JPMorgan Chase & Co. (NYSE:JPM) Q4 2023 Earnings Call Transcript

JPMorgan Chase & Co. (NYSE:JPM) Q4 2023 Earnings Call Transcript January 12, 2024

JPMorgan Chase & Co. beats earnings expectations. Reported EPS is $3.97, expectations were $3.73.

Operator: Good morning, ladies and gentlemen. Welcome to JPMorgan Chase’s Fourth Quarter 2023 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go to the live presentation, please standby. At this time, I would like to turn the call over to JPMorgan Chase’s Chairman and CEO, Jamie Dimon; and Chief Financial Officer, Jeremy Barnum. Mr. Barnum, please go ahead.

Jeremy Barnum: Thank you, and good morning, everyone. The presentation is available on our website, and please refer to the disclaimer in the back. Starting on Page 1, the firm reported net income of $9.3 billion, EPS of $3.04 on revenue of $39.9 billion, and delivered an ROTCE of 15%. These results included the $2.9 billion FDIC special assessment and $743 million of net investment securities losses in Corporate. On Page 2, we have more on our fourth quarter results. Similar to prior quarters, we have called out the impact of First Republic, where relevant. You’ll also note that we have now allocated certain deposits, which were previously in CCB to the appropriate lines of business. For the quarter, First Republic contributed $1.9 billion of revenue, $890 million of expense, and $647 million of net income.

Now, focusing on the firmwide fourth quarter results, excluding First Republic. Revenue of $38.1 billion was up $2.5 billion or 7% year-on-year. NII, ex-Markets was up $2.2 billion or 11%, predominantly driven by higher rates. NIR, ex-Markets was up $139 million or 1% and Markets revenue was up $141 million or 2%. Expenses of $23.6 billion were up $4.6 billion or 24% year-on-year, predominantly driven by the FDIC special assessment and higher compensation, including wage inflation and growth in front office and technology. And credit costs were $2.6 billion, reflecting net charge-offs of $2.2 billion, and a net reserve build for $474 million. Net charge-offs were up $1.3 billion, predominantly driven by Card and single-name exposures in Wholesale, which were largely previously reserved.

The net reserve build was primarily driven by loan growth in Card and the deterioration in the outlook related to commercial real-estate valuations in the Commercial Banking. Looking at the full-year results on Page 3. The firm reported net income of $50 billion, EPS of $16.23, and revenue of $162 billion, and we delivered an ROTCE of 21%. Onto balance sheet and capital on Page 4. We ended the quarter with CET1 ratio of 15%, up 70 basis points versus the prior quarter, primarily driven by net income, AOCI gains and lower RWA, partially offset by a continued modest pace of capital distributions as the firm builds towards the proposed Basel III Endgame requirements. Now, let’s go to our businesses, starting with CCB on Page 5. Total debit and credit card spend was up 7% year-on-year, driven by strong account growth and consumer spend remained stable.

Turning now to the financial results, excluding First Republic. CCB reported net income of $4.4 billion on revenue of $17 billion, which was up 8% year-on-year. In Banking & Wealth Management, revenue was up 6% year-on-year, reflecting higher NII on higher rates, largely offset by lower deposits, with average balances down 8% year-on-year. Client investment assets were up 25%, driven by market performance and strong net inflows. In fact, it’s been a record year for retail net new money. In Home Lending revenue was up $230 million, predominantly driven by the absence of an MSR loss this quarter versus the prior year and higher NII. Moving to Card Services & Auto, revenue was up 8% year-on-year, driven by higher card services NII on higher revolving balances, partially offset by lower auto lease income.

Card outstandings were up 14% due to strong account acquisition and continued normalization of revolve. And in auto, originations were $9.9 billion, up 32% as we gained market share while retaining strong margins. Expenses of $8.7 billion were up 10% year-on-year, largely driven by compensation, including an increase in employees, primarily in bankers, advisors, and technology, and wage inflation, as well as continued investments in marketing and technology. In terms of credit performance this quarter, credit costs were $2.2 billion, largely driven by net charge-offs which were up $791 million year-on-year, predominantly due to continued normalization in card. The net reserve build of $538 million reflected loan growth in card. Next, the CIB on Page 6.

The CIB reported net income of $2.5 billion on revenue of $11 billion. Investment banking revenue of $1.6 billion was up 13% year-on-year. IB fees were also up 13% year-on-year and we ended the year ranked number one with a wallet share of 8.8%. And advisory fees were up 2%. Underwriting fees were up significantly compared to a weak prior year quarter with debt up 21% and equity up 30%. We are starting the year with a healthy pipeline and we are encouraged by the level of capital markets activity, but announced M&A remains a headwind, and the extent as well as the timing of capital markets normalization remains uncertain. Payments revenue was $2.3 billion, up 10% year-on-year. Excluding equity investments, it was flat as fee growth was predominantly offset by deposit-related client credits.

Moving to Markets, total revenue was $5.8 billion, up 2% year-on-year. Fixed income was a record fourth quarter, up 8%. It was another strong quarter in our securitized products business, which was partially offset by lower revenue and rates coming off a strong quarter last year. Equity markets was down 8%, driven by lower revenue in derivatives and cash. Security services revenue of $1.2 billion was up 3% year-on-year. Expenses of $6.8 billion were up 4% year-on-year, predominantly driven by the timing of revenue-related compensation. Credit costs were $210 million, reflecting net charge-offs of $121 million and a net reserve build of $89 million. Moving to the Commercial Bank on Page 7. Commercial Banking reported net income of $1.5 billion.

Revenue of $3.7 billion was up 7% year-on-year, largely driven by higher NII, where the impact of rates was partially offset by lower deposit balances. Payments revenue of $2 billion was up 2% year-on-year driven by fee growth, largely offset by deposit-related client credits. Gross investment banking and markets revenue of $924 million was up 32% year-on-year, primarily reflecting increased capital markets and M&A activity. Expenses of $1.4 billion were up 9% year-on-year, driven by an increase in employees, including front office and technology investments, as well as higher volume-related expense, including the impact of new client acquisition. Average deposits were down 6% year-on-year, primarily driven by lower non-operating deposits as clients continue to opt for higher-yielding alternatives and flat quarter-on-quarter as client balances are seasonally higher at year-end.

Loans were down 1% quarter-on-quarter. C&I loans were down 2%, reflecting lower revolver utilization and muted demand for new loans as clients remained cautious. And CRE loans were flat as higher rates continued to have an impact on originations and payoff activity. Finally, credit costs were $269 million, including net charge-offs of $127 million and a net reserve build of $142 million, driven by deterioration in our commercial real estate valuation outlook. And then to complete our lines of business, AWM on Page 7. Asset & Wealth Management reported net income of $925 million with pretax margin of 28%. Revenue of $4.7 billion was up 2% year-on-year, driven by higher management fees on strong net inflows and higher average market levels, predominantly offset by lower NII.

The decrease in NII reflects lower deposit margins and balances partially offset by wider spreads on loans. Expenses of $3.4 billion were up 11% year-on-year, largely driven by higher compensation, including performance-based incentives, continued growth in our private banking advisor teams, the impact of closing JPMorgan Asset Management China acquisition, and the continued investment in global shares. For the quarter, net long-term inflows were $12 billion, positive across equities and fixed income, and $140 billion for the full year. In liquidity, we saw net inflows of $49 billion for the quarter and net inflows of $242 billion for the full year. And we had record client asset net inflows of $489 billion for the year. AUM of $3.4 trillion and client assets of $5 trillion were both up 24% year-on-year, driven by continued net inflows and higher market levels.

And finally, loans were up 2% quarter-on-quarter and deposits were up 7% quarter-on-quarter. Turning to Corporate on Page 9. Corporate reported a net loss of $689 million. Revenue of $1.8 billion was up $597 million year-on-year. NII of $2.5 billion was up $1.2 billion year-on-year due to the impact of higher rates and balance sheet mix. NIR was a net loss of $687 million compared to the net loss of $115 million, and included the net investment securities losses I mentioned upfront. And expenses of $3.4 billion were up $3 billion year-on-year, predominantly driven by the FDIC special assessment. With that, let’s pivot to the outlook for 2024, starting with NII on Page 10. We expect 2024 NII ex-Markets to be approximately $88 billion. Going through the drivers, the outlook assumes that rates follow the forward curve, which currently includes six cuts this year.

On deposits, we expect balances to be very modestly down from current levels. While lower rates should decrease repricing pressure, we remain asset sensitive, and therefore the lower rates will decrease NII, resulting in more normal deposit margins. We expect strong loan growth in Card to continue, but not at the same pace as 2023. Still, this should help offset some of the impact of lower rates. Outside of Card, loan growth will likely remain muted. It’s important to note that we just reported a quarterly NII ex-Markets run rate of $94 billion. Combining that with the full-year guidance of approximately $88 billion implies meaningful sequential quarterly declines throughout 2024, consistent with what we’ve been telling you for some time. And keep in mind that many of the sources of uncertainty that we’ve highlighted previously surrounding the NII outlook remain.

And on total NII, we expect it to be approximately $90 billion for the full-year, reflecting an increase in Markets NII which, as always, you should think of as largely offset in NIR. Now, let’s turn to expenses on Page 11. We expect 2024 adjusted expense to be about $90 billion. You’ll see on the slide we provided detail by line of business. Generally, you can see that both in dollar terms and in percentage terms, the expense growth is aligned to where the greatest opportunities are, both in terms of share and available returns. And of course, you’ll hear more at Investor Day and between now and then. On the right-hand side of the page, we’ve highlighted some firmwide drivers. Thematically, the biggest driver is what I might call business growth writ large.

Within that, narrowly defined volume and revenue-related growth represents about $1 billion of the increase across the company as a result of an improved NIR outlook, compared to about $400 million in 2023. But in addition, the ongoing growth of the company, which continues to produce share gains and additional profitability, is coming with increased expense across a range of categories. The quantum of investment increase is comparable to last year’s increase and is driven by all the same themes, bankers, branches, advisors, technology as well as marketing. Net-net, First Republic produces a modest increase in expenses, but with a significantly lower 2024 exit run rate as the result of business integration efforts. Finally, despite significantly lower inflation outlook in the economy as a whole, we still see some residual effects of inflation flowing through most of our expense categories.

It’s worth noting that both the general business growth and investment growth include decisions that have been executed both in response to market conditions during 2023 and to support the future growth and profitability of the company. We’ve included the fourth quarter 2023 exit rate on the page to illustrate that a significant portion of the year-on-year increase in expense is already in the run rate. Now, let’s turn to Page 12 and cover credit and wrap up. On credit, we continue to expect the 2024 card net charge-off rate to be below 3.5%, consistent with Investor Day guidance. So in closing, we shouldn’t leave 2023 without noting what an outstanding year it was, producing record revenue and net income despite some notable significant items.

We’re very proud of what we accomplished this year and want to thank everyone who made it possible. At the same time, we emphasized throughout 2023 the extent to which we were over-earning, as indicated by an ROTCE that is 4% above our through-the-cycle target. As we turn to 2024, it shouldn’t be surprising that our outlook has us beginning to march down the path towards normalization of our returns. But despite the expected dissipation of the 2023 tailwinds and the presence of significant economic and geopolitical uncertainties, we remain optimistic about this franchise’s ability to produce superior returns through a broad range of environments. And this management team remains laser-focused on executing for shareholders, clients, and communities.

And with that, let’s open the line for Q&A.

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Q&A Session

Operator: [Operator Instructions] For our first question, it’s coming from the line of Matt O’Connor from Deutsche Bank. You may proceed.

Matt O’Connor: Good morning. Thanks for all the comments on the net interest income. Any updates on that medium-term outlook that you’ve put out there?

Jeremy Barnum: Yes, Matt, not particularly updating. I think you’re referring to that $80 billion number that we put out there. And I wouldn’t exactly describe that as an outlook. I think it’s more just a number that we put out there to try to quantify a little bit the extent of the over-earning. So not particularly necessary to revise the number. But I just would point out again, as we highlighted on the page and as I highlighted in the prepared remarks, that when you look at that $94 billion exit rate and full-year guidance of $88 billion, that implies obviously exiting below $88 billion and some significant sequential decline. So in that sense, you can see us kind of marching on the path to that $80 billion. Whether we ever get to the $80 billion or not and when is maybe a topic for later in the year or next year.

Matt O’Connor: Okay. And then just separately, you bought back a couple of billion dollars of stock this quarter. What’s your thought process on buybacks, given the strong capital generation, but also some uncertainty on regulatory proposals?

Jeremy Barnum: Yes, good question. I think you framed it exactly correctly in the sense that we obviously have a lot of buyback capacity in general based on organic capital generation. So the normal capital hierarchy will apply. But for now, we plan to remain on a modest base of buybacks consistent with that kind of $2 billion net buyback, a quarter number that we’ve talked about and that you’ve seen us do in light of probably the need to continue building to have a bit of a buffer, as you said, the uncertainty about the finalization of the rules. And also, just as a reminder, the SCB is probably a little bit low right now and has been quite volatile. So that’s another factor that we need to keep in mind.

Matt O’Connor: Okay. Thank you.

Jeremy Barnum: Thanks, Matt.

Operator: Next, we’ll go to the line of John McDonald from Autonomous Research. You may proceed.

John McDonald: Thanks. Jeremy, could you give a little more color on what’s baked into the loan loss reserve in terms of kind of weighted average assumptions and how any change in macro outlook played into the dynamics of the reserve builds and releases this quarter?

Jeremy Barnum: Yes. Actually, John, this quarter, that’s all like pretty quiet. So the weighted average unemployment rate in the numbers still 5.5%. We didn’t have any really big revisions in the macro outlook driving the numbers. And our skew remains, as it has been a little bit skewed to the downside, just recognizing that we still see risks being elevated, which obviously you can see that skew, and the difference between the weighted average unemployment of 5.5% and what’s in our central outlook, which I think is something like 4.6% peak of the current levels.

John McDonald: Okay. And then just to follow up on the NII, could you give us some sensitivity to that outlook when you flex the amount of Fed cuts, what’s the impact of a few Fed cuts, and how much does it matter for the first two versus if you’re thinking four, five, six? I know it’s complicated, but maybe a little bit of color on how sensitive you are to a couple of cuts might be helpful.

Jeremy Barnum: Sure. Yes. Happy to do that, John. So I think probably the best way to do this is to look at our EAR numbers. So, as you know, we don’t update that until the Q, but on an estimated basis, it’s going to be a little bit lower, I think something like $1.9 billion as opposed to $2.1 billion. So just round numbers, about $2 billion in EAR. I think empirically the number is maybe a little higher than that, just because even though we do model lags in the EAR, we’ve been seeing the lag effect be a little bit bigger, but just crudely, I think, as I noted, we do remain asset-sensitive. That’s one way to quantify it. I would say the empirical number would maybe be a little higher than that, and hopefully, that gives you enough to work with.

John McDonald: Okay. Thanks.

Operator: Next, we’ll go to the line of Jim Mitchell from Seaport Global Securities. You may proceed.

Jim Mitchell: Hi, good morning. Maybe just a follow-up in a different way on the NII question. Just in deposits, can you, Jeremy, discuss your assumptions on the reprice and migration thoughts? And then layering in, if we do get six cuts, does that start to change the dynamic around growth and deposits? How are you thinking about all that?

Jeremy Barnum: Yes, both good questions. So let’s do reprice first. So I think all else equal, this more dovish Fed environment and these six cuts has the effect of taking a little bit of pressure off the reprice, especially product level reprice. At the same time, we do continue to expect internal migration, particularly out of checking and savings into CDs, and in wholesale, a little bit of ongoing migration out of non-interest-bearing into interest-bearing. And that trajectory I would expect to continue even in a lower rate environment. So as a result, if you look at weighted average rate paid, for example, for the consumer deposit franchise, we would actually expect that number to be a little bit higher, just even in a world with six cuts.

And that’s actually intuitive when you think about it as people continue migrating into CDs. But maybe a little non-intuitive, if you’re kind of trying to do beta-type math with change in rates and change in rate pay, it gets a little bit non-intuitive. And then in terms of balances. Yes, you’ll note that I said that our outlook is for balances to be very modestly down, which when you consider that QT, despite the various speculations about having it slow down later in the year, continues, and that long growth in the system as a whole is expected to be quite muted. It’s a pretty modest decline outlook consistent with the lower rates. So I kind of agree with you that this environment is, at the margin, a little bit more supportive for system-wide deposit balances.

And then obviously, we continue to be optimistic about our ability to take share in deposits based on our customer value proposition across all of our different businesses.