摩根大通 (JPM) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to JPMorgan Chase's fourth-quarter and full-year 2016 earnings call.

(Operator Instructions)

At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon, and Chief Financial Officer, Marianne Lake.

Ms. Lake, please go ahead.

Thanks, operator.

Good morning, everybody.

Happy New Year.

I'll take you through the presentation which is available on our website.

Please refer to the disclaimer at the back of the presentation.

So starting on page 1, we had a strong end to the year, with record net income for a fourth quarter of $6.7 billion, EPS of $1.71, and return on tangible common equity of 14% on revenue of $24.3 billion, reflecting strong performance broadly across our businesses in a more constructive environment.

You'll see on the page, a tax benefit of $475 million included in the result in the CIB, as we were able to utilize certain deferred tax assets.

The quarter would still have been a record without that benefit.

Highlights for the quarter included core loan growth of 12% with strength across businesses, continued double-digit consumer deposit growth, ending with deposits over $600 billion, and record card sales volume up 14% on continued strong momentum.

In addition, markets revenue was the highest on record for a fourth quarter, up 24% year-on-year, and credit performance remains, strong with net reserve releases across both consumer and wholesale.

Moving on to page 2, and some more detail about the fourth quarter, revenue of $24.3 billion was up $600 million, or 2% year-on-year, driven by net interest income on the back of continued strong loan growth, as well as the impact of higher rates.

Non-interest revenue was flat year-on-year, with strength in markets offset by higher card new account acquisition costs.

Adjusted expense of $13.6 billion was flat year-on-year, and this quarter's results included nearly $200 million of after-tax legal expense.

Credit costs of $860 million in the quarter included a net reserve release of a little over $400 million across consumer and wholesale.

Energy remained stable, and we saw modest releases in both oil and gas and metals and mining.

Shifting to the full year on page 3, another full-year record net income of $24.7 billion, and a return on tangible common equity of 13% on $99 billion of revenue.

And while net income was up 1%, our EPS of $6.19 was up more than that as we continued our disciplined capital return to shareholders.

Revenue was up $2.5 billion, driven by NII, up $2.7 billion, on the back of loan growth and the impact of higher rates.

Non-interest revenue remained flat year-on-year, reflecting strength in markets and funding card new account acquisitions, as well as lower asset management revenues.

Adjusted expense for the year came in at $56 billion as expected, and our adjusted overhead ratio improved to 57%, as we continued to execute on and near the end of our strategic cost programs in CCB and CIB, as well as self-funding incremental investments in growth of nearly a billion dollars year-on-year.

In addition, legal expense for the year was a modest positive.

Credit costs for the year were $5.4 billion.

Net charge-offs of $4.7 billion were in line with guidance, and included $270 million of charge-offs related to oil and gas and metals and mining.

And we added [$670] million of net reserves, reflecting builds in card and energy, largely offset by releases in mortgage.

Finally, net capital distributions for the year were approximately $15 billion, up $4 billion or 37%, including dividends of $1.88 a share, up 9%.

Turning to page 4 and capital, we ended the year above 12% for both standardized and advanced fully phased-in CET1 ratios, in line with our expectations.

Net capital generation for the quarter, while positive, included a 16 basis point impact of higher rates on investment securities AOCI.

The advanced ratio improved primarily due to lower account party and market risk, whereas standardized was up by less, reflecting the impact of high quality loan growth.

We've been disciplined managing our balance sheet, and our average balance sheet for the quarter was a little over $2.5 trillion, and $1.5 trillion of RWA.

SLR was down slightly from the prior quarter at 6.5%, as our average balance sheet was higher this quarter, primarily driven by deposit.

Moving on to page 5, and consumer and community banking, consumer and community banking generated $2.4 billion of net income, and an ROE of 17%.

We grew deposits a record $60 billion year-over-year, up 11%, exceeding $600 billion.

Core loans were up 14%, with mortgage up over 20%, but strength across all products, also up 11%, business banking up 9%, and card up 8%.

We saw record card sales volume in the quarter, up 14% marking the strongest growth in a decade.

Card new account originations were up 8%.

They were up 20% for the full year, driven by strong demand for new products, and nearly 80% of those accounts were opened through digital channels.

Merchant processing volumes were up 10% year-on-year, and surpassed the $1 trillion mark last year and our active mobile customer base continues to grow and was up 16%.

Revenue of $11 billion was down modestly year-on-year, reflecting a reduction in card revenue.

Recall that last year included a $160 million gain on the Square IPO.

And in addition, strong momentum in card and auto was more than offset by the investments in our card new account acquisitions.

Consumer and business banking revenue was up 4% on strong deposit growth, and mortgage revenue was relatively flat as higher production margins and volumes were offset by lower servicing revenue on lower balances.

Expense of $6.3 billion was flat year-on-year, as growth in the business was largely offset by continued expense efficiencies and lower legal.

Finally the credit trends in our portfolio remained favorable.

We saw net reserve releases in the quarter driven by mortgage on lower delinquencies, as well as improving HPI, with releases of $275 million in the PCI portfolio and $150 million in NCI.

On PCI specifically, actual losses have been lower than modeled output, and the release this quarter reflects that trend.

We will continue to observe actuals, and recalibrate our models as necessary, which may result in future releases.

These releases in mortgage were partially offset by a build in card of $150 million, and $50 million in business banking, both on the back of strong loan growth.

Charge-offs increased year-over-year driven by card, as newer vintages continue to season in line with our expectations.

And in auto, we are watching industry trends in sub prime and used car prices, but our heavily prime auto portfolio continues to perform well.

Now turning to page 6, and the corporate investment bank., CIB delivered a very strong result, with net income of $3.4 billion, and an ROE of 20%.

Adjusting for legal, tax and credit costs, the ROE was a strong 17% for the quarter.

Revenue of $8.5 billion, up 20% year-on-year, was our best reported performance ever for a fourth quarter.

As we look at the full year a moment on lead tables, in banking we ranked number one in global IB fees, and number one in North America and EMEA, and we were the only bank among the top 5 to grow share.

In M&A, we continued to rank number two globally, and did more deals than anyone else last year.

In ECM, we maintained our number one ranking, improved our share, and were number one in volume across all products, and in both North America and Europe.

And in DCM, we ranked number one across high yield, high grade and loans.

Back to the quarter, IB revenue was $1.5 billion, up 1% year-on-year.

Advisory fees were down 17% from a strong prior year quarter, and impacted by lower announced volumes in the first half of last year.

Equity underwriting fees were down 5%, a little better than the market with strong performance in North America, and debt underwriting fees were up 32% relative to a weak prior year quarter on strong flow issuance, as well as acquisition financing.

Treasury services revenue of $950 million was up 5%, driven by higher rates and operating balance growth, as well as higher fees on increased payment volumes.

Moving on to markets, another strong quarter with the highest revenue on record for a fourth quarter in total, and for each of 16 common equities.

And like last quarter, the strength was broad-based.

Revenue of $4.5 billion was up 24% year-on-year, in part flattered by a weaker fourth quarter last year, but on the whole driven by momentum carried forward from the third quarter, and the ability to capture flow from higher volatility and client activity.

The back drop was that of a healthier global economic outlook, increased optimism, and global political developments.

More specifically, fixed income revenue was up 31%, as we saw increased client risk appetite for spread product, as well as client's actively hedging commodities in a better energy market.

And equities revenue was up 8% reflecting strong performance in derivatives.

Credit costs were a benefit of nearly $200 million, primarily driven by oil and gas and metals and mining.

And finally, expense of $4.2 billion was down 6% year-on-year, primarily on lower compensation resulting in a comp to revenue ratio of 27% for the full year.

Moving on to page 7, and commercial banking, another outstanding quarter in commercial banking, with net income of $687 million, record revenue of $2 billion, and an ROE of 16%.

Revenue was up 12% and expense down 1%, with a overhead ratio of 38%.

Loan growth remains robust, credit performance remains strong, and client sentiment has improved.

Revenue growth was driven by higher deposit NII and loan growth, with loan spreads holding steady, as well as higher IB revenue with good underlying deal flow.

For the full year, IB revenue was a record $2.3 billion, up 5% year-on-year as we gained share.

Expense was down slightly, with the impact of impairment in the aircraft leasing business last year offset by investments we've made in bankers and technologies this year.

We ended the year with record loan balances of $189 billion, up 14% year-on-year, with growth in both C&I and CRE.

C&I loans were up 9%, as the investments we've made in specialized industry coverage, as well as adding over 130 net new bankers this year contributed to growth.

And CRE loans were up 19%.

Finally credit performance remains strong, with a net charge-off rate of 11 basis points, driven by a couple of oil and gas mains largely reserved for.

And we saw a modest increase in loan loss reserves driven by select client downgrades.

In CRE, we had no net charge-offs, and we reiterate three quarters of this portfolio is multi-family lending, to own as a stabilized Class B and C properties in supply-constrained markets.

And the remainder is real estate developers that we know well, and we continue to be disciplined, and limit exposures to riskier segments of the market.

Leaving the commercial bank, and moving on to asset management on page 8. Asset management reported net income of $586 million, with a 30% pre-tax margin and an ROE of 25%.

Revenue of $3.1 billion was up 1% year-on-year, driven primarily by strong banking results on higher deposit NII and continued loan growth, predominantly offset by prior period asset disposals.

Expense of $2.2 billion was down 1% year-on-year.

For the full year, we had long-term net inflows of $23 billion in a challenging environment, driven predominantly by fixed income, multi asset and alternatives.

In addition, we gathered $24 billion of liquidity flows this year.

However, for the quarter, we saw net long-term outflows of $21 billion, obviously disappointing.

But on a more positive note, we saw liquidity inflows of $35 billion this quarter, gaining share and strengthening our leadership position during this period of money market reform.

AUM grew 3% year-on-year, and overall client assets 4% to $1.8 trillion and $2.5 trillion, respectively, driven by net inflows, as well as higher market levels.

And our long-term investment performance remained solid, with 80% of mutual fund AUM ranked in the first or second quartile over five years.

And we had record loan balances up 4%, and record deposit balances up 9%.

Moving to page 9, and corporate, Treasury and CIO was flat quarter-on-quarter, with a net loss of around $200 million, and other corporate was a loss of $144 million primarily driven by legal expense.

Turning to page 10, and the outlook, looking forward to the first quarter, expect net interest income for the Firm to be up modestly, reflecting the impact of the December rate hike, as well as continued loan growth.

For asset management, expect revenue will be slightly less than $3 billion, reflecting seasonality of performance fees.

And recall that last year's first quarter included a $150 million gain on the sale of an asset.

On expense, expect CCB to be up around $150 million sequentially on higher auto lease depreciation, as well as seasonally higher compensation and marketing, and expect expense in the commercial bank to be up quarter-on-quarter to around $775 million as we continue to invest.

Obviously, we're looking forward to Investor Day, and we'll give you more detailed 2017 guidance then.

So to wrap up, a record fourth quarter and a record year, both net income and EPS demonstrating the strength of the platform.

We enjoyed revenue growth, we met our expense and capital commitments, increased payouts to shareholders, and generated good returns on higher capital.

As we move into the New Year, we remain well-positioned, and are excited about the opportunities to grow the Business by serving our clients and communities.

With that, operator, we'll take Q&A.

Operator?

(Operator Instructions)

Your first question comes from the line of Ken Usdin with Jefferies.

Hi, thanks.

Good morning.

Marianne, I was just wondering -- I know you'll give us more at Investor Day, but just in terms of that first quarter starting point for NII, and just how it translates between growth in the balance sheet?

And then, you mentioned the benefit from the roll over in rates, can you help us just try to think about -- just you parse those views out, and think about volume versus rate?

Yes.

So hey, Ken, you guys have a busy day today.

So I would say that, the first quarter is always a quarter in which we have a bunch of different factors.

And most notably, you also have day count issues in the first quarter.

So I can go through that, but I would say most of the benefit which we expect to be up modestly will be driven by the rate increase, with growth being offset by day count.

That's sort of fundamentally how to think about it.

It's probably more instructive to think about the full year.

And so, if you recall back to the third quarter, just to kind of reorient everyone, at that point when we didn't have the December hike, we said rates flat.

So on growth alone, we would expect NII for the full year to be up about $1.5 billion.

Obviously, we have had the 25 basis point hike in December.

And based upon that alone, so now the new rate flat, that $1.5 billion would be about $3 billion, a little over $3 billon.

So for the full year, we're expecting on the December hike alone, that it would be about half volume, and about half rate.

Understood, great.

And if I could ask a follow-up?

Just on the volume side, you had another great year of double-digit loan growth.

And obviously, we're at this intersection between kind of the what was, and then the what will be.

Any change to that expectation you could just grow the loan [bit] book, a core loan book that is, as strongly as you have in the past few years?

Yes.

So I think the way to think about it, and again, I think we talked a little bit about it last quarter, and you maybe see it in the fourth quarter.

So we've been growing our loans in the -- we said it was going to be a 10% to15%.

We revised that, to be at the top end of that range.

So we've been growing at around 15% core loan growth, the fourth quarter was 12%.

So I wouldn't call it a deceleration per se, but it is a little bit lower.

So I think going into 2017, our expectation is that we would continue to grow loans strongly, but possibly at the lower end of that range, rather than the higher.

And of course, to a degree, it will depend upon our mortgage portfolio, but we intend to continue to add to that too.

So sitting here today, I'd say more high single 10% plus or minus, and we'll give you more updates at Investor Day.

Okay.

Thanks very much.

Your next question comes from Betsy Graseck with Morgan Stanley.

Hi, good morning.

Good morning.

I just wanted to dig in a little bit on the forward look.

NII up a bit, but also expense is up a bit.

And I just wanted to understand is that because you've got the opportunity to reinvest in things that you haven't been able to?

And if you could just speak to what kind of time frame the reinvestment will yield returns, because the question I've gotten from people is, why aren't you dropping the NII benefit to the bottom line here?

So just taking the two things separately, Betsy, I would say the NII, up 5% is dropping to the bottom line.

But as we, you saw all of our underlying drivers, across all of the businesses and volumes, transactions, everything is growing very strongly.

And although we still have some work to do to finish the large expense programs, we're near the end of that.

So just generally speaking, we're continuing to invest in the businesses, and we'll see the improvement in our expenses flatten out, and start to grow with volumes.

And that would also support growth in non-interest revenue, outside obviously of the card phenomenon we talked to you about.

And then related follow-up has to do with, how you're thinking about the excess cash you've got, and the balance sheet duration?

And if there's anything in this new interest rate environment that you would be seeking to do -- (multiple speakers) to optimize --

Sorry, carry on.

Oh, to optimize your position.

Right.

So when we think about our investment securities portfolio, we think about it as responding to structural changes in our balance sheet, which predominantly is driven by loans and deposits.

And it's always important I think, to remember, because we focus a lot on structural interest rate risk, but it also is liquidity and liquidity risk.

In this quarter, there was a combination of things.

You saw that we grew deposits more strongly than loans this quarter, so we had some excess cash, as well as the fact that rates rose.

So two things happened in our investment securities portfolio, mortgages extended, and we did add to duration.

But we have a very disciplined risk management framework that's based -- that's been consistent through time, based on our expectations of normal rates in the future, and we just executed on that strategy.

Okay.

So no change to the duration?

Yes, we added to duration, in accordance with our framework.

Okay.

Your next question comes from the line of John McDonald with Sanford & Bernstein.

Hi, good morning.

Marianne, I was wondering if you could comment a little bit about some more color in card trends?

You have exciting new products out there.

How are the economics of the Sapphire Reserve card been coming in relative to your expectations, and what factors drove the decision to cut the original promotion award back, and should that affect your account acquisition costs?

Thanks.

Great.

So obviously, the Sapphire Reserve card is still quite young, or still quite new.

But relative to our modeled expectations even at the intro promo premium, things are coming in, in line or better than our expectations.

Now obviously, we need to continue to [back test] that [three] times.

But we're very encouraged by, not only the excitement in our customer base, but also the way that the trends are performing in terms of spend and engagement.

But when we introduce a new product, we intentionally introduce a very exciting premium promo, and it's intended to generate excitement.

And I think you would agree it did.

So we're delighted with the response that we've had.

And we've actually kept it up for longer than we initially expected, but it's normal for us to come down from those intro rates, as the product becomes more mature, and that's what we are doing.

But to be very clear about our expectations of the performance of the card, even at 100,000 points, we still expected the card to be a strong return and very accretive.

So obviously, at a lower premium, it would be more so.

But one last thing I would say, is everybody gets very interested the up front points.

It's our opinion that the real value to consumers of that card happens over time with their spend behavior, and to take the points down from 100,000 to 50,000 has less than a 10% reduction in the overall value through the lifetime of an engaged customer on average.

Okay.

And just as a follow-up on that, in terms of the card, credit quality, it's been very good.

Would you still expect to see though some seasoning as the book matures?

What kind of outlook would you have on the card charge-offs?

So the charge-offs came in for the year at 2.63%, which is in line with the guidance that we gave, I think in November that Kevin Watters gave.

He's given guidance for 2017, as we continue to see the newer vintages seasoned, are 2.75% plus or minus.

And that's still our expectation, so the newer vintages are performing in line with our expectations.

Thanks.

Your next question comes from the line of Erika Najarian from Bank of America.

Hi, good morning.

I know that you've said previously that regulatory reform or regulatory relief will unlikely have any fundamental change in terms of how you're thinking about budgeting.

But I'm wondering if you could help us understand, sort of over the past few years, how much has regulatory costs grown, and has that peaked anyway?

And can you give us a sense of how that could trend over the next few years, either the natural trend of it, or what the impact would be of regulatory reform?

Yes.

So I'll give you a couple of things, and hopefully that will help.

So I think a year or so ago, we talked about the fact that -- I'm going to now talk about cost of controls more broadly than just regulatory, that the cost of controls had increased for the Company by about $3 billion over several years.

But that we expected they would peak and start bending down, and that is indeed what we have been seeing.

Now I'm not saying that bend down is a sharp bend, as we continue to be held to very sort of hard compliance burdens.

But nevertheless, we are seeing some efficiencies as we mature our processes and automate them.

Offsetting against that, and one of the reasons why it may be less obvious, is that we've continued to increase our spend in cyber security, as we want to protect the bank and the customer's data.

So naturally, that is happening.

We are not going to continue at this point, carving out the costs of regulatory or control because that is our operating model, it's our new normal.

And until we understand whether or not the forward-looking landscape is changed, we won't be able to give you any kind of idea about how and when that will impact our expenses.

But we will continue to be more and more efficient.

And certainly, if we are able to take a step back, and look at the rules and regulations, and the way that they are being implemented, and make rational changes to it, if that is something that is -- allows us to become more efficient, then we will certainly do that, and keep you informed.

Great.

And just as a follow-up to John's question on card trends, when you look at the card revenue rate declining about 200 basis points or so year-over-year, is your response to this question essentially implying that we've potentially hit peak promotion in 2016, and perhaps the revenue rate will have some stability to it in 2017?

So I think in the conference in November, Kevin Watters said that as we look at the new products, and we look at them growing, coming out in 2016 and into 2017, we would expect the card revenue rate for the year next year to be about 10.5%, after which as the cards and the accounts season and drive revenue growth, we should see that continue to trend back up to a level in the past.

Got it.

Thank you.

Your next question comes from the line of Mike Mayo with CLSA.

Hi.

Is Jamie on the call?

Yes.

So Jamie, your comment said that the US economy may be gaining momentum.

Yes.

If you can give some of the basis for that comment, is it more risk borne by investors, or more CapEx by companies, or is this more hope?

I mean, I think that it's actual detail of retail spend, auto sales, house prices, household formation, confidence numbers.

So I'm not basing it on the market, I'm just basing it -- if you look at a broad range of things, it looks like growth may have gotten a little bit better in the fourth quarter.

Plus if you take a walk around the world, Japan is doing a little better, Europe is doing better.

In fact, one of the IMF [or someone else] came out yesterday, and [said] the global growth is going to tick up next year.

So it's just those factors.

Is that enough for you to say you're going to invest a little bit more, or hire more people, or expand a little bit more?

And along those lines, how do you see market share gains potentially from now?

We're not going to change our plans very much, because we don't really react that much to the weather, because we grow to add bankers and stuff.

You know you have to do it through a cycle.

I do think of it as some regulatory relief.

You will see banks be more aggressive and growing, opening branches in new cities, adding to loan portfolios, seeking out clients they don't have.

So I'm hoping to see a little bit of that too, but that will wait for regulatory relief.

Why are you saying this might be a little bit more than just weather, that this might be more sustainable, when you say the economy might be turning?

Well, I'm saying we don't react to the small change in the economy to how we grow and expand our business.

But I just that it looks to us, if you look across the broad spectrum, capital expenditures, business confidence, consumer confidence, household building, household formation, wage income, wages going up, unemployment going down, auto sales going up, retail sales going up, it looks like it's getting stronger, not weaker.

That's what it looks like to me.

That's just my own personal belief.

And maybe just if we give you a bit of insight into the philosophy about how we do our investment and expense budgeting.

When we talk to our businesses, regardless to Jamie's point about necessarily whether the external factors are moving, the question is, what do we want to do in terms of products and services and technology and bankers and offices that we can execute on well and responsibly?

And that is typically what defines us, not our appetite to invest the dollars.

So I think we've told you pretty consistently that, and you've seen it.

We added 130 net new bankers, we opened eight offices in the commercial bank.

We're investing in technology very, very broadly, payments, digital across the Company.

So I would say that, we don't feel like we've been held back in terms of our appetite to invest, because of concern around the economy.

And in the same way, a more confident outlook in the economy won't step change that.

But we will continue to look for great investments everywhere we can and make them.

All right.

Thank you.

Your next question comes from the line of Jim Mitchell from Buckingham Research.

Hey, good morning.

Maybe we could talk a little bit about the investment bank?

Obviously, your peers and a lot of investors have been growing in their optimism for this year, in terms of animal spirits and everything else, and just want to get a sense of how you're thinking about it?

Do you share that optimism, and any commentary on how we can think about both banking and trading into the New Year, with all of the moving parts that we have around policy, et cetera?

Thanks.

So I would say, just if we separate the two, and just talk for one second about banking.

The fundamentals for a solid M&A year are there, and obviously there will be puts and takes depending on what happens in the policy and reforms space.

But we're optimistic about a solid M&A market, but with the continuing trend of fewer mega deals, but nevertheless good flow.

At ECM, looks set to be quite active, and the IPO market continuing to recover, and debt capital markets have a solid pipeline in terms of the refinance arena, but having said that, interest rates may have an impact.

So I think pretty solid pipeline coming into the year, but lots of factors will ultimately affect the full year.

With respect to trading, Jamie said, that we don't look at the first couple of weeks, but so far, so good.

And what I would tell you is, we said this before, we're a client flow oriented business.

And there will be a lot of micro and event-driven activity, and as long as it's not discontinuous, we should be able to intermediate transactions with our clients.

And so far, generally there's been more risk appetite in the investor space, but that can change very quickly as we saw in previous quarters.

So we will be there to support our clients.

And if they are active, everything should be good, but it can change quickly.

Okay, that's helpful.

And maybe as a follow-up.

On the expense side, the comp ratio in the investment bank, I think dropped around 240 basis points this year or last year.

Do you think that's sustainable into 2017, assuming flat to up revenues, or was there anything unusual in there?

So just reminding you about our sort of philosophy on comp to revenue, we pay -- or our comp to revenue is just a calculation, obviously we pay for shareholder value-added.

So you need to take into consideration the fact that we've had overtime increased capital levels and liquidity levels, and that's reflected in a declining overall comp to revenue ratio.

I would say that there are three factors to it being lower.

The first is the strength in performance, and the pay outs aren't linear.

And as you have stronger performance, you would expect to see a lower ultimate outcome.

But importantly, we were -- some tail winds in the numbers this year included a stronger dollar.

So as we pay -- remember comp to revenue isn't just on the front office compensation, it all supports our salaries, benefits and compensation.

And we have a large number of people that we pay not in dollars.

So that was a bit of a tail wind.

Some of that will carry on, but maybe not at the same level.

And we also just did our normal regular hygiene and productivity, in terms of the -- how we think about the workforce and pay.

At the end of the day, we pay for performance, we pay, we think very competitively, to retain the best team on the street, and make sure that our shareholders are getting a fair share of any outperformance.

Okay.

All right.

Thanks.

Your next question comes from the line of Paul Miller from FBR.

Yes, thank you very much.

Hey, Jamie, one of the things that we're seeing, some of the new politicians, coming in talking about opening up to credit box, especially in the mortgage world that has been really shut down over the last years, mainly due to the rules coming from all of the things, Fannie, Freddie, [UB].

What type of things do you need to see or do you think they can do to open up that credit box, where banks can take more risk and be protected?

Simplifying the securitization rules, because we've done some securitizations.

We think they're excellent, but that would open up the market a little bit, clarifying the Safe Harbors on certain types of underwriting.

For example, it's very hard and risky for a bank to make a loan to first time buyers, former bankruptcies, even though it could be very good people with brand new jobs, self-employed, it's hard to necessarily do all of the income verification, stuff like that.

Simplifying servicing, the services standards now have, I think nationwide, we have 3,000 different standards.

It's very costly.

It's very expensive.

It's kind of risky.

If you make a mistake, the punishment is pretty high.

And all those things, that should be done for the good of the United States of America, not for the good of JPMorgan Chase.

And so, I do think it's too tight and there's one thing, that if you get around too quickly, it will help the housing market a little bit, it will help the housing formation, it will reduce the cost of mortgages, and make it available to more people.

Yes, okay, Jamie.

Thank you very much.

Your next question comes from the line of Glenn Schorr with Evercore ISI.

Hi, thanks.

Hi, Glenn.

Hello, there.

So I guess the question for either one of you is, if we do get some lower taxes and/or a better rate environment, I'm curious on your confidence on how much of that can fall to the bottom line?

Because there's a lot of optimism about what can happen if stocks have moved well, we're expecting that to move to the bottom line.

There's the big concern that people have is, that it gets competed away by irrational behavior.

So curious to get your thoughts on that, just big picture in general, if things go well how much of that are you repaying?

So starting off with sort of interest rates.

And obviously, we've talked for an extended period of time about the fact we've positioned the Company to benefit when rates rise, we built the branches, we acquired the accounts, we've built the technology and the services.

So we've been growing our deposits very strongly, and we're going to enjoy the benefits of that.

With respect to how much will go to the bottom line, we have been we think appropriately conservative, when we've given you guidance about ultimately how much incremental NII we would expect in a more normal rate environment.

I mean, if you go back to Investor Days of past, you would see that we said when normalized, we would expect $10 billion-plus, and embedded in that are assumptions obviously around rate paid.

We think that rate paid will be higher this time in this cycle, than in previous cycles for a bunch of reasons including as you said, competition for high quality liquidity balances.

But also that we are coming off of zero rates and the improvement in technology.

So we've been, we think appropriately conservative, but we'll find out in the fullness of time.

So far two rate hikes, absolute rates at 50 basis points, it's too early.

And so far, you would expect there to be (inaudible) in there, and it's not linear, and everything is behaving quite rationally right now.

So we, in fact, if anything a little better than we had modeled.

So we'll keep watching it, and we think we've been thoughtful.

We don't know the right answer, and we'll keep you updated as we see how things progress.

And just on the tax side, so other people understand, generally, yes, if you reduce the tax rates all things being equal to 20% of something, eventually that increased return will be competed away.

That is a good thing.

Okay, so it's not a good thing for JPMorgan Chase per se, but it's a good thing for the world, it's a good thing for growth.

And a lot of studies actually show the beneficiary of that is wages.

And so, it's important for people to understand that good tax policy is good for growth and the country in general.

It's not just good for companies, it will eventually be competed away.

So when should I take that lower tax rate out of my model?

I'm kidding (laughter).

Listen, you aren't going to really know for probably nine months to a year exactly what it is, so I wouldn't worry too much about it.

And I also, just remember the most efficient companies do benefit from things like this, more than others.

The real follow-up I had was, that the concept of interest deductibility, if that is the means that they use to pay for the tax hikes, it feels tough, like a bad thing.

I'm just curious on how you think it impacts your franchise, from anything from debt underwriting to anything else?

I think if you look at -- I mean, again, there's a lot of wood to be chopped and sausage to be made before tax reform gets done.

And some of these things are brand new, they've never been talked about or done before, so you can read a lot of studies in the next six months.

Obviously, interest deductibility, for banks, from a net interest income, so it doesn't directly change how you look at it.

For everybody else, it affects complete industries differently.

How you leverage differently, and utilities will be in a different position, and unleveraged companies.

And plus, I think people will be able to convert what would have been interest expense to some other kind of expense.

So let the work get done, before we spend too much time guessing about it.

I also think that while interest deductibility is one point, the repatriation of cash is another point.

And there are puts and takes, and you have to think, you have to see the whole package, before you can see what the net impact is.

But ultimately if these things get done rationally and grow the economy, then it's good for our franchise just broadly.

So don't focus on DCM, focus on the whole thing.

And I think when you get the whole package, if it's done well which we hope will happen, then it will be good for the economy, good for our clients, and good for our whole franchise.

Okay.

Thank you both.

Your next question comes from the line of Matt O'Connor from Deutsche Bank.

If I could circle back to the discussion on net interest income and the rate leverage.

I think the outlook for net interest income to grow over $3 billion versus $1.5 billion before the rate increase.

That's obviously a nice lift for just a 25 basis point bump on the short end.

So I guess, one, does that include the benefit of longer term rates since they've moved up as well since 9/30, which I assume it does, but just to confirm that?

And secondly, what's the leverage to rising rates from here, as we think about movements in both the short and long end?

Yes, okay.

So yes, Matt, it does include the benefit of higher long end rates.

And if you get the Q, and get our disclosure on net income risk, and do some math, you'll get pretty close to numbers that looks similar to that $1.5 billion or more.

And then, with respect to rate sensitivity from here, clearly it's not linear.

So you can see, if we just look at the third quarter, the first 100 basis points -- this is an illustration of $2.8 billion, 200 basis points is $4.5 billion.

So as we clip away, 25 basis points a time, our $2.8 billion will start to come down.

And so, that's broadly the outlook.

And the next 10-Q will show the next -- (multiple speakers).

And the next 10-Q will show the next.

But obviously, it's less and less as rates go up.

It's not linear.

And then just --

Unless we actively change the ratio, which we may also do at one point.

And that is actually -- getting to my follow-up question.

I mean, on the size of the balance sheet, you did talk about loan growth of about 10% this year.

If you look full year 2016 versus 2015, the balance sheet or the earning assets only rose 1%.

So maybe tie that into, as you think about duration, the fact that you're sitting on a lot of liquidity and cash, and how we should think about both overall growth in the balance sheet, and then potentially some more remixing?

Yes.

So I mean, what you saw happen in 2016 was not only obviously a rotation from securities and deploying deposits into loans, but also we took a very large amount of non-operating deposits out of the balance sheet in 2016.

So that is having an impact.

But we would expect to continue to grow our loans, to grow our deposits strongly to manage the overall balance sheet through our investment securities portfolio.

And from here, if everything continues to be as the market implies, we should see margin expansion.

Okay.

All right, thank you.

Your next question comes from the line of Brian Kleinhanzl from KBW.

Hi, good morning.

Good morning.

Just a quick question on the credit and reserve releases, as it relates to the energy and metals and mining portfolio.

Now that you've actually seen some better credit in there, how much of the reserves are left in that portfolio, and can you still see reserve releases going forward?

Yes.

So answer is across the metals and mining and energy, we have a little over $1.5 billion of reserves.

I mean, there is a normal level of reserves that we will have, that would be a large chunk of that.

And as you saw in 2016, we did take charge-offs of a little less than $300 million.

So we will continue to likely see on a name specific basis, as people work through their business models, that there will be more charge-offs.

But ultimately, if energy stays stable or improves, and of course, we have to see that be somewhat sustained, and find its way flowing through the financial statements of our clients.

Then as we upgrade them, God willing, then we will see more reserve releases.

But it's going to take some time.

We'll start to see some of that -- and think about the large reserves we took.

We took them at the tail end of 2015 and into 2016, we'll start to see new financial data from our clients.

We'll start to do the borrowing base redeterminations, and look at the impact of prices on reserves in the spring.

And so, we'll start getting some data this year, and so we may see some more releases, but it's going to come through over time.

Okay, thanks.

And then, also on CRE, again strong loan growth year over year.

I mean, I understand that you're focusing in these housing-constrained markets, but is there a limit to how much you can grow in those markets?

Yes, I mean, I would say that when I talk about the overall core loan growth going down, still being strong, it does reflect the fact that we've been seeing very strong outperformance in our growth over the course of the last couple of years, particularly in commercial term lending.

And while we continue to believe there's great opportunities there, they will be lower.

So we've been printing in the teens pretty consistently, and I would say, it will be less red hot, and maybe more in the high single-digits, but we're going to keep you updated.

Okay, thanks.

There's still plenty of opportunity.

Your next question comes from the line of Eric Wasserstrom from Guggenheim.

Thanks very much.

Marianne, just to follow-up, a couple more questions on card.

I know you've talked quite a bit about it already.

But one of the sort of conventional wisdoms at the moment is that 2016 represented the pinnacle of the intensification of the competitive environment.

And I just wanted to get your thoughts on whether that's an accurate assessment or not?

Well, I don't know that I would ever try to decide what moment in time, is the pinnacle.

But I would say, you saw us invest heavily in the business in 2015 and 2016 across a number of different fronts.

You saw us proactively renegotiating the card program deals for the vast majority of our portfolio, and investing very heavily in exciting new products.

And in both cases, while it has had an impact on our revenues, in one case in the short-term, and another case more structurally, in both cases these are still very attractive returns.

And so, card is still a very attractive ROE business, very important to our customers.

We are after deep engaged relationships through time with them.

And so, we are going to continue to invest in growth.

Great.

And just on that point, the ROA expectations that you have as a consequence of the trends that you just underscored, do you consider these to be, sustainable as you get back to that 11% kind of revenue yield?

At this point, yes.

Okay, great.

Thanks very much.

Your next question comes from the line of Steven Chubak from Nomura.

Hi, Jamie.

I wanted to start off with a big picture question on the trading side.

You made some recent remarks talking about the outlook for the [FICC] business, and alluded to roughly half of the declines versus the peak being attributable to cyclical as well as secular factors, and a lot of FICC optimism in particular that we've spoken with have really latched on to your remarks.

And I was hoping you could provide context as to how you determine the 50/50 split.

Should we be taking those comments so literally?

And how you're thinking about the FICC fee [portfolio] trajectory overall, as some of those cyclical headwinds abate?

We did try to actually analyze it, because we got asked a lot about what was secular.

So you could break apart your exotic derivatives, certain types of CDOs.

Of course, across the whole spectrum, there are things that disappeared and won't be done no more, for better or worse.

In some cases, by the way, like a CDOs it didn't go away, because the person is still a credit buyer.

So they just went to another product, but that was our best estimate.

I don't want to over do it or anything like that.

I also said that the actual market making requirements are going to be going up over time, I'm talking about over 20 years, I'm not talking about the next quarter or next month.

And remember, we don't run the business next quarter, next month, because assets under management are going up, and needs of corporations are going up.

The fixed income mortgage is going to go up, the needs for FX is going up, the needs for hedging is going up.

So over time, we know there's going to be a cyclical increase.

And we just try to estimate how much of the [downturn] is cyclical, and so, there will be a flip side of that.

And I think you might have gotten to the end of the secular, end of cyclical decline.

Thanks, Jamie.

That's extremely helpful color.

And Marianne, maybe just switching over to the expense side for a moment.

You also provided very helpful detail on some of the drivers of the strong expense progress that you're seeing in CIB in particular.

And from what I recall, last year's update, Daniel actually guided to an expense target of about $19 billion by 2017.

It looks like you've gotten there essentially a year early.

And I'm wondering whether there are more savings initiatives that have not yet been filtered through, and could potentially accrete in the coming year?

So I will obviously, give you a lot more detail about all of this at Investor Day, but really quick, because I knew the $19 billion would get some excitement.

If you go back, and talk to yourself to look at the specifics on the slide, you should see that the $19 billion that he guided to did have some assumptions about some legal costs in there.

The CIB didn't have legal costs in the year.

And as a result, it's still a little higher on an apples-to-apples basis than that would imply.

Additionally, I talked about the tail winds in terms of a stronger dollar.

Now for full disclosure we have intentionally reinvested some of that, but it was a tail wind that meant that apples-to-apples, it would still be a little higher.

I'd tell you that compared to the targets that they set, we still have a few hundred million dollars to deliver on, and Daniel will go through that at Investor Day.

Great.

Thanks for taking my questions.

Your next question comes from the line of Andrew Lim from [SocGen].

Hi, good morning.

Was just wondering if we could talk a bit about rate of trading.

I mean, to my mind, that was a product that's done particularly well this quarter.

But I was wondering looking forward, how you see that performing, whether it's supported by what's going on in the yield curve?

Or whether do you see that supported more by sort of like one-off euphoria around the election, so maybe that might tail off a little bit?

And then just moving on from that, how do you view the opportunities for growth in your capital markets businesses, your CIB versus say, your lending businesses?

Are you equally enthusiastic about both, and given the opportunity sets going forward, or do you see some being more positive than others?

Okay, so just to talk about rate trading for a second.

You're right, that it was a part of the strength story in the fourth quarter this year.

It was also a strong fourth quarter last year, which is pretty much the only reason why we didn't call it out as a bigger driver of the year-over-year growth, but it was a strong performance in the quarter.

And we would expect that to continue.

It's much more interesting to -- for our clients to trade around a moving yield curve and rates above zero.

So as we see rates normalize, we would fully expect that to be ultimately a beneficiary to the franchise in terms of clients trading, and positioning, and hedging around that over time.

And so, [wonderful] if that would be the case.

In terms of the excitement and the enthusiasm of our businesses, lending versus we're enthusiastic about all of our businesses, and would want to defend share and grow them all.

I mean, the reality of the CIB revenue performance in markets, and in general, it was very strong in 2016.

So we will try our hardest to replicate that.

But it will be a challenging comparison, but we're proud of it.

So we gained share competitively over the course of the last couple years, and so I don't think you should necessarily expect that we can continue to gain share at that pace; but defend it we will.

I mean, it sounds maybe that you'll (laughter) the pressures of year-on-year growth, in the CIB business but you're not really highlighting that in terms of your lending businesses, which obviously you'd expect further margins to grow, the loan books to grow.

I think the better way to look at CIB lending, is it's kind of episodic, and goes in and out.

Corporations, a lot of corporations don't need to borrow, and when they do, it may be inconsistent.

It might be because of M&A or something like that.

Our [bridge] book will always be driven by certain types of activity, so the loan book isn't something -- the CIB loan book isn't something you're going to say, that you're growing.

That is more serving clients in the way they need.

One of the things I just want to point out which is, of course, all of our businesses, but just take trading in particular is, we're always creating efficiencies.

Part of what we're investing is big data, is [trade] through processing, electronic exchanges, online services.

I think 97% of FX -- I think it's 50% to 60% of US interest rate swaps, all these things have become electronic and digitized, as trade through for clients.

So that's where some of the investments are going.

And you're going to see more of that not less, but it also creates another round of efficiencies every time we do that.

That's great.

Thanks very much.

Your next question comes from the line of Gerard Cassidy from RBC.

Good morning, Marianne.

Good morning.

How are you?

Good.

Can you give us some color, in the past you've talked about -- in the multifamily, I know you commented on that in your prepared remarks, on your multifamily book, some of the markets that you continue to be a little leary of, can you give us an update to those types of thoughts?

Yes, so we talked before about -- we had in certain markets already pulled back, not necessarily because we had a crystal ball, but because we saw them getting soft before the energy decline.

Dallas and Houston would be examples, parts of Brooklyn would be examples of that.

I would say, watching more carefully -- you've seen us, we have that there is some supply coming through in markets, Seattle, Denver, D.C., San Francisco.

We're still very active there, but just keeping an eye on those markets.

But the supply pipeline, while it's real does not look like it did when we saw the real pressure on the term lending business, the real estate business back in the 1980s and 1990s.

So we're keeping an eye on it.

Okay, great.

And I know you talked about the duration of the securities portfolio, it's in line with -- (multiple speakers)

(Inaudible) I'll add, we don't want to give you all of our secrets in that business, but we do (inaudible).

But we're very disciplined about where we see supply, and supply and demand and pricing, and we would have no problem, not growing at all.

We don't sit at meetings here and say, can you grow at 10%, can you grow to [12%]?

No, if we can't meet what we think is proper risk return, we're not going to grow at all.

We'll shrink.

We have no problem doing that.

And so, the other thing I want to point out about CTLs, the exceptional performance of the CTLs through the last Great Recession.

I mean, we were really pleased with how that happened.

So we try to look at all these things through the cycle, not just what are they doing in good times.

Certainly.

And Marianne, coming back to the investment portfolio, obviously you talked a little bit about the duration.

Do you have the actual duration of it in years, this quarter versus the third quarter?

We don't disclose that.

Okay.

All right, thank you.

Thank you.

Your next question comes from the line of Matt Burnell from Wells Fargo.

Good morning.

Just a quick question for you, Marianne.

In terms of the mortgage, in the overall picture, I understand why you're talking about maybe 10% core loan growth rather than 15% more recently.

But just within the residential mortgage portfolio, it looks like that slowed in the fourth quarter, third and fourth quarter from a mid teens year-over-year rate, to a low single-digit quarter-over-quarter rate.

Can you give us a little more color as to what's going on there?

Are you buying -- or are slowing your purchases of your own originations, or is that -- is there something else going on there?

So, there's a couple different things.

First of all, we, about a little more than half of our originations are jumbo.

We retain all of those.

And then, when you look at the conforming space, it's really, honestly, consistently the best execution decision.

And so in particularly in this quarter, it speaks a bit more to our correspondent conforming volume, it's the lowest margin product.

And it does somewhat frequently toggle backwards and forwards in terms of better execution, whether we would retain or sell it.

But we intend to keep adding to our portfolio, we like the mortgage asset classes.

Even those spreads have compressed in the fourth quarter, OAS and ROEs are holding up.

And so, I would expect us to continue to grow it strongly.

And from quarter to quarter, it may go up or down a few percent, but over a year, we'll continue to add to the portfolio.

Okay.

So no real change in your thinking there?

No.

Okay.

Thank you very much.

That's it for me.

Thank you.

Your final question comes from the line of Marty Mosby from Vining Sparks.

Thanks for taking my questions.

The thing that jumped out at me was, if you looked at the asset management group, you had $21 billion of long-term product outflows, and you had $35 billion of liquidity products inflows.

And it seems like now that we're getting past the financial crisis, when everybody was looking at liquidity, that combining that with continued deposit growth, we're not seeing a change in that perspective, but there's still a premium for increasing liquidity still?

I think there was a little bit of that in the fourth quarter, particularly around actively managed product.

I think you're accurate.

But we haven't seen everybody else yet, but I think you will be true, when we see everybody.

Do you foresee that premium for liquidity lessening, as we kind of go into the rerisking of a better economy, and some things that improve the outlook?

That's a really hard question to answer.

I'd have to think about that a little bit.

And then my last thought was, when you look at M&A, we had M&A kind of suppressed when things were more regulatory constrained, and the outlook was a negative on the overall economy and that uncertainty.

Now we have this positive uncertainty.

Wouldn't that delay some activity for at least a couple quarters, for people to kind of see where we're going to end up, and see where tax rates are, and see what we might get in deregulation that may change perspective on their long-term opportunities?

So just thought there might be a little pause here.

I think that -- I mean, everything is going to end up being reasonably named specific, so I mean, that may be true in some cases.

But for some companies in industries, where deregulation and that would be more helpful.

But generally as I said the trend is towards lower -- I'm sorry, less mega deals, more flow, and the fundamentals are in pretty good shape, and then there will possibly be tail winds, in terms of tax reform and other things.

So I think net-net, we think the underlying flow in the M&A market, and the fundamentals are set to have a pretty positive year.

I just thought maybe in the second half versus the first half, but thanks for your response.

We'll see.

No more questions, operator?

There are no further questions.

All right.

Thank you, everyone.

Thank you very much.

This does conclude today's call.

You may now disconnect.