Good morning ladies and gentlemen, welcome to JB Morgan Chase's second 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 stand by.
At this time, I would like to turn the call over to JB Morgan Chase's chairman and CEO Jamie Diamond and chief financial officer, Jeremy Barnum. Mr. Barnum, please go ahead.
Thanks operator. Good morning everyone. Presentation is available on our website and please refer to the disclaimer in the back.
谢谢操作员。大家早上好。演示文稿已经在我们的网站上提供,请参阅背后的免责声明。
Starting on page one, the farmer reported net income of $14.5 billion, EPS of $4.75 on revenue of $42.4 billion and delivered an ROTCE of 25%. These results included the federal government's budget for the public, where I can purchase a gain of $2.7 billion, a credit reserve bill for the first public lending portfolio of $1.2 billion, as well as $900 billion of net investment securities losses in corporate.
Touching on a few highlights, TCB client investment assets were up 18% year on year. We had a record long-term $1.5 billion in the financials. Before we give you a brief update on the status of the first public integration on page two.
The settlement process of the FDIC is on schedule, the number of key milestones being recently completed. The system's integration is also proceeding at pace and we are targeting being substantially complete by mid-2024. First Republic employees have formally joined us as of July 2nd and we are pleased to have a very high acceptance race on our offers. And although it's still early days, as we get the sales force back in the market, we are happy to see that client retention is strong with about $6 billion of net deposit imposed since the acquisition.
Now, turning back to this quarter of results on page three. You'll see that in various parts of the presentation, we have specifically called out the impact of first republic, where relevant. To make things easier, I'm going to start by discussing the overall impact of first republic on this quarter's results at the firm-wide level. Then, for the rest of the presentation, I will generally exclude the impact of first republic in order to improve comparability with prior periods.
With that in mind, in this quarter, first republic contributed $4 billion of revenue, $599 million of expense, and $2.4 billion of net income. As noted on the first page, this includes $2.7 billion of bargain purchase gain, which is reflected in NIR in the corporate segment, as well as $1.2 billion of allowance bill. And remember that the deal happened on May 1st, so the first republic numbers only represent two months of results.
You'll see in the line of business results that we are showing first republic revenue and allowance in CCB, CV, and AWM. And for the purposes of this quarter's results, all of the deposits are in CCB, and substantially all of the expenses are in corporate. As the integration continues, some of those items will get allocated across the segments.
Now, turning back to firm-wide results, excluding first republic, revenue of $38.4 billion was up $6.7 billion for 21% a year on year. And AI X markets was up $7.8 billion or 57% driven by higher rates. And IR X markets was down $293 million, largely driven by the net investment security losses I mentioned earlier, largely offset by a number of less notable items primarily in the prior year. And markets revenue was down $772 million or 10% a year on year.
Expenses of $20.2 billion were up $1.5 billion or 8% a year on year, primarily driven by higher compensation expense, including wage inflation and higher legal expense. And credit costs of $1.7 billion included net charge-offs of $1.4 billion predominantly in card. The net reserve bill included a $389 million bill in the commercial bank, a $200 million building card, and a $243 million release in corporate, all of which I will cover in more detail later.
On to balance sheet and capital on page four. We ended the quarter with the C-21 ratio of 13.8% black versus the prior quarter. As the benefit of net income less distributions was offset by the impact of first republic. And as you can see in the two charts on the page, we've given you some information about the impact of the transaction on both RWA and C-21 ratio.
And as you know, we completed a C-car a couple of weeks ago. Our new indicative SCB is 2.9% versus our current requirements of 4%. And it goes into effect in fourth year 23. The new SCB also reflects the board's intention to increase the dividend to $1.05 per share in the third quarter.
On liquidity, our bank LCR for the second quarter ended at 129% in line with what we anticipated an investor day. About half of the reduction is associated with the first republic transaction.
And while we're on the balance sheet, as we previewed in the 10K, we will be updating our earnings at risk model to incorporate the impact of deposit reprising lags. So when we release this quarter's 10K, you will see the up 100 basis point parallel shift scenario will be about positive two and a half billion. Whereas in the absence of the change, it would have been about negative one and a half.
Now, let's go to our businesses starting with C-C-B on page five. Both US consumers and small businesses remain resilient. And we haven't observed any meaningful changes to the trends in our data we discussed at investor day. Turning now to the financial results which I will speak to excluding the impact of first republic for C-C-B, C-B, and A-W-L.
C-C-B reported net income of $5 billion on revenue of $16.4 billion goes out 31% year on year. In banking and wealth management, revenue was out 59% year on year driven by higher NII on higher rates. End of period deposits were down 4% quarter on quarter as customers continue to spend down their cash buffers including for seasonal tax payments and seek higher yielding products. Line investment assets were up 18% year on year, driven by market performance and strong net inflows across our advisor and digital channels. In home lending, revenue was down 23% year on year, driven by lower NII from tighter loan spreads and lower servicing and production revenue. Originations were up for run quarter driven by seasonality although still down 54% year on year. Moving to card services and auto, revenue was up 5% largely driven by higher card services and I-I on higher revolving balances partially offset by lower auto leasing costs. Card out standings were up 18% year on year which was the result of a fall normalization and long new account growth. And then auto, originations were up 12 billion, up 71% year on year as competitors pulled back and inventories continue to slowly recover. Expenses of 8.3 billion were up 8% year on year driven by compensation predominantly due to wage inflation and headcount growth as we continue to invest in our firm office and technology staffing as well as operating.
In terms of credit performance this quarter, credit costs were 1.5 billion reflecting a reserve bill, 203 million driven by loan growth and card services. Net charge offs were 1.3 billion, up 640 million year on year, predominantly driven by card as 30 day plus delinquencies have returned to pre-pandemic levels in line with our expectations.
Next, the CIB on page 6. CIB reported net income of 4.1 billion on revenue of 12.5 billion. The cost of banking revenue of 1.5 billion was up 11% year on year or down 7% excluding bridge book markdowns in the prior year. I-B fees were down 6% year on year and we ranked number one with a year to date wallet share of 8.4%. And advisory fees were down 6% for debt and up 30% for equity with more positive momentum in the last month of the quarter. In terms of the second half outlook we have seen encouraging signs of activity and capital markets and July should be a good indicator for the remainder of the year. However, year to date announced M&A is down significantly which will be a headland. Moving to markets, total revenue was 7 billion down 10% year on year. Big thing almost down 3% as expected the macro franchise substantially normalized from last year's elevated levels of volatility and climb flows. This was largely offset by improved performance in the secured as products group and credit. Equity markets was down 20% against a very strong prior year quarter particularly in derivatives. Payments revenue was 2.5 billion up 61% year on year. Excluding equity investments it was up 32% were not only driven by higher rates partially offset by lower deposit balances. Security services revenue from 1.2 billion was up 6% year on year driven by higher rates partially offset by lower fees. Expenses of 6.9 billion were up 1% year on year driven by higher non-compensation expense as well as wage inflation and head count growth largely offset by lower revenue related compensation.
Moving to the commercial bank on page 7. Commercial banking reported that income of 1.5 billion dollars. Revenue of 3.8 billion was up 42% year on year driven by higher deposit margins. Payments revenue of 2.2 billion was up 79% year on year driven by higher rates. Gross investment banking and markets revenue of 767 million was down 3% year on year primarily driven by fewer large M&A deals. Expenses of 1.3 billion were up 12% year on year predominantly driven by higher compensation expense including front office hiring and technology investments as well as higher volume related expense. Average deposits were up 3% quarter on quarter driven by employees related to new client acquisition partially offset by continued attrition and non operating deposits.
Loans were up 2% quarter on quarter. C&I loans were up 2% reflecting stabilization and new loan demand and revolver utilization in the current economic environment as well as pockets of growth in areas where we are investing. C&I loans were also 1% reflecting funding on prior year originations for construction loans in real estate banking as well as increased affordable housing activity. Finally, credit costs were 400 and maybe 9 million. Med charge-offs were 100 million including 82 million in the office real estate portfolio and the net reserve build of 389 million was driven by updates to certain assumptions related to the office real estate market as well as net downgrade activity in middle market banking.
Then to complete our lines of business AWM on page 8. Asset and wealth management reported net income of 1.1 billion with pre-tax margin of 32%. Revenue of 4.6 billion was up 8% year on year driven by higher deposit margins on lower balances and higher management fees on strong net inflows. Expenses of 3.2 billion, growth 8% year on year driven by higher compensation including growth in our private banking advisor teams, higher revenue related compensation and the impact of global shares in JB Morgan asset management and the demand both of which closed within the last year. For the quarter record net long-term inflows were 61 billion positive across all channels, regions and asset classes led by fixed income inequities and in liquidity we saw net inflows of 60 billion. AWM of 3.2 trillion was up 16% year on year and overall net income assets of 4.6 trillion were up 20% year on year driven by continued net inflows higher market levels and the impact of the acquisition of global shares. Finally loans were down 1% quarter driven by lower securities based lending and deposits were down 6%.
Turning to corporate on page 9. As I noted up front we are reporting the first republic Oregon purchase gain and substantially all of the expenses in corporate. Excluding those items corporate reported net income of 339 million. Revenue was 985 million up 905 million compared to last year. NI was 1.8 billion up 1.4 billion year on year due to the impact of higher rates. NI was a net loss of 782 million and included the net investment security losses I mentioned up front. Expenses of 590 million or up 384 million year on year largely driven by higher legal expense. In credit costs were net benefit 243 million reflecting reserve release of the deposit place with first republic in the first quarter was eliminated.
Next the outlook on page 10. We now expect 2023 NIi and NIi X markets to be approximately 87 billion. The increase driven by higher rates coupled with slower deposit repriced and previously assumed across both consumer and wholesale. And I should take the opportunity to remind you once again that significant sources of uncertainty remain and we do expect the NIi run rate to be substantially below this quarter run rate at some point in the future. Competition for deposits plays out. Our expense outlook for 2023 remains approximately 84.5 billion and on credit we continue to expect the 2023 charge off rate to be approximately 2.6%.
So to wrap up we are proud of the exceptionally strong operating results this quarter. As we look forward we remain focused on the significant uncertainties relating to the economic outlook, competition for deposits and the impact on capital from the pending finalization of the Basel III rules. Nonetheless despite the likely headwinds ahead we remain optimistic about the company's ability to continue delivering excellent performance through a range of scenarios. With that operator please open the line for Q&A. Please stand by.
The first question is coming from the line of Jim Mitchell from C-Port Global Securities. You may proceed. Thanks. Good morning. You talked about NIi guidance clearly fed funds futures are up. So maybe I guess first could you discuss comment on deposit behavior broadly around betas and mix and what you are seeing there so far seems to be coming in a little better expected.
Secondly and probably more importantly can you help us think about the implications of higher for longer rates on the outlook for NI next year and beyond. I guess the intermediate term outlook that you guys have talked about. Yeah sure thanks Jim. So when we talk about the drivers of the upper provision as I said it's higher rates coupled with lower deposit reprice, hard to untangle the two drivers and specifically I think when you look at the consumer the combination of the passage of time and the positive feedback we are getting on the field and the CD offerings in particular has meant that it's quite a stable environment from that perspective and similarly in wholesale we are just seeing slower internal migrations. You asked about mix. I think that obviously we are seeing the CD mix increase and we would continue to expect we would expect that to continue to take place probably even past the peak of the rate cycle into next year as we continue to capture money in motion. But as you say the most important point is the fact that as I said earlier we don't consider this level of an ion generation to be sustainable and we talked previously about a sort of medium term run rate in the mid 70s that was before for the public and argue that maybe that number should be a little higher but whatever it is it's a lot lower than the current number. We don't know when that's going to happen. We're not going to predict the exact moment that's going to be a function of competitive dynamics in the marketplace but we want to be clear that we do expect it at some point.
Okay but I guess just one follow up on that just if we don't get rate cuts sorry until middle of next year or later does that sort of give some confidence to the outlook for next year or are you still worried about significant reprise? I wouldn't necessarily assume that the evolution from the current run rate into that mid 70s number is that sensitive to the rate outlook in particular. When we put that number out there we looked at a range of different types of rate environments and the reprise that we think would be associated with that. It was really meant to capture more of what we consider to be able to the cycle sustainable number so I wouldn't think of it as being particularly rate dependent. Okay great thanks.
Next we'll go to the line of Erica Nazarian from UBS. You may proceed.
接下来我们将进入瑞银UBS的Erica Nazarian的发言环节。请继续。
Hi good morning Jeremy and I'm just laughing to myself because I said to you and I said to you any more NII rabbits to pull out of the hat and I guess you do. So I guess I want to ask a broader question really here and maybe Jamie I'd like to get your thoughts so you know you earned 23% ROTCE on 13.8% CT1 and you know we hear you loud and clear that your more normalized NII generation is not 87 billion. You know not being said and you know fully taking into account you know the potential you know haircut from BOGL 3 end game you know is it possible that your natural ROTCE is maybe above that 17% through the cycle rate you know when rates aren't zero because when you first introduced that ROTCE target you know we were in a different role from a rate scenario and everybody's talking about even if the fed cuts the natural sort of bottom in fed funds is not going to be zero so you know any input on that would be would be great.
Yeah thanks our gummy answer a good question as well and obviously I guess I would start by saying that you know when we've talked about the 17% through the cycle ROTCE even though we may have introduced that in a moment where we were at the lower zero bound it was always premised on a sort of normalized rate environment and at some level that remains true today. Furthermore you know you didn't ask this explicitly but in the context of the proposed BOGL 3 end game you know one relevant question might be if you have a lot more capital in the denominator what happens to that target so I think as I said I might refer to it more if you feel very confident about the company's ability to produce excellent returns to the cycle there's a lot of moving parts right now on that some of them could be good some of them could be bad.
Narrowly on the capital one the one thing to point out is that the straight-up math simply diluting down the ROTCE by expanding the denominator misses the possibility of re-price you know re-pricing of products and services which of course goes back to our point that these capital increases do have impacts on the real economy so we're not suggesting that we can price our way out of it but we obviously need to get you know the right returns on products and services and where we have pricing power we will we will adjust to the higher capital so a lot of moving parts in there but I think the important point is that through our range of scenarios we feel good about our ability to deliver good results and we'll see how the mix of all the various factors plays out especially when we see the bus will be proposed all and it goes through the common period.
And Eric I just did one thing first we have a mix of businesses that earn from like 0% ROTCE to 100 we have so much are very capital and tensile so we look at kind of all of them and I think that is a good number and a good target there's even over early on is credit you know we've been over in credit for a substantial amount of time now and I'm quite conscious about it we know that's going to kick off just as normalize it'll be more than now like you know we would consider credit card normalized to be close to three and a half percent.
And so my follow-up question there maybe Jeremy could you remind us what unemployment rate is embedded in your ACL ratio as of the second quarter?
所以,我的跟进问题是,也许杰里米能够提醒一下我们,截至二季度,你的ACL比率中嵌入了什么失业率?
Yeah still 5.8.
是的,仍然是5.8。
Next we'll go to the line of John McDonald from Autonomous Research. You may proceed.
接下来我们将转到独立研究公司的约翰·麦克唐纳德的发言环节。请继续。
Hi good morning Jeremy wanted to ask about capital in the wake of the bar speech we don't have the details yet but just kind of want to ask about options that you have and strategies for mitigation both on RWA and potentially on the G-SIB front as well as you contemplate what you heard recently.
Yeah thanks John so obviously we're thinking about that a lot on the other hand as much as there have been a lot of very detailed rumors out there that might need you to start to try to do some planning it does seem like this time it's real and we are actually going to get a proposal generally sometime this month or something. So soon enough we'll get to see something actually on paper and we can stop kind of the guess word. Having said that indulging in a little bit of guess work it does seem like the biggest single driver of the increase that people are talking about including you know chair pals 20% number or vice chair bar but vice chair bars 2% of our UIA which winds up being roughly the same is just the way operational risk is getting introduced into the standardized pillar and that is a little bit of a straight up across the board tax on everything it's kind of hard to optimize your way out of that with the exception obviously the fact that you can simply increase price assuming you have pricing power but that's obviously not what we want and that's what we sort of mean by impacts on the real economy.
So there are details there's a lot of the FRTV stuff you know we can get way into the market we there within the markets business and we do have a good track record of adjusting and optimizing but this time around it may be a more fundamental set of questions around business mix as opposed to you know the ability to sort of optimize or create technical way. Okay that's helpful and with a number of years for this to phase in and you are generating capital at a high level even if the ROTC comes down a bit.
How should we think about your pace of you know building capital for these new changes versus doing your everyday course of investing and buybacks and things like that in you know the next couple years. Yeah I mean I guess I'm sort of tempted to give you our standard capital hierarchy here I mean we're not going to start investments right if you that won't come as a surprise to you. Generally speaking we're always going to try to comply with new requirements early so when we know the requirements and when we have visibility obviously given how much we're going to capital we're generating right now whatever the answer winds up being it'll be pretty easy to comply narrowly speaking but that's not the same as saying that there won't be consequences to returns or to pricing and you know if for whatever reason things aren't exactly as we're anticipating I don't see us sacrificing investments that we see us strategically critical in order to you know comply with with higher capital requirements ahead of ahead of the formal timing or whatever.
Okay and there's some room for buyback. That would be an unlikely outcome. Okay thank you. Sorry Sean go ahead. Do buybacks play a role you know in the next couple years strategically just episodically buybacks. I mean you know capital hierarchy again right in the end you know when we have nothing else to do with the money we'll do buybacks and you know we talked about the twelve billion dollars for this year. Obviously a lot of new moving parts there although all of the people given what we've done so far that's still probably a reasonable number off of the full year. But yeah that's always going to be at the end of the list but yeah. Got it. Okay thank you.
Next we'll go to the line of Ken Oostin from Jeffries. You may proceed. Thanks good morning I just wanted to ask a little bit about how you're feeling about the trade off between like the commercial economy and what might come through in terms of future loan growth versus the kind of green shoots that people are talking about in the investment banking pipeline and just how it feels in terms of like reopening of markets and the trade up between you know getting some over those fees in and versus what's happening on the loan demand side. Thanks. Sure good question Ken so I think in terms of investment banking and markets. Yeah so you know it's better than expected last month. A lot of talk about green shoots especially in capital markets generally still definitely some headwinds and M&A you know lower amounts activity some regulatory headwinds there so we'll see I think it's a little too early to call a trend there based on recent results but we'll see.
In terms of the broader economy and loan growth expectations generally we do still expect reasonably robust card loan growth but away from that for a variety of different reasons and different products whether it be mortgage or C&I after revolving normalization you know and especially if we see a little bit of a cooling off of the economy I would expect loan demand to be relatively modest there so we're not really expecting meaningful growth away from card but of course you know we're there for the right deals right products right terms you know we lens with the cycle so I see that as more of a demand driven narrative which will be a function of the economy rather than a many tightening on our side. That makes sense and as a follow up to that you know on the consumer side you mentioned that consumers continues to spend albeit a little more slowly and you mentioned that consumers are also using their excess deposits a little bit more as well can you just elaborate a little bit more on just your feeling about the state of the consumer and is that is that card growth you know continue to be driven by people needing to revolve as opposed to you know wanting to have more in their deposits just kind of what the tradeoff on that side too. Yeah I mean to us I think we still see this as a normalization not deterioration story when we talk about consumer credit actually revolve per account has still not gotten to pre-pandemic levels actually so I would definitely say there's a wanting rather than needing at least for our portfolio at this point and yeah you know I think that consumer continues to surprise on the upside here. Got it okay thank you.
Next we'll go to the line of Gerard Cassidy from RBC Capital Markets please go ahead.
接下来我们将听取来自RBC资本市场的Gerard Cassidy的发言,请开始。
Good morning Jeremy good morning Jamie. Jeremy can you give us your view on how you're measuring the treasury functions and the asset liability of your balance sheet as we go forward versus the way you guys were positioning and managing it a year ago in view of the fact that it looks like maybe we're approaching the terminal rate on fed funds rates.
Yeah Gerard I would say honestly not much change there actually you know we've been pretty consistently concerned about the risk of higher rates of course we always start to position things to produce reasonable outcomes across a broad range of scenarios but at the margin we've been biased towards higher rates and that may be a little less true at these levels than it was before although a lot of that is just the consequence of positive convexity playing out in the modeling but in any case you know all else equal I think we are going to continue to focus on making sure we're fine in a higher rate scenario while staying balanced across a range of scenarios so not really a lot of change in our positioning and that's obviously including the fact that we took on first republic which you know even net of some of the liabilities had a long structural industry position we did not actually want to get longer as part of the deal and so as a result we took actions to ensure that we are still about the same as we were last quarter.
Very good and then as a follow up you mentioned in giving us the read through on the commercial banking segment of the business that you had some reserve building tied to some office real estate and also some downgrades in the middle market area can you go a little deeper what are you guys seeing in this area of both commercial real estate but also the sea and islands what's happening in that segment as well.
Yeah so I would caution you from drawing too broad a conclusion from this I mean I think that when we talk about office for example you know our portfolio as you know is quite small and our exposure just sort of so-called urban dense office is even smaller the vast majority of our overall portfolio is multi-family lending. So as a result like our sample size of observed valuations on office properties is quite small but you know we'd like to be sort of ahead of the cycle and based on everything that we saw this quarter it's felt reasonable to build a little bit there to get to what felt like a comfortable covered ratio. You know across the last of the year in the middle market segment we saw downgrades and excessive upgrades but I don't see that as sort of necessarily indicative of anything terribly significant in the broader read-a-cross.
Good morning. I guess just first question following up on the outlook for the economy like we've all been worried about a recession for a year and there's a debate about the lag defects of the Fed rate hike cycle. When you think about Jeremy I think you mentioned you are an unemployment outlook relatively similar today versus a quarter ago. How worried should we be in terms of the credit cycle six to 12 months from now or are you leaning towards concluding that maybe US businesses, consumers have absorbed the rate cycle a lot better than we expected a year ago?
Yeah so I'm sure Jamie has some views here but in my view I would just caution against jumping to too many super positive conclusions based on a couple of recent prints. I think generally our point is less about trying to predict a particular outcome and more about trying to make sure that we don't get to much euphoria that over concentrates people on one particular prediction when we know that there's a range of outcomes out there. So obviously people are talking a lot about the potential for soft landing right now. No landing, immaculate to simplition or whatever and whether our own views on that have changed meaningfully I don't know but the broader point is that we continue to be quite focused on Jamie's prior comments that loss rates still have time to have room to normalize even post pandemics or probably over earning on credit a little bit. Obviously we've talked about the expectation that the NII is going to come down quite a bit so even forgetting about whether you get some surprisingly negative outcomes on the economy from what we've done today even in the central case you just need to recognize that there should be some significant normalization.
Yeah and I would just add the 5.8% is not our prediction that is the average of the unemployment under multiple scenarios that we have to use which are hypothetical to see so. If you have to predict it if you're looking with something different and we don't know the outcome we're trying to be really clear here the consumers in good shape are spending down their excess cash that's all tailwinds.
If people are going to recession they're going with rather good conditions low borrowings and how the price value is still but the headwinds are substantial and somewhat unprecedented. The smaller Ukraine oil gas, climate tightening, unprecedented fiscal needs of governments, huge teams we've never experienced before. I just think people should take a deep breath in that. We don't know what those things could put us as soap landing in mild recession or a hard recession and obviously we should all hope for the best.
And just to follow up on the upcoming Basel reforms, two questions you've talked about the impact to the US economy like others have said the same. At this point if that's falling on deaf ears and secondly maybe Jeremy if you can touch upon just structural changes that you expect to make in the capital markets business because of FRTB. Thank you.
Yeah so on your first point I mean you know I think you can just read Vice Chair Barr's speech right he addressed that point fairly directly. He clearly doesn't agree as this is right. So we'll see what happens. We continue to feel that all else equal higher capital requirements definitely are going to increase the cost of credit which is bad for the economy. So we'll see what happens on that.
On FRTB it's really very nuanced. It's probably like two months of detail for this call to be honest but just to give you like one immaterial and insignificant but useful example you know one product under FRTB is yield curves right options and you know if the FRTB proposal goes through as currently written that product is becomes not viable. So obviously if we need to stop doing that product no one really cares but it's just one example of the way sometimes when you're really disciplined about allocating capital thoroughly all the way down to products and responding accordingly you can wind up having to change your business mix.
There are obviously more significant products that matter much more for the real economy like mortgage where you know the layering on the operational risk and the way it's being proposed especially if some of the other beneficial elements of the proposal don't come through you know you're once again making the product even harder to offer the homeowner. So we'll see we'll see what happens. I would just say that so the product you can go product doesn't make money you might do it for clients who are great clients. You're going to manage by product by client and by effectively business mix and those adjustments roughly loans don't make sense for you balance as a whole almost any loan and you know we that's it's just people have to recognize that and you know some of the matters of all the various complications here and you're going to know what the other do. Thank you.
Next we'll go to the line of bike mail from Wells Fargo securities you may proceed.
接下来我们将介绍富国银行证券的自行车邮件业务,请继续。
Hi I had another question on vice chair bars speech from this week. To the extent the capillaries do go up 20% for you and perhaps others to what degree would you think about changing your business model in terms of remixing where you do business re-pricing or simply you know removing activities that you used to do it's kind of ironic or maybe it's not ironic that Apollo hits an all-time stock price high the same week as the speech so does that how much business leaves Jake Morgan or the industry if capillaries to go up as much as potentially proposed.
Yeah. Before Jeremy answer question I thought this is great use for hedge funds, private equity, private credit, Apollo, Blackstone and you know and there's a lot of people who are going to get the chance in the streets.
Yeah. Exactly and I was going to say my yes to everything so meaning re-pricing yes definitely to the extent that we have pricing power and the higher capill requirements mean that we're not generating the right returns for shareholders we will try to re-price and we'll see how that sticks and how that flows into the economy and how that affects demand for products and if the re-pricing is not successful then in some cases we will have to remix and that is getting out of certain products and services and as Jamie points out that probably means that those products and services leave the regulated perimeter and go into you know elsewhere and that's fine as Jamie points out those people are clients and I think that point was addressed also in vice-chair bar speech so but you know traditionally having risky activities leave the regulated perimeter has had some negative consequences so these are all things to consider.
All right and separate question yeah I'm I appreciate the investor today gives a little bit more color on the degree that your investment may or may not pan out and you know we we are still all watching that closely having said that you just increased revenue guidance by 10 billion for NI I between this quarter and the first quarter without changing expense guidance by even one dollar aren't you tempted to spend a little bit more why not spend more if you're gaining share and I I'm not saying you should I'm just wondering like aren't you tempted to do so you have 10 billion dollars more revenues you're not spending one dollar more of expenses like why not. Mike let me get this right you're actually complaining that our expenses aren't high enough is that right? Wait just just be clear I'm just a flip side of the question I asked for two years you know going back to that I appreciate the balance now I know seriousness we've always been pretty clear right that our spending is through the cycle spending based on through the cycle investment through the cycle spending based on our through the cycle view of the earnings generating power of the company and the gold to produce the labor term so broadly speaking NI tends to flow straight through to the bottom line both when it's going up and by the way when it's going down to and we've been through those moments as you all remember so whether or not there are opportunities to deploy some more dollars into you know marketing and stuff like that we have actually looked at that recently I don't see that being a meaningful item this year which is part of why we have not revised the expense guidance so far but you know this is about investing through the cycle and being honest and disciplined about which which revenue items flow you know carry expense loading and which of them don't. And that's my quick follow up.
I think we're kind of running this best we came so you actually sat down with the risk we were credit compliant oil and marketing bankers recruited trainers the same but this is it you know that we're full effort right now and we want to make sure we get things right we get things thoughtful and careful so it's not such as the money is the people and how many things can you change all the ones to answer all the ones.
And then one quick follow up to that your efficiency ratio this quarter is you know the lowest we've seen in a long long time I guess you're saying don't extrapolate this efficiency ratio because NI will come down at some point but when you just simply look at you know you benchmark yourself against the low cost providers where do you think you're there now and where can you still go because you extrapolate this quarter you're getting closer. Yeah I mean you started yourself right you definitely can extrapolate the current numbers but I think more broadly on benchmarking ourselves to low cost providers it sort of speaks to an area that you've been interested in for a long time which is all of the investment that we're doing in technology to improve generally scalability and get more of our cost base to be you know variable versus fixed in terms of how we respond to volumes that's a big part of the reason that we're doing the investments that we're doing and modernization and cloud and AI and all the type of stuff that we talked about so I think we feel really good about our efficiency as a company but there definitely is room for improvement.
Alright thank you. Next we'll go to the line of Stephen Chewbuck from Wolf Research. You may proceed. Thanks for taking the question and apologies for the technical issues earlier. I wanted to ask on the deposit outlook just with signs that recent liquidity drawdown has come predominantly out of our RRP versus industry deposits. I just wanted to get your thoughts on what expectations you have for deposit growth in the second half both for you and even the broader industry especially as treasury issuance really begins to ramp in earnest.
Yeah good question Steve. So let me take a couple of things about this. So obviously our deposit numbers have bounced around a little bit as a function of some of the turmoil that we saw in regional banks as well as obviously the first public transaction but now if you look at our kind of period deposits this quarter and you project forward our core view is that we would expect a sort of modest downward trend to reassert itself from this higher starting point broadly as a function of QT blanked with the system but noting that we do have some hope for offsets by taking shares to get a couple of examples like in consumer. You know we've got some of our branch expansion markets seasoning and so their share over increase there and then wholesale we've obviously invested a lot in products and services and so we think we have compelling offerings that are helping us with mandates and so they're potentially some share offsets there but broadly we are core view remains modest deposit declines across the franchise within that you know the same thing we've noted that you know as we got through the debt ceiling and the TTA build it build has come into effect and you've seen a lot of bill issuance you know big question in the market about whether that was going to come out of reserves or come out of RFP and so far with most of the TTA build I guess the targeting 600 and they're up for 50 or something so they're almost done you know more of it than some people feared has come out of RFP so as you say I think that's a relatively good sign and highlight so the system works better when you've got you know ample supply of short data collateral you know in the front of the yield curve so that whole RFP TGA bank you know reserve dynamic is going to continue to be significant but it is good to see RFP coming down a little bit.
I hope I'll call her and just follow up on card income you know revenues were muted in the quarter I was hoping you could unpack just the sources of pressure maybe more specifically how much of the drag is associated with that's 91 versus some other factors.
Yeah so actually that card income number Steve is a little bit of a one off thing so we had a reward liability adjustment this quarter kind of a technical thing so that's just a temporary headwind and also the sequential comparison is also getting hurt by a small positive one on a item in the prior period so and obviously you know I know you guys like that a card income isn't sort of a thing that we look at that much ourselves. Can you size the reward liability impact? Why don't you get Michael to give that to you it's not that significant but it's enough to just make the sequential number look a little bit longer.
Great thanks for taking my questions. Next we'll go to the line of Glenn shore from Evercore ISI you may proceed. Thank you. I just want to follow up on this pricing power conversation because you've been consistent over time that you have a limited ability to sustain pricing power due to competitive landscape. But I guess my question is if not now when meaning a lot has changed on the initial side European bank side, the regional bank side. And I would think that there'd be certain businesses that you have a greater ability and willingness to push price on. And then maybe you could tie that to your comments in the press release on. What are the material what are the real world consequences for markets and then users that you're referring to when talking about material regulatory changes.
Sure so I'm pricing power you're right it really depends on the product and it depends on the competitive landscape across different banks. And so it's very granular it's very product specific. And you know in some cases we'll have more pricing power than in other cases. I think the overall point that we're trying to make in connection with. The end game is just that you know like we think we think the capital increases are excessive. It puts pressure on returns all of the people that obviously puts pressure on us to increase price where we can. That is generally a bad thing for the real economy and how all that plays out in detail across different products and services remains to be seen. And importantly, since we don't actually have the proposal yet so. So we need those details and sorry I forgot the second half of your question what was it.
Actually, I think you hit on it, so I'll just do a follow-up on a related topic. The notion of private credit doing large traditional investment grade lending activity may be part of the competitive landscape that limits the ability to push Christ. In Jamie's letter, you talked about the downside, or my question is, what's the downside if more of the mortgage credit asset-backed into mediation business is pushed out of the banking system? I mean, I guess it depends on what you mean by downside, but I just think, you know, societally speaking, I think we've seen in recent history that when home lending is happening outside the regulated perimeter, and things get bad, you know, you have economic downturns, it produces bad outcomes for individuals and homeowners and society as a whole. So, I mean, Jamie's written about this extensively. Beyond that, you know, financially, we've talked about how mortgage lending, I mean, you know, the profitability swings obviously is recently cyclical, and in the recent past, it's actually been profitable, and it was less so like the correspondent channel. Right now, it's actually picking up a little bit, but it's a thin margin business, it's challenging, and when you increase the capital requirements, it makes it even harder. So, that just becomes one of the areas where you're in that tension between remixing versus pricing power that we talked about a second ago. And it might, in fact, mean that we do less, you know, less credit available for homeowners and more regulatory risk as the activity moves outside the perimeter. Appreciate that.
Next, we'll go to the line of Betsy Graphic from Morgan Stanley, you may proceed.
接下来,我们将进入摩根士丹利银行贝琪图形的领域,请您开始。
Hi, good morning. I just wanted to unpack a little bit more the drivers of the change you outline that's coming in the 10 to Jeremy regarding the asset sensitivity going from liability sensitive to asset-sensitive. At least that's the way I read it, I just wanted to understand what the drivers that is. Yeah, sure, no problem. I mean, as you know, that's always been a challenging number, you know, it's meant as a risk management measure of source, although it's also somewhat limited in that respect. And it has been an uneven usefulness in terms of. The way that we've come to the conclusion that would improve the usefulness of the disclosure if we included in the modeling the effect of deposit re-pricing lives. And so we've done that and that just has the effect that I talked about, increases the number by about 4 billion from, you know, minus one and a half which is roughly what it was last order and would have been this quarter without the change. There's something more like two and a half. All the usual caveats apply, right? I mean, it's never the answer is going to always for any given change in rates the change in our eyes always going to be for one reason or another different from what that disclosure shows but we do our best to make the.
Okay, and so is it fair for me to think about that change as a mark to market to where we are today and when I think about your forward guide here longer term you're saying look deposit betas are accelerating. So as I go through the 10 cues over the next, you know, four or five quarters I should expect that 2.5 should come down because deposit betas you're anticipating are going to be accelerating from here just trying to put those two things together. Yeah, it's a good question, it's quite a technical issue so I think in the past the way this number was constructed was to assume through the cycle betas on all the deposits. And so your notion that like the number would include deposit beta acceleration would not have been the case because it would have been using essentially terminal deposit betas or the scenario based on the forward curve and then based on a 100% shock to the forward curve. The nuance that we've introduced now is to recognize that given the shock, the re-priced beta will not be instantaneous. And so you get sort of mathematical consequences of that but I think translating that into a statement about our expectation for beta, you know, for the next 12 months relative to an AI guide might be a bridge too far, I'm not sure you can actually go looking.
Right, but the but you were saying earlier deposit betas you do anticipate are going to be accelerating from here and that's part of the outlook for NII longer term to normalize in the mid 70s, is that right?
Yes, but let me ask. Yes, I mean basically, yes, if the next round is going to be the beta will 30 to 40 to 50 and whatever the product is yeah that's the latter. And the 2.5 will go down over time as that actually happens if rates actually go up. The great don't have to go up to 45, maybe exactly 2.5 again. Yeah, and what I was going to say, that's just that you know that the projection of the 87 coming down to a significantly lower number contains both the element of internal migration as well as the potential which is by no means guaranteed a product level of re-price and furthermore than obviously the dynamics are a little bit different. The different business segments as you move from large corporate wholesale to consumer.
Okay. All right. Thank you. I appreciate it. Yep. Next we'll go to the line of Matt O'Connor from Deutsche Bank. You may proceed. Good morning. So I mean your camp that eventually consumers will want more deposit rate. Sensitivity here. But I guess what would make you change your rates meaningfully so you know the top 2 banks have about 50% consumer market share loan to deposit ratios are low. Your outlook for loan growth and I think others, you know, it's fairly sluggish at least outside of card. So I get that it's common sense and that's what we've seen historically but that there really is this kind of big divergence among big banks and everybody else where you know the big banks just don't need to pay that much for deposits for you know for a reason. So what would make you change that.
Yeah, in the end, Matt, it's just feedback from the field. It's composition and feedback from the field. You know, we. I think I think every bank is in a different position about what they need. And so you have a whole range of outcomes. But remember we do the social by city. So you have different competition Arizona Phoenix and they have in Chicago, Illinois. And when you do have high interest rate products, so it's a combination of all those things. I wouldn't call it big banks for small banks and you're going to see whenever reports. Who kind of paid up a more thing than who didn't and things like that. So I look, I guys, I would take it to give them. I think it's going to say there is very little pricing power most of our business and things are going to go off. Take it to give. There's no service stand that we've ever seen in the history of banking where race didn't get to a certain point that you had to have competing products and race go through migration or direct rates or or move into CDs or money market funds. We're going to have to compete for that. You already see it in parts of our business and not in other forms.
Okay. I don't want to 100% of matters just that it's really just about primary bank relationships. And that's the core of the strategy.
好的。我并不是要100%解决所有问题,只是关注主要的银行关系。这是战略的核心。
Yeah. I mean, again, I 100% agree, but we've never seen kind of loans deposit ratios for banks like yours this low. So you could just let the positive run off, you know, to modest amount for quite some time and make the decision not not to pay up. I know I've seen us the trade off it eventually. That's a little more complicated because that really allows that low value ratio is lower because of regulatory stuff LCR capital ratio, etc.
Morning. Turn me on page four of your presentation. You show some liquidity metrics and there's been a, you know, meaningful deterioration or or I shouldn't say deterioration depletion of some of that excess liquidity, obviously for first republic primarily. So my question is how quickly do you want to rebuild that liquidity? Because as I look out towards 24, there's probably a half dozen variables that are going to make liquidity a premium event to have access liquidity.
So that's my first question is what's your plans for replenishing that liquidity?
那么,这是我的第一个问题:你们有什么计划来补充这个流动性呢?
Yeah, so I know we talked about this a little bit about it. And then it was yesterday, right? So, instead of my paper marks, yeah, we think about about half of the change in the bank all CR number is a consequence of her Republic and the rest of it is just the expected, you know, decrease in, in to some wide deposit is falling through into our HLA balances in the bank will see our ratio. So that's all entirely as expected. And therefore, I think that the replenishing notion is not correct.
In fact, obviously we still have ample liquidity. Now, if you want to project trends forward, that's a different story, but, you know, that's sort of the business of banking will adjust accordingly in terms of our asset and liability mix across different products and to ensure, you know, compliance and the ratios and then for transparency principles, I see what it's like for us. I think we have access liquidity and the liquidity rates is slightly different. I think there's this funny recording system that we do multiple things to change this overnight. Right.
So sort of wrapped into that as a follow up. If you take your 87 billion forecast for NII this year and, you know, that implies at least a quarter of maybe 22 billion of NII and you take your eventual forecast of mid 70, you know, billion of NII at some point in the future, that would imply at least one quarter of 18 billion of NII. So that's about an 18% drop. And if you hold the balance sheet steady, you're talking about, you know, a 30 basis point drop in your margin, your NIM, you know, to get to that from 22 billion to 18 billion.
I mean, what is driving is it really the deposit or are you thinking in terms of interest reversals as credit deteriorates or is it rebuilding of liquidity and just trying to get a better sense of what the big impact is. And I would think of that as being really entirely a deposit story. It's just not that complicated. Right.
I think we did this. I think it was either in the fourth quarter and the first quarter, but we put a little chart on the page. Just very simple terms. It shows like what the dollar consequences are of whatever like 10 basis point change and deposit rate paid in terms of NII run rate. So, whether it's as a consequence of migration from lower yielding to higher yielding, you know, going from 0% to a 4% CD is obviously a big impact on margin, or whether it's because, you know, savings, re prices, relatively small changes in rate there are a lot of money when you've got, you know, a couple trillion dollars of deposits. So it's really not only more complicated than that. That's why we're being so forceful about reminding people about what we expect us to take.
Thank you. And we have no further questions at this time. Thank you very much. Thank you all for. Thank you all for participating in today's conference. You may disconnect at this time and have a great rest of your day.