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JP Morgan Chase & Co. (NYSE:JPM)
Q3 2017 Earnings Conference Call
Oct. 12, 2017, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by. We are about to begin. Good morning, ladies and gentlemen. Welcome to JP Morgan Chase's third-quarter 2017 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 would like to turn the call over the JP Morgan Chase's Chairman and CEO, Jamie Dimon, and Chief Financial Officer, Marianne Lake. Ms. Lake, please go ahead.

Marianne Lake -- CFO

Thank you, operator. Good morning, everyone. I'm going to take you through the presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation.

The third quarter was generally constructive across businesses and asset classes. Underlying business drivers grew broadly and we maintained or gained share in a competitive environment. The US and global economy continue to grow. Clients are active with demands on credit remaining solid, all in all resulting in 7% growth in net income driven by positive operating leverage as revenue rises and expense remains controlled. On an adjusted basis, this is a clear record for a third quarter.

Of course, against the financial backdrop, I want to acknowledge the recent natural disasters. The impact on effected customers, communities, and employees has been devastating. Supporting them is our priority as they rebuild. I will note that any financial impact is not significant to our results.

Starting on Page 1, the firm reported net income of $6.7 billion, EPS of $1.76, and return on tangible common equity of 13% on revenue of $26.2 billion. Highlights of the quarter include average core loan growth of 7.5% year-on-year and the FDIC recently released its survey showing that the firm has surpassed the competition and now ranks number one in total US deposits and in deposit growth, driven by strong consumer deposit growth up 9%.

Client investment assets, credit card sales, and merchant volumes were all up 13% and we continue to rank number one in global ID fees. We had record revenue in the commercial bank and delivered record net income and assets under management in asset and wealth management.

The credit environment continued to remain benign across products and portfolios. Card charge-offs were fully in line with our expectations and guidance. Outside of card, our charge-off rates remain at historically low levels.

Turning to Page 2 and some more detail about the third quarter. Revenue of $26.2 billion was up approximately $700 million or 3% year-on-year. Driven by net interest income, up $1.2 billion, reflecting the impact of higher rates and continued loan growth, partially offset by lower markets revenue.

Adjusted expense of $14.4 billion was flat to last quarter and to last year if you exclude $175 million of one-time items in CCB in the prior year period. Credit costs of $1.5 billion were up about $200 million year-on-year, driven by higher net charge-offs in card. In the quarter, we built card reserves of $300 million primarily due to seasoning of new ventures. And, we saw a wholesale release of over $100 million partly driven by select names in the energy sector and reflecting improvements in portfolio quality in commercial real estate.

Switching to balance sheets and capital on Page 3. What is most notable on this page is that all of the numbers are basically flat quarter-on-quarter, with the exception of growth and tangible value per share. Our capital generation was fully offset by distributions, reflecting a payout of about 100% for the first time in a long time, in line with our previous capital plan. And, from here, we expect the direction of travel for our CET1 ratio to be lower over time.

Moving on to Page 4 and consumer and community banking. CCB generated $2.6 billion of net income and an ROE of 19%. We continued to grow core loans up 8% year-on-year, driven by mortgage, up 12%, and business banking, cards, and auto loans and leases were up 7%. Year-on-year, we saw 13% growth in each of client investment assets, card sales, and merchant processing volumes. Nearly half of the growth in investment assets came from net inflows and our deposit margin continued to expand up six basis points this quarter.

Revenue of $12 billion was up 6% year-on-year. Consumer and business banking revenue was up 15% on higher NII, approximately equally due to margin expansion as well as strong average deposit growth. Mortgage revenue was down 17% on loan spread and production margin compression, as well as lower net servicing revenue driven by the MSR. Underlying that decline, the mortgage business is performing well relative to the market. Our originations are down only 1%, versus the market down an estimated 15% as we gain share in purchase.

Finishing up on revenue, card commerce solutions and auto revenue was up 7% as higher auto lease income and growth in card loan balances outpaced the continued impact of investments in new account acquisitions. Expect CCSA fourth-quarter revenue to be relatively flat sequentially as higher net interest income will be offset by the anniversary net impact of Sapphire Reserve last year.

Expense of $6.5 billion was flat year-on-year, or up 3% excluding the one-time items I mentioned. Higher auto lease depreciation and continued underlying business growth were partially offset by lower marketing expense. The overhead ratio was 54% for the quarter as positive operating leverage despite significant investments in the businesses moves us closer to our medium-term target.

Finally, on credit performance, in terms of net charge-offs, as I said, cards increased in line with expectations and guidance. And in auto, charge-offs included approximately $50 million of a catch-up, reflecting regulatory guidance on the treatment of customer bankruptcies. Excluding this, loss rates in auto was only 41 basis points. In general, it feels like the auto market has plateaued at current levels with inventory incentives, used car prices we saw, all having stabilized over the last few months.

In terms of credit reserves, I've previously mentioned we built $300 million in card reserves in the quarter as we grow. Although there were no mortgage reserve actions, portfolio quality improvements allowed us to absorb the expected impact of the hurricanes into our current reserves.

Now turning to Page 5 and the corporate investment bank. CIB reported net income of $2.5 billion on revenue of $8.6 billion and an ROE of 13%. The third quarter of 206 revenue, in both IBCs and markets, benefited from a number of large fee events and higher levels of volatility, creating tough comparisons across the board.

This quarter in banking, IB revenue of $1.7 billion was strong and relatively flat from last year's record levels. Year to date, we've gained some share and maintained our number one ranking in globally IDBs. We also ranked number one in North America and India. We printed record advisory fees for a third quarter, up 14% on broad strengths across sectors and [inaudible] [00:11:16], particularly in Europe, making up for a smaller wallet in North America.

Equity underwriting fees were down 21%, however, we ranked number one in wallets, number of deals, and volumes globally for the quarter and for the year to date. The market remains active and the pipeline healthy. In desk underwriting, there was a reasonably high run rate coming into the quarter, and we broadly maintained it. Landing fees slightly down year-on-year and quarter-on-quarter, driven by strong repricing and refinancing activity and high yield bond issuance. We ranked number one in fees year to date and gained share overall and across products.

Treasury services revenue of $1.1 billion was up 15%, and while higher rates are a driver, we are also seeing positive momentum in organic growth in the business globally as our clients are responding favorably to the investments we've made in our platform and products. Moving on to markets, total revenue was $4.5 billion, down 21% year-on-year against an impressive third quarter of 2016 in a quieter and very competitive environment.

Fixed income revenue was down 27%, a solid performance given a backdrop of low volatility and tight spreads. At the risk of laboring the point, you may recall that we gained 240 basis points a share in fixed in the third quarter of 2016, which will mean our year-on-year decline will look larger than most.

Equities revenue was down 4%, but underneath that is a diversification story. Consistent with last quarter, lower flow and exotic derivatives activity were substantially offset by strength in cash and prime, which continues to be a bright spot for us this year.

Before I move on, the fourth quarter environment so far feels consistent with the second and third, with no obvious catalysts on the horizon for that to change. But, of course, change it could. So, it's worth pointing out that the fourth quarter last year was also a record fourth quarter since the crisis. As such, we expect next quarter's markets revenues to be lower year-on-year.

Security services of $1 billion was up 10% driven by rates and balances, with average deposits up 15% year-on-year as well as by higher asset-based fees on market levels globally. Finally, expense of $4.8 billion was down 3% year-on-year, driven by lower compensation expense of lower revenues, and the comp to revenue ratio for the quarter was 27%.

Moving to commercial banking on Page 6. Another excellent quarter in this business, with net income of $881 million with record revenue and an ROE of 17%. Although we recognize that our results are flattened by a benign credit environment, the performance is very strong and broad-based, and is driven by the investments we've been making in the business, the differentiated platform capabilities we can offer our clients, and our commitment to business discipline.

Revenue grew 15% year-on-year, driven by deposit NII and on higher loan balances, with overall spreads remaining steady. While IB revenue was down some year-on-year, we grew 9% sequentially with particular strengths in middle markets, which is starting to feel like a trend. Expense of $800 million was up 7% on continued investment in the business, focused on technology as well as banker coverage, having added over 200 bankers since the beginning of 2016.

Since our investment agenda is ongoing, expect fourth quarter expenses to remain at about this level. Loan balances were up 10% year-on-year and 1% quarter-on-quarter. C&I loans were up 8% year-on-year, driven by strengths in expansion markets and specialized industries, but were flat sequentially in line with the industry on flat utilization despite decent flow and stable pipelines.

Commercial real estate full growth is 13% year-on-year and 2% quarter-on-quarter. Although growth rates are decelerating, we continue to outpace the industry. However, we remain very disciplined in client selection, products, and pricing and are sticking to what we know well.

Finally, credit costs were a benefit of $47 million, predominantly driven by commercial real estate. Credit performance remains strong with a net charge-off rate of four basis points.

Leaving the commercial bank and moving on to asset and wealth management on Page 7. Asset and wealth management reported record net income of $674 million with pre-tax margin of 33% and ROE of 29%. Revenue of $3.2 billion was up 6% year-on-year, driven by higher market levels and by strong banking results on higher deposit NII.

Expense of $2.2 billion was up 2% year-on-year, driven by a combination of higher compensation and higher external fees for which there is an offset in revenue. This quarter, we saw net long-term inflows of $21 billion with positive flows across fixed income, multi-asset, and alternatives, being partially offset by outflows in equity products.

We also saw net liquidity inflows of $5 billion and continue to increase our global market share. Record AUM of $1.9 trillion and overall client assets of $2.7 trillion were up 10% and 9% respectively year-on-year on higher market levels globally as well as net inflows.

Deposits were down 6% year-on-year and 4% sequentially, reflecting continued migration from deposit accounts into investment-related assets, and we are retaining the vast majority of these balances. Finally, we had record loan balances up 10% year-on-year, driven by mortgage up 19%.

Moving to Page 8 and corporate. Corporate pulled in net income of $78 million. Treasury and CIO's results improved year-on-year, primarily due to the benefit of higher rates. You'll remember that last quarter, other corporate included a legal benefit, which is driving the quarter-on-quarter decline you see on the page.

Finally, turning to Page 9 in the outlook, all of NII expense charge off and loan growth remain broadly in line with previous guidance. To wrap up, this quarter and this year, we continue to consistently deliver for our clients. Our businesses are performing strongly across the board, maintaining or gaining share. Our financial performance clearly demonstrates the power of the platform, the benefits of diversification and of scale, as well as an investment strategy focus on long-term growth and profitability. We remain very well positioned to continue to benefit in a growing global economy.

...

Operator, we can open up the line for questions.

Questions and Answers:

Operator

And our first question comes from the line of Betsy Graseck.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good morning. Two questions -- one on the revenue list in the consumer and community bank. I know on Slide 4 you highlighted that the 6% up year-on-year is driven by the higher NII and deposit margin expansion. Could you describe a little bit if this is just the start of an improvement in transfer pricing that the consumer banking division is benefiting from? Is there a lag that we should expect would continue to drive up this revenue list over the next several quarters?

Marianne Lake -- CFO

Betsy, there's no change in our transfer pricing methodology, or even the way we compute it. It's to do, as you appreciate, with higher rates and the fact that we are in a very disciplined environment at this point on deposit reprice. We would expect to continue to see the margin expand over the course of the next several quarters, but we would also expect to continue to drive higher NII as we're growing our deposits.

[Crosstalk]

Betsy Graseck-Morgan Stanley -- Analyst

Right. But that FTP methodology should continue to drive up deposit margin over the next couple of quarters.

Marianne Lake -- CFO

Yes.

Betsy Graseck -- Morgan Stanley -- Analyst

How are you dealing with the Equifax fallout? Does the breach that occurred drive any changes to how you are assessing credit requests that come in? How are you filtering for what you perceive as fraud risk? And, how are you managing the book of outbound credit requests that you're looking for from a proactive perspective on your loan book?

Marianne Lake -- CFO

I think the way to think about it -- not to diminish the importance of any individual breach or situation -- is that we are honestly under constant attack in a more general side and from a fraud perspective. While we will always react and learn lessons from every individual situation, this is not the first breach, nor will it be the last breach. As a result, we have been constantly evolving and refining the way we think about fraud prevention, detection, and underwriting. We continue to move to a multi-factor protocol around customer identification. Looking to leverage all of our data to better inform our underwriting decisions.

The reality is that, as important as it is and as much as each individual breach could impact the overall equation, we have had to evolve over an extended period to the position we're in now. As a direct result of this, there will be specific meaningful changes, but a continuous evolution. Whether we're looking at sending out preapprovals or marketing offers or receiving inbound applications, we are increasingly looking at a number of different data points and facts to be able to identify the customer and understand the application.

Jamie Dimon -- Chairman and CEO

And let me -- as part of a breach. So, if your name was taken and we know that -- a Social Security or driver's license -- we can put in a lot of enhanced controls if we do your name specifically. We don't have to rely on those things. We can do some alliance. We can greatly, dramatically increase anti-fraud on your account. We do that and it dramatically diminishes any effect on our customers.

Marianne Lake -- CFO

The reality, Betsy, is that we've operated over an extended period now on the presumption that, while we happen to know about this breach, there will be others that we don't know about right now or over time. So, we have to be proactive and not reactive. We'll obviously look to learn anything we can, but we continue to evolve so we can use all of the information at our fingertips. As a practical matter, we are not seeing a specific increase in fraud.

Betsy Graseck -- Morgan Stanley -- Analyst

As a result, expense impact, loan growth impact, are minimal from your perspective?

Marianne Lake -- CFO

Correct. As a result, we're already spending the money we need to spend to keep hopefully ahead of the curve on all of these things. Our operating losses -- I will say, the combination of all of the information that has been compromised over the course of the last several years has put pressure on fraud costs, but nothing incremental from this. So, no -- no impact on expenses or loan growth that would be measurable.

Operator

And our next question comes from Erika Najarian of Bank of America.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Good morning. I wanted to follow-up to your responses, Marianne, on no pressure on deposit pricing. Especially in light of your deposit growth strengths, especially in the consumer, give us a sense on how repricing trends are today in terms of the consumer wealth management versus wholesale deposits.

Marianne Lake -- CFO

Apart from the rate hike in June, nothing has really happened much since last quarter. So, the landscape is looking pretty similar. Not because that's surprising. There's been very little to no movement in the repricing of deposit accounts. There have been some incremental movements in certain savings and CDs, but nothing systematic in the consumer space.

But, that's pretty much as we would have expected with rates at these absolute levels. At some point in time -- that may be a couple or three rate hikes from now -- the dynamics may start to change. We haven't changed our perspectives about what we think the ultimate reprice will look like.

In asset wealth management, the story on deposit pricing is somewhat similar -- a little bit more movement, but nothing particularly meaningful or dramatic. The story there is very much as expected. At these levels or rates, you are seeing customers start to make choices to move certain deposit balances into investment assets. That's normal migration -- migration that we expected and modeled. We are retaining those balances. We are starting to see some of the dynamics we expected play out. That started happening at the beginning of the year and has continued to progress.

And in the wholesale space, there is a spectrum as well. I would start with we're firmly on a reprice journey in wholesale no doubt. Depending on where you are in the spectrum, it ranges from the smaller and lower middle market companies where the reprice is modest but present to the higher end where it's reasonably high. Overall, if I step back and say, "Have we learned something new in this cycle that we didn't know," the answer is no, not really. If you look at the first four rate hikes of the previous normalization cycle, the overall cumulative deposit reprice was pretty much the same as it is now.

So, we continue to believe that the dynamics we've been talking about over the last several years and that we've expected will play out. They may not play out exactly as we have them modeled, but they will ultimately play out that way. We have appropriately conservative reprice assumptions.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. You're one of the few firms that have been really talking about anticipating the impact from a fed balance sheet reduction over the next several years. The question I often get from investors is -- obviously, in particular retail, is valuable and not just for the price of it today but on an LCR basis. How would you respond to the question, given the 6% growth in digital in the consumer bank and 12% growth in mobile, does technology help with the stickiness of the consumer deposits? Or, does it potentially aid in the velocity of switching?

Marianne Lake -- CFO

At the risk of hedging, it's a bit of both. There have always been two different camps on the reprice theory for consumer. There's been the camp of acute market awareness, floats along, technology enhancements allow movement of money to be easier. Competition for retail deposits and good liquidity is high therefore reprice higher. The counter to that, which has merit and we're seeing to a degree, is customers feel that they're weighing a more balanced scorecard of things when they choose where to keep their deposits. Customer satisfaction, the suite of products and simplicity, the digital and online offerings, as well as the safety, security, and brand all matter. Price is a factor, but not the only one.

I would say we certainly feel that having a leading digital capability is critical to overall customer franchise and it will, in all likelihood, have an impact on the stickiness of deposits. Customers value that kind of convenience very highly. I would also say one other thing about where we are right now. As you know, as much as you're right about the potential demand for these high liquidity value deposits, there's a lot of excess liquidity in the banking system. Although loan growth is solid, it's solid. So, we aren't seeing a friendly -- albeit, we're very proud of our deposit growth.

Operator

And our next question comes from Mike Mayo of Wells Fargo Securities.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi. My question on the consumer and community bank is a three-part question. First, what percent of your customers have online bill pay? I'm trying to get back to that stickiness of the deposits.

Marianne Lake -- CFO

I don't have that off the top of my head, but we can get back to you.

Mike Mayo -- Wells Fargo Securities -- Analyst

Okay, can you give a ballpark? I don't think you've disclosed that before. Is it to the nearest quarter or --

Marianne Lake -- CFO

Here's what we'll do. I fear if I give you a ballpark, I'll get it wrong. While we're on the call, we'll get someone to send the details, and let you know.

Mike Mayo -- Wells Fargo Securities -- Analyst

Okay. The second part is the deposit data's been lower. You gave your caveat. But, mobile bank customers are up 12% year-over-year. Why do you still need 5,200 branches? Isn't this a good time to close branches when deposit competition isn't as tough as it might be in the future?

Marianne Lake -- CFO

We're doing a bit of all of the above. Branches still matter. 75% of our growth in deposits came from customers who have been using our branches. On average, a customer comes into our branches multiple times in a quarter. I know that all sounds like old news, but it's still current news. The branch distribution network matters. Customer preferences are changing and we not being complacent to that. Underneath the overall 5,000-plus branches, we're continuing to consolidate, close, move, grow, change all of our branches in line with the opportunity in the market that we're in.

Net for the year will be down about 125 branches. We've closed more than that, consolidated some, and added some. So, we're not being complacent to the consumer preference story, but branches still matter a lot. We're building out all of the other omnichannel pieces, as you know, so that we have a complete offering. If the customer behaviors start changing in a more accelerated fashion, we will respond accordingly.

Operator

And our next question comes from Ken Usdin of Jefferies.

Ken Usdin -- Jefferies -- Analyst

Hi. Good morning. First, on the loan side, on the yields -- the last quarter held flat and this quarter they're up 16 basis points. Can you help us understand? Was that more just a mechanics of timing of hikes moving through your variable rates? Is there an element of pricing or any other things you can help us understand why we saw that great, nice improvement there?

Marianne Lake -- CFO

Yeah. Over the two quarters, it's normal. You may recall last quarter there were a couple of things we talked about. First, there was a $75 million one-time interest adjustment in mortgage, which artificially reduced loan yields for the quarter. Secondly, there's a mix in cards similarly. We would normally, in the law of extraordinarily big numbers, expect for a 25-base-point rate hike, that we see about 10-is basis points of improvement in loan yields across the whole portfolio. We didn't see that last quarter. What you'll see in this quarter is the reversal of those factors and the normal benefit of the June rate hike.

Ken Usdin -- Jefferies -- Analyst

Got it. With the card build, you took the reserve for card to around 3.3%. I know you had talked about staying below a 3% card wash rate for this year. As we get into next year, you had a medium-term idea of 3-3.25. How are you feeling about that in terms of the seasoning of the card book and loss rates?

Marianne Lake -- CFO

As we look at the loss rates for this year, they're coming in as we expected at less than 3%. As we look out to next year, based on what we know today, it's still in that 3-3.25% range, albeit maybe at the higher end of that range. So, it's broadly in line with our expectations. In the consumer space, we move our reserves not in dollar increments. But, the reserve build is about a little less than one-third on the growth and a little more than two-thirds on normalization of rates.

Operator

And our next question comes from Glenn Schorr of Evercore ISI.

Glenn Schorr -- Evercore ISI -- Analyst

Hi. Maybe it's a little nitty gritty, but you're definitely the person for this. Point to point, the yield curve was about the same. However, throughout the quarter, the curve was much flatter. I'm just curious if that has any dampening effect in any given quarter? And, maybe the better way to ask it is could it have a little bit more of a positive run rate as we go forward?

Marianne Lake -- CFO

A couple of things. First, to repeat -- as a macro matter, we're more sensitive to the frontend of rates than to the low end of rates, particularly over any short period of time. Intra-quarter volatility in the 10-year -- while it's not nothing, it's not likely to have a material impact on our run rate. We're clearly, overall, generally flatter on the long end of the curve on average through the year. All other things being equal, we'll have had a dampening pressure on our expectations. It's part of the reason why it went from 4.5 to 4 -- not the only ones -- as we progress through the year.

But, generally speaking, intra-quarter volatility is not something that would have a meaningful impact on our run rates.

Glenn Schorr -- Evercore ISI -- Analyst

Cool. In terms of the loan growth, I think it's completely normal to see some moderation and you're still doing reasonably better than the industry. I'm curious on the main source of maybe the moderation ticking down a little bit, and then more importantly, is it too soon to ask if any of this talk on tax reform and decent economic data is having a pick-up in the conversations on the loan growth side?

Marianne Lake -- CFO

On the first, it is quite important to not look at the average and to decompose it into constituent parts. We talked before about the fact that we use our balance sheet strategically in the CIB, but loan growth is not really a sting there. So, this quarter, we saw no loan growth in CIB, so no big deal. But, it means that that 7.5% core growth for the whole portfolio would have been outside of CIB, closer to 9%. So, we'll start with that.

Consumer has been pretty consistent. Across the consumer space, where it's jumbo mortgages, the business banking, card, also loans and leases -- they've been growing at reasonably solid and consistent high single-digit territory, or even low double-digit for mortgage, over the last several quarters. At this point, we don't really see anything that is suggesting that that will moderate meaningfully.

So, the way you're seeing -- and similarly, in asset wealth management on the banking side. Where you're seeing the growth moderate is in commercial and it's in both the C&I loans and the commercial real estate loans. They each have a story. With the C&I loans, for us, the story is about moving from meaningfully outperforming the industry to being more in line with the industry. So, over the course of the last couple of years, as we've added expansion markets, opened new offices, added a couple hundred bankers, developed industry coverage models -- we've been growing meaningfully better than the industry.

So, you see that even in this quarter in our year-on-year growth at 8%, as compared to the quarter-on-quarter growth although it's flatter. That, to me, is a factor of the fact that in this phase of the cycle our clients have strong balance sheets, a lot of liquidity, have had access to the capital markets, and so CDC top growth is not unlikely to be a level for the foreseeable future.

With commercial real estate, it's slightly different. We're still outpacing the industry, but we've gone from very strong to strong and we would continue to expect that to slowly moderate. That's a number of things. It's some higher rates. It's actually a lot of competition. It's also about client selectivity, given where we are in the cycle. We are being very cautious about new deals we add to the pipeline and the client selection we have. So, all of those factors weigh into the commercial real estate space.

Tax reform, fiscal stimulus -- the reality right now, we're all hopeful that tax reform is done for the right reasons and the economy responds accordingly. At this point, it's not front and center in the dialogue we're having with our clients about whether they should or shouldn't do a strategic deal or take an action. It's neither holding up business nor spurring business, but that could change. At this point, I would say it's a factor but not a driving factor. And that could change.

Operator

And our next question comes from Jim Mitchell of Buckingham Research.

Jim Mitchell -- Buckingham Research -- Analyst

Good morning. Just a quick question on the outlook of the net interest margin. Should we still expect some grinding of higher asset yields even without rate hikes? How do we think about that trajectory, assuming we don't get any more rate hikes from here?

Marianne Lake -- CFO

We'll just deal with the fourth quarter. The landscape of rate hikes for 2018 is an open question. We would expect loan yields to hold relatively flat, all other things being equal. It's a very competitive environment. We're seeing some pressure in commercial real estate spread. We're seeing generally spread holding up, but I would expect competitive pressures to keep loan yields relatively flat.

Jim Mitchell -- Buckingham Research -- Analyst

This may be on the reserve build outlook. Should we still expect it to track with its growth and keep the reserve ratio similar in cards where we are now? Do you still anticipate some additional building? How do we think about that? If you could size the hurricane impact, that would be great this quarter.

Marianne Lake -- CFO

At this point, we are at that 3% charge-off rate, rising to 3-3.25 next year and growing. So, you should continue to expect that we'll be adding to reserves. Our outlook for reserve add to next quarter is below this quarter, but we will continue to observe that. With respect to the hurricanes, right now in quarter's results, in the credit lines in mortgage particularly -- and to a much lesser degree in wholesale -- we respectively built $55 million of reserves.

To contextualize that, we have used our unfortunate experiences of Sandy and Andrew and other natural disasters to calibrate the assumptions we're using. At this point, it's early to be able to say how the losses will actually manifest themselves. It could be that it's lower than that, but that's the central case right now. $50 million in mortgage and just a handful of million in the wholesale space.

Operator

And our next question comes from John McDonald of Berstein.

John McDonald -- Sanford Bernstein -- Analyst

Good morning. Marianne, could you discuss how you're balancing all of the investments you're doing in IT and business growth with the efficiency mindset that you guys always have? One of the frameworks is, if I look at the three-year simulation you provided in February, a lot of the expense growth needs to happen this year. We have a $2 billion increase in adjusted expense and post 2017 the expense growth looks very modest. Maybe just talk a little bit about the leverage you're using to keep expenses in check as you're doing all of the investments.

Marianne Lake -- CFO

I'll start with a bit of a philosophical discussion, which is it is our opinion that now -- as much, if not more so than ever -- the investments we're making in technology will effectively breed and deliver the efficiency. To the degree that we are able to find incremental investments or accelerate them, we'll be willing to do that. Our expense numbers, our outlook, have never been targets. That's the mental, philosophical point of view that we would deliver any technology innovation or investment that we could execute well that we think would increase our returns through revenues or efficiency.

Specifically, when you look at the simulation, this is a point of technicality. In 2018, probably middle of the third quarter, we are expecting that the FDIC fund will reach its level at which the surcharge will be able to be reduced. That's a meaningful positive for us. If you look at the implied growth and expenses from '17 through the medium term, they are larger than implied. But, if we found the opportunity to do more or accelerate more, we would do it and explain it to you. So, we'll come back to that and investigate.

John McDonald -- Sanford Bernstein -- Analyst

Thanks. You mentioned the card revenue run rate has moved up again and I'd say this quarter you might be able to get to your target by the early half of next year. Is there an upside to that revenue run rate target? Are things coming in better than expected in terms of the moderation of promo rates and things like that? Maybe you could just give a little color there?

Marianne Lake -- CFO

When we did some conferences at the end of last year, I think we said we'd expect the revenue rates for the full year this year to be 10.5%, and it will be a little better than that. The revenue rate increase in the quarter speaks to a little bit of spread and a little bit of lower premium. It will go down next quarter because of the fourth quarter effects of the Sapphire's travel credit for an overall -- call it 10.6% for the year.

But, yeah, we do expect to hit the 11.25% in the first half of next year. We've reached the inception point at the end of the second quarter and into the third quarter where growth is offsetting the impacts of the significant upfront investments in Sapphire Reserves. They will see revenues grow from here.

Operator

And our next question is from Jim Saul Martinez of UBS.

Saul Martinez -- UBS -- Analyst

Good morning. Following up on the commercial banking business, you've obviously had very good momentum there over the last couple of years. You did talk about credit dynamics and moderation in credit growth and a normalization back toward industry trend. Can you just comment a little bit more broadly about some of the initiatives you've had there from a revenue standpoint, whether it be the middle markets initiative, growth in IB, international, and whatnot. Your earnings growth has obviously been very, very strong in this business. It's starting to move the needle a little bit. Can you just give us a bit of color on the opportunity set you see there?

Marianne Lake -- CFO

Although we absolutely expect at some point we're going to see normalization of credit, we haven't seen that yet. I want to make that clear. We are appropriately cautious considering everything but we're not seeing any deterioration or any thematic fragility in our portfolio that we're concerned about at this point.

With respect to the revenue side of the story and the efficiency side, it really is a story of all of the things you've mentioned all coming together at the same time. We have been adding -- we have our expansion markets from the position. We've been adding new markets and opening offices. We've been adding bankers. As you know --

Jamie Dimon-Chairman and CEO

We're in all 50 --

Marianne Lake -- CFO

Yeah, we are in all 50 of our [inaudible] [00:45:40] now. We've been adding bankers. As you know, when you add all of these investments, for a period of time, when they are still in the buildup mode, we don't see that drop to the bottom line. Now, we're starting to see our bankers hit their stride. They've become very productive. The balances are building. And then, I would also say that this is the epicenter of delivering the whole platform to our clients. If you think about what we're able to offer our clients in terms of international capability, banking coverage across industries, core cash, global payments -- we have a platform that is certainly complete and somewhat differentiated.

And then, I would say it's a buttoned-up business. We have been looking at efficiency, expenses, and really working on making sure that, through the simplification processes we went through in 2013-2015, we are focusing all of our efforts on our core strategic plan. And, it's paying off.

Saul Martinez -- UBS -- Analyst

That's great. Obviously, the administration and Congress released a blueprint so congress can now start to flesh out a tax plan. Obviously, there's a lot of uncertainty as to the content, timing, or whether it even happens or not. But, if we do see something that is sensible, how quickly do you think we could start to see that feeding through into better sentiment and into increased demand for credit.

Marianne Lake -- CFO

There are so many uncertainties that it's almost talking about a hypothetical at this point, as encouraged as we are with the ongoing dialogue. My view is sentiment is relatively high. In fact, it's ticked up slightly over the course of the last short while. So, from that vantage point, we're in a position of strength. There will necessarily be some lag, so whether that is a couple of quarters or longer, it's certainly in the foreseeable future that you would hope to be able to see increased demand and confidence leading to action.

Operator

And our next question comes from Matt O'Connor of Deutsche Bank.

Matt O'Connor -- Deutsche Bank -- Analyst

Good morning. Can you talk a bit about how you're managing the excess liquidity? You've continued to build cash. The securities book as shrunk. It makes sense given the flatter yield curve, but you combine that with the still good deposit trends and the slowing loan growth and a challenge as you think about protecting them going forward. So, maybe talk about the dynamics there and how you think about the yield curve and how to manage it.

Marianne Lake -- CFO

I thought we'd answered the liquidity question because, while we feel very, very good about our liquidity position and you will have seen in the recent disclosures where everyone is positioned unnecessarily -- even if LCR was the only consideration, people would want to be running a buffer to LCR. But, LCR is not the only consideration. The other most noticeable one I would point out to you would be resolution planning.

Know that when we have our overall liquidity position, we take into consideration a combination of constraints. What may look excess on one lever may not as excess on another. I would also say that, when we look at the deployment of our H2H, we look at in the context of our target for what we want the duration of the equity for the company to be over the course of the normalization in rates. It's not just about liquidity all throughout that duration, so we're comfortable with our liquidity position. We have a framework for deploying it and thinking about the forward-looking duration of the company.

That's not to say that we are not opportunistic in taking advantage of moves that are technical in the long end of rates, to either deploy or to un-deploy and we still have some. It's more than just liquidity. It's also duration and we've taken the overall balance sheet and our expectations and targets into consideration, albeit that we still have some dry powder.

Jamie Dimon -- Chairman and CEO

And we maximize between loans, securities --

Marianne Lake -- CFO

Yeah.

Matt O'Connor -- Deutsche Bank -- Analyst

To follow-up on the rate sensitivity, you mentioned before you're more leveraged through the short end of the curve. If we get continued increases on the short end of the curve, but the 10-year doesn't go anywhere, is that still indicative as it's been thus far?

Marianne Lake -- CFO

It will be over the short while, and our full expectation, outside of any other stimulation, is that as the front end of rates goes up and gradual unwind happens, you'll be able to see the long end of rates go up, albeit more slowly. It's pretty typical at this point in normalization cycle to have a curve flatten. That's what we're seeing. That's what we would expect. I would expect to continue to see the long end unwind and it should be indicative.

Operator

And our next question is from Gerard Cassidy of RBC.

Gerard Cassidy -- RBC -- Analyst

Good morning. You touched on this a little bit, but maybe you can give us a little bit more color. You mentioned in your opening remarks you increase your market share in investment banking. Are you getting a bigger wallet share or are you winning more customers? Also, some of your competitors are still struggling. Is that also a factor?

Marianne Lake -- CFO

I would say it's wallet share. It's blocking and tackling. We did pretty well in Europe. But, there is still a lot of competition. I would say it's less about the specifics of any one competitor because the environment is pretty competitive and about reasonably broad strengths.

Two things I would point out is that in equity underwriting, similar to in fixed, we gained a couple hundred basis points a share in the third quarter of last year. On an apples to apples basis to where we would normally expect our share to be, we're still doing very well.

Jamie Dimon -- Chairman and CEO

I would say the competition is fundamentally fully there. Most of the players roll out there -- some specialize in certain areas, but it's fully competitive. You have new and consumer -- the shiniest banks, etc.

Gerard Cassidy -- RBC -- Analyst

Very good. What's your read on the new Treasury report on changes coming in the capital markets that was released in early October? Any specific items in there that you guys looked at that would be specifically beneficial that you'd like to see changed? What's the probability of it happening? Could it happen sometime next year?

Marianne Lake -- CFO

Okay, that was a lot. First of all, we welcome the report and it's a long report -- a couple of hundred pages. There are a lot of recommendations. It's very comprehensive, so kudos to the treasury for delivering it. We are supportive of all those recommendations at large. I think the most important thing to remind you is that this is not about materially changing the legislative landscape. It's about sensibly recalibrating the specifics of individual rules over time.

We're still digesting the report, but we are supportive. It is very comprehensive and it could be very beneficial to the liquidity index of the capital market, which is what we should all hope for, and not contrast to safety and fairness. In that sense, very supportive and all good. It's going to be complicated and it will take time. But, the will is there. Whether it's the administration or the regulators, there's a general recognition that there's the ability and appetite to want to make rational change. If that helps grow the economy and all of the things that come with that, we're working as constructively as we can on that.

Operator

And our next question comes from Steven Chubak of Nomura Instinet.

Steven Chubak -- Nomura Instinet -- Analyst

Jamie, I was hoping you could update us on your efforts to launch your online brokerage offering. It's something you had mentioned in your last letter. It comes up with investors quite often, so how do you view the opportunities in that business for JP -- whether it's an effort to just build a moat around your current client cash balances and maybe fill a void, or is your intention to become a bit more disruptive in the space and actually attract many more customers and potentially even offer more aggressive pricing and terms?

Jamie Dimon -- Chairman and CEO

We're building, and are in beta, platforms. We're creating and investing in things like that. Also, the P2P are doing quite well. We look at all of those things that, from the clients' standpoint, you want to offer the client. At one point, we'll be talking about more testing and what we think might or might not work. Then, we'll give you a more strategic view of that, probably around investor data.

Steven Chubak -- Nomura Instinet -- Analyst

Got it. Marianne, I wanted to follow up on some of the discussion around access liquidity management. I appreciate the fact that you guys certainly want to be conservative in thinking about duration and maybe taking a more holistic view of the asset side of the balance sheet. But, looking at the LCR disclosures and given the stark contrast in terms of how much you have parked in the way of excess reserves, and relatively low levels of NBS compared with your peers, how you're thinking about duration management and whether you do have additional capacity to remix some of that cash of the fed into higher yielding NBS, especially as we think about the Fed balance sheet on dynamics.

Marianne Lake -- CFO

We have a fairly large mortgage loan portfolio in addition to having a large portfolio in our investment securities in NBS. So, we are already reasonably equivalently mixed in terms of our percentage of mortgage exposure to our total accessible loans to the competitive landscape. Trust me when I tell you that you talk about excess liquidity because of LCR and we are thinking about more than just LCR. As I said, while we do maintain a sure position and the cost of being sure is relatively cheap, we don't have the kind of capacity to invest $100 million-plus in NBS right now, or anything that's meaningful like that, to generate higher returns without blowing our duration target.

Operator

And our next question comes from Brian Kleinhanzl of KBW.

Brian Kleinhanzl -- KBW -- Analyst

Good morning. Just a quick question on loan growth. You've had another decent quarter of good growth in residential mortgage. Looking at cross consumer, is there anywhere where you've had to open up the credit box in order to get growth there? I know you mentioned that loan yields are expected to be tight on competition and not increase as much. But, have you had to go down market at all for loan growth?

Marianne Lake -- CFO

No, we haven't. As we talked about before, a while ago we made some surgical changes to our credit box in the car space, but that's -- if anything, I would say incredibly granular and incredibly surgically tightening, not the reverse. Whether that's in card, certain microcells, or in auto, I would say we've been pretty conservative and we're probably doing at the very margin a little bit of tightening.

Operator

And our next question comes from Andrew Lim of Societe Generale.

Andrew Lim -- Societe Generale -- Analyst

Good morning. Could you talk a bit more about the timing of return of excess capital? Of course, one of your national competitors has given a very detailed strategy of how to do this by the end of 2019. Are you in a situation to adopt a similar strategy?

Marianne Lake -- CFO

Congratulations to them if they have a high degree of confidence of what 2018 cards are going to look like. I will tell you this, we said very clearly that we feel that the company should operate with the range of 11-12.5%. We feel like it should be lower in that range. Having a capital plan approved of $19.4 billion of share buybacks over the next four quarters and over 100% payout based on analyst estimates is a thought. Nothing has changed about that objective, but we would want to be measured about the pace at which we do it until we have a bit more final clarity on what the new generation of capital rules will look like. We hopefully will know more as we go into the next cycle of capital planning. We haven't changed our point of view that we should be able to continue that journey down into the range. That would be our objective.

To tell you that we could give you the roadmap for that today is not accurate. You can and have done your own math. You can look at our earnings outlook in your models and payouts of over 100% and you can see that we can move down in that same timeframe to something much lower than we are now, if not toward the bottom. But, that's not to say that we will be able to do that. We need to go through the cut.

Andrew Lim -- Societe Generale -- Analyst

Fair enough. Thanks. [Inaudible -- crackling connection] [00:59:55] is high on everybody's minds. I think they once focused on the impact on research, but there are more implications on how that might impact the trading -- not just from your point of view, but also from the point of view of clients who might not be compliant by the end of the year. How does that weigh on your mind and what impacts could we expect there?

Marianne Lake -- CFO

I think I got that. The compliance burden and work to be ready is a significant heaviness, not just for us, but all market participants. There is the possibility that, effective at the beginning of the year, there will be ongoing work that needs to get done. We feel like we're really well positioned to defend our position. But, there's no doubt that, over the course of the year and beyond, as people get clearer and clearer on transparency and costs to execute versus advice versus content, that there may be competitive dynamics that change. We feel like we've been building for the last several years to be ready for those dynamics. There could be some bumps. I don't think it's anything that we're concerned about at this point. We'll all learn a little more as we go through 2018.

Operator

And our next question comes from Marty Mosby of Vining Sparks.

Marty Mosby -- Vining Sparks -- Analyst

Thanks. Good morning. About the credit -- you pulled out and highlighted auto after we went through an episode of possible deterioration. You put that together with energy and what we experienced last year. Those are our first two pressure points on the credit cycle. We've come through without any real heartburn from either. Does that tell us something about the de-risking and underwriting discipline that the banks, in particular, have adopted since the financial crisis?

Marianne Lake -- CFO

I would say that for sure has to be part of it. Even with the auto situation, you're seeing a marketplace that is much more responsive. While we felt like we got ahead of the issues and tightened early, you see the industry generally moving in that direction. I think there's no doubt that the environment, in totality -- the capital liquidity controls regulation has led to higher quality loan books. We have been pressure tested. Energy was a one-in-a-hundred-year flood. I think the industry, and specifically our portfolio, performed quite well. That's not to say there isn't a point of pain out there somewhere that we don't see. We just feel like we're in a good position to get through that.

Marty Mosby -- Vining Sparks -- Analyst

Flipping over to deposit growth, what we saw is layered deposits and institutional deposits, corporate deposits, and retail deposits. We're starting to see a little bit of a pressure in the sense that institutional deposits and wealth management began to decline. Corporate and retail still show a lot of strength. Just think about that dynamic because that's where you really begin to see pressure on betas -- typically when you pressure on volumes. We just haven't seen it in the core deposit base yet. A premium for liquidity that's been kind of pushed into those core customers from corporate and retail seems to be pretty persistent, which will mean the duration and the length and the growth of deposits will be much longer than we probably anticipated before?

Marianne Lake -- CFO

Yes. I will tell you are seeing that rotation start. If you go back even three years ago, we gave you an outline of what we thought would happen. We said we were going to see rotations from the higher wealth segment into investments assets, followed ultimately by the consumer space. We'll see retail deposits move into money funds. We'll see outflows of wholesale loan op deposits as the fed shrinks its balance sheet. But those things are going to pay out over the course of the next -- depending on the rate cut -- two to four years. We've begun to see it. It should be expected. I don't think it tells us anything new or different necessarily at this point.

Operator

And our next question is from Mike Mayo of Wells Fargo Securities.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi, a follow-up question. Card revenues are tracking well per your other comments, but year-over-year card spend growth has moderated some. Can you talk about the trend with the Sapphire Reserve card?

Marianne Lake -- CFO

Our card spend growth at 13% up year-on-year is still very strong. When we say moderated, it's from very strong to very strong. It is in part due to the number of new products we've had. The Sapphire Reserve card spend engagement is very strong. We're very pleased with it. I wouldn't say it's a moderation necessarily. It's just that at these very high levels -- from a slightly higher to very strong is still a great story.

Mike Mayo -- Wells Fargo Securities -- Analyst

And it was such a great deal a year ago. What's the attrition like with the customers?

Marianne Lake -- CFO

If you think about our first acquisitions were in August and September, so we're kind of at the early stages. So far, very encouraging. So far, better than our expectations. But, a little early to draw firm conclusions on it, but very encouraging.

Operator

And we have no further questions at this time.

Marianne Lake -- CFO

Okay. Thank you, everyone.

...

Operator

This concludes today's conference call. You may now disconnect.

Duration: 74 minutes

Call participants:

Jamie Dimon -- Chairman and CEO

Marianne Lake -- CFO

Glenn Schorr -- Evercore ISI -- Analyst

Ken Usdin -- Jefferies -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

John McDonald -- Sanford Bernstein -- Analyst

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Saul Martinez -- UBS -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

Gerard Cassidy -- RBC -- Analyst

Steven Chubak -- Nomura Instinet -- Analyst

Andrew Lim -- Societe Generale -- Analyst

Jim Mitchell -- Buckingham Research -- Analyst

Marty Mosby -- Vining Sparks -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

Brian Kleinhanzl -- KBW -- Analyst

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