JP Morgan at Morgan Stanley Conference

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

A transitional year, smallest mortgage market in 14 years

“2014 is a transition year, it’s a transition year in many ways. Obviously we are optimizing against the capital and regulatory regime and also in the economy we are facing the smallest mortgage market that we’ve seen in over 14 years.”

Low reserve releases and weak markets revenue

“As you know we are facing smaller markets, revenue year-over-year, and although charge-offs continue to be very low, reserve releases will be lower this year than last.”

Positioned short duration

“as you know we are positioned short duration today relative to our expectation of a rising rate cycle.”

A significant portion of deposit growth has been because of QE

“we should note that a significant portion of the growth in deposits that the industry has experienced has been as a direct result of the Fed’s QE policy and reserve bills”

Outlining the expected sequence of events for Fed policy

“In terms of sequencing, what we expect is that Fed will cease asset purchases by the end of this year. The likely next step will be to drain liquidity from the system, potentially as much as a trillion dollars or so using the reverse three tier facility with non banks. This is likely to happen over a short period of time maybe a quarter or two and probably in the second or maybe in the second half of 2015. After which the Fed funds rates will start to be raised and lastly re-investments cease in order to shrink the remaining balance sheet there over time.”

Planning to lose $100 B in deposits in 2H15

“we estimate that we could experience during that same short time period potentially in the second half of 2015, deposit outflows of up to $100 billion.”

Low volume/volatility feels cyclical, not secular

“What we are experiencing right now does not feel secular, it feels cyclical.”

Refi burnout

“to talk specifically about production, the combination of re-fi burnout as well as slow purchase improvement has led to the smallest production market in over 14 years and for 2014, and for that matter, for 2015, the market is estimated to be $1.1 trillion or potentially smaller.”

Without refis the production business will depend on purchases

“going forward with re-fi largely burned out, the production business will be more exposed to recovering housing conditions than interest rate prima facie and housing conditions have been slow to recover so far in 2014.”

There is access to high LTV credit because GSEs are supporting that market

“High LTV credit is widely available today, in part due to GSE and government programs. Of course, the risk of the default and cost of default that services are thinking about may have an impact on that high end over time.”

You have to document your income now, and less access to ARMs and IOs

“the things that have really changed — two things that have really changed, especially for low FICO borrowers. First regulation, together with tighter market underwriting standards requires borrowers to fully document their income and assets and defend their ability to pay in a much more rigorous way, which is leading to a fewer qualified borrowers, together with the fact that affordability products like option ARMs and IOs are not being broadly offered across the FICO segment.”

Build a smaller, less volatile mortgage business

“We’re executing on the strategy we outlined at Investor Day in order to build a smaller, less volatile, higher quality mortgage business in the next cycle, one that will deliver 15% returns through the cycle.

What that means is in production, we continue to simplify our product set, continue to invest in technology to improve efficiency, to improve our productivity as well as the mortgage experience and focus on optimizing our retail distribution strategy.”

JP Morgan 1Q14 Earnings Call Note

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

A clean quarter!

“Of note, you will see that we didn’t disclose any significant items this quarter on the front page of the presentation. There were items in the quarter that we consider non-core or non-recurring, each individually didn’t rise to the level of being disclosed on the front page and importantly, the net of all such items across businesses was not significant to the firm’s reported results.”

“To be clear, this means that our reported net income of $5.3 billion is very close to being a core performance number, which we consider a solid result given the challenging environment for those markets and mortgage.”

Optimistic that improved trends will continue

“We’re also seeing improved banking productivity. So although some challenges remain in the environment, pipeline is strong and at the highest levels since 2012 and utilization rates have stabilized. So we are cautiously optimistic that improved lending trends will continue in 2014.”

Mortgage production -68% y/y weather impact and tight inventory

“We’re seeing tight housing inventory in some markets and the purchase market was affected adversely by the severe weather. This led to a challenging quarter to the mortgage business with production of $17 billion, down 27% quarter-over-quarter and 68% over last year.”

Released some repurchase reserves due to improvement in actual cure rates

“Mortgage production also benefited from a repurchase reserve release. Repurchases for the quarter was positive $128 million principally driven by a significant improvement in actual and projected cure rates for the remaining repurchase risks.”

Credit environment remains benign

“The credit environment continues to be benign and we believe our exposure to Russia is manageable. We are totally reserved based on what we know today and we are closely monitoring the situation.”

Nice to put legal expenses behind us

“And as I said earlier, no significant legal expense to report for the quarter. It obviously is good to have a quarter with such a small number and perhaps puts such large issues behind us. However, I want to remind you that we still expect legal expenses to be lumpy quarter-over-quarter for the next couple of years as we work through remaining issues.”

Haven’t grown credit because staying disciplined

“In C&I, you’re right, the industry was up slightly, we were not. It’s a continuation of the things we talked about which is a combination of current selection of being very disciplined on credit, so not chasing growth at the cost of liberal credit structures and overly aggressive pricing, and also the fact that we continue to see some of our criticized and classified loans be refinanced away from us. So, we are just going to hold the line on discipline. We are seeing the ongoing aggressive investing environment on both credit terms and pricing, and we will do every rational and sensible deal we can do but we are not going to chase growth at the expense of discipline.”

Not seeing impact on credit card spending from weather

“So the sales volume obviously seasonally goes down quarter-over-quarter. I don’t think that we have perceived there’s been a significant impact from weather on card sales in the first quarter. For us, our sales were up 10% year-over-year, so pretty strong. No, I wouldn’t attribute anything to the weather.”

Expecting mortgages to be negative y/y in 2Q even though positive seasonality

“I told you that we are expecting second quarter to be negative. You are going to have higher revenues because seasonally you have higher volumes, but obviously its market depends.”

Hopeful that mortage markets get to 1 Trillion for the year

“we will be hopeful that the market would be above the $1 trillion for the full year, maybe not as high as $1.2 trillion”

Sources of tightness in the mortgage market

“if you are jumbo you get loan, if you are GSE you get loans, but almost all the other stuff in between, anything with any hereon it like you had a credit problem, if you are earning self-report income. So a lot of people have overlaid, it being tougher than it required the FHA, GSE or the own rules because the reps and warranties, et cetera, and I don’t know when that’s going to go away. It’s not getting worse. It’s just kind of sitting there and probably holding back a little bit the purchase market.”

Litigation risk has not affected our standing with customers

“Our market shares are up in credit card, consumer, deposits, that sounds very good. So I would completely separate out this litigation stuff.”

“Clients go with their feet and they seem to be coming to our branches and our bankers.”

Trading business will grow over time, this isn’t secular decline

“there are certain things which were secular. People gotten out of — I’m not talking about as per se, but people gotten out of or reduced dramatically credit hybrids, certain exotic derivatives, set cetera. I think there maybe additional secular change but it’s not the whole business.”

“I don’t look at the $5 billion in markets revenue and cry in my soup, I think it’s pretty good business. And we’ve been very consistent in performance. The numbers driven by technology, research, scales, ideas, of course, order flows and last year, we didn’t even have one trading day loss, which I consider truly spectacular.”

JP Morgan 4Q13 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.

If you adjust out significant items, JPM trading for about 10x

“reported net income of nearly $18 billion, or $4.35 a share, on revenue of approximately $100 billion, and a return on tangible common equity reported of 11%. Again, if you adjusted for all reported significant items in the year, we would have earned net income of over $23 billion, $5.70 a share, and a return on tangible common equity of 15%.”

No material impact from Volcker rule

“we believe that the firm will be materially compliant across our businesses with the rule. We have work to do to get there, but we don’t expect any material impact to our results.”

Expansion in California/Florida complete

“On our retail branch network, we’ve completed building out our key expansion markets, including California and Florida, and have reached leadership positions in each of our key markets.”

mortgage revenue down 15%

“[mortgage] Revenues in the quarter were down 15% on lower application volumes, down 23%, and from a mix perspective, nearly 60% of loans were purchased loans this quarter, up from a little over 20% the same time last year.”

I don’t totally understand this FVA stuff, but important to note/research further

“Turning to page 11, and coming back to the FVA adjustment, we’re recording a $1.5 billion loss as a result of implementing a funding valuation, or an FVA, framework for our OTC derivatives and structured notes this quarter, reflecting and industry migration towards incorporating the lifetime cost or benefit of unsecured funding into valuations.”

“In very simple terms, you can think of FVA, which represents a funding spread over LIBOR, as having the effect of present valuing market funding costs into the value of derivative receivables today. These funding costs otherwise would have affected net income over the life of the derivatives.”

“Going forward, FVA will be incorporated into day one valuation of derivatives and implementing FVA should have the effect of significantly reducing our sensitivity to funding spreads going forward. We’ll continue to refine FVA as the framework matures within the industry.”

tokens coming to credit card purchases

“I think you’re going to see both. You’re going to see chip and PIN in all cards, and then a lot of online type of transactions you’re going to see tokenization. They both are very very good technologies to protect consumers and companies from fraud.”

A huge amount of liquidity

“If you look at the balance sheet today, we have almost $350 billion at central banks, mostly the Fed, another $350 billion of very high quality investment securities. And those two things combined equal our loans of $700 billion. So the company is very, very liquid.”

optimistic about loan growth

“We didn’t use the word cautiously optimistic, we’re using the word optimistic, because we are actually optimistic. You have a U.S. economy starting to grow. You will see loan growth and volume growth across all of these businesses. We are actually optimistic about the U.S. economy in particular.”

Investment Bank is hardest business to forecast in short run

“the hardest business to get a handle on is CIB in terms of the short run. But what we see is investors still have to buy and sell securities. Corporations have ECM and DCM. And you can predict the rolloff, etc. The backlogs are pretty good. You saw a tremendous amount of IPOs in 2013. You saw a lot of debt financings. You’ve already seen a bunch of M&A earlier this year.”

“we feel very good about the business, and one of these days, it’s going to boom. And you can guess just like I can guess when that might happen, but it will happen one day.”

Q: If Fed stops paying IOER does that change how much you keep there?

“Sure. I mean, you know, change either that, or how you reimburse clients for deposits, and obviously it will go into how you price and run your business. We’re not expecting that to happen, but obviously we would do that. And you have other alternatives. You might invest some of that money elsewhere”

“it’s also important to point out that a large portion of that $350 billion are deposits or cash that we would consider to be client nonoperational deposits. And as a result, we don’t give ourselves any liquidity value for those.”

JP Morgan 3Q13 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. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“we appreciate that the litigation expense of $9.2 billion is much more significant than you’ve been expecting. It’s much more significant that we expected until very recently.

The reality is that over the last few weeks, the environment’s become highly charged and very volatile. Things have been very fluid, and the situation escalated to the point where we’re facing very large premiums and penalties, the level of which has gone far beyond what we reasonably expected.”

“we didn’t, even a few weeks ago, reasonably expect things to have escalated to where they are now”

“mortgage banking net income was around $700 million, with an ROE of 14%. And the short story here is significantly lower production income, offsetting higher reserve releases.”

“In card…we saw a slight increase in average outstandings quarter on quarter…The net chargeoff rate has reached historic lows at 2.86%”

“The commercial real estate business continues to grow strongly…Multifamily fundamentals are very strong, and traditional commercial real estate is building momentum”

“However, in C&I, demand remains soft and competitive pressures high, the combination of which has continued to drive relatively flat C&I loans in the quarter”

“As expected, our firm-wide NIM, core NIM, and NII were relatively flat this quarter, and given market rates, we expect relatively flat NIM and NII in the near term. The firm is positioned to benefit from a higher rate environment, and we are starting to see that in our results.”

“we’re de-risking. We’re trying to meet new standards that we’ve set for ourselves and the regulators want us to set to reduce risk to our company, particularly on anti-money laundering.”

“500 people working on CCAR, 500 people working on resolution and recovery. We just turned in a, believe it or not, 100,000-page plan. We’ve added 5,000 people. And so this is a permanent investment. ”

“it’s important to point out that we do have to adjust to a new global financial architecture. It’s not just the [unintelligible], it’s really rules around the world.”

“It’s a board-level issue, and we want a fair and reasonable settlement if we can. And that’s all we can really say about it. It involves multiple agencies. So you can imagine the complexity.”

“We should point out when we do CCAR next year, effectively – it’s not the same for every quarter – it will be based on Basel III, which is a far more volatile number, because RWA moves around under stress with the Basel III as opposed to under Basel I.”

“We would love to reduce the uncertainty around this for ourselves and for you, but it’s very, very hard to do. So the way I look at it is it will probably be elevated the next year or two, not like we just went through, but it will necessarily be lumpy. So as we settle, as we negotiate, as we figure out – remember there are multiple agencies involved in every case now. So you saw in the CIO thing, that we paid four and maybe eventually five penalties, which we really did not expect. And so we just have to deal with it and deal with the reality as it is. It will abate over time, and the underlying power of the company you can see. I wish I could give you a better answer, but one day it won’t be a big number.”

“Obviously that’s true, Mike, because this is very painful for the company. So Bear Sterns, we did do quickly. We didn’t anticipate that we’d be paying anything for prior losses for Bear Sterns. I tell people, even at Bear Sterns, remember I think it was $80 billion of bonds were made good, which would have failed that day had they gone bankrupt.

And we did ask. We weren’t completely stupid. We did ask the SEC and only the SEC for would they please agree not to take enforcement actions against JPMorgan for things that happened at Bear, which of course they couldn’t do outright, but they did say they’d take in consideration the circumstances in which the transaction took place.

And in Wamu, we don’t believe we’re responsible, by contract. But that does not mean that people can’t come after you. So that was a little bit of a lesson learned, too.”

“I mean, obviously it’s very painful, for me, personally, because I agree with you, I don’t like losing money, obviously, for my shareholders. We put up, and Marianne’s been very clear, these are very tough numbers to estimate. It’s a heightened environment, multiple agencies are involved on often the same thing. We’re just trying to improve and get better and move on. Remember, these reserves relate to things that took place over multiple years. So it isn’t a one-year event. And we still didn’t lose money during the crisis.”

“CCAR will be, in our opinion, also another binding constraint over time.”

JP Morgan 2Q13 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. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“our holding company leverage ratio is estimated at 4.7% at the end of the quarter, based upon the U.S. proposed rules…Given those assumptions, we would be able to add approximately 60 basis points to the leverage ratio by the end of 2014.”

“We continue to see really strong growth in the underlying drivers of the consumer businesses. Deposits were up over $40 billion year on year, an increase of 10%”

“mortgage and auto originations showed strong growth”

“Average business banking loan balances are flat quarter on quarter, up 4% versus last year”

“despite the strong start in April, the environment in late May and June drove mortgage rates up significantly, around 100 basis points.

This pressure continued into July, and we expect it could have a significant impact on the refinance market side in the second half of the year. So if mortgage rates stay at or above current levels, the market could be reduced by an estimated 30% to 40%. Although we will adjust capacity, expense reductions will lag volume reductions, and will challenge profitability and production.”

“We continue to be bank number one year to date in IBCs, and despite weaker credit markets toward the end of the quarter, we had near record debt underwriting fees in the first half of 2013. And equity capital markets, we have the number-one wallet share for the first half of the year.”

“NIM was down 23 basis points quarter-on-quarter we acknowledges this is larger than you may have expected but let me give you some color. Importantly it was principally a result of actions we took to build liquidity to comply with Basel requirements more quickly which we believe is a strong positive.”

“My comment on that is that Glass Steagall didn’t have anything to do with the crisis, and our business model allowed us to be a port in the storm. Our customers like doing business with us in the model that we have now, so we don’t spend time thinking about it.”

[reasons for weak loan growth] “Just demand. And I should tender that with demand and the continuation that we talked about of very, very strong competition. And we are, as I said, prioritizing quality over growth. We would tactically underperform rather than chase a deal we were uncomfortable with.”

“If you have a world where some businesses have to have twice as much capital as other companies, that obviously over time can create huge competitive disadvantages…We have an interest in a safe and sound system, so we’re not against the leverage ratio, but we’re not for a hugely unbalanced competitive playing field.”

“anything which is a low RWA asset, including HQLA, revolvers, certain types of derivatives, those things obviously you’ll look at a little bit differently, because of this leverage ratio asset…we take huge deposits in from countries, and from money funds, etc., that you may not take in because you can’t afford capital against a deposit of a billion dollars that you’re getting from a money fund, that you park at the Fed for 25 days, just waiting to pay the FDIC 10 basis points. You pay the client 5 or 6 or 7 basis points. You’ve got to put 6% capital against it. A whole bunch of things we’ve got to figure out how we’re going to do it, but we want to make sure we manage the client franchise properly. We’ll figure out the other stuff over time.”

“if it’s a consumer deposit, it has a completely different LTR, how you can invest, the kind of spread you can make. If it’s what we would call, like, big wholesale short term deposits, you’re absolutely correct. We would probably restrict some of that over time.”

“This is what the issue is with all this. You spend all this time talking about accounting as opposed to business. The business is deposits, serving clients, doing things, and now we’re talking all of a sudden about AOCI. And we have a lot of asynchronous accounting. And pro-cyclical accounting and stuff like that. We try to explain, but we try to look through all of that and build a business. More clients, more bankers, more branches, happier clients, and so all of our business, that’s how we look at it. We’ll work through the asynchronous accounting.”

“we’re expecting NIM to stay broadly flat from here. We do expect some modest loan growth, our outlook.”

JP Morgan at Morgan Stanley 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. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

$JPM at Morgan Stanley Conference Notes

“Europe I’ll do first; Europe is going to be a little bit roller coaster, because they’ve so many things to do. ”

“Housing has turned the corner…Supply and demand are in balance, if not in short supply in a lot of cities.”

“you can make a very coherent argument that the political environment will get better not worse…The regulatory environment will probably get better. That’s what really need a analysis the data showed going to second term of President, new regulations come way down.”

“I think you can get escape velocity and without any dramatic else taking place.”

“you got to remember America still has the best economic system by far in the world, okay. It’s got the best military, the best universities, the best hospitals. It’s got the best businesses large, medium and small. The rest of the world has a lot of very good stuff, still the best here. It’s got the most innovation, the most R&D innovation from the factory floor to a Steve Jobs. It still got a very strong work ethic here. It’s got the lowest corruption and the widest, deepest most transparent financial markets the world has ever seen.”

“there will be no major acquisitions in our foreseeable future… overseas I would rather grow organically and there’s plenty room organically.”

“I was like whatever it’s the right thing to do, I’ll do. To me doing the right is far more important, I didn’t mind restating, was it good it was. It was okay, we are going to survive. Like, we are going to do the right things, so it helps people, what are in the old days you used to get good guidance you probably all too young to remember that. You really go to people and say, we had this issue, use the facts that we know them, what should we do, but you can’t do it anymore, much more fun the second guess and so.”

“Yesterday we put in place where the bulk of professional investors now are clearing interest rate swaps and credit derivatives and it’s kind of going fine.”

“Volcker, we don’t know the final rules yet. We don’t have a prop trading desk.”

“at one point we would be very thoughtful of what we want, why we want it, to what effect and then which could be other parts of the market, shadow banking and all that, but I’m not a firm believer in good capital, good liquidity, get rid of too big fail. A lot of the arguments around too big to fail are false.”

“We are going to be in the mortgage business. We want to be a winner, it’s too important a product not to do it.”

“we’re just trying to grow our businesses and some of these things are like the weather. We have to manage through it. We’re not going to guess the bad weather time. ”

JP Morgan 1Q13 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. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“There is a reason our numbers are good because we have cross-selling clients come to us and there are reasons for global banks just like there are reasons for community banks. I think that the real issue again, you guys do the numbers is the banking system has gotten so much stronger in the United States and it’s not just capital but it capital, liquidity, oversight, sort of activities that people didn’t like, [no longer] [ph] being done, derivatives going to clearing houses and the initial wave of OLA and Living Wills et cetera, those things should all work. I hope at one point we declare victory and just stop eating our young at this time.”

“So the Fed I think is feeling more and more comfortable, not just individual banks but the system as a whole.”

[reasons for soft loan growth] “people thought in the fourth quarter just given the year end issues that people were concerned about, and so that has had an impact. I think it’s slightly less of an impact and in terms of competitive landscape and there are deals being done with terms and conditions and pricing that we’re not comfortable at the moment, and we’re just remaining very disciplined, so that has had an impact for us.”

[analyst comment] “I think a lot of companies have told us that they think that they’ve got through most of the low hanging fruit with HARP, and that the people that aren’t HARPing they doubt they will ever HARP.”

And They Said Bank Profits Would Be Impaired…

JP Morgan and Wells Fargo each reported first quarter results today, which are truly remarkable when one takes a step back and looks at how profitable these institutions have become.  After the financial crisis there was concern that the banking system would have a difficult time reaching former levels of profitability.  While Returns on Capital may still be below former levels, from a pure profit standpoint, our largest banks have become behemoths.  $JPM and $WFC are both in the top 10 for quarterly net income among US companies.

JPM’s $6.5 Billion dollar quarterly profit ranks behind only Apple, Exxon and Chevron, and perhaps the most amazing part is that they are generating these profits in a difficult interest rate environment.  In a more favorable banking environment JPM’s profit would likely be higher.  For the record, since $BAC and $C each have larger balance sheets than WFC it’s not inconceivable that those two companies could also be on this list once the noise from the financial crisis finally works its way through their financial statements.

Bank Quarterly Net Income