JPMorgan CEO’s subtle message to regulators

Investors are used to hearing company executives on earnings calls and in presentations sugarcoat the performance of their business. So it’s surprising when there’s a straight-up admission that “despite our best efforts, the moats that protect this company are not particularly deep.” When the speaker is JPMorgan Chase & Co Chairman and Chief Executive Officer Jamie Dimon in his annual letter to shareholders, attention must be paid.
It’s a disorienting statement because it doesn’t track the spin to which we’ve grown accustomed from the modern CEO. Deutsche Bank AG’s Christian Sewing, for example, told investors last month, that “as the biggest private bank in Germany with a leading advisory and investment offering, we have a unique position to leverage Germany’s strengths.” The superlative language belies Deutsche Bank’s relatively low market share in domestic banking.
Monopolistic companies, in contrast, need to be careful to avoid attracting the scrutiny of policy makers, so they might downplay their market position. “We face an extremely competitive landscape in which consumers have a multitude of options to access information,” Google’s former chairman Eric Schmidt once told a Congressional hearing.
But JPMorgan is not a monopoly. And while it’s big, for sure, its share of US deposits of close to 12% is far removed from Google’s share of online searches, which hovers around 90%. So is Jamie Dimon just being refreshingly honest, or is there an underlying message in his statement?
The answer can be inferred from his intended audience, and Dimon may not be addressing shareholders at all but regulators. In fact, his letter made the same point as Schmidt did in very similar language: “We face extraordinary competition.” Yet rather than try to protect his company’s position from their glare, Dimon wants to focus attention on the burgeoning unregulated sector circling his business.
Dimon charted how the regulated financial sector — of which JPMorgan is a part — has shrunk over the years, while the shadow bank and nonbank sectors have grown.
A universe that includes
investment-management firms, cryptocurrencies, neobanks, global exchanges and financial-data companies are encroaching on his business, unconstrained by the rules that limit JPMorgan’s activities. Dimon notes that while the total value of US debt and equities has increased by 2.4 times since 2010, the combined value of the country’s largest banks has increased by 88%.
Other data confirms that banks have indeed lost their position as primary intermediaries of financial services. According to Federal Reserve statistics, banks now do less than half the lending in every major loan category except consumer — and even there, banks represent barely 50% of the market. In mortgages, their share of new originations is 32%, down from 91% in 2010; in leveraged lending, it’s 13%, down from 46% in 2000. Any hope that an economic downturn would shake out non-bank lenders and repatriate share back to banks turned out to be transient — non-banks gained share, particularly in commercial credit and residential mortgages, in the past two years.

—Bloomberg