JP Morgan 3Q16 Earnings Call Notes

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JPMorgan Chase (JPM) Q3 2016 Results

Marianne Lake – CFO

Card originations up 35%

“Card new account originations were up 35% with strong demand for Sapphire Reserve and Freedom Unlimited and with more than three quarters of new accounts being opened through digital channels. Card sales volume was up double-digit this quarter and we expect share gains to accelerate.”

Markets revenue up 33%

“Markets revenue of $5.7 billion was up 33% year-on-year. Clients were active and risk management conditions were favorable. Fixed income revenue was up 48% compared to a weaker third quarter last year. Rates was a standout in terms of performance this quarter as markets stayed active post Brexit with good client flow, as well as anticipation of an uncertainty around central bank actions. Currencies in emerging markets matched a very strong third quarter last year but was slowed down slightly. And credit and securitized products came back from a weak prior period with a recovery in the energy sector and central bank actions motivating clients to put money to work, producing a much more constructive market making and new issuance environment resulting in a particularly strong quarter.”

Credit performance remains strong. Reserve releases for oil and gas

“credit performance remains strong with a net charge-off rate of 10 basis points, roughly half of which was driven by oil and gas. In addition, you see further reserve releases for oil and gas here as I mentioned earlier. Outside of energy, credit quality is good and the commercial real estate portfolio had no net charge-offs during the quarter.”

Moving more into the near prime space in credit cards and higher delinquencies are to be expected

“ over the course of the last couple of years, we have been changing the mix of our originations a bit to the prime, near prime space and still completely within our credit risk appetite and at risk-adjusted margins that are better than the portfolio average. So, we’re getting paid for that. So, we are doing it within our risk appetite doing it judiciously. But as a result, as those vintages become a higher percentage of our overall population, they will have a gentle upward pressure on the charge-off rate. So, what we’re seeing in terms of the delinquency uptick and the charge-off gradual increases completely in line with how we underwrote those loans and our expectations.

LIBOR hasn’t actually had a large consequence on P&L

“generally speaking with respect to our rate sensitivity, as I think you know we are most sensitive to the front end of the curve but to IOER and prime. So, we do have LIBOR based assets but also liabilities. Good examples would be commercial loans on the asset side or long-term debt on the liability side but our notational mismatch is not particularly big. And so, as a consequence, impact of LIBOR curve move has been not very significant on our P&L, we wouldn’t expect it to be. I will say that the LIBOR moves were one of the features that our rate business had a perspective around and they got good client flow in and around that trade. “

We should be able to generate growth next year even if interest rates are flat

“So, if we ended up in a situation right now where rates are flat throughout all of 2017 which for what it’s worth I don’t think is pretty much anyone’s central expectations right now. But if we were rate flat, you’ve seen us grow our core loans and our loan balances pretty strongly, pretty consistently across businesses. And while we may not be able to replicate $0.15 core loan growth forever, certainly we can continue to grow our loans. So on that stuff, mix shift away from securities over time, we should be able to deliver $1.5 billion of incremental NII next year rate flat. You know that if rates are — if we’re fortunate enough for the right reasons that we see a hike this year, at the end of this year and get the full benefit of that next year it will be higher than that. “

We’re aware of the CRE cycle but we are sticking to our knitting

“ we’re aware obviously of the riskier types of CRE lending, the types of lending that attract scrutiny and for reasonable reasons considering how they performed in past cycles. We are also mindful of where we are in the cycle and take that into consideration in our underwriting. So, we have and continue to avoid and what I would characterize as the riskier segments and those segments that performed poorly in previous cycles. So, we really stick to our knitting”

Our businesses were firing on all cylinders

“all of our businesses did really quite well this quarter. So, not to overuse the phrase, firing on all cylinders but it really was pretty consistent. And normally you might see pockets of more strength or less strength. So, I think it would be hard to imagine replicating this kind of strength through time consistently. But the fourth quarter is seasonally low; we have no reason to expect that it would not be.”