JPMorgan Chase & Co (JPM) Q2 2021 Earnings Call Transcript

JPMorgan Chase & Co  (NYSE: JPM) Q2 2021 earnings call dated Jul. 13, 2021

Corporate Participants:

Jeremy Barnum — Chief Financial Officer

Jamie Dimon — Chairman of the Board and Chief Executive Officer

Analysts:

Mike Mayo — Wells Fargo Securities — Analyst

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Steven Chubak — Wolfe Research — Analyst

Matt O’Connor — Deutsche Bank — Analyst

Gerard Cassidy — RBC Capital Markets — Analyst

Betsy Graseck — Morgan Stanley — Analyst

Charles Peabody — Portales Partners — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, welcome to JPMorgan Chase’s Second Quarter 2021 Earnings Call. This call is being recorded. [Operator Instructions]

At this time, I would like to turn the call over to JPMorgan Chase’s Chairman and CEO. Jamie Dimon; and Chief Financial Officer, Jeremy Barnum. Mr. Barnum, please go ahead.

Jeremy Barnum — Chief Financial Officer

Thanks, operator, and good morning everyone. Before we get going, I just like to say how honored I am to be on my first earnings call, following the footsteps of Brian and Jen, both of whom taught me so much during my time working for them, and their shoes will be very difficult to fill, but I’m going to try. So with that, this presentation is available on our website and please refer to the disclaimer in the back.

Starting on Page 1. The firm reported net income of $11.9 billion, EPS of $3.78, on revenue of $31.4 billion and delivered a return on tangible common equity of 23%. These results include $3 billion of credit reserve releases, which I’ll cover in more detail shortly. Touching on a few highlights, combined debit and credit spend was up 45% year-on-year, and more importantly, up 22% versus the more normal pre-COVID second quarter of 2019. It was an all-time record for IB fees, up 25% year-on-year, driven by advisory and the underwriting. We saw particularly strong growth in AWM with record long-term flows, as well as record revenue. And finally, credit continues to be quite healthy as evidenced by our exceptionally low net charge-offs across the board. Regarding our balance sheet, the time from recent quarters have largely continued. Deposits are up 23% year-on-year and 4% sequentially and loan growth remains low, flat year-on-year and up 1% quarter-on-quarter. Although we have bright spots in certain pockets and the consumer spend front are encouraging.

So, now turning to Page 2 for more detail. As I go through this page, I’m going to provide you some context about the prior year quarter because the year-on-year comparisons are a bit noisy. So with respect to revenue, the second quarter of 2020 was an all-time record for markets with revenue of over $9.7 billion and we recorded approximately $700 million of gains in our bridge book. With that in mind, revenue of $31.4 billion was down $2.4 billion or 7% year-on-year. Non-interest revenue was down $1.3 billion or 7% due to the prior year items I just mentioned, partially offset by strong fee generation and investment banking in AWM as well as from card related fees and higher spend. And net interest income was down $1.1 billion or 8%, driven by lower markets NII and lower balances in card.

Expenses of $17.7 billion were up 4% year-on-year largely on continued investments. And then on credit costs, going back to last year again, you will recall in last year’s second quarter we built $8.9 billion in credit reserves during the height of the pandemic, whereas this year we released $3 billion. So in this quarter, credit costs were net benefit of $2.3 billion. And setting aside the reserve release, its also worth noting that net charge-offs of just over $700 million or half of last year’s second quarter number and continue to trend near historical lows.

On the next page, let’s go over the reserves. We released $3 billion this quarter as we grow increasingly confident about the economy in light of continued improvement in COVID, especially in the U.S. In consumer, we released $2.6 billion including $1.8 billion in card and $600 million in home lending, and in wholesale we released nearly $450 million. So this leaves us with reserves of $22.6 billion, which as a result of elevated remaining uncertainty of our COVID and the shape of the economic recovery are higher than would otherwise be implied by our central economic forecast.

Now moving to balance sheet and capital on Page 4. We ended the quarter with a CET1 ratio of 13%, down slightly versus the prior quarter as net growth and retained earnings was more than offset by higher RWA across both retail and wholesale lending. This quarter also reflects the expiration of the temporary SLR exclusions. And as we anticipated, leverage is now our binding constraint. As you know, we finished CCAR a couple of weeks ago and our SCB will be 3.2%, which reflects the Board’s intention to increase the dividend to $1 per share in the third quarter.

Okay, now let’s go to our businesses, starting with Consumer & Community Banking on Page 5. CCB reported net income of $5.6 billion, including reserve releases of $2.6 billion on revenue of $12.8 billion, up 3% year-on-year. Of particular note this quarter is the acceleration of card spend. And so while card outstanding remained lower than pre-pandemic levels, this quarter’s trends make us optimistic. Total debit and credit spend was up 45% year-on-year, and more importantly, up 22% versus the second quarter of ’19. And within that, compared to 2019, June total spend was up 24% indicating some healthy acceleration throughout the quarter.

And travel and entertainment has really turned the corner, with spend flat versus the second quarter of ’19, accelerating from down 11% in April to actually up 13% in June. The rest of the CCB story remains consistent with prior quarters. Consumer and small business cash balances remain elevated, resulting in depressed loan growth. Overall loans were down 3% year-on-year from continued elevated prepayments and mortgage and a lower card outstanding, partially offset by strong growth in auto and the impact of PPP. Home lending and auto continued to have strong originations with home lending up 64% to $40 billion, the highest quarterly figure since the third quarter of 2013. And auto up 61% to a record $12.4 billion.

Deposits were up 25% year-on-year or approximately $200 billion and client investment assets were up 36%, driven by market appreciation and positive net flows across our advisor and digital channels. And our omnichannel strategy continues to deliver. We are more than halfway through our initial market expansion commitment, as we have opened more than 200 new branches out of our goal of 400, which have exceeded our expectations by generating $7 billion in deposits and investments, and we are planning to be in all 48 contiguous states by the end of the summer.

Digital trends continue to be strong as retail mobility recovers at a faster pace than branch transactions, which are still down more than 20% versus 2019. Active mobile users grew 10% year-on-year to over $42 million and total digital transactions per engaged customer were up 12%. Expenses of $7.1 billion were up 4% year-on-year, driven by continued investments and higher volume and revenue related expenses. Looking forward, the obvious question is the outlook for loan growth, especially in card. And we are quite optimistic that the current spend trends will convert into resumption of loan growth through the end of this year and into next. And while we wait the exceptionally low level of net charge-offs, provides substantial offset to the NII headwinds.

Next, the Corporate and Investment Bank on Page 6. CIB reported net income of $5 billion and an ROE of 23% on revenue of $13.2 billion. IB fees of $3.6 billion were up 25% year-on-year and up 20% quarter-on-quarter, an all-time record driven by advisory and debt underwriting, leading to a year-to-date global IB wallet share of 9.4% and a number 1 ranking. In advisory, we were up 53% year-on-year, benefiting from the surge and announcement activity that has continued into the second quarter. Debt underwriting fees were up 26%, driven by an active acquisition finance market, offset by lower investment grade issuance. And in equity underwriting, fees were up 9%, primarily driven by a strong performance in IPOs. The resulting investment banking revenue of $3.4 billion was roughly flat year-on-year due to the headwind of the prior year’s mark-up in the bridge book. Looking ahead to the third quarter, the pipeline remains very strong. We expect M&A activity and the IPO markets to remain active and while IB fees are likely to be down sequentially, we still expect them to be up year-on-year.

Moving to markets. Total revenue was $6.8 billion, down 30% compared to an all-time record quarter last year. While normalization has been more prevalent and macro, overall we ran above 2019 levels throughout the quarter on the back of strong client activity and performing our own expectations from earlier in the year. Fixed income was down 44% compared to last year’s exceptional results, but up 11% compared to the second quarter of ’19. Equity markets was up 13%, driven by record balances in prime as well as strong performance in cash and equity derivatives, where we matched last year’s great results. Looking forward, while we expect normalization to continue across both Investment Banking and Markets and most notably in fixed income, the timing and the extent of the normalization is obviously hard to predict.

Wholesale payments revenue was $1.5 billion, up 5%, driven by higher deposits and fees, largely offset by deposit margin compression. And security services revenue was $1.1 billion, down 1% as deposit margin compression was predominantly offset by growth in deposits and fees. Expenses of $6.5 billion were down 4% year-on-year driven by lower performance-related compensation, partially offset by higher volume related expense.

Moving to commercial banking on Page 7. Commercial banking reported net income of $1.4 billion and an ROE of 23%. Revenue of $2.5 billion was up 3% year-on-year with higher investment banking, lending and wholesale payments revenue, largely offset by lower deposit revenue and the absence of a prior year equity investment gain. Record gross investment banking revenue of $1.2 billion was up 37% on increased M&A and acquisition related financing activity compared to prior year lows. Expenses of $981 million were up 10% year-on-year, driven by higher volume and revenue related expenses and investments. Deposits of $290 billion were up 22% year-on-year as client balances remain elevated. Loans of $2.5 billion were down 12% year-on-year driven by lower revolver utilization compared to the prior year quarter and down 1% sequentially. C&I loans were down 1% quarter-on-quarter with lower utilization, partially offset by new loan activity and middle market. And CRE loans were down 1%. But we saw pockets of growth in affordable housing activity. Finally, credit costs were net benefit of $377 million driven by reserve releases with net charge-offs of only 1 basis point.

And to complete our lines of business, on to Asset and Wealth Management on Page 8. Asset and Wealth Management reported net income of $1.2 billion with pretax margin of 37% and an ROE of 32%. Record revenue of $4.1 billion was up 20% year-on-year as higher management fees and growth in deposit and loan balances were partially offset by deposit margin compression. Expenses of $2.6 billion were up 11% year-on-year, driven by higher performance-related compensation and distribution expenses. For the quarter, net loan from inflows of $49 billion continue to be positive across all channels, with notable strength in equities, fixed income and alternatives. AUM was $3 trillion, and for the first time overall client assets were over $4 trillion, up 21% and 25% year-on-year respectively, driven by higher market levels and strong net inflows. And finally, loans were up 21% year-on-year with continued strength and securities based lending, custom lending and mortgages, while deposits were up 37%.

Turning to Corporate on Page 9. Corporate reported a net loss of $1.2 billion, revenue was a loss of $1.2 billion, down $415 million year-on-year. NII was down $274 million, primarily on limited deployment opportunities as deposit growth continued, and we realized $155 million of net investment securities losses in the quarter. Expenses of $515 million were up $368 million year-on-year.

So with that, on Page 10, the outlook. Our 2021 NII outlook of around $52.5 billion remains in line with the updated guidance we provided last month. But as you’ll note, we’ve also lowered our outlook for the card net charge-off rate to less than 250 basis points, which as I mentioned in CCB, provides a meaningful offset to the NII headwinds. And tis worth mentioning that the current environment makes forecasting NII even in the near term unusually challenging. So, while $52.5 billion remains our current central case, you should expect some elevated uncertainty around that number, not only because of the ongoing impact of stimulus on consumer balance sheets, but also due to volatility coming from markets among other things. And as a reminder, most of any fluctuation in markets NII, whether up or down, is likely to be offset in NII. On expenses, we’ve increased our guidance to approximately $71 billion, driven by higher volume and revenue related expenses.

So, to wrap up, we are encouraged by the continued progress against the virus and the economic recovery that is underway, especially in the United States. Although we want to acknowledge the challenges in much of the rest of the world is facing and we’re hopeful that a global recovery will follow closely behind.

Our performance this quarter once again showcases the power of our diversified business model as headwinds in NII from consumer delevering are offset by strong fee generation across AWM and CIB and exceptionally low net charge-offs across the board. While we’re proud of the performance of the company and of our people through the crisis, the competition in every business, from banks, fintechs and others is as in times as ever. So, as we look forward to an increasingly normal environment, we are enthusiastically focused on competing for every piece of share in every market, product, and business where we operate and making the necessary investments to lend.

With that, operator, please open the line for Q&A.

Questions and Answers:

Jamie Dimon — Chairman of the Board and Chief Executive Officer

It could be data, it could be management. Lot of these are going to fill in and some a little bit more discount works. So yeah, we — how look at the retail digital overseas, we got patience and time and we’re going to spend a lot of time to see if we can build something very different than we have in the United States. And so it’s all been very — we’ll see its loyalty on the travel company. Again, if you look at that, we are only so largely travel business. So think this is enhanced services and our products and capabilities to our clients, travel packages, etc., which we already, I have got the numbers, I am the seventh largest travel company in the United States, and that does include all the travels, both of course our credit card, debit card, that’s travel, but we want to travel effectively with the travel agents. And so it’s a little bit of all that until we’re doing it. We’re looking all the time. We’re not going to end up a lot of wasted assets. But some of these things may not work a bit. That’ll be okay.

Jeremy Barnum — Chief Financial Officer

And Mike, the only thing I would add is, there is a couple of themes that come through, some of the things that we’ve done recently, one of them is the ESG. You see that especially in the AWM deals. And the other is just improving the customer experience, whether it’s through various fintech — fintech deals or say its loyalty. Customer experience is a key priority for us and we want to have all the tools necessary to deliver that.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

And equally important, we’re putting a lot of money into building. We have like every quarter for the next two years you can have new products and new services being rolled out across the company. I think it’s just exciting and very good. And more and more integrated, more and more simple to use, more and more customer-friendly, etc. And so we’re doing a little bit of all of that.

Jeremy Barnum — Chief Financial Officer

Go ahead, Mike.

Mike Mayo — Wells Fargo Securities — Analyst

I’ve just got — my follow-up, as you talked about disrupting I thought that was interesting, disrupting in the U.K. Since you wrote your CEO letter, Jamie, I mean it’s only gotten more competitive from the fintech, big tech, and being retail and everybody else and that’s a question that comes up probably everyone on this call. Are you going to be disintermediated over the next five years? Whether it’s — you know all the companies, but it just seems like they’re ramping up that much more. You have an executive order from the White House, maybe you have to share data. What’s your current mark-to-market of the threat from outside of banking to your business?

Jamie Dimon — Chairman of the Board and Chief Executive Officer

I don’t feel any different thing when I wrote the letter. I think we have huge competition in banking and shadow banking, fintech and big tech and now Walmart and and obviously is always the changing landscape. But we also have a huge — we got brands and capability and products and services in the market share and profitability. I think some of these competitors are already quite well, probably succeed over time. But that’s called good old American capitalism. I’m quite comfortable, will be fine. I do think there’s going to be a lot of people struggling with the banking business and turn over five or 10 or 15 years. I think when during the call, it been little bit shadow banks than in the banks, overshadowed, would be shadows of themselves. We’re, we’re working hard to make sure that we’re offering services that are not disruptive all because they’re good. So if our clients are happy and we’re providing them a great experience, then there is nothing to disrupt. All right. Thanks, Jeremy. Thanks, Jamie.

Operator

Our next question is coming from the line of Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead, your line is open now.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Good morning, and thanks for taking my question. I guess just sticking with the digital strategy, we heard Jamie talk about multiple times around the lack of imagination that cost the banking industry in terms of either experiments or buy now, pay later. And you talked about your international expansion. But again, going back to Mike’s point as shareholders of banks in the U.S., should be expectation be that banks will be fast followers of what fintech comes up with and replicating that given the risk of cannibalizing your own sort of revenue set, or do we expect or do you think we should expect more disruptive innovation coming from banks in the United States on consumer banking?

Jamie Dimon — Chairman of the Board and Chief Executive Officer

I think it’s both. I mean, it’s not either or question. And remember , a lot of these banks has done quite well, including Bank of America has done quite well in digital products and stuff like that. So if I told the lack of imagination, I mean the whole company. I mean, you look at some of these things is — we could have imagined more why they become a competitor down the road. So some of the competitors are quite good. I called Bob in the region. He’s told one little thing to add product that services that eyeball their customers and they find ways to monetize it. So we got a little more forward looking and how they’re looking at the active guys and stuff like that. But in our case, there will be a little bit of everything.

Jeremy Barnum — Chief Financial Officer

Yeah. And I would just say the whole cannibalization and fast following thing, I think we’ve moved a little bit beyond that, like there will be times where we have the first idea and where can you go to to lean in and innovate. So in times when someone else has the first idea and we’re eagerly copying it. But the whole — we don’t want to do this thing that makes sense with the customer because we might be cannibalizing our own revenues. That’s a recipe to become a shadow of your [Speech Overlap]

Jamie Dimon — Chairman of the Board and Chief Executive Officer

We will be the right thing when the time comes and sometimes delay the golf shot, but we’ll do the right thing. And just when you look at the company and you look at — we’ve talked about SLR. And I always get — about CS and SLR, but look at the flows across this company. Look at the debit card, the credit card, the trading flows, the market share. That’s why we look at much more than what are the ups and downs, the earnings this quarter because of CECL. I don’t think that means anything for the future of the company. I mean, our bankers, our traders, our credit card, our debit card, our merchant services, our auto business, our digital, its still pretty good. I mean, I think which is important, my god the company is doing quite fine. And yeah, and we’d like to be a little critical of ourselves. I think the companies are — that’s part of their failure. We should look at what they didn’t do well what other people have done well and be prepared, and then have a very fair assessment of the competition. It is very large and so be very tough. Does that mean that J.P. Morgan has more wins because their eyes are open.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

And I agree. And I think banks do talk enough about client acquisitions and market share. So agree with you there. This is a follow-up, Jamie, very quickly. There are some questions around like peak inflation, peak growth. I know you guys are very bullish. Compare and contrast how the world looks to you today versus back in 2011 wherein we came out of the financial crisis and the risk of GDP growth disappointing over the next few years.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

I think they are completely different fundamentally. Coming out of the ’09 crisis, the world was overleveraged. You had investment banks at 40 times leverage, like that J.P. Morgan who did not need PARP and didn’t need help. The Lehman, Baird, Goldman, Morgan, you had banks overseas, Dexia, the landed banks that I can’t remember half of them, all went bankrupt. You had hedge funds deleveraging, a constant deleveraging, you had $0.5 trillion to $1 trillion in mortgage losses that were going to be recognized, actual losses spread around balance sheets and derivatives and stuff like that. So, the world is in massive deleveraging. The consumers overleveraged, the companies overleveraged, bridge book and Wall Street was still $100 billion today. Today, its I think 60. So look at today, today — everything you talked about loans being down is the consumer is the public pride. The consumer, their house value is up, their stock value is up, their incomes are up, their savings are up, their confidence is up. The pandemic is kind of in the rearview mirror, hopefully noting gets worse within. And there is where to go. And you see in home prices, you see it auto purchases. You see it. I mean, there will be much higher, but for supply constraints right now. And so — and businesses equally are in good shape and not over leveraged today.

They do have a lot of charts show, corporate debt is like higher, there was — so is corporate cash. And look at middle market losses. It’s almost zero, almost zero and huge underutilized stuff like that’s so the economy starts to grow. And I mean, as you’re going to see loans go up because of inventory receivables and capital expenditures and stuff like that. So, it is completely different. And you’ve got fiscal policy on autopilot. There is a lot of it that hasn’t been spent yet. There’s a lot more that is going to be passed. And you have [Indecipherable] And I just think you’re going to see — hopefully, see a very strong economy. We don’t know how long.

Obviously. if it was like I said, that there is a inflationary effect. And we don’t know the future, I talk about Goldilocks. Goldilocks is — and I’m hopeful, not predicting. Like Goldilocks is that inflation goes up, the 10-year bond goes up, the growth is still quite strong. You may have growth in the second half of this year, the stronger than it’s ever been in United States of America, okay? And Europe is probably six months behind America. And so growth will go into next year and and the 10-year bond goes to 3%, a lot of growth. It won’t make any difference as always had a strong growth in consumer, jobs are plentiful, wages are going up. These are all good things. And so, yeah, obviously, inflation to be worse than people think. I think it will be a little bit worse. I don’t think is only temporary. But that doesn’t matter if we have very strong growth.

Jeremy Barnum — Chief Financial Officer

Yeah, there are always risks and then environment. But the risks in this one I think are quite different from the ones that we have coming out of the global financial crisis. Got it. Thank you.

Operator

Our next question is coming from the line of Steven Chubak from Wolfe Research. Please go ahead, your line is open now.

Steven Chubak — Wolfe Research — Analyst

Hey, Good morning.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

Hey, Steve.

Steven Chubak — Wolfe Research — Analyst

So I wanted to start off with just a follow-up question on card NII. Jeremy you did striking an optimistic tone on the higher spend trends and the potential for the future NII tailwind as payment rates start to normalize. And just looking at the card revenue rate given there are another of inputs in that metric, I was hoping you could just help us isolate the potential NII benefit versus the current baseline from a normalization in payment rates? So just the payment rate normalizing, what would be the incremental step-up in the quarterly NII run rate?

Jeremy Barnum — Chief Financial Officer

Okay. So there’s a lot of pieces in my questions. So, first let’s talk about the revenue rate. So a couple of things. So in terms of the NII, we don’t really see a meaningful uptick in card NII happening this year. Like you might maybe see a tiny bit of it sequentially fourth quarter versus third quarter, but I think it’s going to be pretty hard to see. So I think you want to be thinking about that as 2020 in fact. I’m not going to get into guiding on revenue rate for 2022. And I will actually point out that we’re in the market right now competing aggressively with some great offers and I’m happy to say actually the client acquisition in cards is doing great and we’re seeing great uptake on the offers, but that comes with a bit of elevated marketing expense. So as I look out the next quarter, you might actually see a bit of a dip in the revenue rate just because of the way the accounting works there.

Steven Chubak — Wolfe Research — Analyst

Okay. And for my follow-up, Jeremy. I just wanted to ask or at least honed in on one comment you made, where you said you could potentially still manage to a 12% capital target. I was just trying to better understand how much capital cushion you are looking to manage to under the SCB? And if the G-SIB surcharge is not recalibrated, where do you think you’ll have to run on a steady state basis just because it feels like waiting for to go, we haven’t seen any changes on the re-calibration front, specifically with the G-SIB surcharge.

Jeremy Barnum — Chief Financial Officer

Yeah, okay. So basically, that’s a question about the management buffer and a question about what we would do in a world where G-SIB doesn’t get recalibrated and a world where G-SIB doesn’t get recalibrated as a world where our capital minimums are quite a bit higher starting in 2023. We obviously disagree with that. We don’t think it makes any sense at all given that a big part of the driver of that increase and the amount of capital that we would have and as Jamie pointed out earlier, both we and the system are really flush with capital and the regulators have been pretty clear that there is enough capital in the system right now and that growth would increase that amount quite a bit for us and for everyone else. So that’s a big part of the reason why we’ve been so vocal for so long, but the need to recalibrate that and I think we see some of our competitors making those points to as they start to creep up into higher buckets. And you know, to be fair, the Fed has acknowledge that this is, I think that needs to get fixed. It’s just that we’re kind of busy trying to get the Basel III and put in place in the U.S. rules, which brings particular complexities in light of the columns floor.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

I just want to add to this — I’ve always — I thought the G-SIB calculations not as steep as I’ve ever seen in my whole life and then we doubled it here. So the European banks have a lot of disadvantages in terms of — they can’t have common regulators, they can’t expand across Europe. But what are the advantages. They have pretty much half the G-SIB. And I jut don’t think that in the long run that’s right for America to be doubling. But I would consider basing artificial numbers. So let’s just wait and see what new rules and then we’ll answer that question. You don’t have to sit there and guess what’s going to happen.

Jeremy Barnum — Chief Financial Officer

Yeah, and I think you see the important point is that in the near term, we’re actually bound by leverage. So that’s what we’re focused on right now. That’s our biggest single thing that we’d like to see effects, if that is affecting the management of the balance sheet right now in ways that we think really don’t make sense and eventually result in higher cost that they will get passed on into the real economy.

Just to touch on your buffer point briefly. You know when all was said and done and the framework is fully settled, hopefully we’re back to being bound by risk-based constraints. We have a bit more experience with a couple of years of SCB and there’s a little bit less rule uncertainty. It would be — there is an interesting conversation to have about what the right management buffers are for people in the world where we do think it’s important, and we’ve made these points to do stigmatize the use of buffers. We’ve made this point in the context, for example, of the money market complex too. We have all these kind of guidelines and the rules have them as buffers that supposedly through the years, but that’s not the way everyone treats them. So buffers become minimums and that adds a brittleness to the system that makes it more pro cyclical than anyone wants it to be. So down the road when things are stable, the buffer discussion could become interesting, but right now its a somewhat similar story and that’s really about SLR.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

Remember there is one buffer you guys — we don’t really talk about, which is $40 billion of pre-tax earnings a year. Okay that’s a huge buffer, its huge that allows you to change your forward looking capital that you buy back stock, you don’t buy back stock. And so we have a lot of levers and whatever happens we’re going to figure out ways to do a great job for shareholders.

Steven Chubak — Wolfe Research — Analyst

Fair point. Thanks so much for taking my questions.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

Thanks, Steve.

Operator

Our next question is coming from the line from Matt O’Connor from Deutsche Bank. Please go ahead, your line is open now.

Matt O’Connor — Deutsche Bank — Analyst

Good morning.

Jeremy Barnum — Chief Financial Officer

Hi, Matt.

Matt O’Connor — Deutsche Bank — Analyst

I want to circle back on costs, obviously this year some of it is driven by the stronger than expected fees, some of it is the inflationary pressures you mentioned, some is I think discretionary as you’ve pointed out in the past, accelerating from investment spend. But the question is, as we exit this year, when we look back on costs in 2021 and say they’re are a little bloated because of all those factors or is this could be a good base year to grow off of going forward?

Jeremy Barnum — Chief Financial Officer

Okay. So there is a couple of points in there. There is the word — lets talk about bloated. I mean, you’ve heard Jamie talk about cost before, right?. So we go after everything all the time, go after ways so we try very hard to never be bloated and to not waste, that is is a constant discipline, that’s hard work, we look forward everywhere. So I would like to say that bloated is not the word we’re going to describe ourselves and we spend a bunch of time in the valves of this organization. I really don’t think that’s true and I don’t think anything about what we’re doing in terms of how money is being spent this year is wasteful. And in fact, as you know, the really big driver of the kind of impact on run rate spend is the investments that we’re making, especially investments in technology and customer experience and then transforming the core efficiency of the company in terms of things like technology, modernization and data centers and so on.

So in terms of projecting forward into 2022, I don’t want to get into giving to expense guidance here and I think that you really have to unpack that cost number between the parts of it that volume and revenue-related and the kind of more run rate structural and investment costs as we’ve talked about before. So, I think this year it’s a little bit tricky to unpick the components from their perspective to project.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

As we can find more good money to spend, we’re going to spend it. And I told you guys that there good expense — when we have credit card to spend so much money marketing, the returns are very good and we spend it. If we can open, hire great bankers, then that we’re going to spend it. If we can — with respect to $1 billion dollars of new data centers, which have huge benefit for us down the road, we’re going to spend it. We do not manage the company so we can tell analysts what the expense number is going to be. That is just a bad way to run a great — conversely, a lot of revenue is sucked up. Revenue is not always good. And we all know how much risk we take in the businesses and stuff like that. So we spend a lot of time with good revenue, bad revenue, good expense and bad expense and that’s what’s going to drive the franchise for the next five to 10 years.

Matt O’Connor — Deutsche Bank — Analyst

Understood. And then separately as you think about capital allocation longer-term, is there a thought to more meaningfully increase the dividend payout? I mean, as we saw at the beginning of the COVID crisis, buybacks were suspended after stocks dropped sharply, banks couldn’t repurchase until they roughly doubled. But dividends were maintained and obviously your pre-tax earnings power that you alluded to is very strong. It seems like that soft 30% cap is gone, Obviously. so just thoughts, it’s not going to happen all in maybe one CCAR cycle, but if we do get a multi-year economic recovery is there thoughts of pushing the dividend higher, maybe closer to like a 50% payout?

Jeremy Barnum — Chief Financial Officer

Probably not. I mean, I think quickly wanted dividend which is sustainable through a bad downturn and so we really want to do that and I think this time kind of proves that it was a very minor thing relative to capital retention, but you’ll be wanted to invest in your future and invest in growing stuff like that. And if we can’t — and we don’t want to raise the dividend so high that equipment you bill and do all the things yeah.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

And then the outflows in the stress capital buffer sort of makes that point clear, right. So every part of the reason, there were 3.2 instead of 3.1 is a 10% increase that the Board announced its intention to do so. So If I owned 100% of the company, there would be no dividend.

Matt O’Connor — Deutsche Bank — Analyst

Okay, thank you.

Operator

The next question is coming from the line of Gerard Cassidy from RBC Capital Markets. Please go ahead, your line is open now.

Gerard Cassidy — RBC Capital Markets — Analyst

Thank you. Good morning, Jeremy. Can you guys share with us, if you take a look at your net interest margin in the quarter, obviously it came under pressure. And if we assume and I know this is a big assumption. But if we assume that rates don’t really change from here over the next six to 12 months, the long end stays anchored where it is, at what point does the average yield in your average interest earning assets start to stabilize or maybe go up because the new business that you’re putting on equals or exceeds what’s running off in terms of interest rates on the products that are coming off the balance sheet?

Jeremy Barnum — Chief Financial Officer

Yeah, good question, Gerard. So I mean, I guess one way to think about the question is whether we basically think that NIM has hit the bottom in this quarter. And I think we’ve all learned the loss in the calling bottom is a very dangerous thing. And I would also point out and I would direct you to like the last page of our supplement. I’m not going to give you a big speech on markets NII which is my favorite topic and why that is really a sort of a distraction that we shouldn’t look at, maybe we’ll do that next quarter. But we do have that disclosure where we split out total NII and markets NII as well as NIM, excluding markets. And the reason I raised that is that, yes, your overall mental model is not wrong, it’s reasonable to think that NIM might stabilize around these levels, but it’s noisy, and the markets numbers in there and that’s going to add noise. And also I would say right now there is an unusual amount of numerator, denominator type effects. So whatever winds up being true about the numerator, you also have quite a bit of volatility in the denominator there, which is one of the reasons that we obviously don’t manage to that number, but your overall frame is just reasonable to me.

Gerard Cassidy — RBC Capital Markets — Analyst

Very good. And then as a follow-up and I may have misheard you so — and correct me if I’m wrong. But I think you said that the higher level of non-interest expense, the outlook that is was really driven by the improved outlook for non-interest income. Can you give us any color on that part of it, the outlook for noninterest income improvement?

Jeremy Barnum — Chief Financial Officer

Well, its, I mean some its in actuals and some of its in the outlook. But at a high level the point is simply that if you look at the mix of revenue across this company, we have some offsetting dynamics right now. We’ve got NII headwinds from the consumer delevering as we’ve discussed. But as you saw in this quarter CIB and AWM results, we had exceptional performance in banking even though and in wealth management, and even though markets is down year-on-year, its actually up significantly from what we expect [Technical Issues] So that’s kind of how it all comes together.

Gerard Cassidy — RBC Capital Markets — Analyst

I appreciate it. Thank you.

Jeremy Barnum — Chief Financial Officer

You want some of these expenses to go up because that means the good revenues are going up.

Gerard Cassidy — RBC Capital Markets — Analyst

Thank you.

Operator

Our next question is coming from the line of Betsy Graseck from Morgan Stanley. Please go ahead, your line is open now.

Betsy Graseck — Morgan Stanley — Analyst

Hi, thanks, good morning.

Jeremy Barnum — Chief Financial Officer

Hey, Betsy.

Betsy Graseck — Morgan Stanley — Analyst

I had a couple of questions. One was just on thinking through the outlook for NII, like you indicated $52.5 billion subject to market conditions. Can you just give us a sense as to how you’re thinking about market conditions? What’s the trigger point for being maybe better than expected versus coming down? And I ask in context of — I noticed your securities book, you shifted a bunch from AFS to HTM. So it feels like from that you’re waiting more for rates to move up materially before you would lean into that yield curve trade, but maybe you can give us a sense as to what that market conditions comment was referring to and how you’re thinking about them?

Jeremy Barnum — Chief Financial Officer

Sure. So, let’s go through that for a second. So I said I wasn’t going to give my big markets NII speech until next quarter, but I can’t, I can’t resist. So you talked about market conditions. The markets NII component of that NII outlook includes things like the extent to which we have spec pools versus TBA is the extent to which we have futures versus cash and high rate countries like Brazil. The growth in prime brokerage balances the common theme across all of these, is there situations where you’re deploying balance sheet in the markets business to serve clients and that’s profitable deployment on a spread basis but there’s quite a bit of gross out between the kind of non-derivative piece of it and the derivative of derivative-like piece of that where the derivative piece of it doesn’t have any NII and the non-derivative piece of it does. So every unit of that sort of activity that you do creates a significant swing in the NII number, either up or down. It’s very little impact to the bottom line. And that’s not the entirety of the market story. There are parts of the markets business where we’re actually doing [Speech Overlap] but part of the market dependent comment is the market dependent. I’ll go to the other point in a second. And I’m almost done with the speech. Anyway. you get the point. So that’s one point of fluctuation.

By going to your other piece, so the AFS, HTM, and I think your implied question which is basically what would make us want to deploy more into a higher rate environment. So I will say that the AFS HTM changes that you’ve seen are really just primarily about managing capital across the various constraints while preserving the right level of flexibility to do deployment. But given the level of cash balances right now, the AFS HTM is really a main constraint in terms of duration buys and I think we have enough flexibility in there to do kind short-term cash deployment tactically as we always do. So to get to the punch line, it’s kind of what we said before, which is we’re bullish on the economy. We believe that that comes with higher inflation and therefore higher rates and in light of that we’re happy to be patient right now. When that actually changes and we decided to deploy more, you’ll see it in future.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

And, Betsy, simple way to think that the $52.5 billion other than the markets business which goes up or down. If rates go up, you can on risk disclosure. We will earn more NII. All things been equal, which of course we never ask, but all we view, and in addition to that we can make decisions to deploy more money for more NII.

Betsy Graseck — Morgan Stanley — Analyst

You know it’s interesting versus when you were at our conference, Jamie, it seems like the $52.5 billion is more a function of the curve given the fact that card did, it looks like better than you had thought at that time in the middle of June based on your comments about spend being up so much.

Jeremy Barnum — Chief Financial Officer

I’m sorry to interrupt you, but let me just pick up on that point for a second because I think someone else asked a similar question. But I would just remind you that we do see that very healthy sequential growth in card loans on the back of spending. But the key issue is the revolve behavior, and so our view on that really hasn’t changed and we do see elevated pay rates as a result of the cash buffers which remains kind of the consistent reason why we have admitted outlook for card NII this year.

Betsy Graseck — Morgan Stanley — Analyst

Yeah, No, I totally get that.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

And I don’t want to correct anyone here, but of course, I think you’ll see it go up by the end of the year. Okay, I think we’ll be conservative on that because it always been a stuff like that. But we made guessing — look like how many cars you have, hum much spend, how many happy customers you have, and I will take care of itself.

Betsy Graseck — Morgan Stanley — Analyst

And on that front your card fees were quite good, right? You mentioned that in your press release. Maybe you can give us a sense as to the drivers is that new openings. Is that basically what it is? How sustainable is that because that was a bit of an upside surprise in this result, the card fees?

Jeremy Barnum — Chief Financial Officer

Yeah, I mean, I think it’s spend by Betsy. I mean, we can get even more color than that. You can follow-up if you want, but at a high level. I think the card spend number is really about. I mean, sorry, the card fee number is really all about the spend.

Betsy Graseck — Morgan Stanley — Analyst

Okay and then just one last if I can squeeze it in, your VaR came down significantly. Can you give us a sense as to what’s going on there.

Jeremy Barnum — Chief Financial Officer

Yeah, I mean, that’s just the volatility of last year’s prior quarter coming out of the time series, right? If you think about it.

Betsy Graseck — Morgan Stanley — Analyst

Fair enough. Okay, thanks.

Operator

Our next question is coming from the line of Charles Peabody from Portales Partners. Please go ahead, your line is open now.

Charles Peabody — Portales Partners — Analyst

Yeah, I wanted to ask that NII question a little bit differently. In reiterating your $52.5 billion guidance, you said there was potential for some variation of variability around that number. I’m trying to understand where the greatest variation could come from? Is it in your loan growth expectations because I’m hearing that you really are not expecting much in the way of loan growth, or is it in the shape of the yield curve because of the Fed QE actions or words around taper? And in talking about the yield curve, could you also talk a little bit about what’s more important, the short end of the yield curve between Fed funds and the two-year or the long end? And in that conversation also talk about the significant out of liquidity that’s about to hit the short end? Thanks.

Jeremy Barnum — Chief Financial Officer

There is a disclosure in the March 31, 10-Q. So, its earning at risk. If rates go up 100 basis points, U.S. dollar and non-US dollar of $7 billion, if the whole curve goes up 100 basis points, then $7 billion, some number like 4.5 with 5 short rates versus long rates. The long rate numbers accumulate. I would add every year until you roll over these things at slightly higher rates, that is the number, okay? They are all obviously loan growth, loan growth that’s in the plus or minus. but the biggest thing is the is interest rates, that’ll take a lot of variables.

Let me give you the variables Charles because it’s kind of a reasonable question. So I’ll spare any more markets NII speech. You heard it already, but that’s obviously a big factor. Within card, we are somewhat optimistic about loan growth. But just remember that that loan growth has to translate into evolve to drive NII. And so if pay rates remain as I said earlier, is that some of the forecast that reflects the recent experience so we are forecasting elevated pay rates, but of course, we could be wrong. There could be even more elevated than we are currently forecasting, so that would be a downside and the opposite of that, if we see the consumer we levering starting a little bit sooner would create upside there. And then there is the impact of deployment. So we’re staying patient right now. That means that we’re not earning the steepness of the yield curve. And if that changes, that could create a little upside. And then there’s always the tactical actions that we can take in the front end of the curve. Right now, those aren’t very interesting because IOR is above money market rates, which is a big part of the reason that you see RFP having so much uptake. But it’s not were to change and there were opportunities and repo and so on, then that could help a little bit as part of our constant tactical deployment there, but that’s not again our simple pace.

Charles Peabody — Portales Partners — Analyst

Just to follow up on that. I mean, the liquidity that’s going to hit in July and August is substantial and that’s going to have some impact on the shape of the yield curve at the short end. We saw a rise in the overnight repo rate, reverse repo rate in June. Is it possible that we have to have another one to keep rates from falling too far?

Jeremy Barnum — Chief Financial Officer

Yeah, I mean I think that’s a question for kind of short-term fixed income market strategists and my old research team. But right now, it seems like the Fed is pretty committed to making sure that repo rates don’t trade negative, that’s part of the reason they made their technical correction and that’s part of the reason RFP is paying what it pays. So we’ll see what happens here. But to me, the front end of the yield curve from a deployment opportunity perspective looks not very interesting right now and that is kind of our central case for the rest of this year.

Charles Peabody — Portales Partners — Analyst

And did the rise in the RRP rate have any — your comments about market driven NII. Did it have any impact on market driven NII?

Jeremy Barnum — Chief Financial Officer

Yeah, that’s not really the way that works, plus 5 basis. You may be — I mean, I don’t know if as part of your question or not. But there is of course the increase in IOER, and there is some pretty simple math that you can do there about 5 basis points or 10 basis points on on $0.5 trillion for half a the year. So, but those are pretty small numbers in the scheme of precision we’re doing here.

Charles Peabody — Portales Partners — Analyst

Okay, thank you.

Jeremy Barnum — Chief Financial Officer

Thanks.

Operator

A follow-up question is coming from the line from Gerard Cassidy from RBC Capital Markets. Please go ahead, your line is open now.

Gerard Cassidy — RBC Capital Markets — Analyst

Thank you. Jeremy, I just wanted to follow-up. Can you give us some color about the residential mortgage-lending business? How was the gain on sale margins this quarter? Any outlook on margin or any outlook on volumes, I should say. But also, did you say also that you guys sustained a small loss or loss in the servicing area. If so, what drove that? Thank you.

Jeremy Barnum — Chief Financial Officer

Yeah. So let’s talk a little bit about mortgage, which is a business I’m still learning. But we’ve had very robust originations, $40 billion in this quarter. I think the most significant — one of the significant things that’s going on is we’ve really finished unwinding all of our credit pull back from the crisis. So we’re fully back in the correspondent channel. This is obviously helping the volumes. There is obviously been a huge refi boom over the last year with lower rates, that’s starting to slow down a little bit. The purchase market has been quite robust. Although now we’ve seen so much home price appreciation that the maybe affordability starts to be a little bit of a headwind.

So as we sit here today, from a margin perspective, you have your kind of typical dynamics. As rates go up a little bit, refi slows down a little bit. The industry has built capacity. You have probably a little bit of a margin headwind looking forward and obviously there was a mix effect. So as corresponding becomes a much bigger part of the of the originations, you have mix based margin compression. So, and obviously, [Indecipherable] all time highs and now it’s not — it’s getting lower and all time high So it’s a headwind relative to a super elevated prior year quarter. But it’s still perfectly healthy.

In terms of the servicing business, I think really as you all understand in the current environment, the prepayment rates prevailing speeds have been running significantly to evolve our model forecast. And so as we continually update those as part of our risk management, that can further some small risk management losses. But in general, the risk management of the parts of the MSR that can be managed has actually been very good and very stable. So I think that sort of thing you had, right?

Gerard Cassidy — RBC Capital Markets — Analyst

Yes, thank you very much.

Operator

There are no incoming questions. Thank you.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

Guys, and then — Jen Piepszak did a great job CFO. We also note she is happy at Wisconsin in the new job. And and Jeremy, I know why you know Jeremy, but he’d been CFO of the IB for seven or eight years, so complete professional. And so, Jeremy welcome to the first call and congratulations.

Jeremy Barnum — Chief Financial Officer

Thank you, Jamie.

Jamie Dimon — Chairman of the Board and Chief Executive Officer

Hope to talk to you all soon. Thank you.

Operator

[Operator Closing Remarks]