If, as the old saying goes, imitation is the sincerest form of flattery, JP Morgan should feel very flattered indeed.
It wasn’t long ago that there was a debate about the best model for global banks. One side was exemplified by Goldman Sachs (brains, as little capital commitment as possible, advisory and trading-led); the other by JP Morgan (a one-stop shop, lending-heavy, fortress balance sheet, big on the “plumbing” of the banking system).
For a time, it seemed as if Goldman (and Morgan Stanley) were on the right side of the argument; and that JP Morgan (and to an even greater extent Citigroup) were on the wrong side.
It doesn’t seem that way any more.
Indeed, in a reverse of the pre-financial crisis days when banks were doing their best to be like Goldman (Merrill Lynch, as it was then, was even rumoured to have a “Goldman-emulation unit” whose job was to work out what Goldman did and copy it), JP Morgan now is the institution global banks are most keen to copy.
And the copy-cats include even the mighty house of Goldman.
Want proof? How about this:
- Banks that were previously sniffy about such things are pushing to develop retail banking operations (Marcus in Goldman’s case). But here’s what they’re up against: about 50% of US households have a relationship with JP Morgan Chase; as do about four million small businesses.
- Banks including Bank of America and Goldman are trying to build regional US investment banks. But JP Morgan’s commercial bank has about 1,800 investment bankers across US cities; 90% of the commercial bank’s clients use JP Morgan’s treasury services; in 2017, 38% – or US$2.3bn – of JP Morgan’s North America investment banking fees came from commercial bank clients.
- Banks including Citigroup and Wells Fargo have combined divisions to look more like JP Morgan’s corporate and investment bank in order to increase efficiencies and to improve internal cooperation. JP Morgan made that move in 2012.
- Banks (again most notably Goldman Sachs) are shifting away from hedge fund-heavy client bases – and towards corporates. Again, JP Morgan is already there.
In other words, wherever rival banks reposition, they find themselves up against JP Morgan, a hugely powerful, entrenched incumbent at the top in terms of league tables and wallet share and with unrivalled scale.
The real proof is in the numbers and a quick journey round the fee league tables tells the story.
JP Morgan’s share of global investment banking fees for the first 11 months of 2018 was 7%, according to Refinitiv data, way ahead of Goldman in second place at 6.3%.
Not only is JP Morgan on course to earn the most fees in the industry for the 10th straight year, but its share of fees is growing. For the same period last year, it earned a wallet share of 6.7%.
Split the latest number regionally and JP Morgan is number one at 9.3% in the Americas and number one at 6.5% in EMEA. Split by asset class (number one at 6.4% in bonds, a marginal number two to Goldman at 8.4% in ECM and number one at 6.3% in loans) and the story is just as impressive.
And all this is even more remarkable in “peace time”.
“It’s particularly pleasing that we’re making progress at a time when competition is harder than ever,” said Daniel Pinto, who runs the corporate and investment bank. “This is not an abnormal time like the financial crisis and yet we’re still building the franchise strongly.”
Viswas Raghavan, the bank’s EMEA chief, agreed: “We have been thought of as a better bear market house. But we have now extended our lead in a bull market,” he said.
On the trading side of the industry the bank is even stronger. JP Morgan is easily number one in revenues from trading overall. During the first nine months of the year (the latest data available), JP Morgan had trading revenues of US$16.4bn – over US$4bn more than its closest rival, second-placed Citigroup. It was the clear leader (with nearly US$11bn of revenues) in fixed income, currency and commodities, and was vying for number two spot with Goldman (behind Morgan Stanley) with US$5.6bn of revenues in equities.
“Our efficiency means we can price our services aggressively and secure clients that way,” Pinto said.
Custody and fund services are another area where JP Morgan stands out. It is an area where the bank differentiates itself from Wall Street rivals because the competition are not the usual suspects but the likes of BNY Mellon and State Street.
The bank has jumped to number two in the assets under custody chart (second only to BNY) and now has some US$24.5trn in its care – up US$2trn since the start of 2017. That was in large part thanks to a deal to take US$1.3trn of BlackRock assets but also due to JP Morgan winning South Africa’s first ever international custody deal, in which it on-boarded nearly 1,000 funds from fund manager Coronation.
And while “Fancy-Dan” investment bankers might dismiss the custody function as boring, it is a sticky and lucrative business. Analysis outfit Coalition reckons that JP Morgan’s 10,000 employees in custody can boast a collective operating margin of 32%.
The result of all these superlatives is pretty simple. Through the first nine months of 2018, JP Morgan’s corporate and investment bank generated the most revenue (US$29bn), the most profit (US$9.8bn) and the highest ROE (18%) in the industry.
And there’s another result: JP Morgan is the only major bank whose share price is in positive territory this year (up to the end of November), albeit it is only up some 4%. Its shares are trading at a price-to-book ratio of 1.4. Other banks struggle to get to one times.
WHAT REALLY MATTERS
And yet what really defines a Bank of the Year for IFR purposes is not the numbers – important though they are – but the deals. IFR, after all, is a magazine that cares about capital markets deals above all.
And JP Morgan can boast a cracking roster of deals in the IFR awards period.
There isn’t space here to go into them all. But it is worth touching on a representative sample.
One of JP Morgan’s highlights in the high-yield market was its lead-left positions on the US$4.25bn-equivalent of bonds that helped finance the acquisition of Thomson Reuters’ Financial & Risk division – now renamed Refinitiv, and which includes IFR – by a consortium led by Blackstone. That deal (when combined with the US$9.25bn loan component) is IFR’s Financing Package of the Year.
JP Morgan was also one of four active bookrunners on the US$40bn bond sale that financed the acquisition of health insurer Aetna by CVS (IFR’s US Bond and North America Investment-Grade Corporate Bond of the Year), the US$15bn bond deal for Bayer/Monsanto (IFR’s Yankee Bond of the Year) and the US$16bn bond financing Walmart’s acquisition of Indian e-commerce firm Flipkart.
It was also a bookrunner on an unusual long five-year US$3.75bn senior floater for AT&T that was driven by reverse enquiry from investors.
Nestle’s US$8bn bond issue was another of the bank’s landmark deals. The Swiss-based food and beverage firm received around US$24bn of orders for the deal, which was its first-ever 144A dollar bond, enabling it to target domestic US investors.
The bank was also at the forefront of many of the year’s most interesting FIG deals – including Nationwide’s bail-in senior non-preferred and Rabobank’s debut senior non-preferred.
In the euro bond market, JP Morgan was the highest ranked non-European bookrunner in 2018, ahead of a number of established regional players.
It acted as lead, for example, on both Spain’s €7bn 10-year bond in June and its €4bn 15-year linker in September. In the financials sector, JP Morgan was a lead on arguably the most bond important deal of 2018 – a €400m 10-year non-call five Tier 2 bond for Novo Banco (IFR’s Europe Financial Bond of the Year).
In the corporate market, meanwhile, one key JP Morgan trade was Takeda Pharmaceutical’s €7.5bn multi-tranche offering on November 15, the last eligible date for this year’s awards. The deal was Takeda’s debut in the single currency.
JP Morgan also remains one of the few truly global emerging markets houses, with its emerging Europe, Middle East and Africa franchise, in particular, a standout performer.
A US$1.5bn guaranteed/unguaranteed two-tranche bond for South African state-owned utility Eskom showcased how the bank is able to find innovative ways for its clients to raise funds.
GOING IT ALONE
It was a similar story in the ECM world, where JP Morgan was once again a deal machine.
The bank was on the top line for deals judged by IFR to be the best in each region: Elanco Animal Health’s US$1.7bn float in North America; PagSeguro’s US$2.6bn IPO in Latin America; the US-style €946.9m IPO of payments company Adyen in EMEA; and the first successful biotech IPO in Hong Kong, a HK$3.8bn deal from Innovent Biologics, in the Asia-Pacific.
In fact, it was rare to see JP Morgan operating in anything other than the most senior positions. In EMEA it was a global coordinator on every one of its 21 IPOs, including the three European issuers it took to the US, a feat no other bank could match.
JP Morgan worked on seven of the 10 largest trades of the year, including the €6bn rights issue that wrapped up Bayer’s financing of the Monsanto acquisition, the €4.2bn IPO of Siemens Healthineers and a stonking US$4.8bn follow-on in Hilton Worldwide that extracted retreating Chinese investor HNA from one of its biggest positions.
In loan land, as well as a key role on the aforementioned Refinitiv loans, JP Morgan was also one of three joint global coordinators on a second huge buyout financing: the deal backing the €10.1bn acquisition of Akzo Nobel’s chemicals business.
The US$7.6bn loan and bond deal mirrored the success of the Refinitiv financing, and despite inevitable comparisons to the larger deal, Akzo’s US$6.44bn loan and US$1.2bn-equivalent bond issues were highly successful in their own right.
JP Morgan is currently leading the dollar-denominated loan for the highly anticipated US$10.2bn underwritten debt financing for the US$13.2bn acquisition of Johnson Controls International’s power solutions business by private equity firm Brookfield Business Partners. The deal will launch in 2019.
The bank continued to play a leading role in investment-grade acquisition financing, too.
In October, IBM secured US$20bn of 364-day bridge financing from JP Morgan and Goldman to support the acquisition of US software company Red Hat for US$34bn. JP Morgan provided 70% of the financing, which is one of the largest ever bridge loans for a US investment-grade company.
In Europe, the bank underwrote a €7bn loan in November for German software firm SAP’s US$8bn cash acquisition of US-based experience management firm Qualtrics.
And JP Morgan was one of three coordinators on Saudi Arabia’s sovereign wealth fund Public Investment Fund’s US$11bn loan that was signed in September. The deal was the first commercial loan for PIF, which is tasked with helping to deliver Saudi Arabia’s Vision 2030 reform plan.
“Every country where there was a reference deal to do, we were on it,” said Raghavan.
So what of the future?
Will rivals be able to close that historically abnormal gap in the fee tables? Will JP Morgan slip back into the pack? Possibly, but the bank certainly has lots of weapons to stave off threats. Perhaps most importantly, at a time when banking is at risk of being disrupted by internal and external forces, it has an enormous amount of money to invest – and a willingness to spend it (rather than distribute it in dividends or stock buybacks).
JP Morgan has a tech investment programme of US$10.8bn, with somewhere between 40% and 50% of that (the bank doesn’t publicly disclose the exact split) being spent in CIB. As co-presidents at group level, Pinto and Gordon Smith of the consumer bank oversee tech initiatives together.
Co-head of digital and platform services David Hudson is the investment bank’s “digital tsar”. In a world where reporting lines matter, he reports directly to Pinto and has capital markets bankers in his reporting line.
The best part of US$11bn buys you quite a lot of technologists. Hudson says the CIB employs some 15,000 in the tech team – of which more than 10,000 write code.
And they have pretty clear instructions. Don’t worry about undermining the bank’s entrenched position; worry about improving the bank’s offerings to clients.
“You have to be willing to disrupt yourself,” said Hudson. “If you’re not, someone will do it for you. You have to look three, five, even 10 years out and work out how to adapt to whatever’s coming.”
Hudson’s techies are working on everything from machine learning to predict best times for capital raises, to the roll-out of a corporate finance dashboard that allows clients to monitor global markets with data, research and analytics.
Like many other institutions, JP Morgan is experimenting with blockchain. For example, its interbank information network is looking to use blockchain to make cross-border payments faster and more efficient.
“It’s not about throwing money at the problem, but this is where spending money matters,” said Raghavan. “We have learnt from Amazon and Apple about concentrating on the customer experience. How does the customer want to consume JP Morgan? They tell us and we do that.”
As one example of the fruit of such an attitude, Hudson points to the custody operation, where JP Morgan has introduced a product that allows clients to connect directly to BlackRock’s Aladdin investment management system.
Ask Pinto and his colleagues why JP Morgan is so good at what it does; what, in other words is the secret of the bank’s success, and they struggle to put it into words.
There is an almost pathological fear of complacency – one that comes from Pinto himself. “Past success does not guarantee success in the future,” he said.
Insiders say that Pinto often harks back to how easily JP Morgan lost its way in equities trading in 2003 when it saw others more willing to invest in technology come roaring past. It has taken until now to regain that ground.
“There’s an important lesson there,” said Hudson.
Pinto is convinced that JP Morgan spends less time playing politics than other banks and those who have joined from other institutions testify that the back-stabbing and jockeying for position is much less prevalent than elsewhere.
Pinto points to the fact that he can be the head of the investment banking unit of a US headquartered bank while being based in London as proof of that. He doesn’t quite say it, but the implication is that at a more political organisation it would be impossible to be away from headquarters for long for fear of being plotted against.
“We have a culture of partnership and team work. So we don’t waste a lot of energy in back-stabbing and politics,” Pinto said.
In this he is supported by Raghavan. “Getting to the top is the easy bit. Staying there is hard,” he said. “We have done it by focusing on the client, being collegiate and avoiding snobbery about some areas of banking – for us a dollar is a dollar.”
Cynics would dismiss the “culture” stuff as cliched and platitudinous. And it is true that even those who work at JP Morgan struggle to really identify – or at least articulate clearly – the bank’s “secret sauce” beyond generalities.
They are solid, careful people big on team work and professionalism who don’t go in for messianic flights of fancy or great dollops of the “vision thing”.
And isn’t that what bankers are supposed to be like in this post-financial crisis period?
The thing is, it works. Just look at the results.
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