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Vol. VII, No. 3


Financial Services Insights and Intelligence

FIRST WORD: My conversation yesterday with Jamie Dimon. Yesterday, I went to Manhattan to meet with JPMorgan Chase CEO Jamie Dimon. In my job, I am very fortunate to be able to meet with outstanding CEOs of financial services companies of all sizes. Dimon is unique, however. After each of our meetings I think about what makes him different, and keep coming back to two things:

He knows the details as well as the big picture. Somehow, despite the complexity of JPMorgan, Dimon knows how all of his businesses operate from the front end right on through to the back end. Most CEOs know the businesses they are in from a high level, but few can drill down like Dimon. In this regard, he reminds me of Sam Walton and Warren Buffett.

His decisionmaking is a combination of data-driven analytics and common sense. A good example is a story he told me about a branch his retail team wanted to close in a remote location of Greenwich, Conn. The analytics suggested that the branch wasn’t profitable on a standalone basis. It was the only branch within a six-mile radius. Chase could close the branch, and Chase’s next-closest branch was as close as anyone else’s. Dimon looked at the situation and found the branch has a very high market share of retail and small-business customers in that small area. It might not be profitable on its own, but Dimon concluded the branch was important to the company’s branch-network effect. In this regard, he reminds me of Vernon Hill, the retail banking genius.

For the last few years when Dimon is asked about how long he thinks he will remain as CEO, he’s said, “another five years.”  It has become something of a joke because the answer never changes despite the passage of time. On the way out, I said to him, “Don’t stop after the next five,” and he just smiled and said, “Tom, I am 65. But don’t worry, I am not going to just go play golf.”  Here are some highlights from our conversation.

Last week’s earnings conference call. JPMorgan reported both strong and better-than-expected earnings last Friday, but the stock closed down 6% on the day. It was an unusual conference call for the company because of the length of the prepared remarks by CFO Jeremy Barnum and because of the details he gave about different scenarios for various income statement line items. As I listened, I wondered what they were doing by going through a base case scenario for net interest income, then a downside case and upside case. When you are talking about a company the size of JPMorgan, an entire twelve-month period and an economic environment with so many uncertainties, it was too much to try to cover all the possible outcomes. I anticipate a simpler call next quarter. All Dimon told me is, “We could have done better.”

JPMorgan’s investment spending outlook confused and frustrated some analysts and investors. In his prepared remarks, Barnum indicated that the company’s total expenses were likely to rise 9% this year to $71 billion, largely because of an increase in investment spending. This was a higher level of expenses than most analysts were anticipating. There were several questions on the call about the investments and the payback period that the company probably didn’t fully anticipate. Dimon told me about 80% of the investment spending will go to things like expanding the branch network, the hiring of 1,000 new producers, and increased credit card marketing expense, where the payback is relatively short (less than two years) and very measurable. However, 20% of the investment spending was going for what I call strategic investments. For example, $1 billion of the spending is going to merit salary increases to retain key employees. More significant is the investment spending the company is making in its multi-year move to the cloud. You could try to come up with an IRR on these investments, but the analysis would just be garbage in, garbage out. JPMorgan announced last fall that it is moving its entire consumer bank’s core operating system to Thought Machine, which operates a cloud-based system. This move will eventually save the company around $30 million in operating costs, but that’s not the primary reason for the move. When the move is completed, all of JPMorgan’s consumer silos will be combined on one system, which will make the movement and use of data easier. It should greatly improve the company’s ability to raise the quality of the consumer experience it provides. Dimon reiterated to me that if he could spend even more money, say $2 billion, to move everything to the cloud faster, he would. JPMorgan’s elevated investment spending is the right thing to do to keep the company as an industry leader.

Risk of moving core to Thought Machine. Dimon reminded me that he has done quite a few systems integrations in his career, but the movement to Thought Machine as the core processor for the company’s consumer bank will be different, and much less risky, than prior integrations he’s done. Typically, when a bank merges its core system with another bank’s, there comes a point, after all the preparation, when a button gets pushed and all the data is converted. That won’t happen in this case. Rather, the conversion will be more gradual and manageable. The decision to move to Thought Machine was huge, and has the potential to be viewed as one of Dimon’s most consequential.

The future of community banks.  Dimon is a regular reader of the Weekly, and says he enjoys reading about successful community bank CEOs. He believes there will always be a future for well-run community banks in the U.S. I would add that to stay well-run, they have to maintain the community bank approach as they grow larger. That’s easier said than done.

Blockchain and crypto. Dimon believes there are areas where use of the blockchain can enhance the process, but not in all areas. He cited equity trading as an area where use of the blockchain would be both too slow and too expensive. As for cryptocurrencies, he prefers to call them crypto tokens. He sees incredible customer interest and demand for trading and ownership. JPMorgan will meet that demand, but Dimon wants to provide a warning to crypto holders about the speculative nature of the asset. He is also worried about how much leverage is being used by crypto purchasers. The company continues to search for more info, but there is no centralized data source.

The evolution of retail financial services. We talked about how in the 1990s the consolidation in retail financial services happened faster in various products such as credit cards, mortgages, home equity, and  discount brokerage than it did in the consolidation of companies that provided those services. The product consolidation included specialists such as First USA in cards, Countrywide in mortgages, and Ameritrade in discount brokerage. These specialists then followed one of two paths: they either sold to larger financial institutions or they essentially failed and then were acquired at distressed prices. There was one exception, Capital One, which bought banks to get access to dependable deposit-based funding and has thrived. Today, the dominant retail financial services providers are JPMorgan Chase and Bank of America, and they are winning because of their integrated approach to serving the consumer.

“We are not a conglomerate.”  The previous discussion led into a comparison with Citigroup’s approach under Sandy Weill, where he assembled an ever-growing financial services conglomerate. Dimon says he argued with Weill that this was the wrong approach. Dimon described how all the different pieces of JPMorgan feed off each other, such as the fact that one-third of the company’s investment banking revenues last year came from commercial-banking customers. Don’t think of JPMorgan as a conglomerate, because Dimon is working hard to operate it as one integrated machine.

When Dimon took over JPMorgan’s retail banking effort.  I told Dimon how bad Chase was in retail banking before he took over. Each year Second Curve would do a “branch hunt” in Manhattan to evaluate customer service at various banks, and Chase was always the worst, and provided plenty of entertaining stories. Dimon told me that when he took over, Chase’s branches, despite being located in some of the biggest markets in the country, were breakeven, on average, when he thought they should be making $2 million each. He said that half the problem was a bloated expense base, while the other half was that service levels were so bad that the sales out of the branches were too low. Prior to his arrival, Chase was trying to improve the profitability of the Manhattan branches by moving them to the second floor. Shortly after Dimon took over, he spoke after former Commerce Bank CEO Vernon Hill at an investor conference. In Hill’s presentation he included a picture of the Commerce Bank branch at 14th Street and Madison Avenue, with the Chase branch above, and crowed about the impressive deposit totals of the branch. Dimon went back and told his retail team, “This should never happen again.” Today, Chase is back on one corner at 14th and Madison, and Hill’s new bank, Republic Bank, is on the same corner as the old Chase and Commerce Bank location. Dimon says he learned a lot about retail banking from Hill.

Complacency. The last topic we covered was how a company that has enjoyed the success of JPMorgan Chase can avoid becoming complacent. I have asked this in each of our last several meetings, and his answer is always the same. He starts by quoting Bob Lipp, a respected executive Dimon consults with regularly, by saying “We emphasize the negatives.” He then went on to explain that the success of others, like Stripe, keeps the management team on their toes. Then he got a little more excited and said, “If you walk around this floor with me you won’t see any complacency,” and I believe him.

Each meeting with Dimon is different, yields more information, and is better. We can all learn both by listening to what he says and by watching what he does.

A UNITER, NOT A DIVIDER: You’d think this would be an awfully tough trick to pull off, but Larry Fink has somehow managed it:

ON THE RISE: Don’t look now, but on the PredictIt.org prediction market, Hillary Clinton’s chances of winning the 2024 Democratic presidential nomination have risen to one in ten.

BACKWARDS: Hang on. He’s acting as if he doesn’t realize this is a non-immaterial negative for companies like his. Bloomberg, on Tuesday:


Chime Financial started spotting customers if they went overdrawn in 2018, as U.S. banks clung to revenue from overdraft fees. Now, the startup’s co-founder is predicting an end to the charges altogether, as the likes of Bank of America Corp. and Wells Fargo & Co. ease up on the penalties.

“All of these are steps toward the inevitable, which is that, if not all, most of these fees will go away,” said Chris Britt, who is also chief executive officer of the company that scored a $25 billion valuation last year. “I think they’re just sort of taking baby steps to get there.” [Emphasis added.]

The startup has caused such disruption that the incumbents are changing.

ON OFFENSE: Oh, and while I’m on the topic of NSF fees going the way of the dodo bird, the big banks aren’t phasing out the fees just in reaction to competition from no-fee fintech models. They’re also ditching them to put pressure on their smaller competitors, who tend to be much more dependent on fee income. Size really can count for a lot in banking these days.

GONE GLOBAL: Hey, wait a minute. I thought jawboning the Fed was supposed to be our president’s job.

MORE MOVING AHEAD: A key part of the digital revolution in the banking industry is banks moving their computing activity to the cloud. Capital One has essentially completed its move there, while JPMorgan said recently that its move is about halfway done. However, one estimate is that only 15% of bank IT spending and 25% of the workflow of large companies has moved to the cloud.

EVER UPWARD: Why, it’s nothing but blue skies ahead! Look, I don’t mean to sound like a party-pooper, but this isn’t exactly the kind of story one tends to see early in, or even the middle of, a cycle:


Wall Street’s five largest lenders generated a record $55 billion in revenue last year from putting together stock and bond offerings, as well as advising corporations on mergers and acquisitions. That was up 40% from 2020, aided by the slew of takeovers and initial public offerings for special purpose acquisition companies.

Bankers aren’t done: executives emphasized on conference calls with analysts that they expect even more dealmaking to get done this year. Goldman Sachs Group Inc.’s leaders pointed to recent disruptions to corporate supply chains, saying that companies are being forced to consider more acquisitions to achieve greater scale. [Emphasis added.]

“Greater scale”! That’s always a grabber. Anyway, it’s worth remembering that this sort of craziness tends to stop a lot more abruptly than it starts.

NOT SO IMPRESSIVE: Oh, and if you’re looking for signs that the peak of the cycle might happen sooner than is commonly supposed, there’s this: the average IPO return last year was just awful.

Granted, a lot of those offerings turned out to be orphan SPACs, which surely didn’t help results. But still.

BACK TO EARTH: Hmm. Investors seem to be realizing that the relative valuations of fintechs is out of line vis-à-vis the banks.

HOUSING MARKET OFF TO A SURPRISINGLY STRONG START: The Super Bowl weekend is widely seen as the unofficial start to the spring home selling season, but activity seems to be starting early this year. Despite mortgage rates sitting at two-year highs, the median home sale price rose 16% annually in the first ten days of January to a record $365,000. In addition, in the past month, 41% of sales were at a price above the listing price, compared to 33% a year ago. It’s likely the rise in mortgage rates (and the prospect of further increases to come) spurred procrastinating buyers to finally act.

BOTH WAYS: More super-insightful value-added from the sell side! Here’s Goldman this week, on the financials:

If higher rates are being driven by higher growth, then financials likely should continue to rally. But if higher rates are being driven by higher wage inflation or a perception that the Fed is going to raise rates regardless of growth, then financials may fall. [Emphasis added.]


MORNING CALL: Ground-breaking product innovation on Wall Street just never stops, I tell you. On Wednesday, fund product provider Direxion filed with the SEC to offer something called the “Breakfast Commodities ETF,” which will track—are you ready?—an index focused on coffee, orange juice, wheat, and lean-hog futures. A core holding for any portfolio, surely!

NICE TIMING: And here I thought the idea was to buy low and sell high. With the Nasdaq Composite currently sitting fully 10% off its high of two months ago, the average tech allocation of money managers surveyed by Bank of America has fallen all the way to market weight, its lowest level, by far, in 14 years.

I understand that, arithmetic being what it is, portfolios’ tech weightings will fall as the Nasdaq declines. Still, it would be nice to see some evidence that managers are taking advantage of the stocks’ weakness by buying. But no. Anyway, those folks sure do earn their fees, don’t they?

ONE NOTE: But of course! And right on cue:

BANK OF AMERICA’S IMPRESSIVE DIGITAL SUCCESS STORY: Brian Moynihan noted on Bank of America’s fourth-quarter earnings call that “the pre-pandemic growth engine is back in place,” and he wasn’t kidding. I continue to be struck by how the digital transformation at Bank of America has resulted in such success across all of its lines of business. It’s particularly noticeable in its consumer bank, which wasn’t just a mediocre business at BofA 15 years ago, it was bad. Today, Bank of America and JPMorgan Chase dominate US retail banking. Consider these facts contained in the company’s earnings release.

  • Deposits grew by $269 billion in 2021 after growing $360 billion in 2020. Just the two-year growth in deposits of $650 billion would rank as the fifth-largest bank by deposits in the U.S.
  • The company has now had twelve consecutive quarters of net growth in consumer checking accounts. Last year the net growth in checking accounts was an incredible 901,000, a 64% increase from 2019.
  • Erica (BofA’s AI-enabled assistant) handled 427 million interactions, an increase of 476% from 2019.
  • Last year Bank of America customers conducted 218 million Zelle transactions (sending or receiving money) with a value of $65 billion. Compared to 2019, Zelle transactions increased 50%, while cash and check transactions declined by 24%. Zelle transactions now exceed all consumer payments via checks. This creates a huge cost saving for Bank of America.
  • BofA clients made over 764,000 online appointments to meet a Bank of America employee.

Bank of America’s digital transformation has led to phenomenal business success.

LESS HASSLE: Such a surprise! Managers don’t seem to like working from home as much as the people who work for them do. Who could have expected?

BUYING STOCKS: I can’t say this is completely surprising. As people spent more time cooped up indoors over the course of the pandemic, they got in the habit of trading stocks.

LESSONS FROM THE ARK: The short history of the ARK Innovation ETF, which was told so well last weekend by the Wall Street Journal’s Jason Zweig, provides important lessons to investors and company managements. The lessons are not new, but investors keep repeating them, and management teams keep falling for the head fake. The ARK Innovation Fund was launched in 2015. After a modest gain in its first two years, the fund rose 87% in 2017, then 4%, 36%, and 57% in 2018, 2019 and 2020. Investors made the age-old mistake of chasing performance so that, sure enough, the fund saw its strongest inflows right after the periods of its strongest performance. In the last year the ETF has lagged the Invesco QQQ index of technology stocks by 65 percentage points. Money that flows into strong-performing funds is often then invested in stocks the fund already owns, which can sometimes put upward pressure on the stock price, which in turn helps performance. Then there is a change in performance, and the investors chasing performance sell shares in the ETF, which can put downward pressure on the stock’s the fund owns as it moves to sell the shares, causing more underperformance. The lesson for investors is if you own a fund with exceptional performance, be happy but keep track of its assets under management and consider selling if the growth is exponential. For company executives, keep in mind that an investor that’s rapidly accumulating a large position could be unduly influencing the company’s stock price. I believe the ARK Innovation Fund was the largest shareholder of LendingTree a year ago. Now it owns nothing. Another example is LendingClub, which ARK owned seven million shares of (7% of the total shares) at June 30 last year, then reduced its position by 4.2 million shares in last year’s third quarter. Managements can’t stop this shareholder behavior, but can be prepared for it.

NEXT WEEK: On Tuesday, the Conference Board will release its Consumer Confidence Index for January. The consensus looks for 112.0 vs 115.8 in December. Then on Friday, we’ll get the December PCE. The consensus expects a month-on-month change of +0.4% vs +0.6% in November.

THE LAST WORD: I have been having problems with my eyesight for six years or so. Amy has taken me to many of Philadelphia’s best eye doctors, all of whom think they know what the problem is, but none have done any better than make a modest improvement. They have changed the prescription for my glasses and given me special drops to use. I have even had cataract surgery on both eyes. Nothing has worked, and a couple months ago, the problem seemed to take a step function down. Two doctors think they have found the problem. I have a hole in the macula which goes around the retina. They certainly have found a problem, but what is the solution? Next week I will have eye surgery where they will place a gas bubble into my eye to fill the hole. It’s outpatient surgery, but the recovery period calls for me to be face-down nonstop for five days. I’ll be allowed only ten minutes each hour to lift my head. That’s not good, but I am not the first one to have such a surgery, so I’ll be able to rent equipment that will help aid my recovery. Meet my new office.

In addition, no airplane travel is allowed for two months. All this has required a lot of changes in my schedule. I have been amazed and thankful that everyone has been so accommodative and concerned for me. Everyone except my wife, Amy. She has been telling all our relatives and friends about the surgery and the fact I will “have to be face down, ass up” for five days, and listen to all her stories. In reality, her humor will continue to make an uncomfortable situation bearable.

Edited by Matt Stichnoth.

Copyright © 2022, Second Curve Capital LLC

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