JP Morgan FY 2Q15 Earnings Call Notes

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.’

JP Morgan at Deustche Bank Conference

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.’

JS Notes: BAC, CSX, ICE, JPM, NFLX, WFC

We’re excited to announce that Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.

 

Netflix CEO Reed Hastings believes the business is significantly under penetrated in international markets

“For most global Internet firms, the U.S. is 20%-35% of usage and revenue; we’re not anywhere close to that yet but we’re continuing to invest in international.” 

Netflix Chief Content Officer Ted Sarandos says the company is seeing the highest returns of its capital in its own original content 

“What we’re seeing is that dollars invested in our original programming are more efficient in that for every dollar spent, we get more bang for the buck in terms of hours viewed. and hours viewed leads to higher retention, more word of mouth, and more brand halo.”

 

 

Bank of America CEO Brian Moynihan says the bank has been laying off employees in various departments to drive efficiencies but the bank has also been adding headcount in sales and relationship-focused bankers

“We continued to reinvest in sales capacity. So just in our consumer business, headcount is down year-over-year but we have a thousand more sales people roughly out there selling. And so the idea is to continue to drive sales people into the businesses.”

 

 

Intercontinental Exchange CEO Jeff Sprecher on how they’ve grown different verticals of the business over the years

“Well, we have our historical data business that we grew organically, which was all commodities data set. And when we acquired the New York Stock Exchange, we acquired along with it obviously the data from trading U.S. equities and equity options. And then we acquired the Liffe Exchange, which gave us really an interest rate data footprint. We’ve built a new company called ICE Benchmark Administration, which is the company that took over the LIBOR administration, the Gold Fix and the ISDAFIX.  So we’ve got this new footprint of what are really regulated benchmarks going forward, very global, very important regulated benchmarks.  But what you’ve seen is the evolution of my company from trading into clearing and now increasingly into data and indices.”

Intercontinental Exchange CEO Jeff Sprecher sees growth in the derivatives business coming from Asia 

“We’re betting that Singapore is that nexus for all of Asia, which would include China, Japan and these growth areas of Malaysia, Indonesia and, Vietnam.”

Intercontinental Exchange CEO Jeff Sprecher sees significant operating leverage inherent in the data intensive business model of the stock listings and benchmark listings business

“There is also a very big footprint in our business that’s no longer volumetric.  Things like over-the-counter clearing where daily volumes are not reported but are growing tremendously, and then we’ve ended up with a very large data and listings business. But basically recurring revenue business that is growing against a relatively fixed cost. So, similar model to when the business went from analog to digital on trading, which the allure of that was this fixed technology cost against growing volumes.”

Intercontinental Exchange CEO Jeff Sprecher on the recurring nature of the NYSE listings business model=

“The listings franchise on the New York Stock Exchanges is a business that has been growing. There’s been a lot of IPOs in the last year or so.  And that is a massively recurring business with at least 2,500 listed companies, lots of ETFs and other things that are providing annuity revenue against a very fixed cost base.  So, you take all that together and about 40% of our business is in a form that is much more recurring than it used to be in the past.”

 

 

Wells Fargo CEO John Stumpf said that physical banking branches will remain a key part of how they intend on serving customers even though consumers are adopting mobile banking on a massive scale

“We’re in the information business as much as on the retail we’re in the financial services business, so this is really about connecting all the channels, not about trying to drive customers into what’s cheaper for us. That’s not how we think about that. We think about what’s best for the customers, and branches still remain an enormously important part in that.”

Wells Fargo CEO on John Stump discussed the firm’s recent bolstering of its investment banking unit

“The way we think about business here is around relationships, relationships with team members. My 11 direct reports have an average of 28 years with the company. We think of relationships with our customers, our communities, our shareholders. Buffett’s been an owner of ours for 25 years. We love long-term things, so as it gets to investment banking activities, we think of that as another solution, another product, another service.  Most of the revenue that comes from that business is from existing customers who have been doing business for a long, long time.  I only care that we do the right thing for customers.”

 

 

JP Morgan CFO Marianne Lake said a number of macroeconomic events occurred which helped JP Morgan’s transactional revenue

“A number of macro events occurred in the quarter including central bank actions, the Swiss Bank decoupling, stronger dollar and oil price volatility which supported market performance broadly and currencies, emerging markets, rates, commodities and equity.”

JP Morgan CFO Marianne Lake said loan performance in the bank’s energy exposure weakened during the quarter as a result of lower oil prices

“This quarter’s reserve build was at downgrade in the E&P portfolio and if the current price environment continues, it’s reasonable to expect some further reserve builds during 2015 but relatively modest.”

 

 

CSX CEO Michael Ward sees a robust pricing environment for transportation companies who are moving large physical goods

“We still see capacity as been very tight.  If you notice our minerals business was I think around 11% or so based on a lot of highway infrastructure, projects going on particularly in the region and country that we serve, so we’re seeing truck capacity staying relatively tight. Coast wise barges have been very strong and strong demand, so we still see capacity fairly tight and we still see a strong need for transportation, pricing does seem to be very robust if you look at the spot truck load market it is remaining fairly strong. So we see that it’s still a very strong, robust pricing environment.”

JP Morgan 1Q15 Earnings Call Notes

Made $5.9 B

“the Firm reported net income of $5.9 billion for the quarter and EPS of $1.45 a share and the return on tangible common equity of 14% on revenue of nearly $25 billion up 4% year-on-year reflecting strong performance.”

Core loan growth up 10% y/y

“core loan growth was strong, up 10% year-on-year.”

Core earnings would have been above $6 B

“core earnings number would have been well the other side of $6 billion.”

Dividend and buyback

“the Board announced its intention to increase the quarterly dividend by 10% to $0.44 a share and authorized gross share repurchases of $6.4 billion.”

Continue to see improvements in home prices and delinquencies

“On credit, we continue to see improvements in home prices and delinquencies and released a $100 million of NCI reserve this quarter. And you can see the net charge-off rate of 30 basis points was down 25 basis points year-on-year.”

Macro events in the quarter helped support trading

“if you exclude business simplification, both total markets as well as fixed income market would have been up 20%. A number of macro events occurred in the quarter including central bank actions, the Swiss Bank decoupling, stronger dollar and oil price volatility which supported market performance broadly and currencies, emerging markets, rates, commodities and equity. In fact, equity had one of its strongest quarters, up 22% with strengths in derivatives and cash, in particular across the U.S. and Asia.”

Strongest quarter ever for commercial loan growth. Credit quality remains exceptional

“In absolute dollars, it was our strongest quarter ever for loan growth, adding over $5 billion in loans across C&I and CRE and resolved the utilization with asset highest level since 2009. Credit quality remained exceptional with continued low net charge-offs of only 3 basis points.”

Added a little to reserve for oil and gas exposure

“on credit and reserve, for the full Firm, we added a little over a $100 million to reserve relating to oil and gas exposure this quarter, majority of which was here in the commercial banking. We review our energy exposure on a name-by-name basis and under a range of commodity price assumptions. This quarter’s reserve build was at downgrade in the E&P portfolio and if the current price environment continues, it’s reasonable to expect some further reserve builds during 2015 but relatively modest.”

It’s very possible that there will be very little in the way of credit losses in the energy space

“if you think about the E&P portfolio in particular when we think about the redetermination somewhat semiannually of the borrowing base and look those companies on a client specific name-by-name basis and with some contraction in the borrowing base networks and downgrades that drive our reserving methodology; it doesn’t mean that we feel that those companies are necessarily in significant difficulty, but that’s the way the reserving methodology works. And as I said, we do this on a client-by-client basis. We’re comfortable with our exposures and clients looking to manage their own defensive position. So, it’s not clear that they will necessarily be realized in losses, in fact it’s implied curve rather than flat to long order prices is in fact how things play out, it’s possible that there will be very little in a way of credit loss we’d assume.”

Swiss Franc was neutral to the industry, but we came out ahead

“I will just say overall our sense is that the market is neutral relative to the event we happened to be able to benefit from it; some others will be neutral and some may have lost that. So these things happen regular way in trading businesses and it just happens to be the case that that event and the volatility it drove is good for us and our franchise. And I think it’s fair to show you that we’re in a business where expertise matters and risk decision matters and we were able to capitalize on both of those, not just for the Swiss franc but also for the other macro events in the quarter.”

JP Morgan 4Q14 Earnings Call Notes

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.’

Jp Morgan at Bank of America Conference Notes

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.’

JP Morgan 3Q14 Earnings Call Notes

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.”

Bank of America’s Profit Potential

Bank of America’s stock is up 4% today after the company agreed to settle a lawsuit with the Justice Department for $17 B.  That’s a lot of money, but really just a flesh wound for Bank of America, which has $170 B in equity on its balance sheet.

This lawsuit is thought to be the last major crisis era penalty that $BAC will have to incur, which means that from here on out, shareholders will hopefully get to judge Bank of America based on its underlying profitability.  Even in a difficult banking environment, that profitability is quite significant compared to BAC’s current market cap.

BAC generates a similar amount of revenue to its peers, but, at the moment, much less net income.  That has more to do with legal settlements than operating expenses though.  If legal costs get placed in the rear view mirror, BAC’s margins will rise.  Margins may not get all the way to Wells Fargo’s, but it’s difficult to see how BAC could generate only 1/3 the profit with the same amount of revenue.  Banking is a very competitive business, which makes it extremely difficult for any one competitor to have much better margins than another.  If Bank of America’s profit rises closer to Wells Fargo’s, its market cap should too.

Big 4 Bank Comparison

 

Source: Factset Data, Avondale

JP Morgan 2Q14 Earnings Call Notes

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

Ceding share in mortgages to avoid lower FICO and high LTV loans

“Originations of $17 billion were flat quarter-on-quarter and down 66% year-on-year which is in a market that we estimate was seasonally up 25% quarter-on-quarter which shows that we continue to lose some share. Key drivers behind the share loss were the continuation of our strategy to reduce our participation in lower FICO and high LTV government loans as well as the burn out of HART”

Auto pipeline is healthy

“a few words on Auto, new vehicle sales continue to grow year-on-year and the June start results reached the highest levels since 2006. We’ve seen the 11th straight quarter of loan and lease growth as our partners continue to outpace the general market which remains competitive. The auto pipeline remain healthy consistent with the recovery in the auto market.”

Expecting the current market environment to continue into the second half

“it is too early for us to give specific guidance for market revenues but we do expect the current environment to persist into the third quarter and to the second half and also experience no more seasonal trends. For the third quarter we generally expect mortgage production to be similar to this quarter, a small negative.”

Whatever the Fed decides to do, it’s going to reduce deposits

“keep in mind, the Fed whether they use repo or just sell securities that will reduce deposits. It’s a factor with an absolute formula. The question is who’s deposits, what kind of deposits and when they might do something like that, I assume they will be very careful. I think what we’re simply were saying that some of the deposits will come out of non-operating wholesale deposits already have [HQA], some won’t, some will come out of retail and just people will need to be prepared for it.”

Physical commodity business will impact revs by $2.8 B

“The most significant revenue effect that’s not yet in our run-rate because the transaction is not yet closed is the exit of the physical commodity business and so obviously when that closes which maybe in the early part of the fourth quarter that would have an impact in revenues both in the quarter and then in our run-rate in 2015.”

Fed repos may cause some issues in repo markets because Fed repo can’t be rehypothecated

“the government is still buying a big portion of net treasury issuance and because they are doing it going in the repo market and taking cash out of the system I think that number has maybe gone from $100 billion to $200 billion overtime. Remember I believe that, that Repo can’t be re-hypothecated. So I do think some of the things will cause some issues in the repo market but my guess is that will sort through overtime. We do believe we’ll see dealers reducing their books in Repo and you have heard a lot of statements about repo and collateral and capital against it, so I think that will sort out over time.”

Companies are utilizing their lines more, but not stepping out to CapEx quite yet

“Utilization is usually a pretty good measure of companies starting to expand and early on it’s receivables and inventory. You haven’t really seen in capital expenditures yet and if you look at the U.S. capital expenditures in total including big businesses they are kind of flat to down, that will ultimately be the driver of real growth. So if you start to see that you are going to hopefully see a stronger economy but utilization is I think is the first sign.”

Balance sheet is partially high because of all the liquidity injected into the market

“our balance sheet is kind of high because of all this huge liquidity and securities in the balance sheet and eventually hopefully there will be more loans which are more productive and less just holding excess cash.”

If we are right about the liquidity drain you will see deposits flow out

“if we are right about the liquidity drain in QE you will see a bunch of deposits flow out essentially in the second half of next year and you see some of that will reverse.”

There was an uptick in trading in late June, but July has settled back down. We expect the second half to look more like July

“So in June we did see an uptick in activity in terms of client activity but volatility stayed very, very low and there was no specific catalyst for it, no catalyst that would lead up to believe that was necessary to continue and as we have moved into July it so far has being our experience that has not continued at that level. So it is more — our guidance for second half is that 15% to 20%, the 20% plus or minus decrease that we have seen in the past for that kind of environment is the one that we’re facing over the second half.”

We know our forecast is going to be wrong

“In forecast, it’s our operating assumption it going to stay at low levels for a while. We know we are going to be wrong in that but you will have to pick whatever you think”

Plan for the worst, hope for the best

“We run the company planning for low and hoping for better.”

Going to have some lumpy litigation charges still, but more behind us than in front of us

“we said before that we had very little in the first quarter, we have $700 million now. It’s going to be this way for a while we’re going to have elevated and lumpy litigation cost as work through the issues that you’re aware of and with respect to mortgage we have battled with a large proportion of our NBS risks with the government account policy so we do still have some other civil claims. We would characterize there is more behind us than in front of us and we’re working through it.”

We don’t manage for the quarter

“I can’t overemphasize this, we do not run the company for quarterly profits. We make long-term decisions on people, systems technology, products services, stuff like that and lot of things drive short term profits, but the profit you have in any one quarter relate to decision you made for the last five years and so we feel great about these companies.”

The big weak spot is mortgage

“The big weak spot which we’ll acknowledge is mortgage and we’re going to put, we got great people there, we’re going to put elbow to the metal there, we’re going to invest some more money in their systems. We got some catch up to do, we got caught in the middle of as you know WaMu origination platforms”

I actually think it’s a complete waste of time to judge quarterly performance

“I honestly I mean I don’t care whether the FICC was up 10% or 15% or down 10% the next quarter. I actually think it’s complete waste of time.”

Non-discretionary consumer card spending is growing double digits

“we have a lot of market stats that while we maybe outperforming the market what we see is generally a fairly good picture of what’s happening and what I can tell you is if you see compared to our growth you have still strong high single-digit growth in non-discretionary spend categories driven principally in growth in the space which is not all enterprising but I it’s actually about consumer spending and inflation. And then if you look at the discretionary growth which is growing even more strongly though in the double-digit territory it’s across the board, it’s travel, it’s restaurants, it’s retail, it’s across the board so consumers are spending very strongly in both categories.”

We may not want to be in the FHA business at all (because of the government’s actions

“the real question to me should we be in the FHA business at all and we’re still struggling with that.”

I hope the FHA comes up with some real guidelines

“f you don’t do any FHA that hurts you a little bit but to do FHA and lose billions of dollars that’s a whole different level of shareholder responsibility and so we have got to be very careful how we handle that.

I’m hoping FHA come forward, I think comes up with some real guidelines and harbors that make it easy for us to try to do what the government wants to do but we can’t get penalized for some of the things that happen.”

Wells Fargo Almost Most Valuable Bank Ever

There was an article in today’s Wall Street Journal pointing out that Wells Fargo is only $10 B in market cap away from becoming the most valuable bank ever.  $WFC’s current market value exceeds $JPM by $57 B and is nearly twice as valuable as $C.

It’s amazing that Wells Fargo has been able to climb to the top of the banking pile, because from a balance sheet perspective, WFC is actually the smallest of the big four US banks.  Banks drive revenue from their asset base, and WFC would have to grow its assets by 45% to catch JP Morgan, 39% to reach $BAC and 22% to reach C.

This is not to say that Wells Fargo is overvalued, because Wells is only trading at 13x trailing earnings.  Wells is more profitable than its peers, and the relative market values say more about Wells’ peers than Wells.  BAC, JPM and C are severely under-earning their potential largely because they continue to deal with legacy issues.  From a revenue perspective, BAC and JPM each generated more revenue than Wells did in 2013.

The banking system got much more concentrated as a result of the financial crisis, so it’s not surprising that one of these banks is approaching the largest market value ever.  What’s surprising is that the other ones haven’t gotten there first.

Wells Fargo Assets vs. Peers