, which has always been a focus of yours, is one of the key things separating us in this business right now. And so, we are seeing the benefits of that.
Mike Mayo: All right. Thank you.
Jeremy Barnum: Thanks, Mike.
Operator: Thank you. Our next question comes from Glenn Schorr with Evercore. You may proceed.
Glenn Schorr: Thank you. Your commentary with Ken’s questions were great and clear on Investment Banking for the near term and this year. I have a bigger picture question in terms of — you’re always so good in spelling out where you’re over-earning. Do you feel like you’re under-earning on the Investment Banking side? And I just used some of your own numbers from the past of like, look, the market has added like $40 trillion of equity market cap and $40 trillion of fixed income market cap last 10 years, yet the wallet is like 20%-plus below the 10-year average. So, is there just a bigger upside and it’s just a matter of when, not if?
Jeremy Barnum: Yeah, Glenn, in short, yes. I mean, I think we’re not shy about saying that we’re under-earning in Investment Banking right now. Clearly, we’re below cycle averages, as you point out. We’ve been talking about when do we get back to the pre-pandemic wallet, but as you know, at this point, it’s like March 2020, right? It was the beginning of the pandemic. So, it’s like four years ago at this point. So, there’s been GDP growth, especially in nominal terms during that period, and you would expect the wallet to grow with that. So, I do think there’s meaningful upside in the Investment Banking fee wallet. As I’ve noted, there are some headwinds, I think particularly in M&A, but over time, you would hope that the amount of M&A is a function of the underlying industrial logic rather than the regulatory environment.
So, you could see some mean reversion there. And, yeah, so that’s why we’re sort of leaning in. We’re engaging with clients. We’re making sure that we’re appropriately resourced for a more robust level of the wallet and fighting for every dollar share.
