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| Just after his heart surgery, JPMorgan Chase's CEO Jamie Dimon still prepared a COVID-19-impact letter to shareholders in 2020 |
Whatever he was about to say about the bank's 2019 performance, its capital base, its liquidity, its loan portfolio, and its plans to grow despite competition and political winds, he decided to start from scratch. Or at least it seemed so in the letter widely distributed in the financial community this week.
He had hoped to boast about the bank's banner year, generating $34 billion in earnings and boosting returns on book capital to levels above 13%. (Reductions in tax rates from 2017-18 still help. The bank paid about $6 billion less in taxes than if it had generated the same in 2017.)
The balance sheet now totals almost $2.7 trillion in assets--including over $900 billion in loans and over $400 billion in trading securities and derivatives. A book capital base of over $260 billion anchors the balance sheet.
The letter he writes annually is often a message to the industry, widely read and closely digested. This spring's note, that final version, was a blueprint game plan for how the bank will survive and thrive in a coronavirus-blamed economic crisis. This letter hardly took Dimon time to craft. He has well-thought-out and well-reasoned opinions and is comfortable sharing them.
As a bank leader, he pushes for growth in earnings, increased market shares and global expansion.
But unlike many bank leaders, he is a consummate risk manager, a worry-wart who foresees the worst case and grasps the issues that can have detrimental impact on a colossal bank. That explains his non-stop reference to the bank's "fortress balance sheet."
In the 2020 letter, Dimon states he had intended to present the bank's strategy to respond to competition. JPMorgan competitors include the obvious top-tier banks Citigroup, HSBC, Credit Suisse, Bank of America, Wells Fargo, Goldman Sachs and Morgan Sachs. But the bank operates in many markets and has dozens of businesses; hence, competitors include large regional banks (Regions, PNC, USBancorp, et. al.), specialty banks (BNY Mellon, State Street), broker/dealers (Raymond James, Scottrade), asset managers (BlackRock),
Otherwise, some of the fiercest competition comes from non-bank financial institutions and financial-technology companies ("fin-tech") with technology advantages or access to certain markets JPMorgan covets--the PayPals, the Wealthfronts, etc. For 2020, Dimon was set to present JPMorgan's fluid, ready-to-go strategy, propelled by the bank's size, capital base, risk management experiences, systems expertise and breadth of product offerings.
With the current crisis, he needed to show JPMorgan's posture and planned interaction with consumer and corporate customers, its engaged role in capital markets, and (just as important) its willingness to use its balance sheet and take reasonable risks to support customers. (About 180,000 of its global employees are working from home--including investment bankers, traders, risk managers, relationship managers, systems personnel, community bankers, etc.)
He acknowledges what many expected. The bank's loan portfolio will increase sharply over the next month or so, because large corporates are drawing down on revolving-credit commitments (about $50 billion) and small business loans have increased by $1 billion since February. And for those businesses that can decipher Federal guidelines that offer funding under the stimulus legislation, community businesses will increase borrowings.
Dimon promises JPMorgan Chase risk managers will focus on vulnerable corporate industries. Exposures to these industries at the bank are large, but can be managed. The bank's $950 billion loan portfolio tends to be 50-50 consumer and corporate. The number pushes beyond $1.5 trillion, if commitments and credit-card lines are added. Committed revolving-credit funding and consumer credit lines could be used beyond normal levels as 2020 unfurls.
The recent loan increases suggest the bank's actual loan outstandings might exceed $1 trillion at least for a short period, while it works aggressively to reduce exposures in vulnerable industries. About 11% of its corporate loan exposure is in the lackluster consumer-products and retail-industry sector, 4% in oil and gas, 17% in commercial real estate.
In consumer lending, the bank has over $380 billion outstandings in mortgages and credit cards.
Loan portfolios (outstandings and commitments) at the bank are also managed by country risk and currency risk. (The bank has about $19 billion in China-related exposures, about $42 billion in Brexit-burdened U.K.)
Concurrently the bank will focus on vulnerable small businesses across the U.S., where operating cash flows are dwindling quickly and where cash reserves had already been small. At the outset of this crisis, the bank, like many banks around the country, wants to start by promising to support small businesses (via funding, transactions, cash management, etc.), although it will protect itself from widespread losses, undisciplined business strategy, and irrational risk decisions.
JPMorgan has climbed to the top of most investment-banking tables (underwriting, advisory, mergers and acquisitions, etc.), but this business is uncertain and volatile. (It generates $7.5 billion in annual fees at the bank.) That's the nature of the segment.
Dimon notes the industry had one of its best-performing quarters in the first quarter in investment-grade corporate-bond issues. That might be a result of (a) corporate CFOs taking advantage of low interest rates, (b) a slate deals that might have been postponed in late 2019 and put on the 2020 schedule, and (c) corporate borrowers rushing to close deals and increase funding before public debt markets close their doors later in the year. A wise CFO is a CFO who concludes the company must secure the funding now because it may not be able to get access to it later--especially with interest rates at near-record low levels.
Mindful of the mounds of litigation and penalty payouts it paid to government bodies and civil suit plaintiffs after the last crisis, Dimon mentions the bank will help clients, but wants to minimize litigation risk. At the least, this implies inhouse lawyers will closely advise bankers welling products and making promises to clients. Products that appeared so lucrative and riskless in the early 2000s (subprime mortgage securities, mutual funds, exotic derivatives, e.g.) led to billions in penalties and settlements in the post-crisis years.
Regulation has been a favorite target in Dimon shareholder letters the past decade. In 2020, he tosses another dart at global and U.S. bank regulation: "While a lot of the rules were constructive and made the financial system stronger, we are now seeing the impact of poorly constructed, poorly calibrated and poorly organized rulemaking," he wrote.
This time he reminds readers that onerous liquidity requirements (Basel III) could limit the bank's efforts to provide new loans to consumer and business customers who desperate need funding in the months to come. Financial reports for Dec., 2019, show bank regulation requires JPMorgan Chase must hold cash reserves of $469 billion (to meet unexpected run-offs and withdrawals of deposits and other short-term funding). To comply, the bank maintained $545 billion in "High Quality Liquid Assets," much of which, Dimon has long argued, should be funneled into the loan portfolio to meet cross-the-globe demand.
Yet the so-called tough regulatory rules explain, in many ways, why the bank and most of its peers, should withstand the worst of what's to come. Dimon highlights the stress tests the Federal Reserve conducts on the bank's balance sheet and the stress tests the bank performs for itself. Such tests suggest the bank could survive about $30 billion in an assortment of losses over the next 12-24 months.
Footnotes in the 2019 annual report state the bank's board had authorized bank management to buy back shares at its discretion up to $15 billion until June, 2020. As times improved the last decade and after periods of building up capital bases to ensure compliance with new regulation, banks around the country had begun to reward shareholders with higher dividends and stock buybacks.
As a crisis becomes hard reality, banks must reset priorities and strengthen balance sheets that could be crushed by loan losses and market hits. Dimon's note says the bank will suspend buybacks for now, although it hopes to maintain its attractive dividend. The bank's internal analysis and stress testing suggest the bank will continue paying stock dividends unless Tier 1 capital (which includes tangible equity and preferred stock) falls below $170 billion. That was based on regulators and the bank's stress test for an "extremely adverse" scenario.
At Dec., 2019, JPMorgan reported $214 billion in Tier 1 capital (and had continued to show increasingly higher capital ratios for all forms of capital requirements). Capital ratios are the highest they have ever been over the past decade and give credence to Dimon's frequent reference to the bank having a "fortress balance sheet."
As for regulation, he has a suggestion for when this crisis slips into history: He recommends regulators review the extent to which banks were prepared: "After the crisis subsides (and it will), our country should thoroughly review all aspects of our preparedness and response." And maybe regulators can update rules and requirements that might not have been necessary in the worst of cases.
Tracy Williams
See also:
CFN: Dimon's Regulatory Rant, 2012
CFN: The State of the Industry from JPMorgan, 2011
CFN: Letters to Shareholders at Financial Institutions, 2010
CFN: Is $13 Billion a Lot of Money for JPMorgan, 2013
CFN: JPMorgan Chase's Refined Regulatory Strategy, 2014
CFN: What Will Dimon Do? 2013
CFN: JPMorgan's London Whale Losses, 2012
CFN: Big Banks' Big Year, 2019
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