Jeremy Barnum, JPMorgan’s new chief financial officer, cut a relaxed figure on his first quarterly earnings call on July 13. The numbers were strong, as they usually are for JPMorgan.
A record quarter for investment banking fees – and a number one global ranking – helped to balance a 30% year-on-year fall in markets revenue from a record quarter last year when central banks revived sentiment after the worst of the pandemic.
Confidence is up, which prompted the release of $3 billion of credit reserves and helped JPMorgan to report a profit of almost $12 billion, up by $7.3 billion on the same quarter in 2020.
There was nothing much to discuss in the numbers, so analysts asked Barnum and his boss Jamie Dimon whether a series of relatively small recent acquisitions are part of a strategic master plan. Barnum noted that one theme linking moves by JPMorgan to expand in retail banking in countries like the UK and Brazil is that market share can be pursued digitally.
“It’s kind of fun to be the disruptor,” Barnum said. He may have been pining for his days as an innovator in credit derivatives trading at the start of his career or simply admitting boredom with the business of keeping the banking supertanker that is JPMorgan on course.
With an annual technology budget of around $12 billion, JPMorgan can certainly fund experiments in disruption. And its success in becoming the leading investment bank in Europe as well as America bodes well for a digitally-led international expansion in retail banking.
But even JPMorgan suffers from the enduring gap between valuations for established banks and new competitors that brand themselves as fintech firms or digital-only challenger lenders.
Revolut valuation
Soon after Barnum mused that a bit of digital disruption might be fun, Revolut – a London-based digital banking startup in one of JPMorgan’s target markets – announced that it had raised $800 million of funds at a level that gives it an enterprise value of $33 billion.
That is higher than the current market capitalization of either Credit Suisse or Deutsche Bank, two of the best-known names in European banking, which were both valued at around $25 billion in mid July.
JPMorgan, at a market capitalization of around $470 billion, is in a different league to these firms. But however successful JPMorgan’s planned foray into digital retail banking in the UK proves to be, it is unlikely to attract a revenue-based premium for the bank’s value that is comparable to the Revolut valuation.
And that in turn will have a marginal effect on any acquisitions that the two firms might both consider in the future.
Revolut’s latest funding round could prove to be absurdly optimistic of course. SoftBank’s Vision Fund 2 is one of the investors at the latest aggressive valuation point, so Revolut might end up being comparable to WeWork, which appeared after one SoftBank-backed funding round to be worth $47 billion, before deflating to its current level of roughly $9 billion as it prepares to go public via a merger with a special purpose acquisition company.
In the wake of the last SoftBank funding round for WeWork, top investment banks including JPMorgan and Goldman Sachs were willing to claim that the firm was worth somewhere between $60 billion and $100 billion in a bid to win a slot on the IPO that failed to launch in 2019.
This highlights the fact that ascribing a value to fast growing firms is an art not a science, whatever the role SoftBank currently plays in pushing up nominal prices for its investments.
It’s no wonder Dimon and his chief financial officer are in the mood for some disruption of their own
Values for banking industry incumbents remain stubbornly low, however. Multiple European banks have spent years trading below their nominal asset value and even a successful firm such as JPMorgan only trades at around 1.6 times its book value.
Revolut does not seem to be in any rush to move into the duller corners of traditional banking.
Its first product launch after the funding round that took its value to $33 billion was a function called Revolut Stays that was unveiled on July 21 and offers users discounts on travel bookings.
But as Revolut pursues its goal of becoming “one app to manage all things money,” it might eventually think about deploying its lofty valuation to take over a bigger financial institution.
Nikolay Storonsky, the co-founder and chief executive of Revolut, started his career as an equity derivatives trader for Lehman and Credit Suisse, so he knows how investment banks work.
He forms a chalk and cheese pairing with Revolut’s chairman Martin Gilbert, the former head of Aberdeen Asset Management (in the days before its rebranding as abrdn), a hugely experienced investor.
And the head of Revolut’s remuneration committee is Michael Sherwood, the former co-head of Goldman Sachs International and another very experienced deal maker.
One of Storonsky’s fellow fintech founders, Sam Bankman-Fried, who is chief executive of cryptocurrency exchange FTX, was recently quoted saying that he views established financial firms such as Goldman Sachs or CME Group as potential acquisition targets.
This could easily be dismissed as crypto bro braggadocio boosted on tenuous relative valuations, as FTX has moved from a nominal value of around $1.2 billion to $18 billion in its latest private funding rounds, which might theoretically put it on course to reach Goldman’s capitalization of around $125 billion before too long.
There is a precedent for what was close to a virtual takeover of a long-established bank due to a valuation mismatch, however.
UBS and Pactual
When UBS bought the Brazilian investment bank Pactual for $2.6 billion in 2006 it paid so much that senior managers convinced themselves Pactual’s managing partner, Andre Esteves, must be so valuable that he should be appointed global head of fixed income and relocated to London.
Esteves was still in his 30s at the time, which led to his branding as a whizz-kid, although he was a banking veteran compared to some of the current crop of fintech startup founders.
That particular experiment was not a success, as Esteves was ousted from UBS in 2008 for reportedly plotting to take full control of the bank, before its enormous losses in the global financial crisis later that year made any takeover plans academic.
Esteves and his partners were eventually able to buy Pactual back from UBS for $2.5 billion in 2009, after it had significantly appreciated in size, in an effective valuation arbitrage.
Similar trades might be on offer for the young financiers who are finding fundraising almost laughably easy at the moment.
A slump in value for fintech firms such as Revolut and FTX could be around the corner, either due to regulatory changes that bring them into line with treatment of long-established banking groups or simply because of a reassessment of the premium placed by investors on growth.
The relative valuation gap remains stark for now, however.
Each of Revolut’s Nikolay Storonsky and FTX’s Sam Bankman-Fried currently has a net worth from corporate shareholdings of over $7 billion, which is more than three times that of JPMorgan’s chief executive Jamie Dimon, the best paid establishment banker of his generation.
It’s no wonder Dimon and his chief financial officer, Jeremy Barnum, are in the mood for some disruption of their own. If nothing else, they might get to undermine some current startup valuations.
