In 2021, JPMorgan Chase (JPM 1.09%) had noninterest expenses of $71.3 billion. In 2022, expenses rose nearly 7% to $76.1 billion. For 2023, management is guiding for another 6.5% boost to expenses to bring them to roughly $81 billion.
JPMorgan is a best-in-breed bank stock, but if you want to rile up investors and analysts, raising expenses steadily is an easy way to do it, especially with multiple peers holding expenses flat or managing minimal growth. Should investors be concerned after two big years of expense increases at the largest bank in the U.S.? Let's take a look.
Putting the higher expenses into context
As described in its fourth-quarter earnings presentation, JPMorgan will see higher expenses due to higher labor costs and additional hiring, and higher deposit assessment fees to the Federal Deposit Insurance Corporation. Additionally, the bank will continue to invest in its tech infrastructure and is planning to hire more bankers and advisors, build more branches, and spend more on marketing.
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Investors don't just look at expense increases in a vacuum, however. The bigger picture has more to do with a bank's efficiency ratio and operating leverage.
An efficiency ratio looks at expenses expressed as a percentage of revenue, while operating leverage looks at how fast a bank is growing revenue, compared to expenses. The idea is that if a bank invests in its business appropriately, it will pay off down the line and translate into more operating leverage and a lower efficiency ratio.
For the full year of 2022, JPMorgan essentially had negative operating leverage, as expense growth outpaced revenue growth. But revenue accelerated in the back half of the year, thanks to the Federal Reserve's intense interest-rate hikes, which boosted net interest income (NII), the money banks make on loans and securities after funding those assets. In Q4, JPMorgan generated superb operating leverage on a quarterly basis, thanks to 6% revenue growth and a 1% drop in expenses.
JPMorgan has also done a pretty good job with its efficiency ratio over the last year, regularly outperforming peers. In Q4, the bank delivered a strong 55% efficiency ratio.
Of course, interest rates have risen at a nearly unprecedented rate over the past year, which boosts NII, a key revenue line item. Banks are supposed to be generating great operating leverage and lower efficiency ratios right now. A better question might be, what will the efficiency ratio look like in a more normalized environment once interest rates stabilize?
Should investors be worried?
I doubt investors will be thrilled to see two straight years of large expense hikes, but as the biggest bank operating in many different areas, JPMorgan faces competition from everywhere. It's important that the bank continues to invest for its future while still in strong shape. Additionally, with revenue getting a lift from the Fed through higher NII, it's not a bad time to spend, as revenue is growing.
Finally, JPMorgan has been generating great returns for many years, and the higher expenses don't seem to have lowered the bank's return goals for 2023. CEO Jamie Dimon clearly knows how to manage expenses and has proven it time and again. He deserves some latitude from shareholders.
