Only if the regulators made us do it.
That’s what JPMC’s CEO Jamie Dimon had to say about whether JPMorgan Chase will be broken apart.
Dimon and CFO Marianne Lake were in the hot seat yesterday (Wednesday, Jan. 14) as they fended off questions about why its shareholders should be confident in the strength of the organization. The duo took an aggressive stance on the company’s future, being bullish about the merits of JPMorgan Chase staying as one integrated enterprise.
The topic of the “breakup” started when Goldman Sachs’ lead banking analyst Richard Ramsden said Chase could be hitting higher marks if it was broken into four parts, JP Morgan top executives forcefully negated those claims Wednesday (Jan. 14), saying the strength of its company comes from its size and diversification. And while JPMorgan Chase faces its share of potential regulatory pressures, a slew of legal fees in the billions and is recovering from last year’s massive breach that impacted 79 million households, its leaders kept a positive outlook on the company’s future as one unit.
Leading into Wednesday’s analyst call, Dimon made a bold comment to reporters about what he thinks about the regulatory pressures currently weighing on the company.
“Banks are under assault. We have five or six regulators coming at us on every issue,” Dimon said during Wednesday’s analyst call. “Obviously companies make mistakes. We try to resolve it, we try to fix it; we admit it.”
When one analyst asked JPMorgan to respond to the claims in Washington, D.C., that the company as it currently stands poses a “danger to the global financial system,” Dimon dismissed such a claim.
“Views and facts are completely different,” he said. “This company was a port in the storm in the real crisis of ’08 and ’09,” he said, pointing to the fact that the company now has more capital, is more conservative and has less credit exposure.
“The company is an extremely powerful thing. [Size] isn’t the determinant. And I don’t think we should be making shareholders’ decisions based on the view of people who don’t necessarily know,” Dimon added. “And so if the regulators say they want JPMorgan to be split up then that’s what’s going to happen. We can’t fight the federal government if that is there intent.”
Dimon said what would be more of a realistic change — if regulations require the company to change its business model — would be to modify the system overtime without taking drastic action all at once. JPMorgan Chase has global reach and Dimon said he believes the trend of having more multinational banks will be one that continues over the next 20 years as banks continue to grow, as evidenced by China’s banking growth, he added.
“You got to look forward in this. America has been the leader in global capital markets for the last 50-100 years. It’s part of the reason the country is so strong,” he said. “I look at it as a matter of public policy. I wouldn’t want to see the next JPMorgan Chase be a Chinese company. Because someone has to be serving the global-multinationals around the world. …So I think that if you look ahead 10 years, you’re going to have large global companies that compete. … If we can get a good return for shareholders than we should do that."
Dimon and Lake spent a good portion of Wednesday’s analyst call answering questions about what benefits consolidation has for shareholders versus breaking up or shrinking.
“JPMorgan’s model works,” said Lake, who disputed what some investors have written about the risks of the company having too much capital and risk to manage under one umbrella. Considering alternatives as a global financial company that is continuing to offer returns to its shareholders isn’t quite as simple of a process as some investors and analysts have been suggesting, she said. Lake also said it would be premature for the company to make big-strategic decisions that the JPMorgan doesn’t currently believe would add shareholder value.
Dimon said that “diversification was why [JPMorgan] was able to wade through the crisis.” Dimon noted that this is seen across other global and multinational banks and government systems. Dimon emphasized that analysts and investors must look at JPMorgan’s strategy on a yearly basis and not just quarter by quarter. Referring to the JPMorgan as a “fortress company,” Dimon focused his remarks on the strength of the organization as a whole. All aspects of the company, including shareholders, will be key in any future decision JPMorgan makes about its business structure, he said.
“We have a lot of levers. We have a lot of time and we’re going to do it very intelligently over time. We’re not going to damage franchises just because of the current narrative,” Dimon said. “The company has earned good returns in all its businesses throughout this crisis. And I’m going back 2010, 2011, 2012, and that’s a sign of stability. …The model works from a business standpoint.”
While there was not much mention of Chase’s major security breach 0f 2014 that hit 76 million households, Dimon spoke multiple times about how the company has dealt with its mistakes, moved on and kept up shareholder returns along the way. The legal fees continue to be a stint in Chase’s budget for Q4, but Dimon said they are improving if you look at them on a yearly basis, as opposed to a quarter-by-quarter.
“The several billion dollars that we’re going to have to pay for legal stuff, we want to fix it. It’s unfortunate that we do this to you all, but it’s unavoidable right now,” Dimon said about the legal fees. In recognizing the company’s flaws, Dimon also phrased JPMorgan’s legal scuffles with a little extra color.
“I acknowledge our mistakes. …I’d like to stop stepping in dog****, which we do every now and then,” he said.
Despite Dimon and Lake’s emphasis that JPMorgan isn’t focusing on the possibility of breaking apart the company, analysts continued to ask questions about contingency plans and hypothetical scenarios of what dividing the firm would look like for JPMorgan. One analyst asked if it was possible to “unscramble the egg,” now that the parent company has $160 billion worth of debt.
“The unscrambling would be extraordinarily complex. It would be extremely complex in debt, in systems, in technology, in people, of where certain things go and the businesses would start competing against each other right away,” Dimon said. “We’re very conscientious about the narrative that’s out there but it is far more complex than that. The right way to look at [this is that] we have these great franchises. We have a lot of time to manage through this and that is our objective — not unscramble the egg. We’re going to manage through it and manage almost every single part of it over an extended period of time.”
In terms of other relevant earnings figures, JPMorgan also reported the following figures:
• Active online customers: 36.4 million (includes active mobile customers of 19.1 million). This figure is up 3.5 million or 22 percent.
• Consumer and Community Banking: Average deposits were up 8 percent; credit card sales volume was up 10 percent.
• Chase cardholders: Accounted for over $600 billion, or approximately 16 percent of total U.S. credit and debit purchase volume.
• Credit card sales volume: $123.6 billion, up 10 percent from the prior year. General-purpose credit card sales volume growth has outperformed the industry for 27 consecutive quarters, the company reported.
• Merchant processing volume: $230.2 billion, which was up 13 percent from the prior year and up 8 percent from the prior quarter. Total transactions processed hit 10.3 billion, which was up 7 percent from the prior year.
Overall, JPMorgan Chase missed its earnings expectations, posting a 6.6 percent drop in quarterly profit after it shelled out more than $1 billion in penalties and legal expense for the bank’s actions in the foreign exchange markets. The company’s total legal cost for 2014 hit $2.9 billion, but this was just a fraction of the $11.1 billion it shelled out in 2013. Overall revenue for Q4 was $4.9 billion, a 7 percent decrease from last year’s fourth quarter. Net revenue was also down, dropping 3 percent to $22.5 billion, year-over-year. But looking at annual profit, JPMorgan reported gains as the overall 2014 profit hit $21.8 billion, which was a 21 percent increase and the highest ever annual profit for the company.