Steve Schaefer - Q3 2014 Earnings Call Transcript lyrics

This transcript is annotated! Click on the highlights to read what others are saying. If you'd like to add your own insights, comments, or questions to specific parts of the transcript, visit the transcript page on Genius, highlight the relevant text, and click on the bu*ton that pops up. Your annotation will appear both here and on Genius. JPMorgan Chase & Co. Q3 Conference Call October 14, 2014 _______________________________________________________ Marianne Lake - CFO: Thank you, operator. Good morning everyone. I am going to take you through the earnings presentation, which is available on our web site. Please refer to the disclaimer regarding forward-looking statements at the back of the presentation. Starting on page one, the firm delivered strong underlying performance this quarter with net income of $5.6 billion on strong revenue of over $25 billion, up 5% year-on-year, reflecting growth across most of our businesses, and EPS of $1.36 and the return on tangible common equity of 13% for the quarter. Included in our results with firm-wide legal expense of approximately $1 billion after tax, which relates to a number of matters in large part and estimated amount for FX which was treated as non-deductible tax purposes. There were also a number of smaller items, most notably a benefit of approximately $400 million of tax discrete items in corporate as well as consumer reserve releases of $200 million pre tax. Excluding these and other non-core items, net income was approximately $5.8 billion reflecting strong core performance. _______________________________________________________ John McDonald - Sanford Bernstein: On the legal expense, did you give any color in the beginning on what was that for this quarter and in terms of the FX and LIBOR investigations, are those at the stage that where reserves can be built or can you offer anything on that? Marianne Lake - CFO: At the beginning what I did say is that there are a number of matters in our legal expenses for the quarter but in large part it does relate to FX and consequently you can read into that the things are further progressed this quarter than last but obviously we can't comment any further. John McDonald - Stanford Bernstein: And then just in terms of share buybacks and capital levels, I was wondering about your thoughts on the prospects for higher G-SIB buffers in the U.S. and how are you going to balance in the near term your growing your risk based capitals against executing the remaining buyback authorization that you have. Marianne Lake - CFO: Just to talk about, so we did $1.5 billion of buyback this quarter same last quarter, obviously we have another two to go in terms of our approval. We don't know what the rule is going to be, it'll come out before the end of the year, we'll have to see what that says. There will be a transition timeline, it will transition on the same timeline phase in timeline that the rest of the buffer is transitioning on through to the 1 of January 2019. So there is no need for us to overreact and rate the compliance, so we would do much as we have done over the course of the last two years which is balance continuing to make good progress, getting to wherever it is that we need to be which we're not going to get at this moment against the desire to want to continue to deliver capital to shareholders in the form of increased dividends and repurchases. Jamie Dimon - Chairman and CEO: And remember you all have forecast where our CET 1 goes up to 10.5 or 10.8 or something like that, when the new CCAR rules come out we'll probably be able to fine tune where it might look like at the end of 2015. Marianne Lake - CFO: I mean the reality of the situation is sitting at 10.1% wearing good company with the rest of the industry in the context that just given how CCAR operates, its highly likely that there will be overall accretion to capital in the industry over the course of 2015 and we'll be no exception. So we will continue to accrete capital up towards and potentially above our 10.5. But we're not going to recalibrate a target until we understand the rules. One thing on the target, just when you see the rules yourself know that in our 50 to 100 basis points buffer the reason why we had a range was to allow in part to some of uncertainty and things evolving and so we would obviously want to fine tune and put a finer point a point on our buffer. So it's possible that a buffer may not be as high as 100% too. So we'll deal will all of that when the rules come out. Jamie Dimon - Chairman and CEO: And we've also been remember very careful, the purpose here to protect and grow the client franchise, meet the regulatory agenda and then we'll adjust to all these changes as they take place, the big ones we're go to know by the end of the year. _______________________________________________________ Glenn Schorr - ISI: So first question on -- deposit growth has been growth and I guess I would love to see higher rates in loan growth. But you are positively positioned for the parallel shift up. I guess my first question is how does that change in more of a flattening environment that we are experiencing right now? Do you capture most of the benefit anyway just getting off zero on the short end? Marianne Lake - CFO: Yes, I mean -- yes there is a significant benefit. If you look at our disclosures, you can kind of see the short-end versus long-end impact. Basically there is a significant benefit coming up off the short-end that we would expect to capture a significant portion of that in the first 12 months but we are obviously are looking for a more normal curve overall overtime. Glenn Schorr - ISI: Okay. Just -- I know we are not supposed to read too much into it, but in everyone's mid-cycle (DFAST) [ph] results I think everyone was calling for -- or the big banks were calling for higher losses and lower PPNR in general relative to your own self-test from the previous year. Is that conservatism? Because it is a little different relative to the commentary about an improving economy, a little bit better loan growth, good expense control, things like that. I'm just curious what we are supposed to take away from that mid-cycle. Marianne Lake - CFO: So obviously not to comment on everybody else's results but our results were in terms of the size of the economic downturn they were relatively in line and our results were relatively in line with a few minor sort of enhancements to our process. So we weren't actually looking for materially changed results in our mid-year (DEPAST) [ph]. So obviously we haven't had instructions yet, we are expecting them absolutely eminently possibly as early as this week in terms of guidance from the regulators on how to think about the bank holding company scenario for 2015 CCAR to the degree that there are more and more stressful idiosyncratic losses or stresses on leverage or other things, it could have an impact but we have to wait and see. Glenn Schorr - ISI: Okay, okay, last one. There are a couple of articles on rewriting of banker's agreements between major dealers to resolve some of the early termination rights issues, which obviously is going towards the Fed's issues on living wills. A, did that actually happen or is that just being talked about? And B, does it resolve the issue in the Fed's -- I know you can't speak for the Fed, but does it resolve the issue or do you still have the client side to deal with over time? Jamie Dimon - Chairman and CEO: So Mark Carney of the FSB and the Bank of England, Chairman said that two major things remain to finish kind of the too big to fail issues. One is the how you deal with derivatives and the second is TLAC and that both of those would be done this year. This is the thing has been done, it's a great example, I think it was 18 firms who got together and came up in a very complex way globally how to deal with this in a way that the regulators and the Fed put out a press release and Mark Carney has been positive about it and it was industry led. So we do think it does solve that issue. So all the buy cycles do it. It will be eventually all the sales side I mean the other way around, all the buy side will eventually want to do it because it's actually better for the business as a whole, maybe not better for one trading desk but it's better for the business as a whole and it's a little coercive. So that the regulators are basically saying that to do further derivatives you're going to have to adopt these new rules and we think over time a lot of you will do it. Marianne Lake - CFO: And just one thing that the G18 does put a break to the back of the problem and but we are still awaiting actual regulatory guidance. So there is still the strong possibility that the guidance will be broader and we would encourage it to be broader if nothing else for simplicity purposes not necessarily because the G18 alone don't really achieve the result. Jamie Dimon - Chairman and CEO: And we were also in a position where even if the buy side doesn't for some reason that we would be able to manage that risk overtime and it would diminish overtime because in the short duration of the derivatives. Glenn Schorr - ISI: Right. And as long as the Fed counts that as “material progress by July of '15”, I am cool with it too. Thanks. _______________________________________________________ Betsy Graseck - Morgan Stanley: On the payments discussion: In your prepared remarks, Marianne, you highlighted that you are delighted to work with Apple Pay but that you are also working on some other things yourself. Could you speak to what other things you are doing independently? Marianne Lake - CFO: So, I mean we talked before and you will see more over the coming few months about our own wallet and payments capability. So take Chase Pay and Quick Checkout where we would provide the capability for our customers to be able to have a much more seamless experience also for merchants to have a lower abandonment rates and continuing with the safety and security tokenization and other methods. So we're continuing to work on our own proprietary wallet and payment capabilities that will be piloted and then subsequently launched over the course of the next coming months. And then there's obviously the case that we are out to pilot and in production on our end to end capability including Chase Net. So we're signing up merchants at a faster rate than we expected and again you will hear more about that later. But our ability to now negotiate bilaterally economics with merchants and provide customers with compelling reasons to continue to bring share to us is also something we're working on. Jamie Dimon - Chairman and CEO: Our basic philosophy has been that you the customer who want to be able to use your debit cards, your credits in a way that you want and then we want to make it available to you whether its Apple Pay, in-store apps other people's wallets, these are wallet, our own -- all of which will have benefits et cetera. And as Marianne said, we think that we can also be friendly to merchants with data, with pricing, with simplified contracts. So we're trying to make this an ecosystem works better for everybody and is far more secure, higher customers on both sides and far more secure. Betsy Graseck - Morgan Stanley: And I think is it accurate I mean that you mentioned at a recent conference that you were looking to double the spend in cyber security, is that right? Jamie Dimon - Chairman and CEO: Yes, I was just estimating if I was taking a guess that it will double over the next four or five years. Marianne Lake - CFO: I mean I think it's fair to say that what we're seeing in the cyber space not surprisingly is this relentless constant and evolving set of attacks and we need to be constantly evolving and constantly vigilant in response, so it's entirely reasonable to a**ume that we'll continue to increase our investments over the course of the next several years and we'll -- so it will be larger our we'll let you know. Jamie Dimon - Chairman and CEO: I'd like to clarify that quoted in the press not accurately because this is one area where the government and businesses have been collaborating really well. And for a long time is because all these government agencies and I think we need that because the government sees all kind of attacks and they have a fountain of information. And then also industry self-collaborates which is we share information with other banks immediately when we see something happening, so maybe even if something happens to you, you can help one of your brethren avoid a problem like that. And then cyber goes beyond just yourself, its making sure that all your vendors you deal with have proper cyber controls, that all the exchanges have proper cyber controls. So this is -- we've identified this as a huge effort, we've been very good at it, the most recent breach which we're not going to make excuses for. We'll invest any and all things we just do to get it right. Our customers are protected which is critical but we don't want these things to be happening. But it's going to be a battle, you've already seen a lot of very, very serious far more serious than personal data being taken, where social security numbers, security codes, account numbers et cetera. And we do think that unfortunately there are going to be some wins and losses in this. This is not going to be one of those things where it's going to be absolute and we don't want to be sitting here saying you can absolutely be protected because we think that will put you in a false sense of security. Betsy Graseck - Morgan Stanley: And those are all great points, I mean you could imagine tokenization moving beyond just payments to any interface with clients at some point? Jamie Dimon - Chairman and CEO: Yes, tokenization can be more broadly used and that's avoided a certain type of fraud but not other type of frauds. So you have to look at each one of these things and say what does it accomplish? Marianne Lake - CFO: And that certainly helps across the payments phase, but there are other areas of vulnerability obviously. Jamie Dimon - Chairman and CEO: And [indiscernible] security about who came to what systems, when they use private computers with private lines as opposed to public computers from home. There are all these things we are all doing and we've had some great people come in audit us and this is one area I suggest to most companies, get someone to come who in as an expert at this. . We have our own attacker system where we have our own people trying to get through, so we're always trying to look where we might have a weak spot. _______________________________________________________ Guy Moszkowski - Autonomous: I just wanted to follow-up first of all on the question that Glenn asked about the change in the derivatives contracts. From your perspective doesn't this fundamentally render the contract less attractive for users because of the loss of the automatic bankruptcy preference? And if so, would you expect that this is one more potential pressure on the derivatives revenues that you've talked about in the past potentially depressing your revenues by as much as $1 billion? Jamie Dimon - Chairman and CEO: I don't think it makes it less attractive, for the one reason if you look at one contract that someone may have in one fund or something like that, it may make it slightly less attractive. But if you looked at the improved safety of the system I think it makes it more attractive. So people believe that doing this makes the whole system safer, every institution say while on the one contract side I will prefer to have the optimality but for the total I'd like the fact the system is protected and we have time to work all those out. If the resolution works that is really, really good for everybody. I mean everybody would have preferred that there was a resolution process in place for Lehman. The pain and suffering would have been far less across derivatives even though they didn't have the same -- they had more protection derivatives at the time. _______________________________________________________ Gerard Ca**idy - RBC: You guys mentioned the Apple Pay and the opportunities there. What are some of the business -- where can you see the growth but at the same time where can Apple Pay cannibalize some of your businesses or are there any that would be cannibalized? Jamie Dimon - Chairman and CEO: Look again our view is to -- if you're a client and you want to use your Apple Phone to pay with NFC at a merchant, that's fine. We don't want to say you can't use your JPMorgan Chase credit card or debit card. And like we said we're going to be in other people's wallets too and we're going to have our own which we think will have some competitive advantage. So will it cannibalize? Sure, but we're not against cannibalizing our own business or disrupting ourselves if we're building a better business and are gaining share. Certainly our goal is to gain share. We do believe a little bit and you know when Jeff Bezos says your margin is my opportunity, we want to be the people that come with new ideas and stuff that are getting more of our customers using our stuff and happier. And if reduces certain margins somewhere, so be it.