Our company has emerged as an endgame winner, but we need to earn it every day
If you think back 10, 20 or 30 years ago, my predecessors and I struggled to try to build a great company, which we hoped would emerge as an endgame winner. The ultimate outcome was unclear — and many competitors did not survive (this is true for most large– scale consolidating industries). Even for those of us that did, it was quite a struggle. Today, it is clear that our company is an endgame winner — both in the United States and globally — which is invaluable in any industry. And while we have had some difficult times since the financial crisis, the power of the franchise has shone through. We also know that future success is not guaranteed – only consistently good management over a long period of time can ensure long–term success in any business. But we certainly are in a very good place.
We have delivered good multi–year financial results (strong margins and returns and low volatility) and have shown a great ability to adapt to changes — both from the marketplace and the regulatory environment
We always compare our margins and returns with those of our best competitors in each business. The chart below, which is very similar to a chart we showed at our Investor Day, shows some of these numbers for 2014. We believe that the right discipline is to compare each of our businesses against its best competitor. It is a mistake just to look at the consolidated numbers and compare them — every company has a different mix of businesses. The chart below also shows how our businesses compare in terms of margins, our target margins in a normal environment and, most important, our return on equity (ROE). On most of these measures, we are very close to the best–in–class competitor.
A good company should be able to earn competitive margins over an extended period of time regardless of economic conditions while investing and without taking excessive risk
Any company can improve earnings in the short run by taking on additional risk or cutting back on investments. Any company can grow rapidly if it takes on too much risk — but that usually is the kind of growth one comes to regret. Our margins have been quite good, even as we have been investing for the long run. These investment expenses lower our short–term returns, but they are “good” expenses. In addition to the tremendous amount that we invest annually in technology and infrastructure, some examples of where we have invested over the past five years are:
- 448 retail branches in the United States
- 28 wholesale offices abroad
- 2,498 Chase Private Client locations/ branches, supported by 594 new Private Client advisors
- 20 Commercial Banking expansion cities, including approximately 350 Commercial Banking bankers
- 205 small business bankers
A good company always should be investing while it also is waste cutting; i.e., cutting out any unnecessary expenses. However, I often have received bad advice on what are unnecessary expenses. For example, spending on important strategic off–sites, research and development for innovation, marketing that has a positive return — those are good expenses. We take a bus trip annually to visit branches, operating centers and clients. It is both fun and enormously productive — and it is not an unnecessary expense — it makes us a better company.
Even our annual Retail National Sales Conference with the top 5% of our branch bankers, loan officers and tellers is critical — we spend time working together, we learn a lot and we get to thank these outstanding employees at an awards recognition dinner. While it is perfectly reasonable in tough times to dramatically reduce the cost of that conference, it is unwise to cancel it. I have been to every single one of these events since I started running Bank One, and I intend to continue that tradition.
We earned adequate returns while building an increasingly stronger capital base
During these challenging years, our company has confronted difficult markets, billions of dollars of additional regulatory costs, billions of dollars of costs due to changes in products and services, and, unfortunately, very high legal costs. And we have had to hold an increasing amount of capital throughout this time. While there is no question that these events did reduce our performance and returns, we have been able to adapt, meet the new rules and perform fairly well financially.
The chart below shows earnings, the capital we returned to shareholders through dividends and stock buybacks, our returns on tangible common equity and our high quality liquid assets (HQLA). High quality liquid assets essentially are deposits held at the Federal Reserve and central banks, agency mortgage–backed securities and Treasuries, and they are the component of our balance sheet that has grown most dramatically. Only HQLA count for liquid assets under banking regulators’ definition of liquidity — and we currently have more than is required by the regulators.
The chart below also shows that even after dramatically increasing capital and liquidity, both of which reduce returns on capital, we were able to earn an adequate return on tangible common equity, grow our capital base as needed and still return capital to shareholders.
Our businesses have been able to gain market share, which only happens when we are creating happy clients
Importantly, much of the growth has been organic. Please review some of the numbers in the chart below — they speak for themselves. If you had asked me back in 2006 if we could have accomplished those kinds of market share numbers, I would have been skeptical. And, fortunately, we have plenty of areas where we still can grow or do better — I will talk about this in a later section of this letter.
Most of our businesses have exhibited improving customer satisfaction
The chart below shows the great progress that our Consumer Bank has made in improving satisfaction scores. In fact, American Customer Satisfaction Index named Chase #1 in customer satisfaction among large banks in 2014. We have received even better scores than most of the regional banks and essentially are equal in ranking to the midsized banks. (We still are not satisfied, however, and want to be even better.) We believe that our customer satisfaction has been going up for multiple reasons: error rate reduction, better products and services, good old–fashioned service with a smile, and, importantly, innovations like deposit–friendly ATMs and continual improvement in online and mobile banking services. While the chart shows satisfaction in the Consumer Bank, we also have had increasing customer satisfaction scores in our small business, mortgage, auto finance and credit card franchises.
Our mix of businesses works for clients — and for shareholders
All companies, including banks, have a slightly different mix of businesses, products and services. The most critical question is, “Does what you do work for clients?” Our franchise does work for clients by virtue of the fact that we are gaining share in each of our businesses, and it works for shareholders by virtue of the fact that we are earning decent returns — and some of our competitors are not.
Other considerations are whether your company has “moats” — is it protected in some way from debilitating competition or events? And has it performed consistently — in good times and in bad? We believe that we have well–fortified moats in the form of economies of scale, brand, expertise, technology and operations, and — importantly — competitive advantages created by our ability to cross sell (more on this later in this letter). In addition, we have performed fairly consistently in good times and in bad. Even in 2008, the worst year in perhaps 75 years for financial companies, we earned 6% return on common tangible equity — not great but not bad, all things considered. Additionally, we have embedded strengths that are hard to replicate — the knowledge and cohesiveness of our people, our long–standing client relationships, our technology and product capabilities, our fortress balance sheet and our global presence in more than 100 countries.
Our mix of businesses leads to effective cross sell and substantial competitive advantages. We are not a conglomerate of separate, unrelated businesses — we are an operating company providing financial services to consumers, companies and communities
A conglomerate is a group of unrelated businesses held under one umbrella holding company. There is nothing wrong with a conglomerate, but we are not that. In our case, whether you are an individual, a company (large or small) or a government, when you walk in the front door and talk with our bankers, we provide you with essential financial products, services and advice. We have a broad product offering and some distinct capabilities, which, combined, create a mix of businesses that works well for each of our client segments.
Part of our mix of businesses, however, is not unique. While we divide our company into four distinct businesses, the truth is that many regional banks do a lot of what three of our four businesses do (i.e., Chase Consumer & Community Banking, Commercial Banking and Asset Management). The biggest difference between us and regional banks is our global Corporate & Investment Bank (and the non–U.S. part of our Asset Management business).
Our broad product set and some of our unique capabilities (some we inherited, and some we built carefully over time), combined with effective cross sell, create substantial competitive advantage. The examples below make some of those advantages clear:
- Commercial Banking now generates 35% of our U.S. investment banking business. This means we are able to bring JPMorgan Chase’s exceptional Investment Bank to serve hundreds of midsized corporations and institutions with the best global investment banking products and services in the industry. We can do this because our Commercial Bank is in hundreds of towns across the country where we can serve clients locally — person to person — and also bring the best of JPMorgan Chase to them.
- Around the world, we can bring exceptional private banking services to CEOs and company owners or help private banking clients with their global commercial banking needs.
- Because of our international footprint, we bring global banking services — from cash management to M&A — to approximately 2,500 of our more than 20,000 Corporate Client Banking and Middle Market Banking clients, who are rapidly expanding overseas and who need these services from someone they know and can trust.
- We market Chase Paymentech, our merchant acquirer, through our branches to small businesses, through the Commercial Bank to midsized companies and through our Corporate & Investment Bank to large, multinational corporations.
In JPMorgan Chase’s case, our size is an advantage in serving clients, as well as in helping make us an endgame winner.
America’s financial system is still the best the world has ever seen — it is large and diverse — and it serves the best economy the world has ever seen, which also is large and diverse
America’s financial system still is the best the world has ever seen, and it includes not just banks but asset managers, private equity, venture capital, individual and corporate investors, non–bank financial companies, and public and private markets. In fact, in the United States, banks are a much smaller part of the financial system and the economy than in most other countries. And there is a great need for the services of all banks, from large global banks to smaller regional and community banks.
Our large global Corporate & Investment Bank does things that regional and community banks simply cannot do. We offer unique capabilities to large corporations, large investors and governments, including federal institutions, states and cities. For example, we provide extensive credit lines or raise capital for these clients, often in multiple jurisdictions and in multiple currencies. We essentially manage the checking accounts for these large institutions, often in many different countries. On the average day, JPMorgan Chase moves approximately $6 trillion for these types of institutions. On the average day, we raise or lend $6 billion for these institutions. On the average day, we buy or sell approximately $800 billion of securities to serve investors and issuers. In 2014, our Corporate & Investment Bank raised $61 billion for states, cities, governments and universities, including funds to renovate the historic Arthur Ashe (Tennis) Stadium in New York City, revenue bonds to assist municipalities and hospitals, and green bonds to finance environmentally beneficial projects such as green buildings, clean water and renewable energy. As a firm, we spend approximately $700 million a year on research so that we can educate investors, institutions and governments about economies, markets and companies. The needs of these clients will be met — one way or another — by large financial institutions that can bear the costs and risks involved. Simply put, if it is not done by a large American financial institution, it will be done by a large non–American financial institution.
Regional and community banks are critical to their communities — in fact, we are a huge supporter and their largest banking partner. These banks are deeply embedded in their communities, many of which are not served by larger banks. They have an intimate knowledge of the local economy and local small businesses, which allows them to cost–effectively serve those clients. JPMorgan Chase, as a traditional “money center bank” and “bankers’ bank,” in fact, is the largest banker in America to regional and community banks. We provide them with many services so they can continue to serve their clients. For example, we directly lend to them, we process payments for them, we finance some of their mortgage activities, we raise capital for them (both debt and equity), we advise them on acquisitions, and we buy and sell securities for them. We also provide them with interest rate swaps and foreign exchange both for themselves — to help them hedge some of their exposures — and for their clients.
However, large does not necessarily mean complex (and things should be complex only for a good reason)
Many of the activities we do that are considered large are easy to understand. All of our 5,600 Chase consumer branches do essentially the same thing, and many of our large global transactions are not any more complicated than a loan for a middle market client.
While we agree with the concept that you should keep things as simple as possible, some things, by their very nature, are more complex. And that complexity cannot be reduced by wishful thinking. In fact, basic lending, whether to a large company or a midsized company, is one of the more complex things we do because one must understand the economy, the nature of the business and often the types of collateral involved. There are many judgmental factors to consider as well, which might include the character of the borrower, the growth prospects of the business, and an understanding of the products and services and technology of the business.
There are understandable questions about the role that large financial institutions play. Some of these questions make people nervous, in part because they do not understand the larger picture. These are important questions, and we always are willing to help explain what we do and why we do it. Taken in small component pieces, these activities generally are easier to understand. While some may criticize a bank’s activities instead of taking the time to understand them, this does not contribute to a genuinely constructive dialogue around the role of banks.
People also should ask themselves one basic question: Why do banks offer these services? The fact is, almost everything we do is because clients want and need our various and sometimes complex services. (We do many activities that are ancillary to clients’ direct needs, but we must do these things to provide clients with what they need. For example, in order to support our operation, we run global data centers, we hedge our own exposures and we maintain liquid pools of investments.)
I would venture to say that banking is not as complex as making airplanes, discovering effective pharmaceuticals, building safe cars, developing innovative electronics and, of course, understanding nuclear physics. There are huge benefits to the complexity involved in those other industries — but there also are sometimes negative consequences. The question for society is: Are we, in total, better off or worse off because of some of the great products and services that come with complexity? The answer in our opinion is a resounding yes, though you should always strive to minimize the risks. But we want to acknowledge that the difference with banks, as pointed out by critics, is that if and when they make mistakes, they can severely harm the economy. This concern is legitimate, and I will talk about it in a later section.
Larger does not necessarily mean more risky
For example, many large banks had no problem navigating the financial crisis, while many smaller banks went bankrupt. Many of these smaller banks went bankrupt because they were undiversified, meaning that most of their lending took place in a specific geography. A good example was when oil collapsed in the late 1980s. Texas banks went bankrupt because of their direct exposure to oil companies and also because of their exposure to real estate whose value depended largely on the success of the oil business. Since the crisis began seven years ago, more than 500 smaller banks have gone bankrupt, and JPMorgan Chase has contributed approximately $8 billion to the Federal Deposit Insurance Corporation to help pay for the resolution of those banks.
And, yes, there are both costs and benefits to size and complexity
The benefits of size are obvious: huge economies of scale, the ability to serve large clients and make large investments, and safe diversification, among others. And, yes, there sometimes are clear negatives to size — usually in the form of arrogance, greed, complacency or lack of attention to detail. (There also are many small businesses afflicted with these diseases — they kill companies both large and small.) Good companies get the benefits of size and continuously are fighting off the negatives. And there are lots of winners and losers, particularly as industries consolidate. In every industry, you will see companies that benefit from size — and those that don’t.
Our size and strength allow us to create benefits for society by helping economies and communities around the world grow and prosper
We are able to do our part in supporting communities and economies around the world because we are strong, stable and permanent. And because of this strength and stability, we can continue to support our clients in good times and, more important, in the toughest of times. The most important thing we can do is keep our company healthy and vibrant so that we can serve the needs of customers, consumers and businesses and help local economies and the thousands of cities and various communities around the world where we operate to grow and prosper.
In addition, we strongly believe in being a good corporate citizen. We are one of the most philanthropic companies in the world (we give away more than $200 million a year), but we are able to do much more than provide money. We bring the skills, resources and global knowledge of our entire firm to support the economic growth and progress of communities across the globe. One example is our research, such as studying how our communities analyze labor market conditions so they can get better at training people for jobs or how cities can further develop their economies. See Peter Scher’s Corporate Responsibility letter for more details on our efforts to support cities and communities around the globe. Following are three unique initiatives that we’d like to focus on:
JPMorgan Chase Institute. We will be officially launching an exciting new initiative called the JPMorgan Chase Institute, which is a global think tank dedicated to delivering data–rich analyses, expert insights and thought leadership for the public good. Drawing on the knowledge, market access, broad relationships and resources across the firm, the JPMorgan Chase Institute will help inform both business and policy decisions by grounding them with facts, data and thoughtful analysis. Our aim is to help decision makers — policymakers, businesses and nonprofit leaders — appreciate the scale, granularity, diversity and interconnectedness of the global economic system to inform smarter decisions and good policies that advance global prosperity for consumers, businesses and countries. The research agenda will include groundbreaking analytic work on the financial behavior of individuals, insights on the small business sector, and expert profiling of global trade and capital flows.
Detroit. We brought all of our resources to bear in a special, coordinated way, which we never have done before, to try to help the city of Detroit. We have been doing business there for more than 80 years and already are the largest consumer, commercial and investment bank serving Detroit’s consumers and companies. But we wanted to do more to help kick–start the city’s recovery. This effort is a $100 million commitment, which includes investments, philanthropy and our people working in tandem with a set of city leaders who have come together to work toward a common purpose. Our initial interest in undertaking this effort was made possible because of our faith in the extraordinary work and talent of Mayor Duggan and Gov. Snyder (and Kevyn Orr, who recently left as Emergency Manager). Their dedication to coherently, comprehensively and pragmatically attacking the city’s enormous problems made us want to do more. In fact, everything we have done to help is the result of asking a broad array of the city’s leaders what they really needed and then working with them to come up with some creative solutions. Let me give just a few examples:
- We expanded the city’s effort to systematically map every single parcel in Detroit and provided the technology assistance so that residents can use their phones to continually update the database.
- We helped provide financing for people who wanted to purchase land or to buy and renovate homes.
- We supported nonprofit organizations, including Focus: HOPE, in their efforts to help people gain skills from job training programs.
- We helped small businesses get access to the advice, training and other resources needed to grow, including a new commercial kitchen at Eastern Market that will allow more food businesses to expand.
- We provided lending for development — both commercial development to let businesses like Global Titanium expand jobs and residential development and new construction of apartment buildings in Detroit’s urban core and neighborhoods.
- We created the Detroit Service Corps to bring more than 50 of our top managers to work full time with Detroit nonprofits to help them analyze challenges, solve problems and give them the best chance for success.
Helping Detroit’s economy recover and thrive would be a shining example of American resilience and ingenuity at work.
Military and veterans. Another effort that we want you to know about is what JPMorgan Chase has done to help position military members, veterans and their families for success in their post–service lives through employment, housing and educational programs. In 2011, JPMorgan Chase and 10 other companies launched the 100,000 Jobs Mission, setting a goal of collectively hiring 100,000 veterans. The 100,000 Jobs Mission now includes more than 190 companies that have collectively hired more than 217,000 veterans since 2011 and has pledged to hire a total of 300,000 veterans. JPMorgan Chase hired over 1,800 veterans in 2014, nearly a 40% year–over–year increase, for a total of nearly 8,700 veterans hired since 2011. Further, we expanded our employment programs to address the unique needs of women veterans and military spouses. We hope that this makes you as proud of JPMorgan Chase as it does for all of us.