June 4, 2023


Quietly Brilliant

Jamie Dimon’s letter to shareholders- A fascinating take on the importance of technology and more

Just lately, some of you would have read about the letter that Jamie Dimon, CEO of JP Morgan Chase penned to the shareholders. Whilst you can argue that it is nonetheless not in the league of the Warren Buffet or Charlie Munger letters in phrases of reputation, this is packed with several stimulating perspectives and small business knowledge. I would strongly suggest a whole read through of the exact same. It is a letter in tone and intent wise meant to connect thoughts, beliefs, excite, encourage, make self-assurance and present a lens via which you can perspective the effects of various forces bearing down on a monetary services enterprise as JP Morgan Chase.

Now I should confess that I was prompted to go through it much more so and in entirety, than previously mainly because I was intrigued to find out a lot more about the topic of the mammoth, envy inducing $12 bn annual IT funds which is up from $9.5 bn in 2020, which caught the fancy of analysts, competition and field at big. For reference, quite a few of the prime 15 banks have their spends in the $6-10 Bn variety and lots of other important sized financial institutions in the $ 1bn to $5 bn assortment. Just as in the earnings simply call, the tone from Jamie was a single of complete conviction in the determination as perfectly as drawing consideration to the fundamental causes for such an investment decision and at last a call out that, this is not to be noticed myopically as defence or for in close proximity to phrase gains. The ultimate point seemed to be emanating from an incapacity to vet the appetite of the buyers and analysts by spelling out the particulars of wherever the dollars would be funnelled in phrases of what parts of IT expense. This is not stunning as one particular can envision this to be on account of retaining aggressive advantage and equally on account of the quite dynamic nature of the rising technologies such as AI, quantum computing, enterprise atmosphere alterations, and the lessons that would learnt alongside the way, needing program correction and adaptation.

Equally this intended that the enhance in expenditure could mean that the bank may perhaps overlook the revenue targets for 2023. But the CEO and the Board are unambiguously distinct that this will pay dividends in the extended run and it is this sort of belief in the electricity of engineering, which when well leveraged and deployed that can individual the leaders from the relaxation of the pack.

The letter for every se is lengthy and handles all factors of the small business of the financial institution, ranging from macro-financial, geopolitical condition, expertise and individuals, surroundings, business threats, regulation, position of The us as a nation and the criticality of technology. All of which have been nuanced with fascinating views together with a wonderful inspiring snippet named “Excellent your Picasso”. To know what this is, you have to study the letter. 🙂

I will on the other hand in this occasion expend more time on unpacking the technological know-how investment factor of it but will also simply call out some other intriguing observations that caught my eye.

 First off, allows look at the view concerning competitive threats to the bank, identifying the technique and no superior way to see this than by means of this quotation in the letter. “There are two other essential factors I would like to make. We try to develop enduring enterprises, and we are not a conglomerate — all our corporations count on and profit from every other. Each of these elements support crank out our top-quality returns. But, even with our greatest efforts, the moats that safeguard this company are not specifically deep — and we confront remarkable level of competition.” So, as it goes, fail to system and you need to program to fall short.

Now lets look at yet another massive assertion: The purpose of financial institutions in the world-wide money program is diminishing. This is a bold statement and when uttered by the CEO of JP Morgan Chase, needs a further evaluation. To start with off, it is explained in terms of two broad tenets. A perspective that while banking companies positive aspects from economies of scale, at the very least the even larger dominant types, profitability products and brand, the headwinds from regulation will continue to be as a millstone and Jamie does hint several situations at this not being a amount playing discipline vis a vis fintechs, techfins and other nonbanks in the arena.

This then links into the 2nd tenet which is that of calling out that “nonbanks” are increasingly turning out to be a large section of the monetary companies industry and they continue to be “outside the banking regulatory system”. It can be debated even though how significantly of the differing regulatory regime is a important component. The companies being regarded as in this classification consist of the likes of Vanguard, Fidelity, Schwab. And then there is the mention of the rising forces of fintechs with around $130 bn invested into them globally. The 3rd entrance currently being talked about is that of the firms such as Apple, Walmart and we could add Google, Facebook and Amazon who all have broad customer bases and deep know-how capabilities who can disrupt the market. Jamie does not quit with calling out their strengths but goes onto lament that they really do not usually appear less than the quite a few onerous laws in particular KYC and AML. This I believe is quickly changing nevertheless and lots of of the fintechs and Techfins, Crypto companies are staying matter to regulatory checks but sure it is nonetheless lighter.

So likely back again to the assertion of the diminishing part of financial institutions, there are some interesting stats remaining quoted. Pulling up, a few notations as follows. Banks’ share of home loan originations has long gone down from 91% to 32%. Banks’ share of the leveraged financial loan market place has reduced above the last 20 a long time from 46% to 13%. A sizable and escalating portion of equity trading has moved off clear exchanges to non-conventional investing corporations, producing a decline of access to on-trade liquidity for quite a few market place members.

Thus, if these are inexorable forces, the level is not about why you will need to be paranoid and devote massively, with the agility to fight these forces but as to what others are accomplishing to recognise this menace and why other CEOs have to have to rouse their groups into motion, than believing in the protective moat around, that Jamie does not look at deep sufficient.

And ultimately owning the dollars proportionately to measurement of your financial institution and getting the eyesight from the Exec and Board is a person point but executing on this in the most productive way to attain the ideal ROI is a total distinct component. There can be reams published about how to leverage the highest from technological innovation and that is for another day.

So that normally takes me to the outlook and strategic issues of the $12 bn IT budget allocation. There is a graphical depiction of the wide parts of expend in the yearly report as under that informs us of the typical suspect spots of aim. Even so notably, it is also believed that the $12 bn is split in equal involving Operate the Financial institution (RTB) and Transform the Lender (CTB) and the latter is all about reworking to be completely ready for the long run across infrastructure (migration to the cloud), software package improvement, knowledge analytics, AI and of study course the inescapable spends on cybersecurity.

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 The narrative goes alongside as follows, there is continued invest on what Jamie phone calls as table stakes in enhancing consumer practical experience, new merchandise capabilities, digitisation of client onboarding and so on and then draws consideration especially to the $2 bn incremental investment decision in 2022 and this is for long term proofing and falls into what is referred to as R&D.

This is then damaged down into two viz. infrastructure and computer software. Contemporary infrastructure signifies cloud foundation devices, private or general public and a whopping $2.2 bn has presently been put in in previous couple decades. Thousands of apps are getting re-platformed to operate on the cloud and the goal is to have 40% of them on new platforms. Cost of infrastructure also incorporate modernising developer instruments which is now a higher precedence for numerous banking institutions as I choose up, embedding operational resiliency and cybersecurity controls.

In the other group of application investment, there is a specific spotlight of the Payments capability which has created an incremental $ 4bn in organic and natural income on an investment foundation of $1.5 bn, embedded finance, fraud administration. There is a superior-degree mention of investing into defi and blockchain and find use instances getting trialled.

AI led initiatives are specified its owing in the observe with examples of leveraging facts insights via AI and device discovering from myriad resources for danger profiling for KYC.  customer profiles for KYC. There is an illustration of cost financial savings in fraud administration utilising AI and machine mastering. The yearly fraud losses have come down 14% considering that 2017 in spite of volumes being up nearly 50%, and it is believed that the bank’s know-how investments alone have contributed about $100 million in once-a-year personal savings. And eventually in the arena of forward-wanting investments, the be aware refers to multi-agent simulation, synthetic information and encryption methods — things that have the capability to unlock new strategies of investing, running danger and assessing productivity with a reference to the use of quantum computing.

By now the photo is fairly apparent that this is a lender that believes in the power of technology to generate aggressive gain and has a razor-sharp focus on unlocking the value by investing deep. Addressing these with clarity in the CEO’s letter to the shareholders is a crystal clear sign of how this is seen as a topic of immense value. Time will notify how these investments will pan out in terms of returning benefit and in driving the bank’s enterprise development. That claimed, a statement of intent and the power of intent is in my thoughts, most typically half the occupation finished. And not every institution wants to have this variety of skill to make investments as extensive as you can establish what is most critical and make that materialize with agility.

I hope you located this beneficial and intriguing and do share your thoughts on how banking institutions can continue to be aggressive and relevant to their prospects.

Resource: JP Morgan Chase, tearsheet