JPMorgan Chase & Co. Q3 2022 Earnings Call Transcript

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Provided by Quartr
October 14, 2022

Key Takeaways

  • JPMorgan posted Q3 net income of $9.7 billion, EPS of $3.12 on $33.5 billion revenue and an ROTCE of 18%, even after $959 million of discretionary investment‐securities losses.
  • Net interest income ex‐markets rose 51% year‐on‐year driven by higher rates, and markets NII is expected to be about zero in Q4.
  • Investment Banking fees fell 47% year‐on‐year, with advisory revenue down 31%, debt underwriting fees down 40%, and equity underwriting fees down 72%.
  • The Common Equity Tier 1 ratio grew to 12.5%, and the bank is on track to hit a 13% target by Q1 2023 with a 50 basis‐point buffer over regulatory requirements.
  • Management warned of elevated economic uncertainty—QT, deposit repricing and loan growth risks—and may add $5–6 billion of credit reserves if recession odds rise.
AI Generated. May Contain Errors.
Earnings Conference Call
JPMorgan Chase & Co. Q3 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Third Quarter 2022 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation.

Operator

Please stand by. At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon and Chief Financial Officer, Jeremy Barnum. Mr. Barnum, please go ahead.

Speaker 1

Thank you very much. Good morning, everyone. As always, the presentation is available on our website and please refer to the disclaimer in the back. Starting on Page 1, The firm reported net income of $9,700,000,000 EPS of $3.12 on revenue of $33,500,000,000 and delivered an ROTCE of 18%. The only significant item this quarter was discretionary net investment securities losses in corporate of $959,000,000 as a result of repositioning the portfolio by selling U.

Speaker 1

S. Treasuries and mortgages. Our strong results this quarter reflect the resilience of the franchise in a dynamic environment. Touching on a few highlights, We had a record Q3 revenue in markets of $6,800,000,000 We ranked number 1 in retail deposit share based on FDIC data And credit is still healthy with net charge offs remaining low. On Page 2, we have more detail.

Speaker 1

Revenue of $33,500,000,000 was up $3,100,000,000 or 10% year on year. Excluding the net investment securities losses, it was up 13%. NII ex markets was up $5,700,000,000 or 51 percent driven by higher rates. NIRx markets was down $3,200,000,000 or 24%, largely driven by lower IB fees and the securities losses. And markets revenue was up $502,000,000 or 8% year on year.

Speaker 1

Expenses Of $19,200,000,000 were up $2,100,000,000 or 12% year on year, driven by higher structural costs and investments. And credit costs of $1,500,000,000 included net charge offs of $727,000,000 The net reserve build of $808,000,000 Included a $937,000,000 build in wholesale, reflecting loan growth and updates to the firm's macroeconomic scenarios, partially offset by $150,000,000 release in home lending. On to balance sheet and capital on Page 3. We ended the quarter with a CET1 ratio of 12.5%, up 30 basis points versus the prior quarter, which was primarily driven by the benefit of net income less distributions, partially offset by the impact of AOCI. RWA was down approximately $23,000,000,000 quarter on quarter with growth in lending more than offset by continued active balance Management and lower market risk RWA.

Speaker 1

Given our results this quarter, we are well positioned to meet our CET1 targets of 12.5% in the 4th quarter and 13% in the Q1 of 2023. These current targets include a 50 basis point buffer over the growing regulatory requirements, which provides flexibility over the coming quarters. To conclude on capital, with the future increases in our risk based requirements, SLR will no longer be our binding capital constraint. So we announced the call of $5,400,000,000 in press this quarter and issued $3,500,000,000 in sub debt to rebalance our capital stack. Now let's go to our businesses starting on Page 4.

Speaker 1

Before I review CCB's performance, let me provide you with an update on the health of U. S. Consumers and small businesses based on our data. Nominal spend is still strong across both discretionary and non discretionary categories with combined debit Credit spend up 13% year on year. Cash buffers remain elevated across all income segments.

Speaker 1

However, with spending growing faster than income, we are seeing a continued decrease in median deposits year on year, particularly in the lower income segments. And not surprisingly, small business owners are increasingly focused on the risks and the economic outlook. Now moving to financial results. This quarter, CCP reported net income of $4,300,000,000 on revenue of 14,300,000,000 which was up 14% year on year. In Consumer and Business Banking, revenue was up 30% year on year, driven by higher NII on higher rates.

Speaker 1

Deposits were up 10% year on year and down 1% quarter on quarter. We ranked number 1 in retail deposit share based on FDIC data, up 60% year on year, making us the fastest growing among the top 20 banks. And we are now number 1 in L. A. In addition to New York and Chicago, making us top ranked in the 3 largest markets.

Speaker 1

Client investment assets were down 10% year on year, driven by market performance, partially offset by flows. Home lending revenue was down 34% year on year on lower production margins and volume. Moving to card and auto. Revenue was up 9% year on year driven by higher card NII, partially offset by lower auto lease income. Card outstanding were up 18% and while revolving balances were up 15% driven by strong net new account originations And growth in revolving balances per account, they still remain slightly below pre pandemic levels.

Speaker 1

And in auto, originations were $7,500,000,000 down 35% due to lack of vehicle supply and rising rates. Expenses of $8,000,000,000 were up 11% year on year, driven by the investments we're making in technology, travel, marketing and branches. In terms of actual credit performance this quarter, credit costs were $529,000,000 reflecting net charge offs of $679,000,000 which were up $188,000,000 year on year, largely driven by loan growth in card as well as a reserve release of $150,000,000 in home lending. Card delinquencies remain well below pre pandemic levels, but we continue to see gradual normalization. Next, the CIB on Page 5.

Speaker 1

CIB reported net income of $3,500,000,000 on revenue of 11,900,000,000 Investment Banking revenue of $1,700,000,000 was down 43% year on year. IB fees were down 47% versus a strong Q3 of last year. We maintained our number one rank with a year to date wallet share of 8.1%. In advisory, fees were down 31%, reflecting lower announced activity this year. Underwriting businesses Continued to be affected by market volatility, resulting in fees down 40% for debt and down 72% for equity.

Speaker 1

In terms of the 4th quarter outlook, we expect to be down versus a very strong prior year. And while our existing pipeline is healthy, Conversion will of course depend on market conditions. Funding revenue of $323,000,000 was up 32% versus for the prior year, driven by higher NII on loan growth. Moving to markets, revenue was $6,800,000,000 up 8% year on year. Fixed income was up 22% as elevated volatility drove strong client activity in the macro franchise, partially offset by a less favorable environment in securitized products.

Speaker 1

Equity markets were down 11% against a record Q3 last year. This quarter saw relative strength in derivatives, lower balances in prime and lower cash revenues on lower block activity. Payments revenue was $2,000,000,000 up 22% year on year. Excluding the net impact of equity investments, it was up 41% And the year on year growth was driven by higher rates and growth in fees. Security Services revenue of $1,100,000,000 was relatively flat year on year.

Speaker 1

Expenses of $6,600,000,000 were up 13% year on year, largely driven by compensation. Credit costs were $513,000,000 driven by a net reserve build of 486,000,000 Moving to Commercial Banking on Page 6. Commercial Banking reported net income of 946,000,000 Record revenue of $3,000,000,000 was up 21% year on year, driven by higher deposit margins, partially offset by lower Investment Banking revenue. Gross Investment Banking revenue of $761,000,000 was down 43% year on year, driven by reduced capital markets activity. Expenses of $1,200,000,000 were up 14% year on year.

Speaker 1

Deposits were down 6% year on year and quarter on quarter, primarily driven by attrition of non operating balances, While our core operating balances have shown stability as payment volumes continue to be robust. Loans were up 13 year on year and 4% sequentially. C and I loans were up 7% sequentially, reflecting continued strength in originations and revolver utilization. CRE loans were up 2% sequentially, driven by lower prepayment activity in commercial term lending and real estate banking. Finally, credit costs were $618,000,000 predominantly driven by a net reserve build of 587,000,000 while net charge offs remained low.

Speaker 1

And then to complete our lines of business, AWM on Page 7. Asset and Wealth Management reported net income of $1,200,000,000 with pretax margin of 36%. For the quarter, revenue of $4,500,000,000 was up 6% year on year, predominantly driven by deposits and loans on higher margins and balances, largely offset by reductions in management fees linked to this year's market declines. Expenses of $3,000,000,000 were up 10% year on year, driven by compensation, including investments in our Private Banking Advisor teams, technology and asset management initiatives. For the quarter, net long term inflows were $12,000,000,000 across fixed income, equities and alternatives.

Speaker 1

AUM of $2,600,000,000,000 and overall client assets of $3,800,000,000,000 were down 13% and 7% year on year respectively, driven by lower market levels, partially offset by continued net inflows. And finally, loans were flat quarter on quarter, While deposits were down 6% sequentially driven by migration to investments partially offset by client flows. Turning to corporate on Page 8. Corporate reported a net loss of 294,000,000 Revenue was a net loss of $302,000,000 compared to a net loss of $1,300,000,000 last year. NII was $792,000,000 up $1,800,000,000 year on year driven by the impact of higher rates.

Speaker 1

NIR was a loss of $1,100,000,000 down $852,000,000 primarily due to the securities losses I mentioned upfront. And expenses of $305,000,000 were higher by $125,000,000 year on year. Next, the outlook on Page 9. Going forward, we will also provide guidance for total firm wide NII. For the Q4, we expect it to be Approximately $19,000,000,000 implying full year 2022 NII of approximately 66,000,000,000 And we expect NII ex markets for the Q4 to also be about $19,000,000,000 implying that we expect markets NII to be around 0, which brings the full year to about $61,500,000,000 While we're not giving 2023 NII guidance today, You will recall that at Investor Day, we talked about a 4th quarter 2022 NII ex markets run rate of $66,000,000,000 with potential upside for the full year 2023.

Speaker 1

Today's guidance for the Q4 of this year implies an approximate run rate of $76,000,000,000 And from this much higher level, we would now expect Some modest decline for the full year of 2023. In addition, there's quite a bit of uncertainty surrounding the trajectory of key drivers, Including rates, deposit reprice and loan growth. So keep both of those things in mind as you update the 2023 estimates in your models. Moving to expenses, our outlook remains unchanged. And as it relates to the card net charge off rate, we now expect the full year rate to be approximately 1.5% below our previous expectations.

Speaker 1

So to wrap up, we are happy with the strong diversified performance of the quarter as we continue to navigate an environment of elevated uncertainty. With that, I will turn it over to Jamie for some additional remarks.

Speaker 2

Jeremy, thank you very much. Hello, everybody. I just want to give you a little more insight to how we're looking at capital and interest rates a little bit. So capital planning, we're very comfortable with the earnings power of this company, which you could see is enormous and the margins and the returns. And more importantly than that is that we're growing franchise value, I think, all around the firm.

Speaker 2

And in most areas, we're up in market share and in a few areas, we're not. And of course, that disappoints us. But the earnings power gives us a lot of confidence that we'll get over that 13% in the Q1. But we always have to keep in mind the volatility in a bunch of other things. So We know we have to deal with Basel IV.

Speaker 2

We don't know when and how there's going to be and any change in G SIB, such as an uncertainty at the back of our mind. AOCI, AOCI was traditionally countercyclical, but in this kind of environment is more procyclical. So Think of its ratio of another 100 basis points, that's $4,000,000,000 EASL can handle it just in the back of our mind. CECL, CECL already incorporates 1% of what we think the adverse consequences might be. But obviously, if the environment gets worse, we will have to add to reserves And or if we change our outlook, meaning that we think the chance of adverse events are higher, we'll change our reserves.

Speaker 2

Put in the back of your mind that if unemployment goes to 5% or 6%, you're probably talking about $5,000,000,000 or $6,000,000,000 over the course of a couple of quarters. Again, easy to handle, not a big deal. It just does affect capital a little bit. And then RWA Management, I mean, I think we're showing that we can easily manage RWA and drive it down in some areas and up in other areas and stuff like that. It without I would say a very limited Financial effect.

Speaker 2

And the way you should look at this is, we don't tell Commercial Bank or Investment Bank, don't get new business, don't serve your clients. So we're serving clients the way we always do, and you see the loan books growing in a lot of areas. But there are some discretionary things which barely affect us. So we're not putting Conforming mortgage on the balance sheet, whether we originate them or whether correspondents originate them for the most part, because it makes very low sense to do them the balance sheet and We make other choices. And so we do a lot of tools to manage it.

Speaker 2

Obviously, with the capital requirements going up, we're going to find ways to reduce RWA. I'm talking about over year strategically, I think without affecting our basic franchises. Interest rates, I think the way to look at it is we're fairly neutral at this interest rates going up or down. Jeremy said the $19,000,000,000 Please do not annualize that. There are a lot of uncertainties today, and I'm just going to mention a few.

Speaker 2

We're not worried about them. It's not going to change things dramatically, but it does change things. What's going to be QT's effect on deposits? How much deposit migration you can have in this new technological environment and there are pluses and minuses in that. And of course, there are lags.

Speaker 2

There are lags in consumer. There are going to be some lags in Treasury services, there will be some lags in commercial banking. So it's just on the back of our mind, we're going to kind of actively manage that. And the other thing I want to point out is that Taking investment securities losses for the most part is because we want to sell rich securities and replacement cheap securities. We don't want to be locked into something we think will It get worse and not take a chance to buy something that we think will get better.

Speaker 2

So you might expect to see that taking place now. There may be some securities loss in the future who can do that. We're not doing we can do this to manage interest rate exposure, but for the most part, we can do that with swaps too or other things. We just do it in the most efficient and effective way. I want the people managing these portfolios to know that we can sell things we don't want to own and buy things that we do want to own.

Speaker 2

And other than that, we think it was a very, Very good strong quarter across the board. And I guess we'll open for questions now.

Speaker 1

Yes. Thanks, Jamie. Let's go ahead and open up for questions.

Operator

Please standby. And the first question is coming from the line of Ken Usdin from Jefferies.

Speaker 3

Hi, thanks a lot. Good morning. I just wanted to follow-up on the NI and the Other side to Jamie's comments there, obviously, one of the toughest uncertainties is to understand how we think about flows and mix And beta, so just starting to see it, it looks like in terms of deposit costs starting to increase. So how do you think about it now in this new environment where we might go to 4 point Maybe higher in terms of how betas might act over the course of this cycle as compared to any prior cycles and previous thoughts. Thanks.

Speaker 1

Yes. Thanks, John. Good morning. Okay. So at Investor Day, you'll recall that Jen said that we expected betas to be And what we're now seeing as we see the rate hikes come through and we see the deposit rate paid develop is that we're seeing realized betas being Even lower than the prior cycle just through the actuals.

Speaker 1

And the question, Lorne, is why is that? And it's of course, we don't really know, but Plausible theories include the speed of the hikes, which probably means that some of this is lag, but also the fact that the system is more better positioned from a liquidity perspective than in prior cycles. So as we look forward, We know that lives are significant right now. We know that at some point that will start to come out. Obviously, in wholesale, they come out much faster.

Speaker 1

That's probably starting to happen now. But the exact timing of how that develops is going to be very much a function of the competitive environment in the marketplace for deposits and we'll see how that plays out.

Speaker 3

Got it. Okay. And then, just the second follow-up on Jamie's points about like, okay, if things do look worse Looking ahead, you might have to build a little bit more understandable over the next couple of years. Can you just help us understand just where you are In your scenario now scenarios, Bill, then just today still looks great, tomorrow there's some more uncertainty. So how do we just get to start to understand How quickly and how you get your handle on that magnitude of ACL delta and how do you think about it versus either, I don't know, pandemic peak or Day 1 CECL, it's very hard for all of us

Speaker 1

to see this, of course.

Speaker 2

Yes. As you know, I think CECL is an enormously bad accounting policy. Honestly, I wouldn't spend too much time on it because it's not a real number. It's a hypothetical probability based number. And the way I'm trying to make it very simple for you.

Speaker 2

So if you look at the pandemic, we put up $15,000,000,000 over 2 quarters and then we took it down over 3 or 4 after that, okay? And all it did is swing all these numbers and it didn't change that much. I'm trying to give you a number, and obviously, this number could be plus or minus several 1000000000. But if unemployment goes to 6% and that becomes the central kind of case and then you have possibility it gets better and possibility it gets worse, We're probably asking like $5,000,000,000 or $6,000,000,000 That probably would happen over 2 or 3 quarters. And that's as simple as I can make it.

Speaker 2

Yes. Right now, we already have a percent in these adverse and severe adverse case. We could change if we change that next quarter that will be part of that $6,000,000,000 I'm talking about.

Speaker 3

Yes. Okay, understood. Thank you.

Operator

The next question is coming from the line of Ebrahim Poonawala from Bank of America Merrill Lynch. You may proceed.

Speaker 4

Good morning. I guess just following up, Jamie, so appreciate CECL and the model based approach. I think you were quoted in the press talking about the potential for a recession in the next 6 to 9 months. Would appreciate any perspective in terms of are you beginning to see cracks either Be it commercial real estate, consumer where it feels like the economic pain from inflation, higher rates is beginning to filter through to your clients. Would appreciate any insights there.

Speaker 1

Yes. I'll take that Ebrahim. Thanks. The short answer to that question is just no. We just don't see Anything that you could realistically describe as a crack, in any of our actual credit performance.

Speaker 1

I made some comments about this in the prepared remarks on the consumer side, but we've done some fairly detailed analysis about Different cohorts and early delinquency bucket entry rates and stuff like that. And we do see in some cases some tiny increases. But generally in almost all cases, we think that's normalization and it's And it's even slower than we expect. So

Speaker 2

Yes, I think we're in an environment where it's kind of odd, which is Very strong consumer spend. You see it in our numbers, you see it in other people's numbers, up 10% prior last year, up 35% pre COVID. Balance sheets are very good for consumers. Credit card borrowing is normalized and not getting worse. You might see and that's really good.

Speaker 2

So even going into recession, you've got a very strong However, it's rather predictable if you look at how they're spending and inflation. So inflation 10% reduces that by 10% and that extra cap money they have in the checking accounts will deplete probably by sometime mid year next year. And then of course, you have inflation, higher rates, higher mortgage rates, oil, volatility, war. So those things are out there and that is not a crack in current numbers. It's quite predictable it will strain future numbers.

Speaker 4

And just tied to that, I think the other thing that investors from the outside worry about is interconnectedness of the systems, be it the U. K. GILT market, LBOs. How much are you worried about that part of the business in terms of having a meaningful impact in terms of a capital shock at some point over the next year, just given all the QT happening around the world?

Speaker 2

I mentioned QT as being one of the uncertainties because it's a very large change in the flow of funds around the world. Who are the buyers and sellers of sovereign debt? There's a lot of sovereign debt. And but I think if you look at the guilt thing alone is a bump. It's not going to change what we do or how we do it.

Speaker 2

And you're going to see bumps like that because all of these are already mentioned. It's inevitable that you're going to see them. Whether they create systemic risk, I don't know. I have pointed out it's harder for banks to intermediate in that. And that creates a little bit more fragility in the system.

Speaker 2

That does not mean that you're going to see a crack of some sort. But again, it's Almost impossible not to have real volatility based on the facts we already told you. Those are large uncertainties that we know about today and in the future.

Speaker 4

Got it. And great messaging on the call today. Thank you.

Operator

The next question is coming from the line of Jim Mitchell from Seaport Global Securities. You may proceed.

Speaker 5

Hey, good morning. Hey, Jeremy, at the Investor Today, you noted that expense growth in 2023 would slow from this year's level and might be slightly higher than consensus expectations at the time. So is that now that you get closer to next year, is that still holds? And if the economy does get worse than expected, is there some Leverage the pole or is it just still investing heavily regardless?

Speaker 1

Yes. Thanks, Jim. So broadly, yes, it Still holds no real change on the outlook. Just to remind everyone, at Investor Day, I think the consensus was 79.5% for 2023. We said you were a little low.

Speaker 1

I think it Got revised up to sort of 80.5% or something like that. And that's still roughly in the right ballpark. Obviously, we're going through our budget cycle. We're looking at the opportunity set and the environment set for next year. So it's not set in stone.

Speaker 1

But broadly on the question of investments, I'm sure Jamie will agree here that our investment decisions are very much through the cycle decisions. And so we're not going to tend to change those just because of a sort of difference in the short term economic environment. Of course, the volume and revenue related expense can fluctuate as a function of the environment as you would expect.

Speaker 2

Right. I would just like to add, obviously I'd just like to add, obviously, compensation go up or down dramatically, so you all have different estimates about Investment Banking revenues and markets revenues, and We can't really adjust for your numbers for that. But I just want to point out the other side is, we're making heavy investments and we have among the best margins in the business. I think that's a very good thing.

Speaker 5

Right. And maybe on that front, leverage loan write were there any leverage loan write downs this quarter? And is that and how do you Is that market beginning to clear or are there still overhangs?

Speaker 2

Yes. There are no real levered loan write downs this quarter and that market isn't yet clear. We own our share of it is very small, so we're very comfortable.

Operator

Okay. Thanks. The next question is coming from the line of John McDonough from Autonomous. You may proceed.

Speaker 6

Hi, good morning. Jeremy, I wanted to ask about your EAR disclosures, what we call your rate sensitivity disclosures. They look a little different than peers. And When we look at the sensitivity to 100 basis points of higher rates beyond the forward curve, it looks like you're liability sensitive. Can you give us some context of maybe the limitations of that disclosure and how we should put that in context of the assumptions behind it?

Speaker 1

Yes. Thanks, John. And I'd love to have a very long conversation with you about this, but I'm going to keep it short here. It's really all about lags. So, as our disclosure says, we do not include the impact of reprice lags in our EAR calculation.

Speaker 1

So as a result of that, The entire calculation is based on modeled rates paid in the terminal state. As you well know, right now, we're in the middle of some very significant which are affecting the numbers quite a bit and which we expect to persist for some time. So as a result of that, what I would expect in the near term is Something quite similar to what we've experienced this year. As you know, this year as rates have gone up, we revised our NII outlook from 50 at the beginning of the year to now 61.5. So as we look forward in the near term from here, I would expect Similar type sensitivities to rate fluctuations given the live environment that we're in.

Speaker 6

And just to follow-up on Jamie's comments about Not annualizing the Q4, is that where the risks lie to annualizing the Q4? What are some of the puts and takes that you said it might be down a little bit from that Q4 annualized?

Speaker 2

Yes. I've already mentioned you have a rapidly changing yield curve, deposit migration. Everyone does EIR differently. So one is lag. 1 is we assume deposit migration, some people don't.

Speaker 2

We assume our ECRs included in there, some people don't And all of that, I just think for your models, because of all that kind of stuff, just use a number less than annualized in the 'nineteen. So instead of 76, Use a number like 74. Just keep it as simple as possible and we don't know. We hope to beat that, but with all the stuff going on, you just got to be a little cautious And conservative.

Speaker 3

Okay, thanks.

Operator

The next question is coming from the line of Erika Najarian from UBS. You may

Speaker 7

proceed. Good morning. I agree with Ebrahim that your presentation this morning was quite crisp and impactful. So I'm going to ask the question that I think has been sort of the key debate to the stock all year. So at Investor Day in May, you mentioned our RoTCE target of 17% And that was before we found out that the SCB would be higher in June.

Speaker 7

As we think about Your capital build is going faster than expected. And you think about the revenue power that shows through in this firm, Plus or minus what may happen with CECL, do you think you can achieve 17% ROTCE next year?

Speaker 2

Yes. This is obviously a good question. The answer is yes. And one of the things we always look at is normalized ROTCE. So we're very honest.

Speaker 2

We're not over earning an NII, maybe a little bit because of lags and stuff like that, but not a lot. But we are over earning on credit, think of credit card. And the 1.5%, we've never seen a number that low. We're quite conscious of that. So we don't about the 19% this quarter, thinking that's going to continue further.

Speaker 2

It's not. And obviously, we may adjust that 17% a little bit, but it's not a material adjustment. We're going to find we got a lot of very bright people. We're going to find a lot of ways to squeeze some of these things down, including what I call CCARNIS and SCB and Liquidate some assets and change business models just a little bit. If you look at our acquisition, for example, they were non GSIFI acquisitions, Non capital, non GSIFI, all services and service related.

Speaker 2

So that's what we're going to do over time. And we're pretty comfortable that we'll get very good returns. So yes, we're quite and next year is totally dependent on what happens in the environment. But the other thing I would look at, maybe we'll give you this number other time is, What would we earn in a recession? We would have pretty damn good returns in a recession.

Speaker 2

I mean, so I feel very good about that.

Speaker 7

Thank you for that, Jamie. And this is a supermicro question as a follow-up for Jeremy. Why would markets NII be 0 next quarter? And should we expect that to be 0 next year?

Speaker 2

Yes. Thanks, Carol. Thanks, Carol. We're financing the Marcus business at the yield curve. So you're earning the same thing you're paying to finance the training book.

Speaker 1

Yes. Erika, I mean, basically, as rates go up, the funding cost goes up and the offsets on the other side in many cases work through derivatives So derivatives like instruments, so it goes through NIR. Fundamentally, we believe the market's business revenue is rate insensitive. You can see That history through our disclosures this year. So as you look out to next year with the forward curve implying a much less biased Evolution of Fed funds, you shouldn't expect to see as many changes at least from rates.

Speaker 1

Of course, we can sometimes see Somewhat more unpredictable changes from balances, but that should be unbiased one way or the other.

Speaker 7

Got it. Thanks.

Operator

The next question is coming from the line of Mike Mayo from Wells Fargo. You may proceed.

Speaker 8

Hi. Jamie, once again, I'm trying to reconcile your actions with your words. You've said publicly, you mentioned the hurricane, you mentioned the recession, you mentioned look out and there are all sorts of risks. I don't think anyone disagrees with that. On the other hand, your reserves to loans are still well below CECL Day 1.

Speaker 8

So Your actions with the reserving don't seem to reflect your more pessimistic comments about the economy. So how do I reconcile the 2?

Speaker 2

Yes. So the way to do that is in our CECL reserve in our reserves today, there is a significant percentage Probability that we put on adverse and severe adverse already. So it's in there already. A lot of people work in these CECL reserves. Our economists, Jeremy, a lot of other folks, it's not set by me because I have to think that the odds might be different than other people.

Speaker 2

And so but I completely understand what you're saying. And the numbers are very good. We have some of that. I'm trying to be very honest about if things get worse, Here's what it might will mean for reserves. That may be different because of course these calculations change all the time.

Speaker 2

But Yes. It doesn't mean Michael, which is another thing which in CECL, the timing of when something happens is very important. So if it happens, if you said a recession is going to happen in the Q4 of next year, that would be very different if it's going to happen in the Q1 of next year?

Speaker 8

Yes, I just understood it as the lifetime losses on the loans as opposed to that. It is, but

Speaker 2

some loans yes, but some loans have a short life and some loans have a long life.

Speaker 8

Okay. Let's just cut to the chase. So where are you versus 3 months ago? I mean, is it, you certainly got headlines with the hurricane comment and all that. And it's Look, like as you said, you have Fed tightening, QT, tighter capital rules for banks.

Speaker 8

You have like the trifecta of tightening by The Fed and then you have wars and everything else. So I don't think any stock market supports your view and about all the risks out there. But Are things better, worse or the same as they were 3 months ago?

Speaker 2

They're roughly the same. We're just getting closer to what you and I might consider bad events. So in my hurricane, I've been very consistent, but looking at probabilities And possibilities. There is still, for example, a possibility of a soft landing. We can debate, we think that percentage, yours might be different than mine, But there's a possibility of a mild recession.

Speaker 2

Consumers are in very good shape, companies are in very good shape. And there's a possibility of something worse, mostly because of the war in Ukraine and oil price and all things like that. Those I wouldn't have I would not change my possibilities and probabilities this quarter versus last quarter

Speaker 8

for me. And then, Ernest, I'm going to

Speaker 2

play a different point. Yes.

Speaker 8

Last follow-up. I know you invest in your cycles. You've always done that. You're consistent. But I mean, your headcount increase is probably going to be the highest in the industry.

Speaker 8

I mean, headcount from 266,000 to 288,000, your CIB, you're adding headcount. If you did expect weakness in 9 months from now, wouldn't you wait to hire people, maybe get them a little cheaper?

Speaker 2

No.

Speaker 3

Okay. All right. Thanks a lot.

Operator

Thank you. The next question is coming from the line of Betsy Graseck from Morgan Stanley. You may proceed.

Speaker 9

Hi, good morning.

Speaker 2

Hi, Betsy.

Speaker 9

Hi. A couple of questions. One, just on the investment spend. Could you give us a sense as to The areas that you're leaning in the most as we should be thinking about into next year because you've obviously done a lot this year with regard to Technology advancement, companies that you're buying to enhance your digital capabilities and international expansion in particular on the consumer side. So Just thinking through is this continuation on those themes or is there something else we should be looking for?

Speaker 2

Betsy, it's exactly what we showed you at Investor Day, almost no change. So take out that deck, we broke out by business kind of investment, investment spend, tech And it's pretty much on track for that.

Speaker 9

And the inflation that drives some of that cost structure you can deal with through just efficiency elsewhere, is that fair?

Speaker 2

Believe it or not, that was in the numbers we gave you in May.

Speaker 9

Okay. And then separately on the bond restructuring that you did this quarter and the comments around, look, we don't need to hold stuff we don't need to hold, we don't want to hold. With that, that's kind of suggest to me that there'll be More bond restructuring as we go through the next quarter. Is there any reason why you didn't clean the whole thing up this quarter?

Speaker 2

No, I think I said we sell rich securities and buy cheap. So if you look at if you look what happened to mortgage spreads, they gapped out, They gapped in, we bought. They gapped out, we sold. And that kind of stuff, Ginnie 2, Ginnie 2.5, you can have different point of views. But And I do expect future bond losses going forward.

Speaker 2

I just don't think that's real earnings. So I think but I want our people, our experts in the investment area to know If they really want to sell something, we're going to sell it. We're not going to sit here and lock ourselves into somebody who's gotten very, very rich because we feel like we can't take a bond loss. And remember, it doesn't affect capital. And in fact, when you reinvest it, which we tend to do, you actually have higher earnings going forward.

Speaker 9

Okay. Thanks.

Operator

The next question is coming from the line of Glenn Schorr from Evercore ISI.

Speaker 2

And let me just add too, like you saw the CLOs gapped out in Europe. I want our people, when they gapped out like 3 100 basis points, I want them to be willing to buy. They might sell something to do with that, but that is a very smart thing to do.

Speaker 10

Okay. Thank you. This is Glenn. So look, from time to time, weird things happen in the market. We get these Losses like Archegos and now this U.

Speaker 10

K. Pension LDI issue. So my Question for you is besides that, do you have risk in the derivatives book and is this situation done? It's more of When you meet with risk committee, are there pockets of leverage that you're considering on these big market moves, whether it be the dollar

Speaker 8

or rates where we are not thinking

Speaker 10

of Leica. Or do you view the LEI issue as an isolated event?

Speaker 2

Yes. I'll mention and Jeremy you might have something to add. But so the LDI It is a bump in the road. And I think the Bank of England is also trying to get through this thing without changing all the policies about monetary policy and QT. And I was surprised to see how much leverage there was in some of those pension plans.

Speaker 2

And my experience in life has been when you have things like what we're going through today, There are going to be other surprises. Someone is going to be off sides. We don't see anything that looks systemic, But there is leverage in certain credit portfolios, there's leverage in certain companies, there's leverage. So you're probably going to see some of that. I do think you're going to see volatile markets.

Speaker 2

You already see very low liquidity. So something like the LDI thing could cause more issues down the road. It happens constantly and stuff like that, but so far it's a bump in the road. The banking system itself is extraordinarily strong.

Speaker 10

Would the dollar qualify as one of those Super strong moves that could put people off size. And if so, how do you make sure you protect JPMorgan against that?

Speaker 2

Well, we're because we're we generally we're not taking them we generally hedge when it comes to big currencies and stuff like that. But yes, Dollar flows, QT, emerging markets, hedge funds, yes, that would be a category that might something might happen there. It wouldn't be it shouldn't be something that's going to affect JPMorgan that much. In fact, it usually creates an opportunity for JPMorgan.

Speaker 1

Yes. On that point Glenn, I was going to say

Speaker 2

the same thing,

Speaker 1

which was traditionally the case that emerging The struggle, sovereign struggle with the kind of dollar strength that we're experiencing right now, but our emerging market franchise folks have been through

Speaker 2

Just to add to the strength of the franchise, I remember looking back at our emerging markets results by quarter over a decade. It was shocking to me how few quarters and how few countries we ever lost money. We may have had low returns in some quarters, but it was shocking. We've made money in Argentina every almost every year for the last 20 years. And I think there was 1 quarter we put up reserves for one of the oil companies and took them down.

Speaker 2

But It's kind of very the stability is striking.

Operator

The next question is coming from the line of Gerard Cassidy from RBC Capital Markets.

Speaker 11

Thank you. Good morning, Jeremy. Good morning, Jamie. You guys have been talking about the System liquidity with Jamie you referenced QT also the fragility of the system. Can you share with us What are the metrics you guys are looking at to see if the system does have a problem on liquidity?

Speaker 11

Just this week, you probably saw that the Swiss National Bank upped its reserve currency swap lines to $6,300,000,000 So what are some of the things you guys focus in on to see if there's Going to be maybe more some liquidity issues that could lead to greater problems?

Speaker 1

Yes. I mean, Jiorar, broadly, if you just look at standard regulatory reporting of LCR ratios In the U. S. Banking system, everyone just has very significant surpluses. And of course, we can go into the question of As Q2 plays through and how that interacts with RRP and loan growth, whether that puts some pressure on banking system deposits, but that's starting from a very, very strong position.

Speaker 1

So there's a lot of cushion there for that to come down before you start to have a real challenge from a liquidity perspective.

Speaker 2

We look at everything from the Fed repo to Quadrant tightening to net issuance of treasuries, net issuance of mortgages and Treasury volatility and treasury bid ask spreads and treasury markets and all that, we're looking at all of that. The banking system is extremely strong, extremely strong. It's not what you're going to see will not be in the banking. There may be a bank who's outside somewhere, but It will be somewhere else. It will be somewhere else.

Speaker 2

It might be in credit, it might be in emerging markets, it might be in FX, but you're likely to have something like that. We We have events like the ones we're talking about.

Speaker 11

Very good. And then in terms of the Investment Banking and Capital Markets Businesses, can you guys give us any color into pipelines, how they stood at the end of the Q3? And as you're going into the Q4, What you're seeing in terms of those business lines?

Speaker 2

Yes. I've always pointed out to you all the pipelines Come and go, okay. You've seen that the size we the revenue had before. So pipeline is not necessary to see. I would put in your model Lower IB revenues next quarter than this quarter based on what we see today.

Speaker 2

Markets, we have no idea. Seasonally, it's generally a low quarter in Q4, but we don't know this quarter because there's so much activity taking place and your guess is as good as ours.

Speaker 11

Very fair. Thank you.

Operator

The next question is coming from the line of Matt Socanar from Deutsche Bank. You may proceed.

Speaker 2

Can you guys talk

Speaker 3

about the outlook for loan growth the next few quarters? And besides some of the obvious areas like leverage lending and Correspondent mortgage you already talked about, any areas that you're tightening around the edges?

Speaker 1

Yes, Matt. So let me take your last question first. So In general, no, we underwrite through the cycle. We haven't we didn't really loosen our underwriting standards in the moment where everything looked Great. And so we don't see any need to tighten now.

Speaker 1

Really a lot of consistency there. In terms of the actual loan growth outlook, We have said for this year, obviously only 1 quarter left, that we'd have high single digits. No meaningful change to that outlook there, probably a little bit Of a headwind as a function of rates, as you mentioned, and some of the RWA optimization in mortgages. As we go into next year, we remain very positive and optimistic about the card story across a range of dimensions in terms of both outstandings and revolve normalization. But for the rest of the loan growth environment, it's going to be, I think, very dependent, especially in wholesale on the macro We know that in recession environments, we tend to see lower loan demand.

Speaker 1

At the same time, we've got a lot of great initiatives going and client engagement and New client, so we'll just have to see how that plays out next year.

Speaker 3

And I guess when we read headlines about home prices going down in some markets and Car prices starting to roll. I mean, why doesn't that drive some tightening in those businesses?

Speaker 2

Well, it has. I mean, look at the volumes and mortgage have dropped and cars have been quite up with dropped and stuff like that and It's already in our numbers and we would expect that to continue that way.

Speaker 3

Okay. Thank you.

Operator

The last question is coming from the line of Charles Peabody from Port Harless Partners. You may proceed.

Speaker 10

Yes. I'm just curious in your guidance on NII where you kind of implied Q4 would be peak run rate. Next year, do you factor in any impact from a possible treasury buyback program, which could Redirect liquidity out of the money market system into the banking system and therefore keep your deposit betas lower. Do you think about that at all as a possibility?

Speaker 2

Yes. I think I don't know if you're listening to what I said before. QT, net issuances from mortgages, Net issuances treasuries globally is going to reduce deposits and create certain forms of volatility and absolutely incorporate that in our thinking, Including lags, the change in the yield curve, change in the spreads and all those things in the numbers we gave you. That's why we're being trying to be conservative NII that while you can annualize the 19% to 76%, you can have a model put in 74% And it incorporates all of that.

Speaker 3

Thank you. You're welcome.

Operator

At the moment, there are no further questions on the line.

Speaker 2

Thank you very much and we'll talk to you all next quarter. Thank you.

Operator

Thank you. Everyone, that concludes your conference call for today. You may now disconnect. Thank you all for joining and enjoy the rest of your

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