Headquartered in New York City, JPMorgan & Chase (JPM) is a financial holding company that competes worldwide, serving customers for more than 200 years, making it one of the oldest financial intuitions in the USA. Considered to be the largest bank in the USA, JPM has total assets of more than $2.3 trillion and employs more than 240,000 people in more than 60 countries around the globe. JPM’s stock is one of the 30 components of the Dow Jones Industrial Average. The hedge fund unit of JPM is one of the largest in the USA.
JPM in mid-2013 announced plans to stop trading in physical commodities, but in August 2013, JPM purchased the over-the-counter business in commodity derivatives of Switzerland’s UBS AG. The deal excluded precious metals and index-based trades, but included hedge positions on financial exchanges. Zurich-based UBS is closing the majority of its commodities “flow” trading business involving raw materials and financial derivatives as part of its slimming down and laying off 10,000 employees.
JPM operates under two principle brands, (1) JPMorgan and (2) Chase. The JPMorgan brand focuses on large multinational corporations, governments, wealthy individuals, and institutional investors. The Chase brand is further divided into two distinct segments: (1) consumer business and (2) commercial banking business. The Chase consumer business includes such businesses as traditional bank branches, ATMs, credit cards, home finance, retirement and investing, and merchant services among others. The Chase commercial banking business includes such areas as business credit, corporate client banking, commercial term lending, and community development. The two JPM brands overlap so much in terms of regions and products that the company does not report revenues or income by the two brands.
Copyright by Fred David Books LLC. (Written by Forest R. David)
Dating back to 1799, JPM is one of the oldest financial institutions in the world. The heritage of the House of Morgan traces its roots to the partnership of Drexel, Morgan & Co., which in 1895 was renamed J.P. Morgan & Co. Arguably the most influential financial institution of its era, J.P. Morgan & Co. financed the formation of the United States Steel Corporation, which took over the business of Andrew Carnegie and others and was the world’s first billion-dollar corporation. In 1895, J.P. Morgan & Co. supplied the United States government with $62 million in gold to float a bond issue and restore the treasury surplus of $100 million. In 1892, the company began to finance the New York, New Haven, and Hartford Railroad and led it through a series of acquisitions that made it the dominant railroad transporter in New England. Although his name was big, Morgan owned only 19 percent of Morgan assets. The rest was owned by the Rothschild family following a series of bailouts and rescues attributed by some to Morgan’s stubborn will and seemingly “nonexistent” investment savvy.
In 2004, JPM merged with Chicago-based Bank One Corp., bringing on board current chairman and Chief Executive Officer (CEO) Jamie Dimon as president and Chief Operating Officer and designating him as CEO William Harrison, Jr.’s successor. Dimon’s pay was pegged at 90 percent of Harrison’s. Dimon quickly made his influence felt by embarking on a cost-cutting strategy, and replaced former JPMorgan Chase executives in key positions with Bank One executives—many of whom were with Dimon at Citigroup. Dimon became CEO and chairman of JPM in 2006.
JPM has acquired more than 1,200 financial institutions over its life. Several key acquisitions during the last 20 years include in 1991 Chemical Banking Corp., the second largest bank in the USA and in 1995, First Chicago Corp., the largest bank in the Midwest. The acquisition responsible for the current name of the company was in 2000 when J.P. Morgan & Co. merged with The Chase Manhattan Corp. In 2010, JPM acquired Cazenove, an advisory and underwriting joint venture established in 2004 in the United Kingdom. Since 2010, JPM has refrained from making acquisitions that had historically been its trademark.
Vision and Mission
JPM does not list a formal mission statement, but the company vision statement is:
· At JPMorgan Chase, we want to be the best financial services company in the world. Because of our great heritage and excellent platform, we believe this is within our reach.
Some analysts contend that JPM has organizational design problems because there are numerous CEOs, no presidents, dual-title individuals, lack of a clear JP Morgan-versus-Chase dichotomy, and overall, too many top-level executives. As best as can be determined, the existing organizational chart for JPM is given in Exhibit 1 . Note that Jamie Dimon is both chairman of the board and CEO, a practice being shunned by more and more by corporations.
In 2013, the company replaced its Chief Financial Officer, Doug Braunstein, with Marianne Lake, who is now one of the most powerful women on Wall Street. Lake joins asset-management chief Mary Erdoes as the only two women on the bank’s elite 14-member operating committee.
JPM has an extensive Code of Conduct and Code of Ethics posted on its website. Part of the company’s code of conduct says in part: “The Code is based on our fundamental understanding that no one at JPMorgan Chase should ever sacrifice integrity—or give the impression that they have—even if they think it would help the firm’s business.” The company’s code of ethics is more lengthy, and says in part: “The purpose of this Code of Ethics is to promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of the firm’s financial books and records and the preparation of its financial statements.”
Despite having extensive ethical-based statements, JPM has had its fair share of ethical issues over the years. In January 2011, JPM admitted that it wrongly overcharged several thousand military families for their mortgages, including active-duty personnel in Afghanistan. The bank also admitted it improperly foreclosed on more than a dozen military families; both actions were in clear violation of the Service Members Civil Relief Act, which automatically lowers mortgage rates to 6 percent and bars foreclosure proceedings of active-duty personnel. The overcharges may have never come to light were it not for legal action taken by Marine Capt. Jonathan Rowles, a fighter pilot. Both Captain Rowles and his spouse Julia accused Chase of violating the law and harassing the couple for nonpayment.
In April 2012, hedge fund insiders became aware that the market in credit default swaps was possibly being affected by the activities of Bruno Iksil, a trader for JPM, referred to as “the London whale” in reference to the huge positions he was taking. Heavy opposing bets to his positions are known to have been made by traders, including another branch of JPM that purchased the derivatives offered by JPM in such high volume. Early reports were denied and minimized by the firm in an attempt to minimize exposure. Major losses of $2 billion were reported by the firm in May 2012 in relationship to these trades and updated to $4.4 billion on July 13, 2012. The disclosure, which resulted in headlines in the media, did not disclose the exact nature of the trading involved, which remains in progress and as of June 28, 2012, was continuing to produce losses that could total as much as $9 billion under worst case scenarios. The item traded, possibly related to CDX IG 9, an index based on the default risk of major U.S. corporations, has been described as a “derivative of a derivative.” On the company’s emergency conference call, JPM CEO Jamie Dimon said the strategy was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored.” The episode is being investigated by the Federal Reserve, the Securities and Exchange Commission (SEC), and the FBI.
JPM strategies revolve around the areas of (a) international expansion of its wholesale business and global corporate bank, (b) small business growth, (c) commodities, (d) growth in branch network, and (e) growth in private client business.
EXHIBIT 1 JPM’s Organizational Chart
Source: Extrapolated based on executive titles given on the corporate website.
JPM’s international expansion strategy aims to increase the firm’s global presence through an aggressive international expansion plan. JPM is focused on expanding its asset management, investment bank, and treasury and securities services segments in Asia, Latin America, Africa, and the Middle East. Additionally, slowly expanding into newly emerging or even frontier markets, JPM’s clients in this expansion plan include multinational corporations, sovereign wealth funds, and public entities. In 2008, JPM had approximately 200 clients in Brazil, China, and India combined, but by 2012, the number of clients in these nations had expanded to 800. By 2017, JPM is expected to have more than 2,000 clients in these nations.
U.S. small businesses remain a central focus of the Chase arm of JPM. In 2011 alone, Chase provided more than $17 billion of credit to domestic small businesses, up 52 percent from 2010, indicating Chase believes the economic recovery is robust enough to tolerate any short-term downward pressures. The $17 billion of credit in 2011 makes Chase the number-1 Small Business Administration (SBA) leader nationwide for the second straight year. In addition, JPM is also the number-1 SBA lender to women- and minority-owned businesses. To help facilitate growth in the small business arm, JPM has added more than 1,200 relationship managers and business bankers since 2009 and anticipates an aggressive hiring of bankers for the foreseeable future.
With the 2011 acquisition of Sempra, JPM is currently one of the top-three firms in the world in commodity dealings. Growth from 2011 to 2012 grew by 10 percent to bring total commodity clients to more than 2,200, as well as increased commodity packaging and selling to existing clients. JPM expects commodity demand to increase with the growth of emerging markets and anticipates increased business in the various commodity asset classes the firm currently offers.
Surprising to some, JPM is actively growing its physical branches despite many predictions from outside pundits who suggest that brick-and-mortar branches are a relic of the past. JPM’s own research suggests however that although 17 million JPM customers do much of their banking business online, they still value a face-to-face conversation when it comes to taking out a mortgage, applying for a credit card, or seeking general financial advice in a physical branch location. Currently 45 percent of Chase credit cards and 50 percent of retail mortgages are sold on site at branch locations.
Within its two brands, JPM operates under seven major business segments as indicated in Exhibit 2 , with respective revenues given. Note that JPM’s revenues have been declining in three of the seven segments.
Exhibit 3 provides a breakdown of JPM revenues and net income over the geographic regions where the bank does business. Note that North America accounts for 81 percent of revenues and 86 percent of net income. Note also the dramatic drop in North American revenues in 2011 associated with a dramatic increase in associated net income.
Within JPM’s investment bank segment, $8,303 million of the $26,274 million was derived from noninterest sources, with the balance of $17,971 derived from interest sources. Clients of the investment bank division include corporations, financial institutions, and government and institutional investors. Investment bank activities include advising on business strategy and structure, raising capital though debt or equity, derivative instruments, prime brokerage, and research.
Exhibit 4 provides a geographic breakdown of JPM’s investment bank segment. Note the decline in revenue from North America and Asia and Pacific, but the increase in revenue from other areas globally. Total 2011 net income from this division totaled $1,678 million.
Bonds trading is an important part of JPM’s Investment Bank. A Wall Street Journal article (11-2-12, p. C3) reported that JPM’s 12.3 percent market share in the USA in bonds trading was the largest among all banks, followed by Deutsche Bank (10.5 percent), Barclays (9.9 percent), Bank of America (9.6 percent), and Goldman Sachs (8.3 percent). A part of fixed-income operations, bond-trading is risky business. That is why UBS AG recently exited the bond-trading business to focus its investment bank on less-risky businesses such as advising on mergers and stock underwriting.
EXHIBIT 2 JPM’s Financial Results by Segment (in millions $)
|Revenue by Product||2012||%Change||2011||2010|
|Consumer & Community Banking||49,945||+9||45,687||48,927|
|Corporate & Investment Bank||34,326||+1||33,984||33,477|
|Net Income by Product||2012||2011||2010|
|Consumer & Community Banking||10,611||+71||6,202||4,578|
|Corporate & Investment Bank||8,406||+05||7,993||7,718|
|Return on Equity (%) by Product||2012||2011||2010|
|Consumer & Community Banking||25||15||11|
|Corporate & Investment Bank||18||17||17|
EXHIBIT 3 JPM’s Revenues and Net Income by Region Globally (in millions)
|Europe, Middle East. and Africa||$10,522||$16,212||$14,135||$16,294||$1,508||$4,844||$3,635||$5,212|
|Asia and Pacific||5,605||5,992||6,073||5,429||$1,048||1,380||1,614||1,286|
|Latin America and Caribbean||2,328||2,273||1,750||1,867||$454||340||362||463|
Source: Annual Report, page 300.
EXHIBIT 4 JPM’s Investment Bank Revenue Breakdown by Region (in millions)
|Europe, Middle East, and Africa||8,418||7,380||9,164|
|Asia and Pacific||3,334||3,809||3,470|
|Latin America and Caribbean||1,079||897||1,157|
Source: 2011 Annual Report, page 84.
Retail Financial Services
JPM’s retail financial services segment accounts for about 27 percent of 2011 net revenues with $10,405 million of the segments, $26,538 million being derived from noninterest sources, with the balance of $16,133 derived from interest sources. The retail financial services segment includes: bank branches, ATMs, mortgages, real estate, among others. JPM customers have access to more than 17,200 ATMs and 5,500 bank branches. The Chase business segment currently services more than 8 million loans in 23 states and services more than $150 billion of mortgage originations each year.
Exhibit 5 provides a breakdown of businesses within JPM’s financial services segment. Note the decreases in both revenue and net income in 2011.
Card Services and Auto
JPM’s credit card services and auto segment accounted for about 19 percent of 2011 net revenues with $4,892 million of the segments, $19,141 million being derived from noninterest sources with the balance of $14,249 derived from interest sources. The segment accounts for more than $132 billion in credit card loans with over 65 million open credit card accounts, making JPM one of the largest credit card issuers in the USA. JPM customers can also obtain financing through 17,200 auto dealerships and 2,000 schools and universities. Exhibit 6 provides a breakdown of businesses within JPM’s credit card and auto segment. Note the reduction in revenues but increase in net income over the last three years.
JPM earned an all-time record of $19 billion in net income in 2011, up 9 percent from the previous record of $17.4 billion the prior year. The company’s net income would have been considerably more, except for losses from the JPM mortgage business. Mortgage losses are expected to continue for a while longer, but the bulk of JPM bad mortgages have already been absorbed.
JPM’s recent income statements are provided in Exhibit 7 . Note the unusual decline in revenue associated with the increase in net income.
EXHIBIT 5 JPM’s Retail Financial Services Revenue Breakdown by Product (in millions)
|Lending- and deposit-related fees||$3,190||$3,061||$3,897|
|Asset management, administration, and commissions||1,991||1,776||1,665|
|Mortgage fees and related income||2,714||3,855||3,794|
|Credit card income||2,025||1,955||1,634|
Source: 2011 Annual Report, page 85.
EXHIBIT 6 A Breakdown of JPM’s Credit Card Business (in millions)
|Credit card revenue||$4,127||$3,514||$3,613|
Source: 2011 Annual Report, page 94.
JPM reinstated its annual dividend of $1.00 per share in April of 2011 and increased it to $1.20 a share in April of 2012. Although JPM’s goodwill has remained the same over the last three years, total goodwill of $48 billion indicates a history of paying more than fair market value for many acquisitions. JPM’s long-term debt is declining as shown in Exhibit 8 .
EXHIBIT 7 JPM’s Income Statement (in millions)
|Interest Income, Bank||56,063.0||61,293.0||63,782.0|
|Total Interest Expense||11,153.0||13,604.0||12,781.0|
|Non-Interest Income, Bank||52,121.0||49,545.0||51,693.0|
|Loan Loss Provision||3,385.0||7,574.0||16,639.0|
|Non-Interest Expense, Bank||64,729.0||62,911.0||61,196.0|
|Income Before Tax||28,917.0||26,749.0||24,859.0|
|Income Tax Total||7,633.0||7,773.0||7,489.0|
|Income After Tax||21,284.0||18,976.0||17,370.0|
|Equity In Affiliates||0.0||0.0||0.0|
|U.S. GAAP Adjustment||0.0||0.0||0.0|
|Net Income Before Extra Items||21,284.0||18,976.0||17,370.0|
|Total Extraordinary Items||0.0||0.0||0.0|
Source: Company documents.
Banks are seemingly everywhere on every corner and online. Some analysts say bank products and services are becoming more and more like commodities, all being similar. An interesting note is that foreign banks have not yet penetrated into the U.S. marketplace. But online banks are proliferating.
JPM competes with literally hundreds of banks but a few key rivals are showcased in Exhibit 9 . Note that JPM has higher revenue per employee and earnings per share (EPS) than Bank of America or Citigroup.
Bank of America
Headquartered today in Charlotte, North Carolina, and having total assets exceeding $2.5 billion, Bank of America is the second largest U.S. bank, trailing only JPM, and is the largest bank according to number of employees. Bank of America has a relationship with 99 percent of the Fortune 500 companies and 83 percent of the Fortune Global 500. The 2008 acquisition of Merrill Lynch made Bank of America the world’s largest wealth management corporation and a major player in the investment banking market.
As of May 2012, Bank of America served more than 5,700 banking centers and had more than 17,000 ATMs serving customers in more than 150 countries and had branches in more than 40 countries. During 2011, Bank of America began laying off an estimated 36,000 people, contributing to intended savings of $5 billion per year by 2014. In December 2011, Forbes ranked Bank of America’s financial health 91st out of the nation’s largest 100 banks and thrift institutions. Bank of America will cut around 16,000 jobs in a quicker fashion by the end of 2012 as revenue continues to decline because of new regulations and a slow economy. This will put a plan one year ahead of time to eliminate 30,000 jobs under a cost-cutting program called Project New BAC. Bank of America generates 90 percent of its revenues in its domestic market and continues to buy businesses in the USA. The core of Bank of America’s strategy is to be the number-one bank in its domestic market. It has achieved this through key acquisitions.
EXHIBIT 8 JPM’s Balance Sheets (in millions)
|Cash & Due From Banks||53,723||59,602||27,567|
|Other Earning Assets, Total||1,358,307||1,271,811||1,174,042|
|Property/Plant/Equipment, Total – Net||14,519||14,041||13,355|
|Long Term Investments||0||0||0|
|Other Long Term Assets, Total||0||0||0|
|Other Assets, Total||162,708||165,609||175,438|
|Liabilities and Shareholders’ Equity|
|Other Bearing Liabilities, Total||0||0||0|
|Total Short Term Borrowings||392,762||362,048||415,551|
|Notes Payable/Short Term Debt||0||0||0|
|Current Port. of LT Debt/Capital Leases||0||0||0|
|Other Current Liabilities, Total||0||0||0|
|Total Long Term Debt|
|Deferred Income Tax||0||0||0|
|Other Liabilities, Total||61,262||66,718||76,947|
|Redeemable Preferred Stock||0||0||0|
|Preferred Stock – Non Redeemable, Net||9,058||7,800||7,800|
|Additional Paid-In Capital||94,604||95,602||97,415|
|Retained Earnings (Accumulated Deficit)||104,223||88,315||73,998|
|ESOP Debt Guarantee||0||0||0|
|Unrealized Gain (Loss)||0||0||0|
|Other Equity, Total||4,081||906||948|
|Total Liabilities & Shareholders’ Equity||2,359,140||2,265,792||2,117,605|
|Total Common Shares Outstanding||3,803.95||3,772.7||3,910.3|
Source: Company documents.
Citigroup was formed on October 9, 1998, following the $140 billion merger of Citicorp and Travelers Group to create the world’s largest financial services organization. The history of the company is comprised of many acquired firms such as the City Bank of New York (later named Citibank) in 1812; Bank Handlowy in 1870; Smith Barney in 1873, Banamex in 1884; and Salomon Brothers in 1910.
EXHIBIT 9 A Synopsis of Large Banks
|JPM||Bank of America||Citigroup|
|Number of Employees||261K||279K||263K|
|Net Income ($)||17.5B||−1.31B||10.7B|
|EPS Ratio ($)||4.5||−0.13||3.59|
Source: Company documents.
Based today in New York City, Citigroup is a diversified financial services holding company broken down into two segments, Citicorp and Citi Holdings, providing global banking, advisory services, derivative services, brokerage, and much more. Citigroup today is the largest banking enterprise in the world based on geographic coverage with operations in 140 nations and more than 16,000 offices worldwide.
On Tuesday, March 13, 2012, the Federal Reserve reported Citigroup as one of the 4 financial institutions, out of 19, that have failed its stress tests. The tests make sure banks have enough capital to withstand huge losses in a financial crisis like one Citigroup faced in 2008 and early 2009 when it almost collapsed. The 2012 stress tests determine whether banks could withstand a financial crisis with unemployment at 13 percent, stock prices cut in half, and home prices decreased by 21 percent from current levels. According to Citi and the Federal Reserve stress test report, Citi failed the stress tests because of Citi’s high capital return plan and its international loans rated by the Federal Reserve to be at higher risk than its domestic U.S. loans. Citi gets half their revenues from its international businesses. In comparison, Bank of America, which passed the stress test and did not ask for a capital return to investors, gets 78 percent of its revenue in the USA.