Balance sheet reduced by $120B

“Year-to-date our balance sheet is down over $120 billion on a spot basis, driven by a reduction of over $100 billion of non-operating deposits across our wholesale businesses partially offset by continued growth in consumer deposits. We also saw a $36 billion reduction in trading assets and secured financing as we continue to make progress simplifying our balance sheet.”

Retail deposits may reprice much faster than in past cycles

“there are other people who have slightly different views, but we are expecting retail deposit to reprice higher and faster in this cycle than in previous rising rate cycles, given the competition so good high quality LTR compliant retail deposit, given the advancements in mobile banking, given the awareness in the general environment around low rates and the desire to participate in rising rates. So when we think about our sensitivity and our reprice, we model it in assumption that it’s going to be higher — somewhat higher.”

Loan growth strongest in mortgage, most competitive in middle market

“the one that is most challenging, but still growing is middle market. Fiercely competitive, competitive everybody is chasing that sector. But you can go through the businesses, so we had 6% loan growth, 6% to 8% loan and lease growth in Auto, 6% Business Banking, 19% core in consumer, 4% in commercial, so 3% core in card. So it’s solid to strong, pretty much across the board, most competitive in middle market and flattered by portfolio and mortgages.”

It’s likely that we may take another reserve on oil portfolio in second half, but we are happy with the way the credit cycle is progressing

“We built another modest reserve at this quarter, and we said we don’t — we might expect more reserves in the second half of the year, there’s another redetermination cycle in the fall and its — I’m not going to say likely, but its possible we’ll be selectively downgrading some time. If none of that is out of our expectations its completely sort of normal levels considering the cycle and how we think about the credit, we’re still very happy.”

Credit chargeoffs very benign, but reverted to normal levels in auto and slowing improvement in other areas

“credit like charge offs have been very benign across the wholesale space. They’ve reverted to somewhat more normal levels in auto. So I’m not expecting that to be big step changes in the underlying charge offs in the wholesale space. We’re continuing to see improvements at a slower pace in mortgage, but at 21 basis points we’re sort of getting down there. And Card well, its slightly above at the 2.6% above our 2.5%, its also pretty much getting there. ”

Expect reserve releases but not in the billions any more

“I would still expect there to be more reserve releases over the course of the next 18 months in hundreds of million of dollars in total, not billions any longer of course’

There is no way to operate other than to be prepared for very tough times

“we’re building there for the long run. As a risk management tool we’ve always said that the way we treat that is we will be prepared for very tough times. And I think it’s a mistake not to grow because you’re going to have tough times. I have never seen an economy didn’t have tough times. So, if you went back to United States when JPMorgan was building JPMorgan back to 1850-1860, look every single time that you panic because America had a recession, there would be no JPMorgan. So we’re not going to change.”

Officials in China are very responsive to changes

“What we’ve seen with the officials in China is that they’re very responsive to changes and you could argue whether they should have got in that involved in the stock market and you can’t manipulate stock markets and, but they’re very responsive to lending to — they have changed their reserve policies, their RMB policies, the QFII policies, the Hong Kong Shanghai Connect. Not everything they do is going to work, but they still seemed very committed to more and more market reform, more and more of taking SOE rationalization — SOEs and taking them public, so some market discipline there, creating more of a consumer society and what we’ve always said and I think they’ve the wherewithal to meet their kind of short-term objectives of growth.”

Jamie may not be on the call one day

“Before you all go, I just want to tell you one of these days I’m not going to come in this call. I’m not doing it because I want to avoid it, I don’t like it. And obviously if anything is important or really bad, I’m not going to ever try to avoid bad news here, because we like to tell the whole truth, nothing but the truth, the good, bad, and ugly. But Marianne has started to do such a good job that I’ve become unnecessary to be in all of them and I can obviously go do other things. So don’t be surprised if one of these days I don’t show up, don’t read anything into it. Thank you for being here.’

Gordon Smith – CEO, Consumer & Community Banking at JPMorgan Chase & Co.

Broadening of economic improvements

“I think, just on – it’s always little choppy because nothing is in a very straight line up in terms of improvement but I would say net-net that we’re seeing a slow continuous improvement in the economy that we’ve been observing now over the last three or four years as the employment rate continues to improve, we are really seeing a broadening of the improvements.”

The middle and lower segments of the economy are improving

“if you go back two years, you would have seen the much more affluent segments had recovered perhaps three years had recovered quite quickly, equity markets look very strong, we saw very good spending on credit and debit in those segments but in the kind of middle and lower middle income segments much weaker, those are coming back actually quite nicely right now.”

Travel and entertainment spending looks stronger

” think if we look at credit and debit you see kind of an interesting story that particularly kind of travel and entertainment. So restaurants particularly look very strong and again across all those income segments when they would have been looking quite weak in the lower income segments this time last year.”

Consumer isn’t re-leveraging

“I think the deleveraging cycle of the consumer has worked its way, fairly substantially through but what we’re not seeing is re-leveraging by the consumer in any meaningful way.”

Made changes in the credit card business to make customers stickier

“obviously with the business like that, it’s not really an annuity business you’re constantly cycling through customers. We change that fundamentally in 2008, 2009 and 2010 to be much more relationship oriented and with the new value propositions not that we’ve talked about before with Sapphire and Inc. for business, changes to the freedom, the new awards programs we put in place, I guess they are not new any more, that’s seven years old now. And so, now we are capturing much more of a customer’s wallet. We are their kind of primary card”

Don’t see any bubble in auto lending

“I would say broadly we’re very pleased with the auto business, certainly margins are much tighter than they were right after the financial crisis that’s to be expected, but I think it’s a good asset class. And I don’t see a bubble yet, but certainly something is got to be watched very carefully.”

This is the most dangerous point in the credit cycle

” We will regularly tell our team that this is the most dangerous point in the credit cycle for all of the industry, why because credit performance is being good for so long and people become very comfortable in a good credit cycle and actually people come into the business and they don’t remember and doesn’t seem long ago for those of us who went through the pain of the downturn that people come in and they think, credit all you do is see improvements in role rates.’

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

10% growth in card

“In Card, we led the industry for the 27th consecutive quarter gaining nearly 500 basis points of share during the same period. And this quarter, we saw sales growth of 10%, driven by enhanced client acquisition and reward strategies.”

Auto credit losses higher on balance

“For auto, credit losses were higher on balance growth and as a charge-off rate start to trend off from historical lows.”

Overall oil is a reasonable positive for the economy

“It is cyclical business and we are expecting downgrade but we are not facing any meaningful issues in the face right now. Overall, oil is a reasonable positive for the economy and consumer and so for JPMorgan from the financial perspective a modest issue, positive or negative”

What do you do for your customers, not yourself

“the first way to look at a business first and foremost has been and always will be what do you for customers. Not what you do for yourself and your return et cetera”

Our diversification is part of the reason that we are stable

“diversification is the reason why you said less volatility of earnings, was able go through crisis and never loss money ever, not one quarter. And so in the real life crisis gets fine, any future crisis we are going to do fine.”

There is a reason you have big multi-national banks

“There is reason you have big global multi national banks. And they are so big global multi national including government. This company movies $6 trillion to $10 trillion a day, you are not going to do that as a small bank. And you are not going to syndicate out of $20 billion bridge loan and you can’t do certain things globally in 20 countries if you are in 20 countries. So you got to figure out what model you have and does it make sense. And it’s not necessary comparable to all other companies”

Exposure to oil loans is ~46B

“So our exposures are about $46 billion, about 5%, there are just no credit portfolio and about two — 70% of its investment grade about, two third is in the sort of CIB, so these are large well capitalized company. ”

This doesn’t feel like a very significant issue right now

“But, yes, we do have reserves. We have reserves based upon a long history of day that include cycles; it seems cycles before like this. And so we will take downgrade maybe –we may need to take more reserve but it doesn’t feel like it say very significant issue or imminent series of charge -off rates now.”

There will be geographic areas that are hit hard

“For us there will be companies that are more invested in oil that may have different issues. And then there is a secondary effect which obviously you all can predict like Russia, Venezuela. So, Russia, we have exposure. Venezuela virtually none and other countries. And there is another secondary effect. If you are talking about commercial or even consumer real estate, Dallas, Denver, Houston. As you saw in 1986, 1989 and those all slight negative”

It’s a legitimate concern, but we don’t need to be worried about it

“net-net for us it’s just not that big deal. It is a perfect legitimate thing we all be concerned about for companies which are very concentrated in oil or even commercial real estate companies concentrated in oil areas. So that’s not something that we need to worry about.”

Oil more about fundamentals than liquidity at financial level

“On the first point, I think there is probably some true to the less liquidity but it is more about over supply and lack of global growth simulating demand than it is I think a liquidity story from a capital market perspective.”

Commodities move like this

“I am surprised that people so surprised when commodity moves like this. Commodities move like this my whole life.”

Ya the liquidity thing is a legitimate concern

“I think it is a legitimate concern about liquidity in markets that when we have volatile markets or violent markets, how much liquidity will remain but I think you there you are talking more about– which you saw a little bit in treasuries but it is about credit. And it’s possible. We just don’t really know. So we are little worried about it. But we will there hopefully making healthy markets for our clients when the times come.”

Lower oil prices help the consumer, but don’t spend too much time building it into your models

“I wouldn’t spend too much time trying to build this into your models if I were you, but it is quite clear that when you add $800 a year to the consumer cash flow statement that they consumers on average spend most of that. And I think you are seeing it in spend. And you are seeing in car sales, and you are seeing in retail spend, you’ve seen it — and it is also quite clear it helps consumers.”

PE is temporary

“the other thing I want to point out about the current narrative which kind of surprises me that people don’t mention, when you all talked about P/Es and some of the parts P/Es are temporary. P/Es change over time and the real question we should asking is, is the E going to be much higher or much lower under scenario A or B not just what the P/E going to be. So that gives a lot of scenario, your Es going to be held lot lower. And that towards the effect of the P/E change. And PE itself is temporary”

Some people are making comparisons that are not true comps

:”some of the people out there feel a comparative, they are not real comparisons. We are not in the same business as those people so but we are sure conscious. It is not to say we are not going to do the right things for shareholders over time. We will, there are other ways to do it. ‘

We compete globally

“we compete globally. Remember, we have to be very conscious who we are competing with and what they are going to do over time. And my guess is you can have some very large, very tough global competition over the next 20 years. They are not going to wait, they may have currently lower G50 charges but I am not sure if can be true 10 years from now. Now particularly the Chinese banks get bigger and bigger and some other global competitors decide they wanted to be in there global businesses.”

DOn’t look at the legal stuff quarter by quarter

“I wouldn’t look at this is quarter by quarter issue. If you owned a 100% of this company, the better way to look at it is, it is going to cost us several billion dollars more of somehow plus or minus another couple of billion before we get to normal– what I call normalized legalized basis.”

Auto charge offs are rising but it’s normal, consistent with the cycle

” I can talk for JPMorgan very specifically that we are seeing the charge-off rate, remember we’ve had charge-off rates for the auto business that have been relatively low for an extended period and now we are seeing them revert back to something more normal. And when we think about pricing the business and through the cycle, we concentrate on more normal level of charge-off. So this isn’t surprising to us.”

OTher people were more aggressive than we were though

“Having said that what we are also seeing in terms of just the broad competitive space is, is not irrationality necessarily but longer duration, higher LTV more sub prime origination. And JPMorgan, we are low LTV than the industry and very concentrated on the near and super prime space”

Credit card hasn’t deteriorated, so we don’t think auto is a canary, but we’re watching it

“when we look at credit card, we don’t think it is early indicator credit card. We will be very conscious. As Marianne said, auto did unbelievably well through the crisis, shockingly well, we will all say so maybe there is return to norm. But we are going to be paying a lot of attention.”

People aren’t looking at the risk of this institution in the right way

“People when they talk about risk, they are just talking about stock– lot of they feel look at the size there, it scares them. I completely understand that. But that isn’t the determinant and I don’t think we should be making shareholder decision based on views the people don’t mess like really no.”

We will do whatever the government tells us to

“We can’t fight this federal government. That’s their intend to– maybe their intend what it is, if you are going to carry more capital, you got a modest value business model over time to carry capital. ”

JP Morgan is a public policy issue

“And remember, again, you got to look forward in this. America has been the leader in global capital market to the last 50 or 100 years, it is part of the reason the country is so strong. I look as a matter of public policy. I wouldn’t want to see the next JPMorgan Chase to be a Chinese company.’

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Douglas B. Petno – Chief Executive Officer-Commercial Banking

The actions of a single individual can affect a company as large as JPM

“What I will say just commentary from me is that the trader at the center of these investigations are very disappointing behavior, very serious behavior on his part. It’s something we’ve been very focused at the management team level and the board level, the operating committee level, the culture of the company and the conduct of our employees and it’s just a reminder that we’ve got to redouble our efforts. It’s a reminder that the behaviors of this single individual define a company. And so, it is something that we’re super focused on as a business which will hopefully lead to satisfying the pole-to-pole outcome of leading to less litigation and settlements over time, certainly it feels like those are starting to taper away at this point.’

Middle market customer

“So, you’re absolutely right, the Middle Market is an excellent proxy for the U.S. economy, it’s an excellent proxy for Main Street. The best part of my job is I get to spend time in our markets meeting with our customers. When you think about what is the Middle Market, it is a cross section of the entire U.S. economy across all geographies, all industry types, energy, healthcare, technology, manufacturing, on and on and on. It is heavily correlated with U.S. GDP. So our typical Middle Market client is still pretty cautious. They have had low-single-digit revenue growth, high single-digit expense growth, a lot of their expense pressure, things like healthcare, severance or workmen’s comp, things that are sort of really out of their control.”

They’re in good shape though and getting more optimistic

“They are in pretty good shape, however, so they dramatically delevered since the financial crisis, their cost structures are well in line with the current operating environment. They have tremendous liquidity. We see that just in the deposits we maintain for them as well as the revolver capacity that they have. And I would say that their sentiment is getting better quarter-over-quarter and period-over-period. And I think the real drivers of that, and this is general commentary because sort of there is high highs and low lows amongst the footprint. But they just see a sustained improvement in the U.S. consumer and feel that that is going to have a meaningful impact on the broader economy and their businesses. They appreciate the energy security aspects of the initial [ph] the change in the energy policy in the U.S. with respect to cheaper oil, more available oil, cheaper natural gas, so energy intense clients really I think put value on that.”

More and more hands going up over hiring and raising prices

“I think the most common thing I hear from clients, and I do lunches and dinners with all of our customers all over the country, I always ask, can you raise products – prices for your products and services in the coming year, are you going to hire people in the coming year? And more and more hands are going up. But when they don’t go up it is primarily because there are still a lot of concern about overhang and fiscal uncertainty, not just at the federal level but also at the state and local level.’

Also don’t have access to skilled labor

“The other big pinch point in the recovery in really driving growth in the market I think is just access to skilled labor. We hear that very commonly. If you think about the prospects for a resurgence in manufacturing capacity and manufactures in the U.S., they just don’t have access to the right skilled labor.”

Our clients have adopted a loaf along rate view

“I think our clients sort of have adopted a loaf along kind of rate view and think – and are hoping that the Fed can kind of get us to more normal long-term rates in a way that doesn’t shake the markets or worse case not us back into some sort of stagflation or kick us back into a recession of some form.’

Our credit underwriting is local

“I think the proof is in our credit cost but our delivery model is very local in design, very autonomous in design and we are able to manage risk pretty effectively even though it is as decentralized as it is. If somebody wants a giant bridge loan it will find its way to New York, but that is a rare transaction relative to the day-to-day activities that we underwrite in each of our geographies.”

Pricing is very competitive

“I mean it is pretty intensely competitive. But I will tell you I’ve been it JPMorgan 25 years, I can’t recall a period of time where it wasn’t – this industry wasn’t intensely competitive.’

We can compete on price, because we get a larger relationship

“We can certainly compete on price. We can compete on price for a combination of reasons. Mainly we have enormous confidence in our ability to have a deep and fruitful relationship. I think we have a very comprehensive set of capabilities to really grow and help a client. There is a lots of ways we can have a productive relationship. So we should not lose on price even with higher capital levels”

We do not compromise on structure

“Structure is something that where we maintain absolute discipline. And I think you are right to be concerned probably less about price more about the structure of some of these financings that are getting done in the market, because it is something that people become much more liberal. ”

We win because we know the industries and can deliver with certainty

“But to get back to my first point, when we win business it’s usually because we have a great banker who knows their industry, they want to work with our institution, they like the scale of our bank, they like the certainty of execution, they like the fact that we know the industry as well as anybody. And they want an institution that they can grow with over time and that can serve them over time.’

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

The credit environment remains benign in card

“Moving onto credit. The environment remains benign. We continue to see improvements in card early delinquencies and the card net charge-off rate was 252 basis points, an all time low. This quarter we released $100 million of Auto and student lending reserves with no releases in card.”

Shout out to Apple Pay

“During September, a new step forward in the evolution of payment was announced, Apple Pay. We’re excited to be a key player in a solution that offers improved security and a streamlined customer experience. At the same time, we are continuing to develop other innovative payment solutions”

We’re working on our own wallets and payments capability too

“so we talked before and you’ll see more over the coming few months about our own wallets and payments capability both in pay and quick checkout, but we would provide the capabilities for our customers to be able to have much more seamless experience, also for merchants to have a lower abandonment rate and continuing with the safety and security of tokenization and other methods. So we’re continuing to work on our own proprietary wallet and payment capabilities that will be piloted and then subsequently launched over the course of the next coming months. ”

Liquidity in fixed income markets is slightly reduced

“I think it wasn’t the report requirements, I think it was pushing down of LCR, the cost of capital, the cost of debt and that the traders reduced their balance sheet a little bit and are a little more cautious of how they use balance sheets. And that’s industry wide. And then some people say we simply can’t stay in these areas. I’ve seen people exit certain trading areas.”

The rules may affect returns

“the reality mathematically is obviously true that if we have higher capital we would probably have lower returns but the reality hasn’t been that way over time. You know acutely that we’ve added significant capital over the last however many years and have been able to over time continue to reorient the business and optimize against it to deliver strong returns. Could there be a decline in returns? Obviously will have to see what the rules look like.’

Wholesale funding rules are a risk to returns, but we’ll do our best to control costs

“Clearly at the moment, the most clear and present danger relates to higher charges on short time wholesale funding. In the first order impact of it would obviously have an impact on directly those businesses and products in the CIB, but obviously if the company’s holding more capital we’ll look more broadly. I don’t think it’s a foregone conclusion that you’re going to see a pro rata decline in our returns and obviously – we are continuing to focus on our expenses and making sure that the overall business is as efficient as possible.”

Now it’s less likely that there will be huge deposit outflows from the banking system

“Well, so since we talked about the $100 million estimated deposit outflows associated with liquidity draining out the system. Remember, that was predicated on believing that it was possible that the fed would use the reverse repo program in much more size than is likely to be the case today for two reasons. One is that obviously they’ve made changes to the term deposit facility that allows them to and now LCR eligible which hopeful in terms of providing another tool in their tool kit and the second is that in September as you know the ROP was capped in total at $100 million. That cap may or may not be permanent. It looks like it will be unlikely to be reach the $100 billion that would have driven the $100 billion – $200 million that would driven the $100 billion. You can make your decision about whether it’s $300 million or $500 million and scale our operating deposit outflows back relative to that knowing of course that is already at operation at $300 billion right now.”