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J.P. Morgan Chase and Co. (NYSE:JPM)
Q2 2018 Earnings Conference Call
July 13, 2018, 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 J.P. Morgan Chase's Second Quarter 2018 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 to J.P. Morgan Chase's Chairman and CEO, Jamie Dimon, and Chief Financial Officer, Marianne Lake. Ms. Lake, please go ahead.

Marianne Lake -- Chief Financial Officer

Thanks, operator. Good morning, everyone. I'm going to take you through the earnings presentation, which is available on our website. Please refer to the disclaimer at the back of the presentation. Starting on Page 1, the firm reported net income of $8.3 billion and EPS of $2.29 on revenue of $28.4 billion. All were records for a second quarter, even excluding the benefit of tax reform. Our return on tangible common equity was 17%, and also included in the results were two notable items, which I will call out in a moment, excluding which EPS would have been about $0.10 higher.

The strength this quarter was broad-based across businesses, and highlights included average core loan growth excluding CIB of 7% year on year, consumer deposit growth of 5%, which we believe continues to outpace the industry, FOB sales up 11%, and client investment assets and merchant processing volumes each up 12%. We maintained our No. 1 rank in global IBCs and CIB delivered double-digit revenue growth across the board. Commercial Bank revenue was up 11% year on year with IB revenues being a bright spot this quarter. And, in Assets and Wealth Management, AUM and client assets were both up 8%.

Turning to Page 2, some more details about the second quarter. The firm delivered strong core positive operating leverage this quarter. Revenue of $28.4 billion was up $1.7 billion or 6% year on year. Net interest income was up $1.1 billion or 9%, reflecting the impact of higher rates and loan growth, partially offset by lower markets and II. Non-interest revenue was up over $600 million, driven by strong performance in markets and IBCs, and also, higher auto lease income. NIR this quarter was negatively impacted by a Rewards liability adjustment in Card, and remember, that last year included a significant legal benefit. Excluding these two items, NIR would have been up $1.6 billion and total revenue up 10%.

Expense of $16 billion was up 8% year on year, with half of the increase directly related to incremental revenues, principally compensation in the CIB, transaction expenses, and auto lease growth, about a third related to continued investments in technology as well as headcount across the businesses, and the remainder was largely a loss on the liquidation of a legacy legal entity as part of our simplification efforts. And, if you exclude this item, expense was up only 7%. The legal entity loss together with the Rewards liability adjustment in Card are the two notable items I mentioned in the beginning for a total reduction of over $500 million pre-tax. Credit costs of $1.2 billion were flat year on year and credit trends remain favorable across both Consumer and Wholesale.

Shifting to balance sheet and capital on Page 3, we ended the second quarter with CET1 of 11.9%, up about 10 basis points versus the last quarter, and most of the capital generated was returned to shareholders. Risk-weighted assets were relatively flat despite solid growth in loans and commitments, being offset from further categories. In the quarter, the firm distributed $6.6 billion of capital to shareholders, and last month, the Fed informed us that they did not object to our 2018 capital plan. We were pleased to announce gross repurpose capacity of nearly $21 billion over the next four quarters and the board announced its intentions to increase our common dividend to $0.80 per share effective in the third quarter.

Moving on to Page 4 and Consumer and Community Banking, CCB generated $3.4 billion of net income and an ROE of 26%. Core loans were up 7% year on year driven by home lending up 12%, business banking up 6%, cards up 4%, and auto loans and leases also up 4%. Deposits grew 5%, and although growth is slower than a year ago, we are seeing record high retention rates and customer satisfaction scores. Clients' investment assets were up 12%, with more than half of the growth from net new money flows, and we are capturing an outsize share as our customers shift from deposit to investments. Card sales volume was up 11% and we announced several new cards as we continue to update our product offerings.

Revenue of $12.5 billion was up 10% year on year. Consumer and business banking revenue was up 17% on higher NII, driven by continued margin expansion as well as deposit growth. Home lending revenue was down 6% on production margin compressions and lower net servicing revenue despite higher purchase volume in retail. And, card merchant services and auto revenue was up 6%, driven by lower card acquisition costs, higher card NII on margin expansion as well as loan growth, as well as higher auto lease volumes. This was largely offset by a lower net interchange driven by a Rewards liability adjustment of about $330 million, reflecting strong customer engagement across our Ultimate Rewards offerings. As a result, the card revenue rate was 10.4% for the quarter, but our full-year guidance of approximately 11.25% holds.

Expense of $6.9 billion was up 6% year on year, driven by higher auto lease depreciation and investments in technology. Finally, on Credit, charge-offs were down $36 million year on year, including a recovery of about $130 million from a loan sale in home lending. This was largely offset by higher net cost charge-offs in Card. The Card charge-off rate was 3.27%, reflecting seasonality, and is in line with expectations and in line with our guidance. There were no reserve actions taken this quarter.

Turning to Page 5 and the Corporate and Investment Bank, CIB reported net income of $3.2 billion on revenue of $9.9 billion, up 11%, and an ROE of 17%. In Banking, we maintained our No. 1 ranking for the quarter and year to date in global IBCs with a record first-half performance and we grew share across all regions. IB revenue of $1.9 billion was up 13% year on year, outperforming a market that was down slightly as we saw robust activity, particularly in M&A and ECM. It was a record second quarter for advisory fees, which were up 24%. Benefiting from a number of large deals closing this quarter, we gained share and ranked No. 2 globally.

Equity underwriting fees were up 49%. We ranked No.1 globally, as well as in North America and EMEA, and gained share in a contested environment, driven by ITOs and convertibles in the two most active sectors, healthcare and technology, which are areas of strength for us. Additionally, we saw good momentum in private capital markets as clients are exploring alternative sources of capital. Debt underwriting fees were relatively flat versus a very strong prior quarter, supported by healthy acquisition-related activity, and we ranked No. 1 in VCMs globally and across all sub-products. Looking forward, the overall pipeline remains strong.

Moving on to Markets, total revenue was $5.4 billion, up 13% year on year or up 16% adjusting for the impact of tax reform, and was driven by strong results in equities, solid performance in FIT across categories, and with performance picking up in the second half of the quarter. Fixed income markets revenue was up 12% adjusted on the backs of good client flow and decent volatility, and with commodities making a notable recovery from a challenging prior year.

It was a record second quarter for Equities, with revenue up 24%, driven by strong client activity and favorable trading results, and with particular strength in cash, prime, and flow derivatives. Treasury Services and Security Services revenue were each up 12%, driven by higher rates and deposit balances, and security services also benefited from higher asset-based fees on new client activity and higher market levels. Finally, expense of $5.4 billion was up 11%, driven by higher performance-related compensation, volume-related transaction costs, and investments in technology. The comp-to-revenue ratio for the quarter was 27%, consistent with the prior-year quarter.

Moving to Commercial Banking on Page 6, another strong quarter for this business with net income of $1.1 billion and an ROE of 21%. Revenue was a record for the second quarter, up 11% year on year driven by higher deposit NII and strong investment banking activity. Gross IB revenue of $739 million was up 39%, driven by several large transactions, a strong underlying services NIS, and the overall pipeline is robust and active. Expense of $844 million was up 7% as we continue to invest in the business, both in bankers and in technology.

Loan balances were up 4% year on year and 2% sequentially. C&I loans were up 3% year on year and sequentially due to increased M&A-related financing, with strengths in our expansion markets as well as in specialized industries, and despite lower tax-exempt activity. CRE loans were up 4% year on year and flat versus last quarter as there continues to be a lot of competition for high-quality assets, and we are flectic given where we are in the cycle. Finally, credit performance remains strong with a net charge-off rate of 7 basis points.

Moving on to Asset and Wealth Management on Page 7, Asset and Wealth Management reported net income of $755 million with a pre-tax margin of 28% and an ROE of 33%. Revenue of $3.6 billion was up 4% year on year, driven by higher management fees on growth in long-term products as well as strong banking results. Expense of $2.6 billion was up 6%, driven by continued investment in advisors and technology as well as higher external fees on revenue growth.

For the quarter, we saw net long-term inflows of $4 billion with positive flows across multi-asset equities and alternatives, partially offset by outflows in fixed income. Additionally, we saw net liquidity inflows of $17 billion. AUM of $2 trillion and overall client assets of $2.8 trillion were both up 8%, with the increase being split about equally between flows and higher market levels globally. Deposits were down 7% year on year, reflecting continued migration into investments, where we are also capturing the vast majority, and down 3% sequentially on seasonal tax payments. Finally, we had record loan balances up 12% with strength in global wholesale and mortgage lending.

Moving to Page 8 and Corporate, Corporate reported a net loss of $136 billion. The result included a pre-tax $174 million loss on the liquidation of a legacy legal entity previously mentioned, but it is of note that while this loss drew expense that affects earnings this quarter, it is offset from a capital perspective, so it's capital-neutral. Before I wrap up, you may note we have no outlook page here. Although both revenue and expense are trending higher market-related, given we're only halfway through the year, we're not updating our outlook at this point.

So, to close, the macroeconomic backdrop continues to be supportive. Consumer and business confidence and sentiment remains high, client activity levels are robust, and the markets are open and active. We are pleased with the firm's results this quarter. Our broad-based financial performance clearly demonstrates the power of the platform. Revenue grew strongly -- double digits year over year in many cases. We realized positive core operating leverage despite significant investments and credit trends remain favorable across both Consumer and Wholesale. This was a clear record for second quarter whichever way you slice it. We remain focused on consistently delivering for our customers and communities and investing for the long term. With that, operator, can you open up the line for Q&A?

Questions and Answers:

Operator

At this time, I would like to remind everyone in order to ask a question, press *1 on your telephone keypad. We kindly request that you ask one question and only one related follow-up. If you would like to ask additional questions, please press *1 to be reentered into the queue. Our first question comes from Ken Usdin of Jefferies.

Marianne Lake -- Chief Financial Officer

Good morning, Ken.

Ken Usdin -- Jefferies and Company -- Managing Director

Hey, good morning, Marianne. Can I ask you to talk a little bit about the Card business and the -- you mentioned the strong customer engagement with regards to the Rewards markdown. Can you just walk us through what's the drivers of that, and is this a one-time event, and does it affect the Card revenue rate outlook?

Marianne Lake -- Chief Financial Officer

So, I'll start at the end because that's pretty simple. It obviously affected the Card revenue rate in the quarter. You can see that that was 10.4%, and you can see on the page we've adjusted for the impact, but the 11.25% for the year remains true, which is to say that while this may be slightly larger than normal, it's not exactly a one-time item. We regularly review our liability as we observe the mix of our portfolio and the behaviors of our customers.

On face value, I know Rewards is often talked about as a competitive matter. This is less about competition per se. In fact, we have record low sales attrition, which in a competitive environment is really very good, and it's more about a customer's awareness of the value proposition of Rewards and them being engaged in redeeming them, which for us is a net positive thing because engaged customers spend more, and we're seeing that, they attrite less, and we're seeing that, and they will bring up more of their share of deposits and investments as we deepen relationships. So, I would say it's a little larger than normal. We do it pretty regularly, so it's not one-time, but it's not completely typical.

Ken Usdin -- Jefferies and Company -- Managing Director

Got it. And, in the press release, Jamie mentioned in the first paragraph about increasing competition. Is that a global, across-all-businesses comment, or are you seeing it narrowly in specific areas?

Marianne Lake -- Chief Financial Officer

I think it's pretty global across all businesses as a general matter. There are some obvious areas where it's pretty acute, and in the retail auto space, for example, we talked about commercial real estate, for example, mortgage clearly with capacity in the system, for example -- all of those areas are pretty competitive for a variety of reasons given where we are in the cycle and the economy and the like. But, I would say it's broad-based. It's everywhere. That said, we are holding our own, and in many cases, gaining share, so we're doing pretty well.

Operator

Our next question is from John McDonald of Bernstein.

John McDonald -- Sanford C. Bernstein -- Analyst

Hi, Marianne. I wanted to ask you what you're seeing this quarter in terms of consumer deposit trends with a little more color on both the pricing data and volume balances. I'm wondering if you're seeing a lot of competition from the online competitors like Marcus, and whether those are affecting your deposit balances with consumers being attracted to those high yields, and are they affecting your pricing decisions?

Marianne Lake -- Chief Financial Officer

I would say you talked of consumer deposit, so I'm talking retail now, not those high-net-worth data -- I'll come back to that. Consumer deposit is up 5% year on year, slowing down, as we would have expected. While you have seen online competitors and even some regional competitors make some moves in the large bank space, we haven't really seen that yet. When we look at the deposit slowdown and we unpack it, it feels to us like the vast majority of the root cause is customers moving into investments, and in the case of retail customers, actually into managed accounts, so it doesn't appear to be rate-seeking. Spending more would be the second driver, and to a much less extent are we seeing behaviors that look like they're rate-seeking at this point.

So, we're not seeing that kind of migration out of the company to online or other competitors at this point, and so, at this point, reprice is still not happening. That said, we are on a journey, clearly. In the higher-net-worth space, we continue to see the migration into investment assets we've been seeing, and again, we continue to recapture the vast majority of those. So, at this point, things are playing out as we would have expected, and we're not actually losing deposits en masse to any third parties.

John McDonald -- Sanford C. Bernstein -- Analyst

Okay. And, just to follow up on that, can you remind us what's the opportunity you see with the rollout of FIN and what advantages you expect to have in that arena?

Marianne Lake -- Chief Financial Officer

I would look at FIN as one of many digital innovations that we're doing, and I would look at it also in conjunction with broader digital account openings, and although we've now launched FIN nationwide, I think it's fair to say it's still very nascent and we're still learning. So, we're going to continue to observe. It's got very high net promoter scores, by the way, so customer experience is good, but it's still quite young.

Jamie Dimon -- Chairperson and Chief Executive Officer

We haven't even marketed it, either.

Marianne Lake -- Chief Financial Officer

No, we just started. I would say digital account opening, on the other hand, is a pretty good success story, and we are seeing a lot more accounts opened digitally across the channels, and we're seeing also a decent chunk of net new to the bank, and where we're seeing existing customers opening new accounts, we're getting incremental money. So, we are seeing our digital effort pay off, and even more broadly than that, we could go into QuickPay and Zelle and the like, but I wouldn't focus overly on FIN as isolated thing, but think digital more broadly.

Operator

Our next question is from Jim Mitchell of Buckingham Research.

James Mitchell -- Buckingham Research -- Analyst

Hey, good morning.

Marianne Lake -- Chief Financial Officer

Morning, Jim.

James Mitchell -- Buckingham Research -- Analyst

Maybe just talk a little bit about loan growth. It obviously seems to have picked up in the Fed data over the last month or two. What are you guys seeing on the ground, and do you think what we've seen so far is a good indicator for a more sustained pickup in growth?

Marianne Lake -- Chief Financial Officer

I would say that we would -- if you use the Commercial Bank C&I loans as a kind of bellwether, there has been decent demand, and I mentioned it in my remarks, but decent demand -- not exclusively, but partially on the back of a very robust and active M&A environment. And so, the demand is there, I would say growth is solid and in line with our expectations, so we continue to hope to see that growth as we go through the year. There may be other tailwinds. We've yet to see the full effect of tax reform flow through into profitability and free cash flow, so I would characterize loan growth as solid, and our expectations for the outlook to remain solid, benefiting from a very active capital markets environment.

James Mitchell -- Buckingham Research -- Analyst

Okay. As a follow-up, when we think about NIM going forward, I think it was a couple years ago that you talked about normalized being somewhere in the 2.65 to 2.75 range, or 2.46 now. Is there a certain loan-to-deposit ratio you think you need to have, or level of rates? How do we -- I'm just trying to think through how we think about NIM going forward.

Marianne Lake -- Chief Financial Officer

We're at ted funds of 175 to 200 right now, so we're not anywhere yet close to normal rates, so when we think about what we've talked about in normalizing NIM, we were thinking it more through the cycle adjusted for new liquidity rules and everything else. So, we have a number of further rate hikes to go before we would reach that point, but we are, on a core basis -- and remember, we have a fairly sizable market balance sheet, but on a core basis, we are continuing to see NIM expansion in line with expectations and moving up toward that. So, we would expect to see expansion year over year moving toward that level, but not getting there yet.

Operator

Our next question is from Erika Najarian of Bank of America.

Erika Najarian -- Bank of America Merrill Lynch -- Managing Director

Hi, good morning.

Marianne Lake -- Chief Financial Officer

Good morning, Erika.

Erika Najarian -- Bank of America Merrill Lynch -- Managing Director

My question is on the regulatory process this year under the new leadership. I'm wondering if there's anything that you could share with us in terms of change, whether or not it was -- how receptive or not the regulators were during the comment period for the SCB, and also, during the CCAR process. Was there any marked or observable change in the processes this year versus previous years?

Marianne Lake -- Chief Financial Officer

I would say on the comment period for the SCB, obviously, during the comment period, the regulators are quiet, so it wasn't a two-way dialogue during that period. We would expect the two-way dialogue to start now that the comment period is over and the industry and bilateral letters have been submitted.

I will say -- going back to comments I think I've made previously -- that I remain constructive about the willingness for the current leadership to pay attention and take on board those comments. If you look at the proposal that was sent out for comment, not only did it have a large number of questions that they were asking for feedback on, but the actual proposal was very similar to what we had been understanding was the intention and speeches that go back a fair way, which is to say that it feels like we're still making the sausage rather than this is a done deal, and so, we're very optimistic that the comments will be taken onboard, and you know what they are -- volatility was evident in spades in this test. Opaqueness, GSIB -- we can go through them; I'm sure we will.

So, we remain optimistic that the comments -- the bilateral discussions will start now -- or, the industrywide discussions will start now. I would say on CCAR, it felt status quo to prior years. That's not to say that it's not constructive, it's just that it felt like status quo to prior years.

Erika Najarian -- Bank of America Merrill Lynch -- Managing Director

And, my follow-up question -- the pushback that I'm getting from a lot of investors on bank stocks is that we're long in the tooth in the economic cycle. Clearly, the strong activity levels that you posted this quarter and the credit metrics that you posted would suggest otherwise. I'm wondering -- both Jamie and Marianne -- how you would respond to that pushback that now is not the time to invest in banks because we are late in the game from an economic standpoint.

Marianne Lake -- Chief Financial Officer

I would say two things, which is while this cycle is older than potentially typical cycles have been, growth over the last decade has been lower through the recovery, so there is plenty potential room to play in. As we look at all the economic data -- not just here in the U.S., but also globally -- there are no real signs of fragility, and I know people are staring at a flat yield curve, and we would say that that flat yield is a bare flattening, good flattening from bank profitability perspective, and not some looming risk of a recession embedded in it. Term premium is still negative, real policy rate is still at zero, credit very benign. That said, we are in cyclical businesses, no doubt, so we are preparing, and we'll be ready when the cycle turns, and no doubt there will be impacts from that. But, through the cycle, I think that we've proven that our business model will produce strong shareholder returns and among best-in-class performance.

Operator

Our next question comes from Mike Mayo of Wells Fargo Securities.

Marianne Lake -- Chief Financial Officer

Hi, Mike. You might be on mute.

Mike Mayo -- Wells Fargo Securities -- Managing Director

Hi, can you hear me?

Marianne Lake -- Chief Financial Officer

Yes.

Mike Mayo -- Wells Fargo Securities -- Managing Director

I wanted to follow up on that last question -- if Jamie could respond, too. Marianne, you said the macro is very supportive, you sound very positive. On the other hand, the 10-year Treasury yield has flashed warning signs to a variety of parties. So, Jamie, we had the tax cut, we've been waiting for the extra boost to the economy, whether it's capital expenditures or whatever. Do you think the economy is accelerating, it's still on steady footing, it's the same, or maybe it's slowing down, and how should we think about the 10-year -- or, how do you think about the 10-year and how do you manage to a flatter yield curve?

Jamie Dimon -- Chairperson and Chief Executive Officer

Real quickly, Mari said it's almost nine or ten years of growth at 2%, averaging 20% over the ten years, it really should be closer to 40%. There's a lot of evidence that the slack in the system is being finally -- people are going back to the workforce. The consumer balance sheet is in good space, capital expenditures are going up, household formation is going up, homebuilding is in short supply, the banking system is very healthy compared to the past. Consumer confidence and business confidence are very high, albeit off their highs, probably because of some of our trade.

So, if you're looking for potholes out there, there are not a lot of things out there, and growth is accelerating. Of course, things are always a little bit different. My own personal view about the 10-year is that I wouldn't say it has to happen the way it's happened every time, last time. I just think that's a mistake. The Fed is reversing the balance sheet. I think it's very easy that rates can go up, the 10-year rates can go up, in a healthy environment. In history, we've had rates going up where you had a healthy environment. It's not always true that the 10-year going up is bad.

Marianne Lake -- Chief Financial Officer

I would also say that the shape of the curve is correlated to Fed funds in a tightening cycle, and that is what we're seeing. So, while there are other factors weighing potentially on the 10-year in terms of still very accommodative central bank policy, particularly in the banks of Japan and the ECB, where obviously, trade is not necessarily constructive just in terms of the narrative, short-term underfunded pensions going into bumps -- there are some technicals, but fundamentally, what you're seeing in terms of the flattening is pretty typical of a tightening cycle, and as long as it's accompanied with solid to strong economic growth, it doesn't concern us at this point, and in fact, as we've been pointing out, we are still levered toward fund rates from a profitability perspective, and we do expect the curve to steepen over time.

Mike Mayo -- Wells Fargo Securities -- Managing Director

All right, thank you.

Operator

Our next question is from Glenn Schorr of Evercore ISI.

Marianne Lake -- Chief Financial Officer

Hi, Glenn.

Glenn Schorr -- Evercore ISI -- Managing Director

Hi. Thanks very much. Just one follow-up on the competition conversation. I just want to see... Your loan growth decelerated, but it was in line with your 7% to 8% goal. Your loan beta capture -- what you're getting on the pricing side -- is actually a little bit better than what you've given up on the deposit sign. So, that all seems fine, but that's the first time I remember you putting in the comment about the competition. Are you still OK with the 7% to 8% goal? And, just an add-on to that -- I'm just curious if part of the competition has anything to do with the private credit market that seems to be growing pretty strongly.

Marianne Lake -- Chief Financial Officer

I would say just a tiny little correction -- our outlook was 6% to 7% core loan growth excluding the CIB. We're at 7% now. Things are still moving ahead in line with that. I would also just point out that it is an outlook, not a target, so while we still feel like that is our outlook at this point, we obviously are going to make the right decisions based upon the environment that we're in. Competitively, the private credit market for commercial real estate, for leveraged lending -- it's competitive, but so are our mainstream competitors. It's just that the environment is pretty constructive and everybody is trying to get access to the high-quality assets, so margins are under pressure, and we will make sure we're getting the right return for the risk we're taking.

Glenn Schorr -- Evercore ISI -- Managing Director

Okay. And then, the follow-up on the expense side, $16 billion times 4 would be $64 billion. Your outlook is $62 billion, but a lot of those were good expenses on better volumes. Are you still on track in your mind for the overhead ratio? I don't want to overly focus on a dollar amount.

Marianne Lake -- Chief Financial Officer

It's a couple things. Remember, the 62 was before the impact of expense growth up, so the actual full-year outlook was about $63 billion including them. This quarter included a one-time item of $174 million on the legal entity liquidation -- we knew about that, obviously, so it was in our number, but you can't annualize it, you can't times it by 4. So, you're absolutely right. As we look out for the full year, to the degree that we would be above -- our outlook is $63 billion -- it would be largely driven, if not exclusively driven, by higher performance-related compensation on higher revenues, with the only other caveat that as you probably know, we are waiting -- as I'm sure you are -- for when the FDIC surcharge is taken away. The FDIC anticipated that would be in the middle of the year this year, but that is now potentially at some risk of moving out into the third or fourth quarter. So, while that could have an impact on this year, to answer your broader question -- are we still on track for our expense overhead ratios? Yes.

Operator

Our next question is from Saul Martinez of UBS.

Saul Martinez -- UBS Financial Services -- Managing Director

Hi. Good morning.

Marianne Lake -- Chief Financial Officer

Hi.

Saul Martinez -- UBS Financial Services -- Managing Director

So, just following on the theme of economics and policy, to what extent do you see trade friction, geopolitical concerns, those things starting to impact client sentiment, whether it's institutional or corporate clients? And, ultimately, do you see that -- or, how do you gauge that as being a risk to global growth and U.S. growth?

Marianne Lake -- Chief Financial Officer

I would say so far, where we are is that trade is firmly part of the risk narrative, so it's definitely, as Jamie has said, on the psyche of people, but at this point, it's not causing them to change the strategic actions and decisions that they're making, but clearly part of the conversation. And, as currently outlined, it's more of that than it is a real impact to the global macroeconomic outlook. But, that isn't to say that uncertainty can't ultimately lead to more challenges or slower growth, but because confidence is a really important part of not just the business investment cycle, but also the financial market stability. So, at this point, it's more of a risk narrative than it is an actual driver, but it is important that that uncertainty is taken off the table.

Saul Martinez -- UBS Financial Services -- Managing Director

Okay. And, if I could just ask a quick follow-up -- I apologize if you addressed it earlier; a lot of multitasking this morning -- but, on the market side, you did much better than what Daniel suggested in his update in terms of year-on-year being flattish overall. Can you just give us a sense of what changed in the last month of the quarter?

Jamie Dimon -- Chairperson and Chief Executive Officer

It got better.

Marianne Lake -- Chief Financial Officer

Right, and [inaudible], but let me just give you the context. The context is -- as you will recall, as we ended the first quarter, there were some bouts of volatility, and clients became more cautious, and that carried over into the first part of this quarter, and while activity was fine, it wasn't as strong. In the second half of the quarter, that generally faded, activity levels picked up, and I would say there were more catalysts. Ironically, one of the more catalysts -- when you're thinking about trading volatility, or intraday volatility, or vol of vol, trade is part of that. Emerging market idiosyncratic events are part of that. The European sovereignty situation -- so, there's just more catalysts in the market, and just generally, more client participation.

Operator

Our next question is --

Marianne Lake -- Chief Financial Officer

Sorry, to finish that to make sure that no one is confused, it was pretty broad-based, it was pretty consistent throughout the second half of the quarter, and it wasn't a lot of one-off large trades.

Operator

And, our next question is from Betsy Graseck of Morgan Stanley.

Betsy Graseck -- Morgan Stanley -- Managing Director

Good morning.

Marianne Lake -- Chief Financial Officer

Hi, Betsy.

Betsy Graseck -- Morgan Stanley -- Managing Director

Jamie, I wanted to ask about the China investment. I know that you put in the press release that you announced this quarter plans for a more significant investment in China. I just want to understand the timing. Is this something that's over the next year or something that's a longer-term three- to five- year? And, if you can just give us a sense as to how much is in your control versus needing regulatory approval from folks over there, et cetera.

Jamie Dimon -- Chairperson and Chief Executive Officer

I'll just make a broader business comment for a second. I think we easily answered Mike Mayo's question. We don't run the business guessing about when there might be a recession because we know there's going to be one. We already priced the recession -- we like to play in clients, bankers, cards, accounts, products, services -- that's how we run the business. Some of the decisions you make are portfolio decisions. You can add to your mortgage portfolio or you can sell it. You can reduce your growth or the loans if you think the credit is bad, and of course, we will do that when the time comes, but we'll still be adding accounts. To me, I don't worry as much about the 10-year bond or all these various things. We can manage those risks. We want more clients in almost every business we're in and want to do a very good job for them in products or services.

China -- it's a long-term story. We're not looking for any immediate thing. In the next 12 years or so, China will -- internal markets, bond markets, stock markets probably will be very close -- equal in size to the United States of America. Therefore, we want to do everything we do here in China. We can do a lot of that in Hong Kong today, but we can't do it in Shanghai, so we've applied for licenses, and obviously, we need permission ultimately from our regulators and from their regulators, so it's totally in their control. EMEA may not be affected by trade, but I look at this as a point in time. It is what it is.

Eventually, we'll get these licenses. Eventually, hopefully, we'll be a large competitor in Shanghai. Remember, we already do a lot of that business with Chinese companies around the world, with Chinese companies in Hong Kong. We get a lot of people going into China. So, we're looking for the full set of licenses to do what we need to do for Chinese companies. Ultimately, I think it'll be good for China to have a company like J.P. Morgan equity, debt, credit, transparency, governance issues, inside China.

Betsy Graseck -- Morgan Stanley -- Managing Director

But right now, today, the ability to operate in Shanghai...?

Jamie Dimon -- Chairperson and Chief Executive Officer

Look, we already do deposits and certain banking. What we can't do is equity, debt, and trading of equity and debt. If we get this license one day, at 51%, we'll be able to make -- and, with these licenses, we'll be able to basic equity underwriting, equity sales and trading, research, debt underwriting, debt sales and trading. We can do all of that today in Hong Kong, but remember, Chinese companies -- they can do it in Shanghai, they can do it in Hong Kong, they can do it in London, or they can do it in New York. We just want the full capability.

Operator

Our next question is from Gerard Cassidy of RBC.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Good morning.

Marianne Lake -- Chief Financial Officer

Good morning.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Marianne, can you share with us -- and, correct me if I'm wrong -- I think you guys have given us some color in the past about the impact of the Fed taking down their balance sheet over the next three to five years by a couple trillion dollars, that it will impact your deposit side of the balance sheet. Can you give us an update of where that stands today?

Marianne Lake -- Chief Financial Officer

The Fed has been on a pretty well-telegraphed path here, reducing their balance sheet by about $50 billion a quarter. We talked about the fact that if you take $1.5 trillion out of the system, if you look at -- as the Fed was growing its balance sheet, about half of that will ultimately impact deposits, and our share of it would be 10%. So, we talked about potentially -- that kind of $50 billion to $75 billion of deposit outflows over the several years it would take to reduce that, but primarily they would be -- not exclusively, but primarily not operating, and therefore, limited impact on liquidity or basis. And so, it's playing out textbook right now.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Okay. And then, as a follow-up, I know you've touched on this increased competition. Can you give us some more details in the commercial real estate and the residential mortgage area what you're actually seeing? Is it just pricing, or is it now loan covenants, is it loan-to-values? Any further color there?

Marianne Lake -- Chief Financial Officer

So, residential mortgage correspondence, in particular, is pricing -- pricing, pricing, pricing -- and so, we will cede share if the pricing goes to what we consider to be not sufficient to return shareholder value. In the commercial real estate space, I would say it is primarily pricing -- so, spreads are under a lot of pressure, and the competition, as I said, it's GFEs, it's insurance companies, it's non-bank commercial institutions. It's a little bit less credit terms, but still pretty robust, albeit we are seeing a tiny shift to the right in LCVs. We're not going there, by the way, but I would call it pretty modest. So, I'd say generally, terms are holding up quite well.

Jamie Dimon -- Chairperson and Chief Executive Officer

On the competition issue, I think it's good for the country -- the United States -- if we have a fully competitive card, mortgage, retail, asset management, commercial banking, investment banking, sales and train -- there are strong competitors everywhere. It's just recognizing that. That's all it is. It's a good thing. It's called capitalism.

Operator

Our next question is from Al Alevizakos of HSBC.

Marianne Lake -- Chief Financial Officer

Hi.

Al Alevizakos -- HSBC -- Director

Hi. Thank you for taking my question. I've got one question and a follow-up. I do care about geographical speed of the IB performance. You mentioned that there were certain catalysts, and you also mentioned both a talent situation, but also the mixed market, so I want to know whether the strength was driven by the U.S., or whether there were specific areas that were weaker or stronger. And, my follow-up is [inaudible].

Marianne Lake -- Chief Financial Officer

Al, I'm sorry --

Jamie Dimon -- Chairperson and Chief Executive Officer

It'd be really helpful if you guys weren't on your cellphones.

Marianne Lake -- Chief Financial Officer

Al, I'm sorry, but you were breaking up, so I didn't catch most of that question.

Jamie Dimon -- Chairperson and Chief Executive Officer

Where's the IB doing well internationally, USA...?

Marianne Lake -- Chief Financial Officer

Okay. I would say across regions. Equity has strong performance across regions. While there were more catalysts this quarter -- so, you mentioned Italy, I think -- none of those were particular drivers, so we did fine on all of those, as I mentioned. So, I would say broad-based, gaining share, we think, in some areas -- in equity, cash and prime in particular, and holding our own elsewhere, and I would say solid performance across the SIC spectrum, and gaining share in investment banking, but obviously, you can't look at any one quarter.

Al Alevizakos -- HSBC -- Director

Thanks for that. The second part -- I'm sorry that you couldn't listen before -- is do you feel that you've started picking market share from the European competitors in the U.S., especially the ones that are deleveraging?

Marianne Lake -- Chief Financial Officer

I would say that if you just go back over the course of the last couple of years, you have seen some share shift from European banks to U.S. banks broadly. In the prime space, I would say U.S. prime incumbents are gaining some share, but it's not a particularly new trend, and it's not the dominant trend.

Operator

Our next question is from Matt O'Connor of Deutsche Bank.

Marianne Lake -- Chief Financial Officer

Hey, Matt.

Matt O'Connor -- Deutsche Bank -- Managing Director

Good morning. To follow up on the net interest margin, you mentioned ex the market's business, it was still increasing, and I was wondering if you could size the magnitude of the NIM increase linked-quarter on a core basis ex markets.

Marianne Lake -- Chief Financial Officer

Yeah. So, linked-quarter reported down 2 basis points because of lower markets NII and higher market assets -- $20 billion -- core up 8 basis points.

Matt O'Connor -- Deutsche Bank -- Managing Director

Okay, that's helpful. And then, separately, within CIB, the net charge-offs went up. Is that just some of the cleanup in energy? I know you mentioned that there was a reserve release related to energy, but you had a little blip in the charge-offs there. Just wanted to get some color on that.

Jamie Dimon -- Chairperson and Chief Executive Officer

That was actually credit.

Marianne Lake -- Chief Financial Officer

Charge-offs -- so, in CIB, the charge-offs were driven by two names, and the principal one was the remaining piece of the Steinhoff loan that we sold this quarter. We had a reserve release against it that was larger.

Operator

Our next question is from Gerard Cassidy of RBC.

Marianne Lake -- Chief Financial Officer

Hi, Gerard.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Thank you. Just a follow-up, Marianne -- on the capital return that you guys were approved for in terms of the share repurchase, is that going to be spread out evenly over the next four quarters, or will it be more front-end-loaded?

Marianne Lake -- Chief Financial Officer

We haven't disclosed that, but if you look at our historical pattern, it's pretty even.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Very good. Thank you.

Operator

Our next question is from Betsy Graseck of Morgan Stanley.

Marianne Lake -- Chief Financial Officer

Hi, Betsy.

Betsy Graseck -- Morgan Stanley -- Managing Director

Hey. Just a question on CECL. I think Jamie mentioned in the past that CECL is not a big deal for you guys, and maybe you could explain why, what kind of prep work, and what you're thinking about as you work to adopt that over the next couple of years?

Marianne Lake -- Chief Financial Officer

Sure. Look, CECL is not a big deal insofar as we're getting ready for it. I will tell you that we haven't disclosed an adjustment number on the basis that we're still working through the modeling and the data, and it is more complicated operationally to get everything lined up than you might think. We're going to intend to be running some stuff in parallel next year, so we'll be able to give you much more color next year.

Generally speaking, as we move to life-of-loan losses, it won't shock you to know that we will have an adjustment to our reserves through equity. It will be driven most likely by any of the portfolios that have longer weighted-average life-Cert Ed incurred-loss models. Card would be the most notable-to a lesser extent, unfunded wholesale commitments -- but it'll be manageable in the context of the firm. It goes through equity. And then, if you think about the economics, the cash flows, the NPV of these loans doesn't change --

Jamie Dimon -- Chairperson and Chief Executive Officer

Which is what my comment relates to.

Marianne Lake -- Chief Financial Officer

Yeah, it doesn't change the economics of the loans. You upfront a little bit of reserves you get paid for over time. We don't think it's going to fundamentally shift the dynamics, but that will play out.

Jamie Dimon -- Chairperson and Chief Executive Officer

We don't make economic decisions based upon accounting.

Betsy Graseck -- Morgan Stanley -- Managing Director

Are there any asset classes where it's shorter under CECL than under the incurred-loss model?

Marianne Lake -- Chief Financial Officer

It's hard because it's life-of-loan, so it's hard to have a shorter -- it's difficult to imagine that a life-of-loan could be shorter than an incurred loss, so, no, not really. But, for us, the reason why it's pretty limited -- not to say there's no other impact, but the reason why it'll be mostly driven by the areas I mentioned is because in most of our wholesale space and so many of our other products, we are covered for multiple years, if not close to life-of-loan, at this point.

Operator

Our next question is from Erika Najarian of Bank of America.

Marianne Lake -- Chief Financial Officer

Wow, we're popular today.

Erika Najarian -- Bank of America Merrill Lynch -- Managing Director

Yeah, I thought I'd join the party too. I was feeling a little left out. A quick question -- follow-up on card retention. You mentioned that Rewards redemption is a sign of engagement. I wondered if you could share with us -- once redemption hits a certain level in terms of the number of points -- so, the number of points remaining may not be enough to redeem a trip or whatever -- what is the retention level then?

Marianne Lake -- Chief Financial Officer

I'm not sure that I totally follow the question. I just --

Jamie Dimon -- Chairperson and Chief Executive Officer

They're already -- they're constantly creating Rewards points and they're constantly using them for things. When they use Rewards points, some points cost us more than other points, and the pace that they use them changes economics a little bit, but basically, it's still what we expect over time.

Marianne Lake -- Chief Financial Officer

Yeah, and remember that in a very oversimplified model of these, we would want an extraordinarily high level of redemption. We are giving these rewards to customers because we think they are -- and, they indeed are -- perceiving great value in them, and so, we're just continuing to observe that as the mix changes.

Erika Najarian -- Bank of America Merrill Lynch -- Managing Director

Very helpful. Thank you.

Operator

And, we have no further questions at this time.

Marianne Lake -- Chief Financial Officer

Thank you very much, you guys.

Jamie Dimon -- Chairperson and Chief Executive Officer

Thanks for joining. We'll talk real soon.

Operator

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

Duration: 48 minutes

Call participants:

Marianne Lake -- Chief Financial Officer

Jamie Dimon -- Chairperson and Chief Executive Officer

Ken Usdin -- Jefferies and Company -- Managing Director

John McDonald -- Sanford C. Bernstein -- Analyst

James Mitchell -- Buckingham Research -- Analyst

Erika Najarian -- Bank of America Merrill Lynch -- Managing Director

Mike Mayo -- Wells Fargo Securities -- Managing Director

Glenn Schorr -- Evercore ISI -- Managing Director

Saul Martinez -- UBS Financial Services -- Managing Director

Betsy Graseck -- Morgan Stanley -- Managing Director

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Al Alevizakos -- HSBC -- Director

Matt O'Connor -- Deutsche Bank -- Managing Director

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