It's not just the size that matters
When Jamie Dimon spoke at length to Euromoney in June about how he runs JPMorgan, he took us back to the early days after the merger with Chicago-based Bank One, where Dimon had been chairman and chief executive.
That 2004 deal installed him as the designated successor to JPMorgan’s William B. Harrison and exposed the chief executive-in-waiting to some early internal politics.
“I remember when I first got here some of the investment bankers telling me that the consumer bank was holding them and the company back,” Dimon recalled.
But they were lobbying the wrong guy.
“I told them: ‘No. You’re doing a shitty job all on your own. The consumer bank is not holding you back.’”
The branches may not have been making much money, but Dimon ignored the investment bankers urging him to close them down and instead set out to manage them better. Now, Dimon tells Euromoney that it is a competitive advantage for the investment bank that it is strong in consumer.
At the start of December 2019, JPMorgan’s market capitalization stood at $412 billion. That is more than Citi, Morgan Stanley, Goldman Sachs, Barclays, Credit Suisse and Deutsche Bank combined. Yet Dimon says that the bank is not a conglomerate. Rather, all its businesses feed each other.
“Earnings may be up or down 10% one year to the next, but a lot of them are like annuity streams – cash management, asset management, many parts of consumer banking,” Dimon says. “And then there are businesses where earnings are more volatile. That doesn’t mean they are bad. They are just more episodic: M&A, equity capital markets, certain trading results. But I’ve always agreed with Warren Buffett. I’d rather have a lumpy 20% return than a steady 12% return.”
Fast forward to today and the investment bankers are no longer doing a shitty job. For the first nine months of 2019, JPMorgan ranked number one for global investment banking revenues, according to Dealogic, with a 9.3% share, well ahead of second-placed Goldman Sachs (7.8%), third-placed Morgan Stanley (6.2%), fourth-placed Bank of America (6.2%) and Citi in fifth, with 5%.
“In each asset class or product, the competition is different,” says Viswas Raghavan, chief executive for Europe the Middle East and Africa, “but JPMorgan is consistently a leader in most.”
But overall this is a shrinking business. For the first nine months of 2019, the global investment banking revenue pool – across M&A advisory, ECM and DCM – shrank 10%, compared with the same period the year before. The biggest market, North America, was down 5%; the next biggest, Europe, was down 25%.
The outlook for 2020 is uncertain. Trade tensions between the US and China, the US and EU and unrest across Latin America, the Middle East and Hong Kong make business leaders nervous.
“Never before have we seen such a sustained influence of geopolitics on business confidence and on financial market sentiment,” says Raghavan.
“Many executives have reined in capex and investment against a backdrop of cheap money and the quest for yield. It feels like we are late cycle, but if geopolitical uncertainties resolve favourably, then markets will be sustained in 2020. If not and if confidence suffers, then that could tip us into a correction but not necessarily a recession.”
How will JPMorgan fare then?
It must hope that it has invested well. Dimon told us in June: “We will never boost returns by cutting the investments we need to ensure we will have a profitable future.”
The bank famously invests $11.5 billion a year in technology. Raghavan says this is a competitive advantage, allowing it, for example, to help clients with their cybersecurity.
“Clients are realizing that their own defences are only as good as those of their banking counterparties, so our investments in cyber afford added protection to them and the entire ecosystem.”
JPMorgan is doing a little less of what banks used to do – that is making and holding loans. On its third-quarter 2019 earnings call, it pointed to sales of mortgage loans and investments in bond market duration.
The bank has invested heavily in the coming businesses. “The battle for the customer today is really in wholesale payments,” says Raghavan. “That’s where you’re seeing some convergence of focus between banks, credit card companies, payments providers and technology companies, and that’s where there will continue to be a lot of innovation.”
JPMorgan has taken a lead in establishing the interbank information network (IIN), which it hopes will become a global distributed network for payments. Much attention has focused on the number of banks signing letters of intent to join IIN, which numbered over 325 at the last count.