Top of the league
JP Morgan bestrides the world of finance in a way unprecedented in the modern era. It does more deals, makes more money and has bigger ambitions than any other banking institution. JP Morgan is IFR’s Bank of the Year and Loan House of the Year.
Q: What do British football managers George Burley, Harry Redknapp, Alan Pardew and Tony Pulis have in common?
A: They were all voted Premier League Manager of the Season despite being in charge of sides that didn’t win the league.
They won the award for taking relatively small clubs to remarkably high positions in the league even though they didn’t manage the best teams.
Why is this relevant to IFR’s Bank of the Year? Because just as Alex Ferguson missed out when manager of the season awards went to less successful managers who had punched above their weight for a season, so one bank has in the past missed out on IFR Bank of the Year awards despite dominating global banking in the post-financial crisis period in the same way that Ferguson-era Manchester United dominated English football.
That bank is JP Morgan.
Of course, other banks excelled in one year or another, and had eye-catching stories to tell – which is why they were worthy winners of previous Bank of the Year titles. But all the while CEO Jamie Dimon and his lieutenants have been crafting one of the most remarkable achievements in the history of banking: building the most globally dominant financial institution since the Glass-Steagall Act dismantled the old JP Morgan after the Great Depression.
READ ’EM AND WEEP
How dominant is JP Morgan? The numbers tell the story.
When it comes to the Thomson Reuters league tables, JP Morgan is number one underwriter for straight bonds in the first 11 months of 2017; number two for equity/equity-linked issuance; number two for syndicated lending; number three for structured finance. And for a host of sub-asset classes and geographies, it is at the top of the charts.
And if, as someone nearly said, volume is vanity but fees are sanity, the fee tables tell an even bigger truth.
JP Morgan is about to become the biggest fee earner in the investment banking industry for the ninth consecutive year, according to TR data.
For the first 11 months of 2017, the bank is the top fee earner not only in its home Americas region, but also in EMEA. Indeed, globally in the same period JP Morgan is number one, with US$6.3bn of fees from 4,161 deals.
JP Morgan is also the top fee earner in global bond underwriting and global equity underwriting, and second in loans (to Bank of America Merrill Lynch) and M&A (to Goldman Sachs).
That all adds up to a remarkable 6.7% market share and puts the bank nearly a full percentage point ahead of Goldman in second place.
Such a large gap between the top two is not quite unprecedented but it is very unusual. In modern times there were only two other periods when the gap was so large over a sustained period: during the dotcom boom and in the run up to the financial crisis.
Widening the picture – to add the markets businesses to investment banking – underscores the bank’s strength.
Indeed, JP Morgan is a flow monster in its trading businesses. True, revenues from trading fixed income, currency and commodities in the first nine months of 2017 were down 11% from the same (strong) period the year before. Like its peers, it struggled to cope with low activity and a lack of volatility.
But it nevertheless increased its market share, according to analysis firm Coalition, and certainly has the scale to weather the slowdown. Public filings show it brought in US$10.6bn in FICC revenues in the first nine months of the year, almost US$1bn ahead of nearest rival Citigroup and more than Goldman and Morgan Stanley combined.
In equities, JP Morgan is building its cash equities business to try to match its strength in other trading areas. Cash equities is the only major area of investment banking where it is not in the global top three, according to Coalition (although it moved to number four from number six, as a series of impressive hires took effect).
After lagging other institutions in building up its electronic trading platform, it has ramped up spending there.
Like rivals, overall equities revenues were broadly flat in the first nine months. The Coalition data suggest that, for equities overall, the bank was more or less tied with Morgan Stanley for top spot in revenues, up from an unambiguous number two in the same period last year.
“It’s impressive what we have achieved in fixed income in a downturn environment – how we grew our market share,” said Daniel Pinto, the CEO of JP Morgan’s corporate and investment bank.
“So is the transformation of our equity business to become one of the biggest in the world. It all creates a franchise that runs like a well-oiled machine.”
All of this resulted in a return on equity of 15% in the corporate and investment bank in the first nine months of 2017. With many of JP Morgan’s rivals hoping to get to double figures – at best – at some point in the future, that is impressive work.
DEALS, DEALS, DEALS
Of those more than 4,000 deals, Pinto finds it hard to pick a favourite. Given JP Morgan’s varied and geographically diverse business (from the emerging markets to structured finance, from corporate and FIG bonds to derivatives, from M&A to ECM – and much more) that is understandable. So the following deals will have to stand as examples of many more.
- Two innovative exchangeable bonds for Volcan Holdings that totalled £3.5bn and allowed Anil Agarwal, chairman and majority shareholder in Vedanta Resources, to become the largest shareholder in Anglo American for minimal outlay. JP Morgan was sole global coordinator and bookrunner on the so-called POEMS deals (purchase of equity via mandatory securities). “It’s great to solve intricate corporate finance objectives by creating innovative transactions. And that’s what we did here,” said Viswas Raghavan, CEO of JP Morgan in EMEA. Partly as a result of the two deals JP Morgan is IFR’s EMEA Structured Equity House of the Year.
- The Micro Focus acquisition and corresponding financing. JP Morgan was lead financial adviser to Micro Focus on its US$8.8bn acquisition of Hewlett Packard Enterprises’ software business and sole underwriter on US$5.5bn of committed financing. The deal was the first ever cross-border “reverse Morris trust” transaction.
- Rockwell Collins’ US$30bn sale to United Technologies. JP Morgan acted as financial adviser to Rockwell Collins on what was the second-largest aerospace and defence transaction and eighth-largest industrial deal in North America of all time. The deal highlights the strength of JP Morgan’s aerospace and defence franchise – it has advised on six of the last eight large transactions in the sector (for deals greater than US$5bn) since 2012.
- UniCredit’s €13bn rights issue: JP Morgan was joint global coordinator and joint bookrunner on the deal that is the central reason that UniCredit has won IFR’s Financing Package of the Year.
- JP Morgan was active across emerging market debt. It was involved, for example, in almost every big sovereign deal from the Middle East, including Saudi Arabia’s US$9bn of sukuk, the biggest ever Islamic bond issue, and its second conventional bond offering, which raised US$12.5bn. It was also a global coordinator on Kuwait’s debut bond deal. Meanwhile, the bank was at the forefront of Russian borrowers’ renewed activities in the bond markets and some Ukrainian credits, including the sovereign. As a result, JP Morgan is IFR’s Emerging EMEA Bond House of the Year.
A TRILLION DOLLARS
Pinto named a custody and fund services agreement as his overall highlight of 2017. Observers might have been forgiven for stifling a yawn, but that would be decidedly the wrong reaction, as the deal was the largest of its kind ever and was struck with investment management giant BlackRock.
The deal sees JP Morgan provide custody and fund services to more than US$1.3trn of BlackRock’s clients’ assets.
The custody business is another area where JP Morgan unambiguously stands out from its peers, as it is the only global custodian with a top-of-the-range markets business.
“If I had to pick one of the year’s highlights, I would pick that,” Pinto said. “Custody and fund services is one of the businesses that we are investing massively in and it is going through a process of transformation. The BlackRock deal is a recognition of that effort.”
Pinto was keen to point out just how much money – literally billions of dollars – the bank spends on technology and how his institution is planning for – and investing in – technology that is going to change banking. Pinto himself leads many of those efforts, and the level of investment is undoubtedly a major factor in JP Morgan’s market dominance.
Dimon provided some details of that spend in a recent letter to shareholders. In 2016, he said, JP Morgan spent more than US$9.5bn on technology of which some US$3bn was dedicated to new initiatives. Of that, around US$600m was spent on what he called “emerging fintech solutions”.
And despite Dimon’s well-publicised aversion to cryptocurrencies, one of those projects (again to stand in for many more) uses blockchain technology to minimise friction in global payments processes and to ensure payments reach beneficiaries faster with fewer steps and better security.
The Interbank Information Network, as the project is called, was launched in 2017. Royal Bank of Canada and ANZ Banking Group were the first two banks to sign up.
Given that JP Morgan’s treasury services business processes approximately US$5trn in payments daily for clients in more than 100 countries, the scope for something like IIN is enormous.
LENDER OF FIRST RESORT
Another area of global strength is JP Morgan’s syndicated lending business, where the bank also made a strong showing on the biggest trades of the year.
Key examples in investment-grade are a €15bn loan for German infrastructure group Hochtief that financed a €17.1bn counterbid for Spanish motorway operator Abertis, and a financing backing candy and pet food manufacturer Mars’ US$9.1bn purchase of pet healthcare services provider VCA.
But it was in the ultra-competitive leveraged finance world where the bank made its biggest push in 2017, particularly in sponsor lending, which hit a record high in December. The bank expanded its franchise to include middle-market and upper middle-market deals.
Leveraged loans provided one of the market’s only growth areas in 2017, but despite a surge in new issues, especially in the second half of the year, deal flow got nowhere close to satisfying fevered investor demand for floating-rate loans.
Standout leveraged loans included the Micro Focus loan mentioned above for the US$8.8bn acquisition in March of Hewlett Packard Enterprise’s software business.
The bank also arranged a headline-grabbing US$3.125bn debtor-in-possession financing for Toys ‘R’ Us when the retailer filed for Chapter 11 bankruptcy protection in September. And it closed the year with a US$3.725bn seven-year term loan backing Sinclair Broadcast Group’s purchase of Tribune Media.
The good times rolled as leveraged loans clawed back some ground from high-yield bonds, and covenant-lite lending was accepted as here to stay. But nearly 75% of activity was refinancing and coupon clipping, which increased competition for new-money buyouts.
In EMEA, JP Morgan had a good hit rate on most of those buyouts, including the highly complex public-to-private buyout of German generic drugmaker Stada. The bank was a joint bookrunner on the deal, which backed the company’s €5.2bn buyout by Bain Capital and Cinven.
The bank was a lead on a take-private deal for Danish payments firm Nets, which was backed by €2.16bn-equivalent of first-lien term loans that supported Hellman & Friedman’s DKr33.1bn (US$5.3bn) public-to-private acquisition.
JP Morgan was also a joint global coordinator and physical bookrunner on €2bn-equivalent of term loans that were launched in November to finance Dutch bottling company Refresco’s buyout by PAI Partners and British Columbia Investment Management Corp.
The deal was the second for the company, after it completed a €2bn-equivalent loan backing Refresco’s acquisition of the drinks manufacturing business of Canada-based Cott Corp in September, highlighting JP Morgan’s ability to retain clients and work with an existing lender base.
Pinto’s other important focus is avoiding complacency. Indeed, JP Morgan bankers confirm that it is a constant refrain from the bank’s most senior people.
He argues that JP Morgan has done the easy bit by getting to its dominant position. It’s staying there that is tricky.
“When you are at the top, you have a different challenge. You’re no longer trying to catch up. In some ways, you have to be even more disciplined, willing to stay innovative and disruptive and to think again about your business model and keep adjusting it.
“It is very dangerous when you feel too good about yourself. People sometimes tend to become complacent and relax. I want us to be as hungry today as we were 10 years ago.”
Which takes us back to where we started. Pinto himself isn’t a football fan, but those who are will recognise that refusal to give in to complacency. Daniel Pinto is the Alex Ferguson of investment banking – and he has helped make JP Morgan into a champion bank.