Over the last decade, Jamie Dimon has shrewdly steered JPMorgan Chase (JPM 1.10%) through one of the most challenging periods in the history of American banking. The nation's biggest bank by assets didn't only survive the financial crisis of 2008, it thrived as a result of it, picking up two pivotal acquisitions for pennies on the dollar and gaining significant market share in the world of investment banking.
When Dimon speaks, in other words, avid bank stock investors should listen. With this in mind, here are three of the most trenchant points he made at last week's Barclays Global Financial Services Conference -- click here for the full transcript:
1. Serving clients not regulators
The last few years have been a regulatory whirlwind for the nation's biggest banks. The Dodd-Frank Act spawned hundreds of new rules and regulations. Banks are now stress tested once a year by the Federal Reserve, which uses the results to determine whether banks can increase the amount of money they return to shareholders. And substantial changes were made to capital and liquidity requirements that are still in the midst of phasing in over a multi-year period.
The net result is that banks have been focused as much on serving regulators over the last few years as they have been on serving clients. According to Dimon, however, this should begin to change, as banks acclimate to the heightened regulatory environment:
I think the next 3 years, hopefully, will be better. By the end of this year, we'll have NSFs, TLAC, another year of CCAR. These things will be more and more embedded in how we run the company and the pace of change will be a little bit slower so we can focus more on the business. I do think that banks have to make sure they're serving clients, not just serving regulators.
2. On China...
Everyone in the financial world is talking about China right now. Not only has its once-rapid economic growth slowed down, but a massive bubble in its equity markets seems to have popped over the past year. This triggered elevated volatility in U.S. markets that culminated in a 9% decline in the S&P 500 since the middle of last month.
The good news is that Dimon believes this is all temporary. As he explained:
I think what you just saw was a speed bump in China. Our view of China is that in 20 years, it will be a large developed nation, probably housing 20% to 25% of the global Fortune 2000 or something, and that's what we're keeping our eye on. We know that between here and then, they are going to have some serious bumps in the roads and maybe even a rut like we had in '08 or '09. The reason for that -- and I think they're very bright. The reason for that, though, is they have a lot of issues they got to deal with.
3. Accounting for higher capital requirements
Being the biggest and most important bank in the global financial system, as JPMorgan Chase is, is a two-edged sword. On one hand, it has the scale and reputational cache to serve the world's best clients more effectively and efficiently than its competitors. But, on the other hand, in today's post-crisis regulatory system, it also means that JPMorgan Chase is subject to heightened capital standards.
Nowhere is this more obvious than the so-called G-SIFI surcharge, which requires the biggest and most complex financial institutions in the world to hold more capital than their smaller, simpler rivals. This is a huge competitive disadvantage for any bank that's singled out, as JPMorgan Chase is, because driving down leverage at banks, which make money first and foremost by acquiring interest-earning assets with borrowed funds, necessarily drives down profitability.
It's for this reason that Dimon seems intent on tweaking JPMorgan Chase's business model in a way that will bring its capital requirements more in line with its competitors. And one of the ways it's doing so is to reduce its exposure to volatile, "non-operating" deposits presumably from the likes of hedge funds.
As Dimon explained:
So when G-SIB, when the final rules came out, we were an outlier 4.5%. And we don't want to be an outlier. I think it's bad place to be. So we want to, over time, become close to everybody else. We announced just one thing that we're going to do -- reduce our nonoperating deposits by $100 billion -- and we've done that. And we can probably do another $100 billion. But obviously, the first one is easier, and it was kind of no-regrets $100 billion. The second one was a little harder. Going back -- going out to your clients and saying, "We don't want your money," is a very funny thing for banks to do. And -- but we have done it.
The point here is that JPMorgan Chase is dedicated to doing the hard things that are necessary to operate profitably in the post-financial crisis world. It's impossible to say whether this offers the $2.5 trillion bank a durable competitive advantage that will last for decades, but it isn't impossible to say that shareholders can rest easy so long as Dimon is at the helm.