JPMorgan’s revenues of $90.3 billion for the first nine months of 2020 were 4% ahead of the same period in 2019, however profits fell by 39% and return on tangible common equity came down to 11% from 19% for the first three quarters of 2019.
Taking $19.4 billion of provisions for credit losses – compared with a more normal $4.2 billion in the first nine months of 2019 – will do that to your results.
But JPMorgan is still producing better returns in a terrible year than most large European banks manage in a great one. At the end of November its shares traded at 1.9 times tangible book value.
At the end of September deposits were 31% higher than at the same point in 2019. The bank had thought deposits would fall in the third quarter. They kept growing.
Signal of faith
It is a heartening signal of faith from retail and wholesale customers but a likely dampener on profits with rates set to stay low for years to come. Analysts want to know what JPMorgan can do to protect net interest income (NII), perhaps by boosting returns on its $1.3 trillion in cash, high-quality liquid assets and other unencumbered securities.
They should know better than to ask.
“We’re not going to do anything to protect the NII,” chief executive Jamie Dimon told them on the bank’s third-quarter earnings call. “We’re not going to invest in stuff making 50, 60 or 70 basis points so we get a teeny little bit more of NII.”
Dimon and his team make long-term decisions for the company. If the net interest margin gets squeezed, so be it.
“But we don’t want to be in a position where we lose a lot of money because we made investments in five- or 10-year securities where you’ll lose a lot if rates go up,” he explained.
While every bank, including JPMorgan, is talking up digital adoption, and investors want to hear about cost cutting, Dimon is doing something unusual: opening branches. A pandemic, rising loan-loss provisions and depressed net interest margins aren’t going to persuade him that is suddenly a bad idea.
We will look back in the years when this pandemic is behind us and see an inflexion point in digital adoption
Viswas Raghavan, JPMorgan
“We just keep on growing. The branch expansion is one example of that,” he says. “We never stopped doing that. We never stopped gaining credit card products. We never stopped growing digital home-lending products. And we’ll be doing that for the next decade. And of course, you’ll have all those ins and outs from what I call the weather: NII, spreads, margins, markets, etc. But the goal is always the same. You grow the business to serve your clients around the world.”
Clients of the corporate and investment bank were particularly well served this year. It has been the star performer, growing net income over the first nine months by 30%, while profits fell in both consumer and community banking and in the smaller commercial banking division.
Fixed income markets revenues were 54% higher in the first nine months of 2020 than in the same period in 2019. Equity markets revenues were up 33%, with underwriting fees 59% higher in equity capital markets and up 23% in debt.
“What we saw in March spanned across the whole market, from the bluest of blue-chip companies to those at sub-investment grade,” Viswas Raghavan, chief executive of EMEA and co-head of global investment banking, tells Euromoney. “Companies that had never before touched their revolvers drew them down. The rush for liquidity was almost like the scramble for groceries we saw in supermarkets. Even if companies easily had enough cash, they still wanted more.”
Capital markets revival
The strong and immediate central bank response soon led to a revival in capital markets that had briefly frozen.
“What is remarkable is that it was not just the companies doing relatively well – in technology, healthcare, defensive consumer – that could access markets,” says Raghavan. “The Covid-impacted companies were also able to. We raised multiple financings for Carnival Cruise Lines; we recapitalized many of the world’s airlines; and we raised money for hotels and for commercial real estate, including a rights issue for Hammerson in the summer.”
The worry persists that buying has been indiscriminate and that low rates and a wall of liquidity have boosted valuations, sending investors hunting for yield to riskier assets.
“As with markets, the economy is as much about confidence as it is about fundamentals,” says Raghavan. “If vaccines roll out to people as seamlessly as we hope and the economy rebounds strongly, all will be well. However if the economy falters even while inflation appears, the concern will begin to focus on the sustainability of riskier assets.”
As to how this period will be remembered, Raghavan suggests: “We will look back in the years when this pandemic is behind us and see an inflexion point in digital adoption. We have done multi-billion dollar deals without flying management teams on three-week roadshows around the world – and they have worked out perfectly well.”
Is this a permanent change? “Of course people will travel again. But I’m not sure many of us will be jumping on a plane to Frankfurt or Milan for just one meeting.”
