JP Morgan at Deutsche Bank Conference Notes

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Marianne Lake – Chief Financial Officer

The reality is that these policy things take time

“I mean, I think we still remain very hopeful that there will be [indiscernible] policy and reform on the agenda. I think it’s hard because everybody was super enthusiastic out of the gate, but the reality is all of these things is they’re extraordinarily hard and there are reasons why tax reform hasn’t been successful over the course of the last several decades. It’s because it’s complicated, and so I think it’s–you know, we’re four or five months into the new administration, and while it would have been helpful to have some more scores on the board, I don’t think it’s time to give up the belief that–you know, we know a few things. We know that they’re deadly serious about reform in multiple facets, we know that they have smart and capable people around them, there’s bipartisan support particularly for certain aspects of tax reform and regulatory reform, and anything that’s constructive for the country and the economy and pro-growth is constructive for our clients, so we are trying to be as engaged and constructive as we can be, and we still see all of those things on the agenda, it’s just they take a little time and I think that’s a reasonable expectation.”

Confidence levels are still high

“So meanwhile, we have to keep the wheels turning and doing what we’re doing and serving our clients, and so there’s no actual change. The levels of optimism are still high, they’re still higher than pre-election. They may be off slightly from their peak, but I think generally people are still feeling that the pro-growth agenda is real. How exactly it ends up being manifested in reform and policy action over the course of the next six, 12 months is still an unknown, but I think the seriousness with which it’s being approached is something to applaud and we should all welcome it and be as constructive as possible, and so that’s the approach we’re taking.”

We feel that accreting further capital is not necessary

“So on capital, we’ve been pretty vocal and consistent for a number of years now that we think that the company can be run safely and soundly at around 11%; meanwhile, for a variety of reasons, we’ve been sort of operating in this capital corridor of 11% to 12.5%, and at this point we’re at the high end of that range. This year at investor day, we made the clear statement that we feel that accreting further capital is not necessary, and moving down in the range over time would be our preferred strategy in the absence of any new news, and so that really hasn’t changed.”

CCAR is the predominant binding constraint to returning more capital

“As you look at the capital agenda, CCAR at the moment is the predominant binding constraint for most of the large banks in the U.S., and so reforming CCAR through the way its implemented and supervised, I think is a real possibility, if not a probability. And even in his outgoing speech, Governor Tarullo laid on the table a number of meaningful improvements that seem somewhat uncontroversial at this point, so number one, let’s phase out or eliminate the qualitative assessment test.”

Second quarter does look better than the first

“some difference of opinion about the second quarter and whether or not it will rebound from the first. Our view is first quarter continued the trend of having seasonal distortion in it. People are looking through that, second quarter does look better. Consumer spending in the first quarter was disappointing – that’s rebounding. Inflation data is disappointing, but other than that, jobless claims are the lowest since ’74, retail sales, industrial production, capex were decent. So I think if you smooth out the noise, the first half is going to be a 1.5 to 2% growth situation, which is pretty in line with our near-term historical averages, and so we’re, I would say, solid, not stellar but not reasons to be concerned at the moment. We’ll keep an eye obviously on the inflation data, and the Fed have said the same thing; but if you look forward and not spot, I think the general assumption is that will be somewhat transitory in nature too, so we’ll have to see about that. We’re seeing that in our businesses, so we’re seeing strong spend, we’re seeing decent loan demand, we’re seeing reasonably healthy capital markets activity, so it feels to us like it’s still a pretty constructive environment generally in the second quarter. While there are small pockets, so you know, auto sales have been a little softer over the last couple of months for maybe obvious reasons, then they’re pretty small and pretty modest in comparison to the bigger picture, so I think generally pretty healthy so far in second quarter. Nothing that we’re seeing in our client engagement, in the dialogue or in the activity is a foreboder of anything different from that at this point.”

I would say our central case for US rates is two hikes this year

“You know, I would say our central case for U.S. rates is two hikes this year, the Fed starts to shrink the balance sheet at the end of the year, slowly and under control such that it’s more in the background, so rates remain the major monetary policy tool that we’ll see a flatter but nevertheless somewhat normal yield curve, and that the 10-year will be, call it 2.75 at the end of this year. Maybe we’ll be wrong, but implies a 2.40 so you pick your number. We’re not seeing it going down.”

Consumers are in good shape

“consumers are in very good shape. Their balance sheets are repaired, they’re pretty liquid, their debt to income ratios are pretty low, debt service burdens are pretty well insulated from interest rate hikes because interest rates have been low forever, and they’ve been able to refi debt at–term out at low rates. I know that someone mentioned yesterday that the household debt burden has gone back to peak levels, but meanwhile GDP has gone up by 30%, so as a relative to income measure, it’s low.”