JPMorgan Chase : 4Q21 Earnings Transcript

4 Q 2 1 F I N A N C I A L R E S U L T S

EARNINGS CALL TRANSCRIPT

January 14, 2022

MANAGEMENT DISCUSSION SECTION

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Operator: Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Fourth Quarter and Full-Year 2021 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. Please stand by.

At this time, I'd 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.

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Jeremy Barnum

Chief Financial Officer, JPMorgan Chase & Co.

Thank you, operator. Good morning, everyone. The presentation is available on our website and please refer to the disclaimer in the back. It's slightly longer this quarter to cover both our fourth quarter and full-year results as well as spend some time talking about the outlook for next year.

Starting with the fourth quarter on page 1, the firm reported net income of $10.4 billion, EPS of $3.33 and revenue of $30.3 billion and delivered an ROTCE of 19%. These results included a $1.8 billion net credit reserve release which I'll cover in more detail shortly. Adjusting for this, we delivered a 17% ROTCE this quarter.

Touching on a few highlights, as we suggested last quarter, we have started to see a pickup in loan growth, 8% year-on-year and 3% quarter- on-quarterex-PPP, with a significant portion of this growth coming from AWM and Markets. But we're also seeing positive indicators in Card as well as increasing revolver utilization in C&I. And it was an exceptionally strong quarter for Investment Banking particularly M&A as well as another good quarter in AWM.

On page 2, we have some more detail on the fourth quarter. Revenue of $30.3 billion was up 1% year-on-year. Net interest income was up 3% primarily driven by balance sheet growth partially offset by lower CIB Markets NII. And NIR was down 1% largely driven by normalization in CIB Markets and lower production revenue in Home Lending mostly offset by higher IB fees on strong advisory.

You'll notice that we've added some memo lines to this page this quarter to show NII and NIR excluding Markets as well as a third line of stand-alone Markets total revenue which, as we said before, is more consistent with the way we run the company. We'll be keeping this format going forward, and you'll see later that this is how we will talk about the outlook. If you look at things on this basis, the drivers are the same, but the numbers are a little different. NII excluding Markets is up 4%, NIR excluding Markets is up 3% and Markets is down 11% on normalization. Expenses of $17.9 billion were up $1.8 billion or 11%, largely on higher compensation, and credit costs were a net benefit of $1.3 billion reflecting reserve releases.

Looking at the full year results on page 3, the firm reported net income of $48.3 billion, EPS of $15.36, and record revenue of $125.3 billion. We delivered a return on tangible common equity of 23% or 18% excluding the reserve releases.

And then on to reserves on page 4. We released $1.8 billion this quarter, reflecting a more balanced outlook due to the continued resilience in the macroeconomic environment. Our outlook remains constructive, but our reserve balances still account for various sources of uncertainty and potential downside as a result of the remaining abnormal features of the economic environment.

On to balance sheet and capital on page 5, we ended the quarter with a CET1 ratio of 13%, up slightly, and reflecting nearly $5 billion of capital distributions to shareholders including $1.9 billion of net repurchases.

With that let's go to our businesses, starting with Consumer & Community Banking on page 6. CCB reported net income of $4.2 billion including reserve releases of $1.6 billion. Revenue of $12.3 billion was down 4% year-on-year and reflects lower production margins in home lending and higher acquisition costs in Card, partially offset by higher asset management fees in Consumer & Business Banking. Many of the key balance sheet drivers are in line with the prior quarter. Deposits were up 20% year-on-year and 4% sequentially, and client investment assets were up 22% year-on-year, about evenly split between market performance and flows. Combined credit and debit spend was up 27% versus the fourth quarter of 2019 with each quarter in 2021 showing sequential growth compared to 2019. Within that, travel and entertainment spend was up 13% versus 4Q 2019, though we have seen some softening in recent weeks contemporaneously with the Omicron wave.

Card outstandings were up 5% year-on-year but remained down 8% versus 4Q 2019. However, it's promising to see that while revolving balances bottomed in May of 2021, since then they have kept pace with 2019 growth rates. In Home Lending, loans were down 1% year-on- year but up 1% quarter-on-quarter as prepayments have slowed. And it was another strong quarter for originations, totaling $42.2 billion, up 30% year-on-year. In fact, it was the highest fourth quarter since 2012, driven by increase in both purchase and refi volumes. In Auto, average

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loans were up 7% year-on-year and up 1% quarter-on-quarter. After several strong quarters, the lack of vehicle supply resulted in a decline in originations to $8.5 billion, down 23% year-on-year.

So overall, loans ex-PPP were up 2% year-on-year and sequentially driven by Card & Auto. And expenses of $7.8 billion were up 10% year- on-year on higher compensation as well as continued investments in technology and marketing.

Next, the CIB on page 7. CIB reported net income of $4.8 billion on revenue of $11.5 billion for the fourth quarter. And for the full year, net income was $21 billion on record revenue of $52 billion. Investment Banking revenue of $3.2 billion was up 28% versus the prior year and up 6% sequentially. IB fees were up 37% year-on-year, primarily driven by a strong performance in advisory, and we maintained our number one rank with a full year wallet share of 9.5%. In advisory, we were up 86%, and it was the third consecutive all-time record quarter benefiting from elevated M&A volumes that continued throughout 2021, specifically from mid-sized deals. Debt underwriting fees were up 14% driven by an active leverage loan market primarily linked to acquisition financing. And in equity underwriting, fees were up 12% primarily driven by our strong performance in IPOs.

Moving to Markets, total revenue was $5.3 billion, down 11% against a record fourth quarter last year. Compared to 2019, we were up 7% driven by a strong performance in equities. Fixed income was down 16% year-on-year, reflecting a more difficult trading environment early in the quarter, especially in rates, as well as continued normalization from the favorable trading performance last year in currencies, emerging markets, credit and commodities.

Equity Markets were down 2% on $2 billion of revenue as continued strength in Prime was more than offset by modest weakness in derivatives. For the full year, Equity's revenue was $10.5 billion, up 22% and an all-time record.

It was a particularly strong year for both investment banking and markets, and looking ahead, we do expect some modest normalization of the wallet in 2022. However, for purposes of the first quarter in Investment Banking, the overall pipeline remains quite robust.

Payments revenue was $1.8 billion, up 26% year-on-year or up 7% excluding net gains on equity investments. And the year-on-year growth was from higher fees and deposits, largely offset by deposit margin compression. Security services revenue of $1.1 billion was flat year-on- year.

Expenses of $5.8 billion were up 18% year-on-year predominantly due to higher compensation as well as volume-related and legal expenses. And credit costs were a net benefit of $126 million driven by the reserve release I mentioned upfront.

Moving to Commercial Banking on page 8. Commercial Banking reported net income of $1.3 billion and an ROE of 20%. Revenue of $2.6 billion was up 6% year-on-year on record Investment Banking revenue driven by continued strength in M&A and acquisition-related financing.

Expenses of $1.1 billion were up 11% year-on-year largely due to investments and higher volume- and revenue-related expenses. Deposits were up 8% sequentially on seasonality. Loans were down 1% year-on-year and up 2% sequentially excluding PPP. C&I loans were up 4% ex-PPP, primarily driven by higher revolver utilization and originations in middle markets and increased short-term financing in corporate client banking. CRE loans were up 1% with higher new loan originations offset by net payoff activity. And credit costs were a net benefit of $89 million driven by reserve releases with net charge-offs of 2 basis points.

And then to complete our lines of business, AWM on page 9. Asset & Wealth Management reported net income of $1.1 billion with a pre-tax margin of 34%. Revenue of $4.5 billion was up 16% year-on-year as higher management fees and growth in deposits and loans were partially offset by deposit margin compression.

Expenses of $3 billion were up 9% year-on-year, predominantly driven by higher performance-related compensation and distribution fees. For the quarter, net long-term inflows were $34 billion and for the full year were positive across all channels, asset classes and regions totaling a record $164 billion.

AUM of $3.1 trillion and overall client assets of $4.3 trillion, up 15% and 18% year-on-year respectively, were driven by strong net inflows and higher market levels.

And finally, loans were up 4% quarter-on-quarter with continued strength in custom lending, mortgages and securities-based lending, while deposits were up 15% sequentially.

Turning to Corporate on page 10. Corporate reported a net loss of $1.1 billion. Revenue was a loss of $545 million, down $296 million year- on-year. NII was up $160 million primarily on higher rates, mostly offset by continued deposit growth. And NIR was down $456 million primarily due to lower net gains on legacy equity investments. Expenses of $251 million were down $110 million year-on-year.

So with that, as we close the books on 2021, we think it's important to take a step back and look at the performance over the last few years through the volatility of the COVID period and then pivot to discussing the 2022 and medium-term outlook.

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So turning to page 11. What stands out is the stability of both revenues and returns through a very volatile period, especially when you strip out the reserve build and subsequent releases in 2020 and 2021.

If you look at the revenue drivers on the bottom left-hand side of the page, you see overall revenue growth with some significant diversification benefits. NII ex-Markets was down nearly 20% on the headwinds of lower rates and Card revolve that we've discussed throughout the year. This was partially offset by significant NIR growth ex-Markets, largely from higher IB fees and AWM management and performance fees. And we also saw strength across products and regions and CIB Markets as the extraordinary market environment in 2020 did not normalize as much as we expected in 2021. So, when you look across the company, we saw consistent, modest revenue growth as well as good performance in the areas that we control, notably staying in front of our clients to serve them well and managing our risks effectively, resulting in quite stable returns, once again proving the power of the JPMorgan Chase platform.

So, turning to the next page. The strong revenue performance and consistent returns have further bolstered our confidence in forging ahead with an investment strategy designed to ensure that we're prepared for the long term. On the left-hand side of the page, you can see the expense drivers from 2019 to 2021. The first part is structural, and while the growth of 2% is modest over the two-year period, that includes some COVID-related effects that we would see as temporary, including, for example, lower T&E spend and elevated employee attrition and we do expect some catchup in those effects as we look forward.

Then the middle bar is $3.4 billion of growth in volume- and revenue-related expenses. Some significant portion of that is driven by increases in incentive compensation primarily from Investment Banking, Markets and Asset & Wealth Management, the major areas where we have seen exceptionally strong results and where changes in compensation are more closely linked to changes in performance. And remember, we've seen a lot of market appreciation and strong flows in AWM and CCB, so don't assume all of this is CIB as you look forward because there are some versions of the world where the markets and fee wallet goes one way and AWM goes the opposite way.

And then this bar also includes volume-relatednon-comp expenses such as brokerage and distribution fees, some of which are true expenses and some of which are bottom line neutral because they're offset with revenue gross-ups.

Then the last bar of $1.7 billion, as previewed with you this time last year, is a result of our investment agenda which we've been executing largely according to our plans and consistent with our long-standing priorities. You can see the breakdown of the total investment spend on the right-hand side of the page. $9.6 billion growing to $11.3 billion across the categories that we've often discussed.

We're continuing to broaden our footprint and expand our distribution network. Then marketing, where the significant increase in spend as part of the reopening in the second half of last year resulted in a full-year spend comparable to 2019. And tech which we've broadened to include tech adjacent spend reflecting our recognition that tech means more than just software development and encompasses data and analytics, AI, as well as the physical aspects of modernization such as data centers.

And what's really powerful to note here is our ability to make these investments, which are quite significant in dollar terms and are designed to secure our future, while still delivering excellent current returns.

So, over the next few pages, let's double click into some of these investment areas to see what we're doing starting with examples of marketing and distribution on page 13.

We've expanded our reach across the US and are thrilled to be the first bank in all contiguous 48 states, an important milestone in our branch market expansion plans. We also continue to expand internationally, including 13 international markets as part of our commercial bank expansion, China and both our CIB and AWM businesses and in the UK with Chase UK where we've seen exciting progress since we launched in September although we expect this to be a multiyear journey before having a measurable impact on the firm overall.

We continue to hire bankers and advisors in Investment Banking, Private Banking and Wealth Management, really across all of the wholesale and consumer footprint where we believe we have opportunities to better penetrate geographies and sectors to continue to grow share. And as I just said, the point of our investment strategy is to secure the future of the company, so we're not making short-term claims about share outcome causality, but as you can see at the bottom of the page, our market shares are robust and growing broadly across the company.

Turning to page 14, in addition to all of our distribution-related investments, a critical foundational component of our strategy is technology where we spend over $12 billion annually with about half of that being investments or as we sometimes call it "change the bank" spend.

It's important to understand what's in the investment category. About half of that is foundational and mandatory, which includes regulatory- related investments, modernization, and the retirement of technical debt, in addition to other key strategic initiatives to help us face the future. On the left-hand side, you can see some more detail around this. Modernization, which includes migration to the cloud as well as upgrading legacy infrastructure and architecture, data strategy that enables us to extract the value that exists in our proprietary dataset by cleaning it and staging it in the right ways and then deploying modern techniques against it, attracting and acquiring top talent with modern skills, and a product operating model which is obviously a popular buzzword these days.

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But if you look through all that, it reflects the simple reality that the best products get delivered when developers and business owners are working together iteratively with end-to-end ownership. Underpinning all of this is our continued emphasis on cybersecurity to protect the firm and our clients and customers, as well as maintaining a sound control environment.

Moving to the right-hand side, the other half of the investment spend is to drive innovation across our businesses and with our client-facing products. We believe it's critical to identify and resolve customer pain points and improve the user experience, and we're attacking the problem with a combination of building, partnering, and buying.

And so a few examples of that. On the retail side, we've been able to digitalize existing product offerings with applications like Chase MyHome and launched our cloud-native digital bank with our recent Chase UK launch. On the wholesale side, we've continued to innovate on our Execute trading platform, commercialized blockchain through Onyx, and are building out real-time payments capabilities. In addition, our modernization allows us to more efficiently partner with or acquire more digitally centered companies, and you can see several examples of this on the page.

So taken together, our strategy and investments are critical to ensuring that we can compete with the most innovative players out there, whether we're the ones pushing the envelope of innovation or responding quickly to the creativity of our competitors, but doing so at scale.

With that, let's talk about the outlook and the year ahead starting on page 15. As you'll remember from Daniel's comments in December, the 17% that we have talked about as a medium-term ROTCE target is not realistic for 2022. We do expect to see some tailwinds to NII, including the benefit of the latest implieds, and the expectation that Card revolve rates will increase. But the headwinds likely exceed the tailwinds, as capital markets normalize off an elevated wallet and we continue to make additional investments, as well as the impact of inflationary pressures. However, despite these potential challenges for the near-term outlook, we do continue to believe in 17% ROTCE as our central case for the medium term, as rates continue to move higher and we realize business growth driven by our investments.

So let us try to give you more detail around forward-looking drivers that could be headwinds or tailwinds. So first, the rate curve. Our central case does not require a return to a 2.5% Fed funds target rate, as the current forward curve only prices in six 25 basis points hikes over the next three years. Assuming we realize the forward curve, from there, we see the outcomes as being relatively symmetric, with plus or minus 175 basis points of ROTCE impact as a reasonable range relative to our central case. And of course, there are obviously any number of rate paths to get there, which could produce different outcomes over the near term.

In this illustration, the downside assumes that rates stay relatively constant to current spot rates, whereas upside would be driven by a combination of a steeper yield curve and more hikes, together with a more favorable deposit reprice experience. And of course, what we are evaluating here is the impact of rates in isolation on NII. But for the performance of the company as a whole, credit matters a lot, and the reason why rates are higher will have an impact on that.

In Markets and banking, we feel good about the share we've taken, and there are reasons why the beginning of a rate-hiking cycle could be quite healthy for fixed income revenues in particular, at least in the sense that it might provide a partial offset to what we would otherwise expect in terms of post-COVID revenue normalization. In our central case, Markets and banking normalize somewhat in 2022 relative to their respective record years in 2020 and 2021 and resume modest growth thereafter. The downside case assumes a return to 2019 trendline levels, with sub-GDP growth rates, whereas the upside case assumes continued growth from current elevated levels.

As we've been discussing in Consumer, the big surprise as we emerge from the worst moments of the pandemic was the lower level of Card revolve, even as spend has started to return. In our central case, we assume healthy sales growth on the back of continued economic recovery and strong account acquisitions, and that, combined with relatively constant revolve rates, generates a strong recovery in revolving balances.

But there are those who worry about a permanent structural shift in consumer behavior, which could be a source of downside, and in that scenario, revolving balances could stay depressed relative to the long-termpre-pandemic averages, resulting in approximately 50 basis points of downside relative to our central case. Of course, there could be an upside case where revolving balances recover much faster, but we believe the risks here are more likely to be skewed to the downside.

And then let's touch on inflation for a second, which is obviously increasingly relevant. On balance, modest inflation that leads to higher rates is good for us. But under some scenarios, elevated inflationary pressures on expenses could more than offset the rates benefit, which could represent around 75 basis points of downside. And while it's not on the page, another key driver is capital, where even though we remain hopeful, our central case assumes no recalibration of the rules and that we will operate at a higher CET1, reflecting that we finish the year in the 4.5% G-SIB bucket, which equates to a 1% increase from G-SIB in the central case, although as a reminder, that does not become binding until 2024.

This is a good opportunity to point out that QE deposit growth and growth of the overall financial system, proxied by GDP growth of the factors in the original 2015 rule release, combined, represent two full G-SIB buckets. So in the absence of those, we would still be in the 3.5% bucket.

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