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U.S. Economy
He believes that the U.S. economy is in mild recovery, and it seems to be strengthening over time. If looking at all the sectors including corporate, middle markets, small business and consumers, for the most part, they are better than they had been a year ago. Dimon believes the housing market is probably near the bottom right now, based on the current rental prices, supply and demand, and household formation. He is hoping that we have a growing economy and a growing number of jobs. When talking to many CEOs in many businesses, he sees that companies have a lot of money and like everybody else, they were worry about the world, but believe they themselves are doing quite okay.
Euro crisis
Banks are now facing many issues, including Europe, which might be the largest part of them. The European Union and the euro itself were a great accomplishment of mankind. Anybody could accurately say that we want to see all countries be financially responsible, and to do that they have to have common social policies, about retirement, work, housing, competitiveness, etc. It would be fair for the ECB to say it was not their issue; it was the government's issue. He thinks it would be fair for the government to say that the ECB needs to help providing liquidity, particularly for Spanish and Italian sovereign debts. The issues should be solved together, and quickly. The longer we wait, the higher the risk that we can't control.
Recently, around three to four weeks ago, the ECB expanded the amount of collateral and said if you have the collateral, you can borrow for three years at a fairly low rate. It was huge and very helpful in terms of removing a lot of issues about liquidity and fronting at the banks. He thinks the issue was almost taken off the table by that one move. Banks there still had to raise capital, and in order to do that, they might have to sell assets or do other things.
J.P. Morgan Europe exposure
J.P. Morgan’s exposure to troubled nations like Italy, Spain and Portugal was around $15 billion, net of collateral. Most of the collateral is cash. The firm has stressed this, and he thinks the in the outcome, or worse, the terrible disaster, J.P. Morgan could lose $5 billion. The firm has decided to keep the exposure, not because it is taking a bet, but it has been doing business in Spain and Italy for 100 years, and it wanted to be there in 100 years. Most of what J.P. Morgan did there was related to client-type business. It would be trying to manage the exposure, and Dimon hopes the worst would not happen, but if it did happen, he wouldn’t feel terrible. He felt terrible for them, and J.P. Morgan is still trying to do business in those countries. Dimon feels confident about the risk exposure management. Much of the collateral is cash, which is obviously fine, with a lot of hedges taking place, and the firm knows the exposure to every single counter party. Of course he thinks he might go wrong, but not terribly wrong.
Stress test
Dimon agreed with the stress test in a sense they need to know if banks can withstand in the face of home prices down 20%, equity markets down 15%, catastrophe in the capital markets here and catastrophe in Europe. J.P. Morgan can handle all this and be well. He thinks they have well above the 5% Tier 1 capital which is required. He hopes that it shows that American banks, maybe with an exception of one or two, are extremely well capitalized to handle extreme stress. A certain bank should hold enough capital to handle extreme stress or more, and for him, they have more. After all the stress tests, they are asking for 5%, and J.P. Morgan will probably be 7% or 8% after the extreme stress. At the end of last quarter, it was almost 10%.
Dividend and buying back stocks
In answering whether J.P. Morgan raised dividends or not, Jamie answered that it was a board-level decision; the firm raised it last week, putting it back to $1. However, that was just a small capital decision relative to another decision last year, when it bought back $8 billion worth of stock. And he was looking forward that he might do something like that this year. For him, the most important was to buy back at what price? The management team is not the kind of people who can buy stock back at any prices, only when the stock is cheap.
He and the management team built the company for the long run; they are here to serve clients, more companies, more branches, better systems, better products, better services, three quarters, year-to-date record earnings, they just kept building the company, then the stock would eventually take care of itself. Also, he was thinking of returning the cash to shareholders as well. Buying back stock to him only made sense when he thought he were buying it below intrinsic value; buying above intrinsic value only helped the shareholders who are exiting, not the remaining ones. And he thinks the stock is below intrinsic value right now.
In three years time, Dimon doesn't see anything divesting or changing significantly but spending a lot of time this year navigating through a massive amount of rules, regulations, Basel 3, LCR, FCB, FSA. He thought of changing products and pricing but the fundamental job of the bank in the corporate side such as providing loans, credit, equity, debt, balance sheet management or advice was the same. And to consumer, it was checking accounts, investment accounts, mortgages, would be the same. If anybody looked from the consumer standpoint, these were necessary and indispensable and he thought the firm would be able to provide them at a fair price to consumers and still earn a fair amount of profits.
Cost cutting and growth
JP Morgan expanded on the traditional banking side, even though the capital was very pressured. And it would not be fair to anyone to say that the firm hasn’t cut costs. If anyone looked at the overhead of the company, like tech and ops, HR , finance systems, things like that, the percent of revenues was down 9% for the last 05 years. On the other hand, it has invested that money in new system, new branches, new bankers, new markets, new products, and new bankers. It got to do both, saving costs and keeping expanding. A company would survive by doing both, not just by doing one. So to Jamie, they were very cost conscious.
What Jamie saw is when you were the companies, you were easily raising money. The firm was still doing $10 billion in mortgages a month, he thought it was tight but the number was terrific, $10 billion a month. It was still doing a lot of credit card, small business loans as the end of September up 70% year over year, middle market loans up 18% year on year. JP Morgan has seen the underlying growth in the areas. Some might due to the market share gains, but he believed that the competitors would see the similar growth numbers.
At the end of the day, what JP Morgan would like to focus on was organic growth. It has opened 800 branches in the last 05 years, added hundreds of salespeople to those branches. In addition, it opened around 20 branches overseas to serve multinational clients, been building out the prime broker platform, to expand the commodities business. So the ultimate plan was to grow organically, in terms of systems, products and services.
Readers can see the interview by clicking on this link.
About the author:
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam Visit Anh Hoang's Website
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