The Fintech Playbook: What Financial Services Leaders Need To Know

JPMorgan Chase & Co. (NYSE:JPM) Barclays Global Financial Services Conference September 13, 2018 1:05 PM ET

Executives

Marianne Lake - CFO

Analysts

Unidentified Company Representative

For our keynote lunch presentation today, we’re very pleased to have back, Marianne Lake. As you all likely know, Marianne is the CFO of JP Morgan Chase and a member of the firm’s operating committee. She was previously CFO of the Consumer Community Bank and served as the Investments Bank’s Global Controller and was in the Corporate Finance Group, managing global finance infrastructure and control programs prior to the financial conference.

She first presented at this conference back in 2013, her inaugural year as CFO, than followed up in 2014 before taking a three year hiatus in which we heard twice from Jamie and once from Gordon Smith. So Marianne welcome back, it’s great to have you.

Marianne Lake

Thank you, thank you for having me. I can't believe it's been 4 years, times flies and you’re having fun.

Question-and-Answer Session

Q - Unidentified Analyst

Yes, I guess certainly the last four years were a bit more fun and four or six years before that. I guess as we think about the last four years and maybe that’s the best place to start, obviously seen a lot of change. The economy has improved dramatically, the markets have done better. Lot of change in the regulatory environment, from it getting a lot more stringent to maybe some easing of late. Maybe talk to some of yours kind of I guess, bigger surprises and disappointments from your perspective as a CEO, and maybe what do you think will be the biggest drivers of change go forward.

Marianne Lake

Yes, so I mean it certainly is a different environment that we are operating in today than four years ago, five years ago, six years ago. The things you mentioned, I wouldn’t call them surprises, I would say that we were waiting for them for quite a long time. And so as we sit here today on the positive side, maybe not particularly surprising, but on the positive side the U.S. economy is in pretty good shape, some may say booming by some accounts. Core inflation is at the magic number, labor markets are tight, consumer spending CapEx good.

So, it feels like the U.S. economy is in good shape and set to be in good shape. You mentioned markets held up quite well, been liquid healthy trading markets record IBPs last year. So good momentum in markets and capital markets. The regulatory side is positive, but is what I would say. So on the one hand stable is a positive considering the decade we have had running up to now.

So less incremental new news is positive, new leadership is positive, the narrative is better, but little has actually been done. And so I’m sure, we’ll talk about that more. So, I would say that is not necessarily the disappointment, but we’re still hopeful that we’ll get some real improvement in the reg environment, maybe not material quantitative improvement, but cohesion, simplification some of that stuff.

I’d say on the less constructive -- or I should mention fiscal policy, tax reform, big positive accretive to growth everything else. So, maybe that goes in the my all surprise category that it got done and so we’re very grateful that it did.

On the less constructive side, I think the sort of populism, protectionism, trade, flash, Brexit, there are a number of geopolitical it’s none of which individually altogether I think are going to be significant enough to derail where we are, but they create uncertainty, uncertainty creates instability, volatility investor sentiment is affected.

So I would say a good place to be a better position we’re in, we have been waiting really long time for it, long may it continue, we’ll probably talk about that too. Trends, I would go back to Investor Day. We are very, very focused on the pace of change, on the pace of the evolution of customer preferences, the importance of digital mobile payments, transformative technologies and being leaders to the degree we can in all of those things.

Unidentified Analyst

I guess in advance something you touched on is the economy and I guess if we look across your four franchise businesses, you obviously touched all aspects of the global economy. Maybe how long do you expect the current environment to continue, is there anything on the horizon that gives your pause for concern?

Marianne Lake

I’ll get my crystal ball out.

Unidentified Analyst

Yours is clearer than mine.

Marianne Lake

I don’t know about that. I would say, like I said there is -- while I know there has been some concerns more recently about the divergence between the U.S. and the rest of the world, some emerging markets stress a little bit that there were some good news today, we’re still buyers of a synchronized solid global growth story. Global GDP is above trend, led by strength in the U.S. the extension cycle is nine years are old, but we don’t see any sort of late stage vulnerabilities emerging no obvious potholes that we’re going to set into.

And I'm not -- I can’t promise you, but for us expansions don’t die of old age. Jamie said I think in his Shareholder Letter we've only seen 20% growth this recovery normally you might expect to see significantly more than that, maybe twice as much of that. So there is still potential room to run.

Credit is doing really well. And set to continue to do very well. So I would say that we don't see anything that leads us to believe that there is going to be a turn in the cycle in the near to medium future. So I'm not going to give you a time because I’d definitely be wrong, but it's not clear and present danger.

Unidentified Analyst

On your last earnings call, you chose not to update the outlook slide. I am not sure, if it was you or Jamie's recent op-ed regarding putting earnings guidance. But still you noted both revenue and expenses were maybe trending higher than originally anticipated, maybe share your current thoughts for the remainder of the year?

Marianne Lake

Yes, and I would just clarify specifically I think what Jamie is talking about. Was talking about giving short-term EPS guidance that will drive you to make potentially short-term decisions that would be in conflict with long-term growth strategies. And we've never done that, it's one of the reasons why you'll notice that we actually don't set targets.

We talk about our outlook will tell you what we're seeing.

We'll tell you what we might expect so we will give you a simulation. But we -- I don't think in my tenure have ever really set a target. And that is because we wouldn't do on natural things to meet a target.

And really with the reason why we chose not to update guidance specifically at the middle of the year is a lot of our performance is market dependent. And you can chase your tail changing that every three months. Having said that, I am here and I know you've asked the question.

So I will give you that shot. NII we said expect NII to be $54 billion to $55 billion for the year, it will run higher than that higher than the high-end of the range closer to $55.5 billion based upon what we know right now. Obviously lots of things can drive that change. The principle reason for it would surprise you, the principle reason for it is lower than expected reprice.

And this is a different cycle, it started from an absolute level of rate that was lower plus all of the investments in broadly the consumer ecosystem mean that we don’t exactly know how reprice is going to turn out in this cycle. So that's where we are right now.

For NII for our fees, we said about 7% up year-on-year it will be higher than that too. Of course that's extremely market dependent.So whatever I tell you now will change about a percentage points higher than that if the NII were to stop. And that's because of the strength of CIB markets and fees year-to-date the momentum that we see there as well as to a lesser extent asset management.

Expense is higher than we said $63 billion. Right now it would be close to $63.5 billion. The majority of that is revenue related. The majority of the revenue related impact is transaction cost brokerage clearing, but also some performance incentive. And then, we don't know about exactly when this is going to hit its magic number, but we added another little bit over $200 million into our expense outlook for the third quarter as the FDIC have updated their timeline. Now I don't know if that's exactly the right timeline for that, but that's what we've got in our thoughts right now.

Other than that credit is in really good shape. Our effective tax rate is in line with our guidance. So it's really everything is a little bit higher for generally good reasons doesn't change the fundamentals of what we've articulated.

Unidentified Analyst

No, fair enough. Maybe to talk a bit about the competitive landscape. Some segments you heard about some banks getting more active than others kind of pulling away from. But maybe talk about the competitive landscape and maybe some of your kind of biggest kind of near-term or even longer term opportunities that you think investors under appreciate.

Marianne Lake

Yes, I mean. So I'll start with -- our goal and this is true and this has been true pre-crisis, through the crisis. We’ve continued to invest because scale and completeness is a goal of ours. And so we are investing broadly across our businesses in lots of different ways. The environment is competitive everywhere in everything that we do. And so we still think we compete from a good place from a position of strength, but it is a competitive environment. And we don't have big gaps.

So there is no sort of big missing part to our landscape part there is lots of opportunity when you get granular and surgical. And so that's what we're focused on. So we're looking go gain market share or preserve market share everywhere and doing that by serving our customers the right way. I would say, we have some opportunity in the consumer space.

I'm going to talk about Sapphire banking. But the opportunity is about creating better interoperability across the businesses, across the products that across the channels. And so Sapphire bank is a really good example of that, whether that's going to be a game changer in terms of growth and share, but it's still very important for us because we've taken this amazing cohort of customers that we’ve talked about a lot and we're going to be deepening relationships with them and creating what we think is a compelling value proposition for them. So we're working at it on every front all the time.

Unidentified Analyst

Let me just delve into what is Sapphire banking, I think it's something that people have heard a little bit about more over the last week or to, but haven't really delved into exactly what you mean by that?

Marianne Lake

Okay, well, I have swag for you.

Unidentified Analyst

Sure.

Marianne Lake

Okay. So it wouldn't be me if I didn't bring something right. So Sapphire banking is it's a new premier checking account products that we're providing is targeted to the same customer demographics as a Sapphire reserved, Sapphire preferred portfolio of cards for eligible customers, it will be free checking, free ATM worldwide, no foreign exchange fees, unlimited commission free online trading and all of the other experiential perks that go along with that. And we're embedding ultimate rewards which these customers value so much as part of that. So we talked about an offer today that ultimate rewards related. So it is also linked to you invest, so I brought you a you invest T-shirt

Unidentified Analyst

Usually we have to give the gift.

Marianne Lake

Shameless plugs and the Sapphire banking absolutely gorgeous debit card, which has my name on it. So I’d be very careful.

Unidentified Analyst

Okay. Unlimited.

Marianne Lake

But it's just a very -- it's just a good example of how we're trying to deepen our relationship to bring together the brand, the value and across products, across channels.

Unidentified Analyst

So I mean, I guess, if you look, I guess, JP Morgan's has done over the last several years either the original Sapphire Card on which became a superior value proposition. You want a lot of assets from Blackrock assets from State Street, supposedly on price coming out that you invest app, which is obviously free in some aspects. I mean, how effective are you be able to compete on price and win share in. I guess what other aspects of the financial service relationship are you kind of looking to bring a similar strategy towards?

Marianne Lake

Well, I mean. So you asked a bit of a question earlier, I think I answered which is, what people under appreciate? And I’m not going to say that, I think people underappreciated, but I think the cumulative organic growth opportunities we have are still pretty impressive. So you talk about some of the big sort of mark key things that we’ve done, but we’re adding bankers across the board, we’re entering new markets, we’re building new technologies and platforms.

In card, we had -- it wasn’t the same flashes Sapphire reserve, or freedom limited, but we had eight product refreshes this year with our partners. And we have improved customer satisfaction pretty much across the board and running at a high watermark across most of our businesses.

So it’s a hand-to-hand combat, but we’re looking to put the customer experience front and center to continue to create new value added, services products experiences for all of our customers wholesale and retail. And these are good examples, because they get the splash, but it’s a lot of that going on everywhere.

Unidentified Analyst

Maybe that gives us a good point we’ll take our first ARS question. So there should be remotes in the middle of your table, if you want to grab those. And then over the last several months there has been numerous press articles about several JP Morgan initiatives. What do you think is most additive, you guys write a lot about the trading platform, seeing them on the mobile only bank? Marianne just talked about the Sapphire ultimate rewards offering. New ETF products, they recently talked about entering a lot of new markets, Boston, Philly, et cetera. And then doing more in the custody space of the choices.

Marianne Lake

Instead of having another all of the above.

Unidentified Analyst

So Sapphire brand, I guess we could use that as your lead in for the swag followed by entering new market, new metro markets. You talked a bit about Sapphire, I guess where you are in terms of the new market initiatives and what you expect to garner out of that?

Marianne Lake

Yes. So look in the context of a five year plan. We talked about adding up 400 branches 15 to 20 new markets. That was at the beginning of the year in the context of a five year plan. We are still in the very early stages of that we have yet to open our first branch, but it's going to happen soon in the DC area. So it's early, but what we intend to do and we’ve chosen the prioritization and the ordering of these is to bring the whole power of the company to these new markets. We may enter them slightly differently, but we're going to bring not just the retail presence, but also the commercial bank will follow through. And so we'll get the network effects of being able to do that.

So in the -- we're just working on it. And we will update you, but we have 5,100 branches, we continue to refine our distribution footprint all of the time. And this will be an important part of that. It's also important when you bring it into not necessarily the same markets, when you bring it into context of our advancing cities. So we're just looking to be where our customers are to be supportive of the communities that they're in. Because when they grow our clients do well, when clients do well, we do well and it's a virtual circle.

Unidentified Analyst

Helpful. We'll go with another ARS question just for fun. But for the audience, how many Chase product services do you currently have for use?

Marianne Lake

Not about the number of products, it's the quality of the relationship. We welcome your business.

Unidentified Analyst

Interesting, not bad.

Marianne Lake

Lots of opportunity, simulator.

Unidentified Analyst

As big as you are.

Marianne Lake

I can get you one of these gorgeous cards and a t-shirt too.

Unidentified Analyst

I'm curious to use it. I guess, earlier you've kind of touched on technology and digital capabilities and obviously that's been a heavy focus. I think every bank in this conference so far has said they're above average in technology. So half if we’re mistaken. But maybe just how do you get a sense of kind of your relative technology positioning. What do you think your advantages are? And I guess where do you see kind of the biggest -- or who do you see is kind of the biggest competitors in the technology space. Obviously the other big banks, just not banks. And how do you kind of navigate around that?

Marianne Lake

Okay. So I'm going to try and give a nuance question to a bit about how good we are, but I’ll start with everyone is our competitor. So -- and we consider it that way too. And some of our competitors are our clients. So these are important water to navigate. Leveraging technology to take advantage of our scale and our data has always been part of our strategy, it's foundational to how we thought about the company and the businesses we run.

And I think our ability and willingness and approach to investing heavily through the cycle and continuing to invest heavily in the technology agenda does differentiate performance ultimately over the long-term. And I hope that that’s evident to everybody here.

I would say if I -- we spend $10.8 billion on technology nearly half of which is changing in the bank and that's platform, it's data, big data, it new technology that is also modernizing platform. So I'm going to answer your question in a nuance way, which is I think we do some things really very well. I think that our focus on the customer experience is one of the reasons why our online portal, our mobile apps are recognized why we have great customer satisfaction scores, improved customer satisfaction scores in many cases great at high watermark.

A lot of that is because we focus on the customer experience as being -- we talked about at Investor Day mobile first, digital everything. We still have a lot of work to do and we've been very acquisitive over decades. We have infrastructure that needs to be modernized. So when we think about the business case the technology, yes it's about better products and services cheaper, quicker, fastest client, but it’s also a lot about efficiency for us. And so there are some things that we still really needed to work on and we're working on those two.

And then there is some R&D so we'll see how good we are at that. But I will give us a decent overall grade, but with pluses and minuses across the board. What else is there in your question?

So our competitors everybody. I would say what we do have that maybe differentiates us and is helpful is if you think about disruption and sort of trend of electronification easy to use technology, great experiences, scale will distinguish you. We've been focused on building best in class customer centric digital and mobile capabilities. As I said driving better customer satisfaction and scale and the brand and the distribution we have isn't something that everyone can replicate.

So we do have competitive advantages, that also can be a competitive advantage in attracting talent in the technology space. Because many of the best developers and engineers want to work on problems that touch fraud audiences and we have many of those opportunities for people so just to give you some stats. Of the sort of 50,000 people we have working in technology, 31,000 of them are in development and engineering world, 2,500 of them are in digital technology world. So we’re very focused on that.

That said, there are going to be smaller companies, whether it’s FinTech or anyone else you have excellent product capabilities, differentiated capabilities that can accelerate speed to market or reduce cost or whatever and we’re very interested in partnering where it make sense there. So build by partner invest all of the above.

Unidentified Analyst

Helpful. Maybe shift gears to capital for a second, there has obviously been some work to reduce capital requirements for smaller banks, not so much for the bigger banks. So should we talk in terms of your outlook, in terms of the potential for the evolution of CCAR, you have talked in the past about wanting changes in the GSIC coefficients and just how you kind of think this all capital situation evolves over the next year or two.

Marianne Lake

All right. So, so I’ll start with a belief, the belief that we have is that not only did we have adequate capital and liquidity arguably more than enough so does the industry there a lot of success should be -- we should be willing as a collective group to declare some success, but all of the post crisis reform has gotten the industry into much safer and sounder place and now we all to be able to look at simplifying and making things more coherent across the board.

I think that the stress capital buffer is an interesting one, because while it’s easy to say, you support the convergence of bringing together stress and business as usual like spot capital requirements it’s difficult to do. The proposal as written, which I recognized by the way as being very similar to proposals that we discussed a while back, had some significant challenges and the vary sort of potential significant volatility which we saw this year. The opacity of modules, the opacity of the scenario design and the scenario construction are real challenges and when you take that and you floor it at the current CCB, at best it can be neutral.

So I think it’s very complex, really I am encouraged change in leadership very, very constructive dialogue, but I think it’s tough and it’s nearly the end of September. So the clock is ticking when you think about an annual cycle, very supportive of trying you’ve seen all of the common letter from the industry, from us trying to be helpful in bringing that to ahead.

I also think that you hear some of the regulator saying they also believe that capital and liquidity in the system is adequate I don’t think you hear them saying it’s more than adequate. So, again we’re not taking to the bank some idea that we’re going to get a big win for gain, but we’ll take simplification and the ability to manage capital more over multiple years instead of this sort of stop short, sharp shop kind of approach to it, which we think would be much more constructive.

On the G-SIFI front, more encouragingly I think is very, very willing and open to think about at least at the very minimum, the recalibration of the coefficients, in light of the growth in the economy. And so that is extremely encouraging. I would get that a -- I would give that a decent shot of getting done, but very politically touched. And so, I think it’s going to take some time.

So, for us we’re not -- we’re continuing to work on managing ourselves in the 3.5% bucket, while we wait to figure out which hopefully will be sooner rather than later. The level of confidence we have that these things are going to work themselves out in a rationale form.

So, no change to our targets right now on the capital front, because there is a lot of unknowns.

Unidentified Analyst

Helpful. I guess maybe shift gears obviously you can’t buy a U.S. based depository right now, but maybe talk about acquisitions have played a big role in kind of evolution of JP Morgan Chase, any opportunities in terms of non-bank acquisitions or even bank acquisitions outside the U.S. come up from time to time?

Marianne Lake

Yes, I mean, there is a chart that I used at Investor Day, I don’t know if I did show that thing, but previously years and almost every year we sort of baseline the leadership position to market share of our businesses back to 2006, the pre-crisis and then look at where they’ve come to. And if you actually look at that chart back in 2006 we weren’t in the position we’re in right now in terms of our sort of leadership positions our market share, the sort of diversity at scale and everything that’s strategically important to our clients was a desire at that point, we were decent. But where we’re right now, we don’t really have there is notably big gaps that would require us to do sort of much M&A to fill if any, but we are always looking for ways to accelerate our capabilities and to provide better services to our clients.

And so organically, acquisitively partnerships we're looking at it all of the time always exciting their muscle. Typically at this point, these -- the things that we're doing are relative to the size of JPMorgan and relative to things of the past typically going to be necessarily smaller, but important nonetheless. And we pay and investments and build out those sorts of things matter and lots often. Because we're trying to make sure we're moving on multiple fronts.

On the global side, I would say our focus is still wholesale at this point. And wholesale adding bankers, looking surgically where we need to sort of deepen market expertise, the China JV those are sorts of things we're working on right now.

Unidentified Analyst

Helpful. And why don't we go to the next automated response question.

Jerry, we do like to see JPMorgan invest in I guess technology marketing payments, consumer lending, wholesale lending, asset and wealth trading and branches. Three clear answers, I guess for payments closely by asset and wealth and technology. I guess on payments, I guess when you were here four years ago you actually unveiled ApplePay for the first time. I guess, maybe talk to just maybe delve a bit more into how you see the payment landscape in JPMorgan evolving right over the years you talked a lot about these and at Chase net, you launched a couple of -- a bunch of products along the way that we I guess chase, well at least, I guess we haven't really heard a lot about just how do you kind of some of those initiatives are bearing?

Marianne Lake

Yes, so look on the consumer payment side, our strategy has been and continues to be to provide our customer the choices and to be wherever they want us to be, which is why we are partners in most digital wallets, while we have our own, there is space for everyone and it's an evolving landscape. It’s still while it's growing, it's growing from a very small base right now. We have market-leading share in sort of card, we have a mode around us in terms of spend, we have a great set of products I talked earlier about the fact that even though they may not had the same splash we’ve been continuously refreshing our products on the card space. And so we're pretty excited about the opportunities there and linking them into banking and new invest trade is also part of that P2P.

So I think it was only in 2016 that that was launched and QuickPay with Zelle we are part of the Zelle network more than half in terms of volumes. We are moving more money than Venmo that's just Chase. So -- and growing rapidly year-over-year. So that is also and in college age customers of our they are more deeply penetrated into Zelle than Venmo.

So I think that these sorts of things they have, again the network effect. They have this sort of momentum that is a little bit self-propelling. And it's not just in the consumer space it's also in the wholesale space where we spent a lot of time talking about that we have a wholly end merchant acquirer we have a great label of footprint. We've been investing in our platforms. We can manage all the way from receivables through payables for the largest multi-national corporations around the world.

So the payment space is very competitive. It's very competitive I would say in card of its peaks but still intensely competitive at rational stable rational. And I think we're doing quite well.

Unidentified Analyst

Helpful. Earlier you talked about net interest income kind of being above the range. We've heard others talk complaining about LIBOR being lower than expected. We've heard others talk about the yield curve being flatter than anticipated, obviously if the Fed unwinding the balance sheet deposit beta is I guess lower than anticipated helps you relative to your guidance. Kind of talk in terms of your outlook in terms of managing the balance sheet in this kind of maybe flatter yield curve environment and an environment where I think our expectation are that betas will ultimately rise.

Marianne Lake

Yes, so a couple of things. The first is we said at Investor Day that probably beyond 2018, the net impact of rates would be largely in the run rate because although as an industry we may be over earning on lower reprice given the absolute low level of rates right now and maybe given other secular shifts in terms of product services, et cetera. We still think that much of that will get given back. And so it is about growth and about mix and about spread and loan growth will be the biggest driver. We have been doing pricing strategies and underwriting strategies in card that will improve this right over time. So, that will be the biggest driver of NII going forward.

In terms of the beta discussion, actually no one knows what through the cycle beta is going to look like in this cycle, we've taken a position that and we talked before about the case for them being higher, the case for them being lower, that that’s in a lot of technology developments that allow people to move money more easily. There's a lot of awareness and in the sort of broader population about, the low rate for really long time wanting to enjoy the benefits of higher rates. There was a belief that there might be a lot of competitions for high quality liquid assets, and those liquidity deposits, and that will probably still be the case.

And so that could drive higher, when we think about the value we give to our customers, price is a small part of that. All of these investments that we've been making, whether it's in the products we're developing, whether it's in the client facing technology, whether it's brand, whether it's the branches, digital, mobile, all of those things are increasingly important. And so we actually don't know where it's going to end up when all is said and done, and the dust settles and we're going to watch it as it unfolds. We just don't know enough now to be able to make a call differently from that.

There are two reasons why I think reprice is lower, one is that absolute level of rate is lower than where we were in previous normalization cycles. And the second is for us it, again, pricing will be a factor feature of consumer behaviors and deposit flows and deposit migration. And so we watched it carefully. And we talked about it before. And we've seen some of it in the higher wealth spectrum and in the corporate space, but we're still seeing, yes, lower but solid deposit growth and more than the industry.

So that's what's going to ultimately drive pricing strategy for us. And we're going to figure it out as we go along, and we will be there on the journey with that. And in the yield curve, the flatter yield curve is a feature of front enterprise normalizing, a normal feature of that, the term premium is negative, massive QAE [ph] for a long time. So it’s structurally different, I think, it can be telling you if you look at the 210s and you look at -- it can be telling you something different now than it might have been telling you in previous situations.

And if you really want to look at barometer for forecasting return of the cycle. One other place to look is at the front end of the curve. Where if you look at the short-term three months rates versus two year rates, if the curve is still steep and consistently so. So yield curve resist inverting in healthy economies and the economy is healthy.

Unidentified Analyst

Interesting, you mentioned loan growth being an important factor. You guys have talked to 6% to 7% type core loan growth this year, which is good. I think maybe delve more into kind of where your outlook for loan growth is? Certain banks so far at this conference have kind of top down near-term expectations and really been talking down expectations for the last year and a half or so. I guess, why is your loan growth are kind of above others, are you talk about taking share in the deposit side, also taking share in the lending side and kind of what do you see kind of additional opportunities going forward?

Marianne Lake

Okay. So we gave an outlook for loan growth if between 6% and 7% core loan growth excluding CIB, because not to dismiss the importance of CIB loans, but they are -- can be accelerate, they can be large and lumpy and they can also -- they are also clearly a feature and a factor of our strategy and relationships. Yes, we’re still looking for 6 to 7% core loan growth at CIB this year, actually trending towards the higher end of that range. That’s because, we did contemplate what is happening, we contemplated that C&I and CRE given where we are in the cycle, given the competition for yield that those and us with our risk appetite that those would decelerate and be growing in kind of GDP, kind of range and that’s contemplated in our outlook.

So I would say things have played out as we would expect. And our growth is pretty much where we would want it to be given where we are in the cycle. CRE -- C&I is much like I said with CIB, it is a feature of the coverage of our clients and the relationships we have. We’ve done quite well because we have invested in new markets, we have invested in specialized industry. So I would call the investments, the driver for any out performance and hopefully the great end to end client experience that we have.

CRE is still while we are late in the cycle, there are still opportunities to add high quality loans, particularly in multi-family, but it’s super competitive. And so plus an element of caution given where we are. Home lending is a very, very rate driven market and we’re seeing the breaking effect of higher rates, but again as we contemplated. So the market is expected to be down about 10% year-on-year and we would largely down in line with that. But more importantly on the mortgage front quality is really good, really, really good of what we are doing and return define.

Unidentified Analyst

I guess you touch the multi-family in this vein, but obviously credit quality is great everywhere and no one seeing any issues, but as you kind of look out I guess maybe what areas are you kind of most focused on, that could be cause of potential concern looking out?

Marianne Lake

Yes, I mean as you have heard Jamie, say here over last year or the year before credit is never ever, ever it’s very, very good. And so we look very carefully at the industry and other portfolios that we have to try and see if there is any fidelity in them. I would say broadly credit remains benign, household debt is at a peak, but relative to GDP and debt service coverage is manageable, low interest rate deleveraging, mortgage refinancing all have helped I think protect consumers even in rate rising cycles and going into the next cycle. And same is true of corporates largely speaking. So, yes that is elevated, but interest coverage is in decent shape.

[Indiscernible] lending, it’s not something that we have, that we’re worried about, but we are interested in what the spillover effect could be given our exposure to consumer, sub-prime auto again not something that we have very significant concentration in our portfolio. We’re not seeing deterioration, but clearly an area to keep watching.

Retail has been the same no immediate concerns though, no real shadows on the wall. There is some, you can still call it idiosyncratic emerging market stress, but in the most vulnerable economies given reflation after massive coincide of easing, leverage lending, leverage is high, but cash coverage levels are good, asset quality is good, credit fundamentals and transactions are good. I mean, just credit CRE there is some excess is nothing, but we look everywhere, still looking pretty good.

Unidentified Analyst

And we look as well.

Marianne Lake

I guess no one ever sees till it happens, but looking pretty good.

Unidentified Analyst

I guess maybe shifting gears to expenses. Obviously expenses you talked about earlier in the year about some incremental investment spend on technology. But as you kind of think about the outlook for expenses and the opportunity to I guess further it get more efficient through technology. I guess how do you kind of think about maybe the operating margins or efficiency ratio playing out overtime.

Marianne Lake

So, I mean, I’m not going to tell you anything that I am sure that you don’t know and believe about I say hope, is that we’re very disciplined when it comes to manage expenses, we manage the first dollar, then the second, then the third. Someone asked me the other day like how would you go about approving an $11 billion technology budget you don’t, you approve individual business cases and you manage at the granular level.

So, I would say discipline always looking for improved efficiency so that we can invest more and always looking to cut waste. And I think we do a good job, this year in particular we felt like the environment allowed us to accelerate investments that we think will be defining in terms of long-term gross profitability leadership positions market share all of those sorts of things. And so we’re doing that.

I think we have been clear that, we expect over the medium term as articulated at Investor Day, that we think we’ll get to a 55% overhead ratio, we’re very much focused on technology not just to drive revenues, but to drive efficiency and we’re working on all of the new emerging technologies be it artificial intelligence, machine learning, natural language processing, robotics, big data, but we’re sort of -- I am not a baseball person, I don’t know what inning we would be in, but it’s at the beginning of all of that.

So I’d really believe that these technologies and the leveraging data will be very transformative for the industry and for us.

And it will include being transformative in terms of efficiencies that will create the room to carry on investing.

And actually if you look at it at some point, I am not saying that we won’t potentially go below 55% ratio. I'm just saying that there is an efficiency ratio that would actually be healthy given the mix of business you have. And your willingness to carry on investing, so I'm not sure that is always about being a lowest, albeit that I think we're now in good shape.

Unidentified Analyst

Fair enough. Before we open up to the audience for questions. Maybe go to the last two ARS questions that we've been asking all the companies.

Marianne Lake

You have asked all the companies the same question.

Unidentified Analyst

The next two we asked all of them was about the investors yes, about each company. So we know your answer to this one. But with regard to JPMorgan are you overweight, market weight, underweight are no position?

So 46% overweight, I will tell you that number was 51% last year. So since James presented it’s got down. So we'll see where it will grade your performance next year and see if it goes back up. And we'll go to the next question.

If you don't own the shares of JPMorgan, underweight the stock, which line item would most influence you in changing your mind. And the same response was used for each company?

That's Jamie. So valuation by -- of all the companies that have presented so far. And there has been at least of the large cap banks and there has been call it 12 of them that’s the highest that have kind of called out valuation, which is interesting. I guess in response to that, I guess, with your valuations now over 2 times tangible book, how do you feel about buying back your stock here?

Marianne Lake

So I know that everybody is always laser focused on the choice of Jamie's words when he talks about valuation. And so it was purposeful when we said at or about 2 times tangible book value. And it was purposeful that we don't put a number into so ever we doesn't get more squarely with us on where the thing is. Listen, we are growing across most of our businesses, we have our expenses under control, credit is in great shape. The earnings power of the company is really strong. We have a very, very clear line of site to 17% return on tangible common equity, arguably higher at depending on how competitive dynamics play out overtime and what the capital equilibrium is when we get down to it, we have over $20 billion of repurchase Class D and we're using it.

So we feel pretty good about being in the market.

Unidentified Analyst

Why don't we pause there and we'll open up to the audience for questions. I see one in the middle first.

Unidentified Analyst

Hi, Marianne. I was admiring the t-shirt that you brought up to Jason earlier in the presentation. And just wanted to ask a question on you invest, so had a chance to (inaudible) platform.

Marianne Lake

Sorry?

Unidentified Analyst

I had a chance to check out the platform. I think a number of people in the room did intuitive, pretty slick. But fairly basic right now. And just wanted to see what sort of the plans were in terms of the evolution in our platform maybe some more sophisticated trading options on it that might be coming out?

Marianne Lake

Yes, so I would say coming to market, we were focused on it being easy, it being compelling in terms of pricing, and satisfying the vast majority of the needs of the vast majority of our customers. And so that's what we have out right now. It's going to be iterated, but it will continue to be evolved. There will be -- we have right now trade and portfolio build we will have our digital advisory and new and more complicated products will be added over the course of the future. But what we have right now is very compelling for the vast majority of the needs of the vast majority of our customers, but it's the beginning. So we're pretty pleased.

I am very surprised you didn't ask about markets or fees, but we'll see if somebody does.

Unidentified Analyst

Hi. Just quick question about deposit betas. Particularly with a lot of the demographics that you're targeting with the Sapphire both the checking and the Sapphire reserve. If you think about it anyone aged maybe 18 to 35 let's say 40 hasn't really been in adult and had a bank account in an environment where they had interest on any of their deposits. So to what extent do you think customers will eventually expect some yields in their deposits? Or is it just not even on the forefront of the minds of most people, under a certain age?

Marianne Lake

I mean, I think, so I think there is -- while we have been acquiring lots of millennial customers, and you're right about the sort of new products being skewed in some ways towards millennials. By the way, that takes you away up to 35, I believe, if I'm not -- if I'm wrong, forgive me. But, not everybody is at college.

So, I would say that there's an awareness of low rates, people are going to want to be paid properly, ultimately for their whole relationship, but what we don't know is and so anyone who has higher level of sophistication and higher balances is able to afford themselves of the opportunity to try and look for more rate. So we’ve seen that, we've seen the migration of deposit into investments in the asset management space that's natural that's what happens generally in all cycles. And people who don't have as much wealth think about the account being the sort of functional equivalent for a consumer as an operating account for wholesale client where you're spending that money on a regular basis you need it in your checking account to be available to link with your cards and all that sort of stuff.

So, ultimately people are going to want to get paid for the whole relationship, but I do think that price is only going to be one part, right. And if you are someone who believes that the value proposition in totality of being a Sapphire banking customer is really good for you, then price will be important, but so will all the other things that are adding value to you. So there’s going to be a lot of interest in how it plays out. But I don’t think that even people who haven’t sort of enjoyed higher rates aren't going to want to enjoy them going forward.

Unidentified Analyst

So Marianne, you talked about the income being at the upper end of your range for the full year. So you could talk about kind of current market environment and how you see trading revenues progressing this quarter other key areas?

Marianne Lake

Yes, so just a couple of things, the first is that, we had record IBCs last year. So really strong performance that momentum carried on into the first half, it carried on into the third quarter. So compared to a strong year, last year, a very strong year, actually last year in fees. This quarter will be flat to some upside potential relative to that. So, really feeling pretty good about that.

Markets, if you look at last year for the first time in a while I can say, it was neither particularly a flattering comparison nor particularly a challenging comparison of the market performance in the third quarter of last year was good. And in compared to that on a reported basis our markets revenues will be down year-on-year about mid-single-digit on a repeated basis. Remember there’s some tax effects, because our sort of tax gross ups are smaller and if you were to normalize that out that’s worth a couple of percentage points. So down small on a core basis.

Unidentified Company Representative

Seeing we’re out of time, with that. Please join me in thanking Marianne for her time today.

Marianne Lake

Thank you.

Source : https://seekingalpha.com/article/4206182-jpmorgan-chase-and-co-jpm-management-barclays-global-financial-services-conference-transcript

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