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J.P. Morgan Chase & Co. (NYSE:JPM)
Q3 2018 Earnings Conference Call
Oct. 12, 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 Third 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

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. Starting on Page 1, the firm reported net income of $8.4 billion and EPS of $2.34 on revenue of $27.8 billion with a return on tangible common equity of 17%.

The results this quarter were strong. Record net income for third quarter, even excluding the impact of tax reform, with key drivers being higher net interest income across businesses, reflecting continued rate normalization and solid growth in both loans and deposits, as well as very strong credit performance across all portfolios. Highlights include average core loan growth excluding the CIB of 6% year on year, card and debit sales as well as clients' investment assets and merchant processing volumes in Consumer were all up double digits. We gained share in global IBCs and across all regions year to date. And, in Asset and Wealth Management, AUM and client assets were both up 7%.

Turning to Page 2 and some more detail about our third-quarter results, revenue of $27.8 billion was up $1.4 billion or 5% year on year. Net interest income was up $945 million or 7%, reflecting the impact of higher rates net of lower market NII as well as loan and deposit growth. Non-interest revenue was up $425 million, driven by market NIR and higher auto lease income, partially offset by markdown on certain legacy private equity investments.

Expense of $15.6 billion was up 7% year on year. More than half of the increase relates to investments we're making in technology, marketing, bank as broadly defined, and real estate, and the remainder is driven by revenue-related costs, principally higher auto lease depreciation, and transaction expenses on higher volumes. Credit trends remain favorable across both Consumer and Wholesale. For the quarter, credit costs of $950 million were down $500 million year on year, driven by changes in consumer reserves.

Briefly on Page 3, turning to balance sheet and capital, there's little to say here other than as you can see, capital and risk-weighted assets remain basically flat quarter on quarter with a CET-1 ratio of 12%. Moving on to Page 4 and Consumer and Community Banking, CCB generated $4.1 billion of net income and an ROE of 31%. Core loans were up 6% year on year driven by home lending up 10%, business banking up 5%, card up 4%, and auto loans and leases up 3%. Deposits grew 4% year on year, continuing to outpace the industry, although slower than a year ago. According to the recently released FDIC annual survey, we grew at nearly two times the average, and we were the fastest-growing bank in nine of our top 10 markets. Chase also earned the No. 1 spot in customer satisfaction in the JD Power U.S. National Banking Satisfaction Study.

Client investment assets were up 14% as we saw clear record net new money flows, more than doubling year on year, with flows accounting for more than half of the growth. Card sales volume was up 12% with strengths across our portfolio, and we also saw very strong debit sales performance, up 13%. Revenue of $13.3 billion was up 10%, consumer and business banking revenue up 18% on higher NII, driven by continued margin expansion and deposit growth. Home lending revenue was down 16% as higher rates drive loan spread compression and a smaller market, pressuring production margins. In addition, net servicing revenue was down, including the MSR.

Card, merchant services, and auto revenue was up 10%, driven by higher card NII on margin expansion and loan growth, higher net card fees on lower acquisition costs, substantially offset by lower net interchange, and also on higher auto lease volumes. Expense of $7 billion was up 7%, driven by continued investments in technology and by auto lease depreciation. The overhead ratio was 53%.

Finally, on credit, starting with reserves, this quarter, we built reserves in card of $150 million, largely driven by growth, and we released reserves in the home lending purchase credit-impaired portfolio of $250 million, reflecting improvement in home prices and delinquencies. On charge-offs, there are a few moving pieces. Year on year, charge-offs were down $137 million, driven by a recovery from a reperforming loan sale in home lending this quarter of about $80 million together with an approximately $50 million charge-off adjustment in auto this period last year.

Excluding those charge-offs, we're about flat, but we are seeing improvement across all portfolios except for card, and in card, while charge-offs are up as newer vintages season, they are up less than expected as credit performance remains very strong. At this point, we expect card charge-off rates for the year to be below our guidance at about 310 basis points.

Now, turning to Page 5 and the Corporate and Investment Bank, CIB reported net income of $2.6 billion and an ROE of 14% on revenue of $8.8 billion, up 2%. In banking, we maintained our No. 1 ranking year to date in global IBCs as well as in North America and EMEA and gained share across regions. For the quarter, CIB revenue of $1.7 billion was flat to a strong prior year, and we outperformed a market that was down meaningfully as we saw robust activity, particularly in ECM. Equity underwriting fees were up 40%, gaining share across all products, with continued strength in IPOs, particularly in technology and healthcare.

Advisory fees were down 6% compared to a third-quarter record last year, outperforming the market and gaining share year to date. And, debt underwriting fees were down 11%, although better than the market, as our strong lead-left positions drove share gains. Looking forward, the overall pipeline remains strong, up solidly from the prior year across products.

Moving to Markets, total revenue was $4.4 billion, down 2% or up 1% when adjusting for the impact of tax reform -- so, another good performance. Fixed-income markets revenue was down 6% adjusted with no single predominant driver. We saw mild weakness in rates, financing, credit trading, and securitized products as a result of compressed margins and tighter financing spreads in range-bound and competitive markets. This was partially offset by higher activity levels in emerging markets on volatility and commodities returning to more normal levels relative to a weaker prior year.

Equities continued the momentum from previous quarters and was up across all segments on the back of strong client activity. Equities revenue was up 17%, reflecting continued share gains in cash and prime and strong performance in corporate derivatives. Treasury services and security services revenue were $1.2 billion and $1.1 billion, up 12% and 5% year on year respectively, driven by high rates and balances, and security services also benefited from higher asset-based fees on new client activity. Quarter on quarter, security services revenue was down, principally on seasonality and the impact of a business exit. Finally, expense of $5.2 billion was up 8%, driven by higher legal expense, higher compensation expense as we invest in technology and bankers, and volume-related transaction costs.

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 of $2.3 billion was up 6% year on year, driven by higher deposit NII. Gross IB revenue of $581 million was flat, although we saw a strong underlying flow of business and pipelines remain robust and active. On deposits, while we continue to benefit from the normalizing rate environment, as expected, balances are down year on year, bases are trending higher, and we are seeing some migration at the top end to higher-yielding investments.

Expense of $853 million was up 7%, as we continue to invest in the business, in banker coverage, and technology initiatives. Loan balances were up 4% year on year and 1% sequentially. In C&I, demand remains muted in the wake of tax reform, as well as client confidence is high, balance sheets are strong and liquid, and the environment is competitive. For us, C&I loans were up 4% year on year and flat sequentially, in line with the industry, but if you decompose it, we're growing strongly in our expansion markets and specialized industries, growing solidly in our core markets, but are seeing notable offsets in tax-exempt activity given the mix of our business. CRE loans were up 3% year on year, a little less than the industry, as we are seeing increased competition and continue to be very selective. Finally, credit performance remains strong, with net recoveries of 3 basis points.

Moving on to Asset and Wealth Management on Page 7, Asset and Wealth Management reported net income of $724 million with a pre-tax margin of 27% and an ROE of 31%. Revenue of $3.6 billion was up 3% year on year, driven by higher management fees net of fee compression on higher market levels and continued growth in long-term products. These were partially offset by lower mark-to-market gains, including on seed capital investments. Additionally, banking results are strong.

Expense of $2.6 billion was up 7%, 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 $8 billion with positive flows across all asset classes. In addition, we saw net liquidity inflows of $14 billion. AUM of $2.1 trillion and overall client assets of $2.9 trillion were both up 7%, with more than half of the increase being driven by flows and the remainder on higher markets. Deposits were down 8% year on year, reflecting migration into investments with us, and down 5% sequentially, including seasonality. Finally, we had loan balances up 12%, with strengths in global wholesale and mortgage lending.

Moving to Page 8 and Corporate, Corporate reported a net loss of $145 million. Treasury and CIO net income was up year on year, primarily driven by higher rates. Other corporate was a net loss of $241 million, including markdowns on certain legacy private equity investments of $220 million pre-tax. For the whole company, legal costs were a modest negative with a benefit here in other corporate being more than offset in the CIB.

Moving to Page 9 and outlook, we recently gave you updated outlook, so, unsurprisingly, that still holds, and it's here on the page. Only two things of note: Our expense outlook assumes that the SEIC surcharge ended this quarter, so clearly, an extension would pose a risk, and on tax, there are a number of questions in the rules which we expect to be clarified by the end of the year. We will have to work through them, but would not expect any changes to be material.

So, to close, we are growing across most of our businesses, we're investing heavily in all of them; we're investing in technology, bankers, and beyond. Credit is in great shape and the earnings power of the company is evident. We are particularly proud of the strength and improvement in customer satisfaction broadly and our continued investments, which drive leadership positions and market share gains. This quarter, we announced Sapphire Banking and our digital investing platform, You Invest. We opened our first branch of part of our expansion strategy in Washington, D.C., announced additional expansion into Philadelphia and Boston, and also announced our Advancing Cities initiative, as we invest for growth in the clients and communities that we serve. With that, operator, please open up the line for Q&A.

Questions and Answers:

Operator

If you would like to ask a question, please 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. Your first question comes from the line of Glenn Schorr with Evercore ISI.

Glenn Schorr -- Evercore ISI -- Managing Director

Hi.

Marianne Lake -- Chief Financial Officer

Good morning, Glenn.

Glenn Schorr -- Evercore ISI -- Managing Director

Good morning. So, at the Investor Day, I remember asking you this same question, so I apologize, but you have a slide that talked about Consumer and Corporate balance sheets being in great shape and having a low debt service burden. The 10-year is up a modest 35 basis points since then, and the world is freaking out that it's the end of the cycle, and that's gonna choke off the recovery. Your results are your results, but some would say they are backward-looking. Are you seeing any impact A). At the modest increase in the curve now, and B). I'll ask again -- is there a level of rates where you would start to see an impact of slowdown and what you're willing to lend rising in credit costs, things like that? Thank you.

Marianne Lake -- Chief Financial Officer

Yes. So, I would say -- I would pick up on the tone that you had in your question, which is the level of rates is not surprisingly high, and so, from our vantage point, we're not seeing anything in terms of looking at our client dialogue or, for that matter, at the credit trends that would suggest that this is problematic. With higher rates -- and, we do this all the time -- we obviously look at all of our portfolios and stress them for shocks of up 100 basis points, even up 200, although, clearly, where we are now, risks are more symmetric.

But, there doesn't seem to be any extraordinary stress that becomes evident, even if you -- obviously, at the margin, you're going to get more, but it doesn't seem to be overwhelming, and I think it speaks to the fact that low rates have been for a long time, people have had the chance to get prepared, there is a lot of liquidity, and in the corporate space in particular, people have been able to hedge. So, is there an absolute level of rates where things would be problematic? At some point, but we don't think we're anywhere near there. So, I'm not saying that there couldn't be select downgrades, I'm not saying that at the margin, there may not be some incremental stress if rates continue to go much higher, but that's not where we are right now.

Glenn Schorr -- Evercore ISI -- Managing Director

Okay, thanks very much, Marianne.

Operator

Your next question comes from Steve Chubak with Wolfe Research.

Steven Chubak -- Wolfe Research -- Executive Director

Hi, good morning.

Marianne Lake -- Chief Financial Officer

Morning, Steve.

Steven Chubak -- Wolfe Research -- Executive Director

I wanted to start with a question on the You Invest launch. As we think about the strategy for the business, I want to understand -- is the goal to compete with the incumbents to win new clients, or are you simply trying to augment the existing offerings for J.P. Morgan clients? And, it's really just our effort to understand the long-term strategy given that the pricing is quite competitive, but at the same time, the marketing effort has been fairly minimal so far.

Marianne Lake -- Chief Financial Officer

Remember, You Invest -- it's early. Jamie just said -- I don't know if you heard it -- yes and yes. Clearly, we are trying to add products and capabilities and value to our existing clients in an effort to continue to drive loyalty and engagement, and also earn more share of their wallet, but we do think that the proposition is compelling, and that the pricing is disruptive, and we should also expect over time to be able to attract new accounts. So, yes and yes, but it's early days. We're going to continue to develop You Invest and its capabilities to iterate it and improve it. So far, it's early, but good.

Steven Chubak -- Wolfe Research -- Executive Director

Got it. Thanks for that, Marianne. Just one follow-up from me relating to the commentary on the deposit side. You spoke of some of the headwinds to deposit growth, and these are more industry trends, including yield-seeking behavior on both the Commercial and Asset Management sides. I know you've given some helpful guidance in terms of the impact of Fed QE unwind as well in the past. I'm just wondering -- is the yield-seeking behavior you've seen so far consistent with your expectation? Do you still expect to grow deposits as we look out for the next couple of years?

Marianne Lake -- Chief Financial Officer

So, the answer is generically, yes, as we would have expected. Obviously, we have no crystal ball as to the timing in part of these things, but it is playing out arguably a little slower than we thought, but like we thought, and I would say that our outlook for deposit growth is for it to be slower, but still positive.

Operator

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Betsy Graseck -- Morgan Stanley -- Managing Director

Good morning, how are you?

Marianne Lake -- Chief Financial Officer

Good, how are you?

Betsy Graseck -- Morgan Stanley -- Managing Director

Good, good. So, first question just on the rate question that you got earlier, but I wanted to understand how you're thinking about the impact on the outlook for your asset yields, and in particular, the securities portfolio. I know you've given guidance on that before, but given the sharp backup that we got over the last couple of weeks, how's that impacting your forward look on that?

Marianne Lake -- Chief Financial Officer

On the asset side of the balance sheet, a big rule of thumb is a little less than half our loans are variable indexed to a primer LIBOR, so what we've been seeing -- in any one quarter, there can be noise on one-time items, mix, or whatever else, but largely speaking, for every rate hike we've been seeing on the front end, we're seeing our assets repriced about half of that -- or, our loans reprice about half of that, and that's what we'd expect. Similarly, if we see sustained increases in the long end of the curve, then we would see that play through into our investment securities yield. Obviously, this quarter, while there was a meaningful increase on a spot basis -- on an average basis -- that wasn't the case, and particularly not for mortgages, so it had a modest impact on investment security yields this quarter, but again, if it were sustained and more sizable, we would see that pass-through yet, and we would rotate the assets into higher book yields over time.

Betsy Graseck -- Morgan Stanley -- Managing Director

Okay. And then, my follow-up question has to do with a blockchain that you launched this quarter -- I think it was on September 25th. You launched a blockchain for international payments, and I know that at Investor Day, you talked a lot about the investments you were making on that side. Should we be viewing this as a competitor to Swift? Is that how the vision is for this blockchain?

Marianne Lake -- Chief Financial Officer

So, this is the Interbank Information Network, which we talked about at Investor Day, and now we have, I think, 75 banks and growing signed up to it. I wouldn't necessarily look at it exactly like that. I would say this use case -- at least, for now -- is very much around reducing the friction in the wholesale payment space in terms of inquiry and information sharing, and not at this point about processing payments. So, we are still exploring use cases across the board on blockchain, are very excited about this and the uptake. I think it will be meaningful, but I wouldn't think of it that way -- not yet.

Operator

Your next question comes from Erika Najarian with 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 first question expands on what Glenn had asked. So, clearly, the bank stocks have been hit along with the broad market, and I guess you're telling us one of two things. Either the economy is slowing down or the relationship between bank revenue growth and solid economic growth in the U.S. is broken or not somehow as correlated as expected. And, I'm wondering -- given your fairly strong results across the board -- where is the market wrong in terms of how they're thinking about either the economy or bank revenues related to a strong economy?

Marianne Lake -- Chief Financial Officer

I wanted to start by saying -- I mean, there's a lot of macro uncertainty, noise, and overhang that have been affecting the markets over the last few days, so overthinking any one driver or conclusion might be challenging. I would say that as we look at the economy, we don't see it slowing down. It seems to be continuing to grow pretty solidly. There is divergence around the world, so it's led by U.S. strength, but still expecting there to be more convergence going forward. So, I actually think that our outlook is still quite optimistic on the global economy, not to say -- to Jamie's point -- that there aren't some risks out there.

And so, as we continue -- and also, just to talk about monetary policy for a second, everything -- given that growth outlook -- is lining up for a December rate hikes, and for more hikes into 2019, and the continuation, hopefully, for a steeper yield curve, and that all should be constructive for bank stocks. It is definitely the case that as we've been talking about for years now, as the Fed is shrinking its balance sheet and liquidity is coming out of the system, yes, we are seeing deposit growth slow, and there's a natural feedback loop. As you reprice liabilities, you'll have a natural asset-based response, so you might have slower growth on the asset side relative to the past, but it should be at higher spreads, and that should be how it plays out. So, there's really no change, I don't think, in our expectation of the drivers.

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

That's helpful. And, just as a follow-up, I picked up in part of your response to an earlier question, Marianne, as we think about your wholesale loan trends year over year, which continue to outpace the banking industry, could you tell us a little bit more about the dynamics in terms of competition from non-banks, particularly in private middle-market lending? And, I guess we're really wondering what you're observing in terms of competition more on structure rather than rates and whether or not some of the liquidity that you noted could be drained out of the system would change those competitive dynamics near-term, and what is J.P. Morgan's indirect exposure that remains on balance sheet on the sponsor-backed transactions? Sorry, I know that was a lot.

Marianne Lake -- Chief Financial Officer

Yeah, I'll try and remember all that. First of all, I would just clarify that when you say wholesale loan growth has been outpacing the industry, I would say that from my recollection over the course of the last several quarters, we've basically been saying in line with -- if not even slightly less than in line with -- the industry, but it is nuanced. You need to get beneath it. There are areas where we would fully expect to be growing more strongly than the industry, and those are in our newer expansion markets, where we've been investing, we're reaping the benefits of those investments, and we're growing from a smaller base and deepening into the markets. In our core markets -- the mature markets -- in line to maybe not even quite, as we are being cautious given where we are in the cycle, so I just want to clarify that --

Jamie Dimon -- Chairman and Chief Executive Officer

We haven't changed our standards.

Marianne Lake -- Chief Financial Officer

We haven't materially changed our underwriting standards, no, and if anything, I would say we're just being cautious at the margin. With respect to competition outside of banks, it's definitely true that non-banks are gaining share, and it's also true that they are, structure-wise, going to be willing to do and are willing to do things that we are not. And so, for our best clients, we aren't largely going to lose on price. We would be willing to work on price. But, we would walk away on structure.

Jamie Dimon -- Chairman and Chief Executive Officer

And, we don't have a lot of residual exposure to sponsors doing that kind of lending.

Marianne Lake -- Chief Financial Officer

That's right.

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

Thank you.

Operator

Your next question comes from Mike Mayo with Wells Fargo Securities.

Marianne Lake -- Chief Financial Officer

Hey, Mike.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi, can you hear me?

Marianne Lake -- Chief Financial Officer

Yes.

Mike Mayo -- Wells Fargo Securities -- Analyst

So, Marianne, look, ROTCE is 17%. You seem to have some deposit market share gained, but year over year for the third quarter, expenses are up more than revenues. So, can you highlight the dollar amount of investment spending, and how that's changed, and where you are in that progression?

Marianne Lake -- Chief Financial Officer

Yeah. Actually, before we get into expense for a second, if you step back, there's a couple of things. I wouldn't look at any one quarter when I'm thinking about operating leverage. Not to overplay seasonality or anything else, but I would look at the whole year, and tax reform is an important part of that. So, if you look at year to date on a reported basis rather than a managed basis, year-over-year year to date, we have about 200 basis points of positive leverage, so tax reform is a big factor. And then, obviously, we had some private equity losses, which are episodic in this quarter's revenue print.

So, I think there's strong growth across the businesses. The expense number in investments -- our expenses are up over $1 billion year on year -- are in line outside of FDIC and revenue-related costs we gave in the guidance at Investor Day. So, think about that $2.7 billion of year-over-year investment, and we're working through it. So, we're on track. It's different from revenues insofar as it's more linear, and so, expenses are in line and positive leverage is, I think, pretty strong.

Mike Mayo -- Wells Fargo Securities -- Analyst

All right. And, just one separate question for you, Jamie. Your CEO letter highlights the expectation that interest rates would go a lot higher -- so, I guess for along the track that you laid out -- but it doesn't seem like the market is digesting it as well as you might have thought the market would digest. It's basically what you expected. So, what's different between your expectation and how the recent market has been reacting?

Jamie Dimon -- Chairman and Chief Executive Officer

I think I noted that the market might not take it that well if rates go up because it'll surprise people, but people shouldn't be surprised. And, of course, so many things have changed since we've been through this before, like monetary policy, liquidity ratios, capital ratios, et cetera. So, I was also pointing out that just about probabilities that rates can go higher -- people should be prepared for that. They should not be surprised about it. I'm always surprised when people are surprised. And, the why is more important -- you're still growing. The economy is strong; rates are going up. Mostly, that's considered a healthy normalization and going back to more of a free market when it comes to asset pricing, interest rates, et cetera, and we need that.

So, to me, overall, it's a good thing, particularly because the economy is strong. And so, I do expect rates to continue to go up. We don't bet the company on that; that's just my own expectation. I have much higher odds at being at 4% than most other people, but again, the economy is strong, so as long as we're normalized, a strong economy is a good thing. The economy could be strong for a while. Marianne pointed out that wages are going up, participation is going up, credit has been pristine, housing is in short supply, confidence -- both small business and consumer -- is extraordinarily high, and that could drive a lot of growth for a while in spite of some of the headwinds out there.

Marianne Lake -- Chief Financial Officer

I also think -- not exactly, but if you went back and looked a couple of years ago what the two-year forward 10-year rate would look like, it would look much like this. And so, it's just that it's been -- because the curve was having a hard time pushing up, people are now focused on it, but this is what we would have expected, should expect, and higher.

Operator

Your next question comes from Jim Mitchell with Buckingham Research.

James Mitchell -- Buckingham Research -- Analyst

Hey, good morning. Maybe just a quick question on deposits. We're starting to see some slowing of growth, if not outflows in some areas, as rates rise, but you guys still have a loan-to-deposit ratio that's in the mid-60s and have been gaining share on the retail side. What's your sense of competition for deposit and pricing, particularly in the core retail bank?

Marianne Lake -- Chief Financial Officer

Well, it's not really about competition particularly. When we think about the deposit base and the retail/consumer relationship, deposits and rates paid is an important part of it, but it's increasingly less important, not that it's not significant. And so, when you think about the value that we give to our customers, it's not just that, but it's also all of the customer experience initiatives that we've had. It's about convenience, about digital mobile capabilities, it's about launching new products, new services, simplifying the environment for them. So, there's a lot of different investments and things to play, which might make this kind of normalization cycle a little different. So, the way we think about it is we look carefully across the spectrum of deposits -- retail and wholesale -- at what we are seeing in terms of flows and balances and elasticity for our customers on our balance sheet. And, that's how we think about our strategy for deposit reprice, and it's largely behaving as we would have expected.

Jamie Dimon -- Chairman and Chief Executive Officer

Can I just make a macro point, too? As the Fed reduces balance sheets -- say, by $1 trillion over the next 18 months or whatever, which they've indicated they're going to do -- that's $1 trillion out of deposits. That will have an effect on macro competition and stuff like that, and we try to estimate the big points. Is it coming out of wholesale, out of retail? It's hard to know, but that will change the competition a little bit for deposits.

James Mitchell -- Buckingham Research -- Analyst

Okay, fair enough. And, maybe a follow-up on that investment spend -- obviously, it went up, with the tax cut helping to accelerate some investments. Going forward, do we think of it stabilizing at these high levels, or is this sort of a one-off increase and we might see that come down, or do we keep increasing? How do we think about the investment spend needs going forward a little further out?

Marianne Lake -- Chief Financial Officer

I would say first of all, obviously, we'll give you more thoughts on forward-looking guidance at a future date, but just generically, I wouldn't really put tax reform as being a primary reason for what we're doing on investment. I would say that we have identified the opportunity to accelerate capabilities that are consistent with our clients' strategic long-term goals, so we've been leaning into that this year.

And so, it was a pretty sizable step up this year acknowledging that. We wouldn't necessarily expect to see that continue, but we're going to carry on investing in technology, adding bankers, opening branches, launching new products so that we're defending the long-term growth and profitability of the company. And, in the absence of giving you guidance, I would just point you to the fact that we're still targeting -- not targeting, but we're still expecting an overhead ratio to be around the mid-50s over the medium term, which, on revenue growth, implies we're going to continue to invest, and there's also volume-related costs associated with that.

Operator

Your next question comes from John McDonald with Bernstein.

John McDonald -- Sanford C. Bernstein -- Analyst

Hi, good morning. Marianne, I was wondering -- on the regulatory front, do you have any visibility yet into the future interaction of CCAR process with the new loan loss accounting rules -- CECL -- particularly in the context of the stress capital buffer particularly being implemented? It seems like we could have some overlapping pro-cyclicality, and then the potential to freeze that into the run rate capital. So, I'm wondering if there's any visibility yet on that. Is that a big area of uncertainty for you?

Marianne Lake -- Chief Financial Officer

So, you hit the nail on the head with both your question and what that could imply. It is a big area of uncertainty. We do not have clarity on capital broadly as it relates to CECL, including whether there will be permanent capital relief and/or how that will play into CCAR. It is one of the most open questions we have. So, right now, what we know is -- as far as I know, anyway -- we don't have to put the CECL impact in until CCAR 2020, so it's not an imminent question, but it's an important one, and we don't know the answer.

Jamie Dimon -- Chairman and Chief Executive Officer

It seems to me that every single time there's a chance to make things more pro-cyclical or less, we make it more pro-cyclical.

Marianne Lake -- Chief Financial Officer

That's the danger for sure, so we would encourage the dialogue on clarifying capital treatments write large to be at the forefront of standard set of mind.

Jamie Dimon -- Chairman and Chief Executive Officer

This also won't change our strategy. That's just accounting.

John McDonald -- Sanford C. Bernstein -- Analyst

Got it. And, just as a follow-up, I was just wondering how rising rates are affecting competition and capacity in the mortgage business, and whether the regulations in mortgage have made you open to reconsidering getting back into some areas that you exited after the crisis.

Marianne Lake -- Chief Financial Officer

So, mortgage being a cyclical business as it is, we are -- on higher rates -- expecting the overall market to be down about 10% year on year. We are down in line or more than that, but for us, it's a tale of two channels. We are flat year on year in the Consumer channel, so decent consumer engagement and purchase market share, and we're down meaningfully in correspondent because we are pricing for some risk and higher rates. With respect to would we be willing to reconsider opposition on mortgage, the narrative -- the dialogue is constructive, but there hasn't actually been any resolution to the bigger challenges, so if we can get that resolution, then I think the answer would be largely, yes. Jamie?

Jamie Dimon -- Chairman and Chief Executive Officer

I would just add that mortgage -- the mortgage company is earning money, doing quite well. Delinquency is way down. We're competitive. We started Chase My Home so you can digitally track your mortgage process, and there's a lot of good stuff coming, so the big picture is pretty good. Obviously, refinances and new home sales will probably be down because of the rates a little bit.

Marianne Lake -- Chief Financial Officer

And, you're right, there's excess capacity in the market right now, and that will clear -- it will clear itself out over the course of coming months, and we're in this for relationships, not volumes, and margins are under pressure as a result, but they will stabilize.

Jamie Dimon -- Chairman and Chief Executive Officer

And, that is an area, by the way, where all the riskier lending has gone to non-banks, pretty much.

Operator

Your next question comes from Al Alevizakos with HSBC.

Al Alevizakos -- HSBC -- Director

Hi, thank you. I would like to ask a question on the CIB, especially I would like to focus more on the outlook that you gave that the spreads are getting tighter. I would like to know regarding the credit and securitization business where we see an issuance being quite slow during the summer, then continuing like that in September. Do you see that there is a risk of mode in the market, and how would you believe that the revenues would actually move going into foreign in the new year? Do you think that generally, fixed-income wallet would actually be going down? Thank you.

Marianne Lake -- Chief Financial Officer

A risk of what? Sorry.

Al Alevizakos -- HSBC -- Director

The what? Sorry.

Jamie Dimon -- Chairman and Chief Executive Officer

The risk the wallet will go down.

Marianne Lake -- Chief Financial Officer

So, I'd like to say on the margin point, it's been the case that particularly in the more liquid space, you've seen margins coming down consistently over the years, so it's not necessarily that this is some sort of step change or new phenomenon, but it's competitive, so that's what we're seeing. On the SPG side, pipelines aren't strong at this point, so we expect fourth quarter to go much like the third.

Jamie Dimon -- Chairman and Chief Executive Officer

I'll just make a long-term point or two. In the next 20 years or so, the total fixed-income markets around the world are going to double, and that is an important thing to keep in the back of your mind. So, when you run the business, you run the business to capture your share of that doubling, and of course, margins over time will come down, and the way you do it is being transformed by electronics, et cetera, but it's a pretty good future outlook.

Al Alevizakos -- HSBC -- Director

Okay, thank you.

Marianne Lake -- Chief Financial Officer

Thank you.

Operator

Your next question comes from Ken Usdin with Jefferies.

Ken Usdin -- Jefferies and Company -- Managing Director

Thanks, good morning.

Marianne Lake -- Chief Financial Officer

Good morning.

Ken Usdin -- Jefferies and Company -- Managing Director

Marianne, on the consumer credit side, you made the point about card losses remaining low and toward the low end of what you had thought for the year, but I also noticed that you added to the card reserve and noted higher losses, so can you give us the to and fro about what you're seeing and the underlying on card and losses and trajectories? Thanks.

Marianne Lake -- Chief Financial Officer

Sure, OK. So, as you know, we've been talking for a couple of years now about the fact that we did some targeted credit expansion in the card space a few years back, and naturally, as that seasons, it will -- risk-adjusted returns that are healthy, but underwriting loans with higher loss rates, which means that as that seasons, the overall portfolio loss rate will naturally increase, so the higher the percentage of newer vintages are, the higher the loss rate will be in accordance with our underwriting standards and good risk-adjusted returns. So, that's something we've been tracking, guiding to, and expecting. The build this quarter was more about loan growth than it was about the seasoning of the charge-off rate, but it was a bit of both.

My comment about the performance, though, is if we had looked at the 2018 card loss rate as we did at the beginning of the year, we said we would have expected it to be closer to 3.25%, but there are three things driving it to be slightly better. The first is the pre-expansion vintages are holding up very well -- so, the pre-2015 vintages continue to hold up very well. The second is that as we have continued to observe the newer vintages, we've been rigorous in terms of -- at the margin -- doing risk pullbacks and ensuring we're managing the performance really well, and the third is that we've been improving our collection strategy. So, a combination of factors have allowed us to deliver, apples to apples, a charge-off rate for the portfolio that's a little better than we would have expected coming into the year.

Ken Usdin -- Jefferies and Company -- Managing Director

Great color, thank you.

Jamie Dimon -- Chairman and Chief Executive Officer

[Inaudible] to the cycle number, so you should explain that to them too.

Marianne Lake -- Chief Financial Officer

Yeah, and obviously, in this portfolio, as we go through the cycle, we would expect charge-off rates to continue to rise, and that's one of the reasons why I emphasize that the pre-expansion vintages continue to be -- you'll remember we hit that 2.5% charge-off rate, which is extraordinarily low for this kind of portfolio, and we're still there for those pre-expansion vintages, so, naturally, as the cycle matures, we will see that rise, but we aren't seeing it yet.

Ken Usdin -- Jefferies and Company -- Managing Director

Yup, makes sense. And, on the other side, can you talk a little bit of auto in the same context too, where the losses have been flat as a pancake? Can you talk about that, and also just that leasing side of the book, which we more see in the other income? Are you still seeing the same potential for growth in both the on-balance-sheet and the leases?

Marianne Lake -- Chief Financial Officer

So, on the loan side in auto, I would say that we are losing share as we competition from credit unions and captives that may have economic frameworks that are different from ours. We are not going to chase volume. We're going to get the appropriate return for the risks. So, our credit reflects our discipline on pricing and underwriting standards, so it is continuing to be flat to a little better. On the leasing side, we do leasing with our manufacturing partners. We are seeing very strong growth. We're very careful about how we think about residual risks and reserving on that portfolio, but it's very high-quality growth, and that looks set to continue.

Operator

Your next question comes from Saul Martinez with UBS.

Saul Martinez -- UBS Investment Bank -- Analyst

Hi, good morning.

Marianne Lake -- Chief Financial Officer

Good morning.

Saul Martinez -- UBS Investment Bank -- Analyst

I just wanted to follow up on the question on operating leverage. How should we think about the outlook for positive operating leverage more philosophically? Your efficiency ratio is currently not materially above the 55% through the cycle expectation. So, should we be thinking of positive operating leverage as part of the investment narrative, or is the goal really to invest in favorable business outcomes, operating leverage does what it does, and really doesn't drive business decisions?

Marianne Lake -- Chief Financial Officer

More the latter than the former. So, obviously, we have a view of what we think the right return profile for these businesses should look like, and we're investing to deliver these returns through the cycle and over the long term, so we don't have an operating leverage target in mind when we set our investment strategy, nor, for that matter, do we have an expense target in mind either. So, again, we saw a reasonable step up year on year this year because we saw the opportunity to do that well. I wouldn't necessarily expect to see that kind of growth. But, again, operating leverage is more of an outcome -- not entirely, but more of an outcome than an input.

Jamie Dimon -- Chairman and Chief Executive Officer

And mix.

Marianne Lake -- Chief Financial Officer

Yeah, and mix.

Saul Martinez -- UBS Investment Bank -- Analyst

Got it, OK. Fair enough. And, if I could just ask a quick follow-up on CECL, I know you don't manage to accounting outcomes, and I think, Marianne, you mentioned a number of areas last quarter where CECL could have an impact. But, any update on CECL preparations and when you think you might have an estimate of what the effects could be?

Marianne Lake -- Chief Financial Officer

I appreciate that you guys have been asking about this now for a while, and I hate to tell you that the modeling, the data, the methodologies, are complicated, so, operationally, we are working through that across all of our businesses. We continue to expect to be running in parallel through some parts of 2019 across some of our portfolios so that we can make sure that we fully understand the potential implications.

We don't have a number for you, but I will tell you this: Same as I said last time, the biggest driver is likely to be card because of the size of the portfolio and the 12-month incurred loss model today, so, the weighted average life of the portfolio driven by revolvers would be longer than that, most likely. There will be some other impacts, pluses and minuses. Research reports have been written. I think on average, those that have been written have suggested that not just for us, but across others, that the reserve increase could be 20-30%, and while I don't have a number for you, it's not implausible.

Operator

Your next question comes from Matt O'Connor with Deutsche Bank.

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

Good morning.

Marianne Lake -- Chief Financial Officer

Good morning.

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

Hi. I wanted to follow up on the discussion about increased competition in FIC. The language in the release implied there was some increase in competition. Your comments on the call here say it's been competitive for some time. I guess I was trying to square the two, and I would just add that coming into this year, you had the No. 1 FIC share, and incredibly, you've been the biggest FIC share gainer year to date when we look on a global basis. So, you've been building on top of that share, and I'm just trying to gauge if there's been a change among competition trying to get some of that share back, and maybe that's just started to accelerate.

Marianne Lake -- Chief Financial Officer

I think if you go back a number of years, when we were all having those deep and meaningful debates about whether we should be changing our FIC operating model, and we were committed to the full-spectrum, complete platform, you roll forward to 2016, there was outperformance in fixed-income, and coming in -- and, people had made changes to their operating model and operations, and the competition came back pretty fiercely, I would say, into 2017. And then, in 2017, the market didn't play nicely, particularly. The volatility and volumes were less robust than they had been in 2016.

But, we haven't seen the competition let up, so people are back and wanting to enjoy -- Jamie just talked about it -- the fixed-income wallet will double, and pretty much, everyone everywhere wants to enjoy some of that. And so, the competition -- it's a combination of it's been very competitive for a while and it continues to be so. So, I don't think it's a step change, but it does obviously feel -- particularly when volatility has been reasonably contained outside of specific emerging-market areas -- that everybody is competing for these thin margins.

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

And then, just broadly speaking, if we look at both FIC and equity tradings, obviously, you've had the leadership position with FIC. You've been gaining a lot of share in equity, including this year. What do you think the biggest driver of that is? It doesn't feel like it's the capital or liquidity advantage. Is it all the technology spend that you've been doing? What are a couple reasons you'd just chalk it up to high level?

Marianne Lake -- Chief Financial Officer

If you think about the -- we're gaining share most notably in cash and prime, and if you go back a number of years ago, we were pretty open and honest about the fact that we weren't where we needed to be in either of those two scenarios, and we have been consistently investing in the platform, and it is technology. Think about prime with the -- building out of the prime platform, particularly internationally, has been a game changer, and we've had a best-in-class competitive offering over the course of the last couple of years, and now we're getting the momentum of being able to deliver that to clients, and similarly, we've been investing in the cash side, so it's across the complex, but we're getting the benefits of the investments we've been making. I also think that the relationship effects of having the equities business with our private bank and with the commercial bank -- the feedback loop -- is also quite powerful, so it has a little bit to do with our operating model, our platform as a company.

Jamie Dimon -- Chairman and Chief Executive Officer

And really great research.

Marianne Lake -- Chief Financial Officer

Yeah, great research.

Operator

Your next question comes from Brian Kleinhanzl with KBW.

Brian Kleinhanzl -- Keefe, Bruyette, and Woods -- Managing Director

Thanks. I had a quick follow-up question on the securities services. You mentioned that there was a decline sequentially based on seasonality and the exit of the business, but is there any way to size that to get to what the underlying growth trends were in that segment?

Marianne Lake -- Chief Financial Officer

From an underlying growth trend perspective, I would look year over year rather than sequentially. I point out the sequential points because of seasonality. We also exited U.S. broker/dealer business, so that obviously has an impact. It is also the case -- so, if you think about the year-on-year growth of 5%, we have been growing more than that, led by very strong growth in NII. For this business, this is a wholesale business where deposit bases are high, so we would expect that growth to level off, and in this quarter in particular, just the specifics of our internal transfer pricing is that -- so, LIBOR OAS narrowed, and it just had an impact. Year over year, continue to expect us to grow assets, asset-based fees, NII solidly but not as strongly, and transactions. So, I don't know whether it's going to be high single-digit or mid-single-digit growth year on year.

Brian Kleinhanzl -- Keefe, Bruyette, and Woods -- Managing Director

Okay, thanks. And then, just one separate question on the non-interest-bearing deposits -- it came down quarter over quarter. Was that just on the corporate side, or was there also some pickup on the deposit gammas on the retail side as well?

Marianne Lake -- Chief Financial Officer

Not on the retail side, not yet. There's not a sufficiently compelling rate differential to be driving any product migration on the retail side yet, but we are seeing it on the wholesale side.

Operator

Your next question comes from Gerard Cassidy with RBC.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Thank you. Good morning, Marianne.

Marianne Lake -- Chief Financial Officer

Good morning.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

I apologize if you've already addressed this, but can you give us the outlook for the pipeline for commercial loan growth or commercial loans in investment banking? I know it's very early in the quarter, but with the trading volatility we've seen, any color that you can share with us on that as well.

Marianne Lake -- Chief Financial Officer

So, commercial loans -- we're 4% up year on year, flat to 1% up sequentially. At this point, as we look forward over the near term, it feels like that kind of steady growth -- GDP plus, GDP -- is what we're going to get. And remember, everybody has a different mix, but one of the things that happened quickly with tax reform is that the government healthcare hospital not-for-profit space was less compelling from a loan sense, and now are going to be more compelling in the capital markets, so we're seeing that impact, our growth down. So, I would say that not quite mid-single-digit growth feels like a decent outlook, all other things being equal.

In terms of the capital markets, I would say that the third-quarter pipelines coming out into fourth quarter and momentum sets us up for a decent fourth quarter, honestly, across products. Clearly, volatility depending upon how long it stays around and what the drivers are can impact business confidence. We're not necessarily expecting that, so I would still say the outlook across products is good, with ECM obviously being the one that would most likely be impacted, but even there, I think it might be more of a temporary set of pauses as people see how everything is digested.

And, honestly, on markets, no good ever comes of trying to predict what a course will look like after a couple weeks. And, volatility is not necessarily a bad thing. It can be constructive in some ways and less in others, so there's no good coming of a prediction at this point. I will say one thing about markets, just to give you guys a tiny view, as I know you now, but just because of tax reform and another one-off item in the fourth quarter, flat year-on-year comparably would be up.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Very good. I appreciate that. The second question is when we look at the weekly H8 data on Fridays, the smaller banks in this country are growing their loan books much faster than the larger banks. You obviously had good loan growth this quarter, but it doesn't match up to what the smaller banks are producing. So, the question is what impact do you think the CCAR process has had on you when you compare your underwriting pre-financial crisis? I know you're not changing your underwriting standards, but do you think the larger banks are more conservative as a general statement? And, it's reflected in these very strong credit quality numbers you and your peers are posting today.

Marianne Lake -- Chief Financial Officer

It's difficult to generalize, and obviously, everybody has a different risk appetite. It might be fine if you're getting properly paid to grow more quickly. We are sticking with our guns in terms of our underwriting and risk appetite on credit. The other thing I think you have to bear in mind -- again, it depends on the particular situation of any competitor -- is that we are materially and increasingly bound by standardized risk-weighted assets. And so, while we don't overthink that and we do honestly think about economic capital, at some level, we have to generate a positive return for shareholders and shareholder value, and it's-on these very high credit quality loans that we're producing, it's expensive.

Operator

Your next question comes from Marty Mosby with Vining Sparks.

Marty Mosby -- Vining Sparks -- Director

Thanks, and good morning.

Marianne Lake -- Chief Financial Officer

Good morning, Marty.

Marty Mosby -- Vining Sparks -- Director

I wanted to take a little bit of a different slant on deposit betas and just ask a three-part question. 1). Is the increase in deposit betas that we've seen over the last couple of Fed moves surprising at all or abnormal, in your opinion, to normal historical trends?

Marianne Lake -- Chief Financial Officer

So, I would say if you look at the first four hikes, it was relatively muted deposit reprice across the complex. It accelerated for the last three hikes excluding September, given, obviously, when it happened. So, we are seeing an acceleration in betas, and it started at the top end of wholesale, and it will migrate through the complex over time. I would say it's in line to arguably better than we would have modeled, but remember that this cycle did start in a very different place. So, while if we looked at history, we might have seen reprice in totality having been higher at this point, we started at 100 basis points of rates, not 25. So, I think that plays into it too. So, generally in line with expectations is what I would say.

Marty Mosby -- Vining Sparks -- Director

Okay, that's what I would say, so let's go to the next question. Given that rates have been low for so long going up until we started increasing rates, we've repriced almost every security and loan we had on the books. So, the actual upward potential to reprice portfolio yields to current market rates has got to be larger than what we typically have seen historically. Do you agree or disagree with that idea?

Marianne Lake -- Chief Financial Officer

I would say yes. Obviously, it depends on how you position the company over that period, but we talked about it before -- we were and have consistently been relatively short the market. We've been keeping dry powder so we could invest as long as rates go up, and we still are looking at that, but obviously, there's convexity in the portfolio too, so, paying attention to that. Yeah, I agree.

Marty Mosby -- Vining Sparks -- Director

So, the stretch between this portfolio yield -- so, asset yields can actually reprice faster than what we've seen historically. So, the combination of those two things in our estimation gives us a threshold -- so, if we solve backwards for deposit betas, it gives us a threshold if we estimate for J.P. Morgan of somewhere between 80-90% deposit betas before you actually break through and start eroding net interest margin. Currently, you had about a 40% deposit beta this quarter, so you had a lot of headroom still to go before margin starts to really erode, given deposit pricing. So, I just wanted to get a feel for that estimate of 80-90%, given where you're at today.

Marianne Lake -- Chief Financial Officer

So, obviously, I don't know exactly your mental model, but let me tell you this: I think you're right. I don't know about the 80-90% specifically, but you're right about net interest margin if you look through any short-term noise. So, we would expect the trend for our firmwide anchor NIM to trend or grind higher over time, but it does depend on the path and pace of reprice.

So, if we continue to see deposit betas stay low or lower than, potentially, a linear kind of move, you'll see margins increase, and then, as they accelerate back to target, you might even see it compress, but if you see through that over the long run, yes, net interest margins will be higher, and that will be driven mainly by balance sheet growth, mix, and long end of rates. At Investor Day, you might remember we told you that beyond 2018, net-net, there was little rate left to go, and it was going to be more about balance sheet, mix, and growth, and long end of rates a little compounding, but the path does matter. So, you can see core NIM in particular will be very vulnerable to the pace of reprice, but I would look through that.

Operator

There are no additional questions at this time.

Marianne Lake -- Chief Financial Officer

Thank you, everyone.

Jamie Dimon -- Chairman and Chief Executive Officer

Thank you.

Duration: 61 minutes

Call participants:

Marianne Lake -- Chief Financial Officer

Jamie Dimon -- Chairman and Chief Executive Officer

Glenn Schorr -- Evercore ISI -- Managing Director

Steven Chubak -- Wolfe Research -- Executive Director

Betsy Graseck -- Morgan Stanley -- Managing Director

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

Mike Mayo -- Wells Fargo Securities -- Analyst

James Mitchell -- Buckingham Research -- Analyst

John McDonald -- Sanford C. Bernstein -- Analyst

Al Alevizakos -- HSBC -- Director

Ken Usdin -- Jefferies and Company -- Managing Director

Saul Martinez -- UBS Investment Bank -- Analyst

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

Brian Kleinhanzl -- Keefe, Bruyette, and Woods -- Managing Director

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Marty Mosby -- Vining Sparks -- Director

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