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Jamie Dimon doesn’t like the suggestion that JPMorgan is “dominant,” as analysts discovered during the US megabank’s earnings call on Friday. How could that be, when there are more than 4,000 lenders in the U.S. and an abundance of hungry fintech companies? But in some ways, Mr. Dimon’s huge profits are a result of the normal competition in the banking industry. Indicates that the rule no longer applies.
Take JPMorgan’s huge consumer division, for example. Return on equity for the most recent quarter was 29%. Assume that the minimum cost of equity required by investors is 10%, and that the bank is making abnormally large profits. Over the past decade, if JPMorgan had just cleared that hurdle, its retail banks would have earned about $50 billion in cumulative profits. As it stands, it makes $90 billion more than that.
Textbooks tell us that extraordinary returns tend to be competitive, but when they don’t, it can signal a problem in the market. But there are several reasons why JPMorgan defies gravity. The cost of establishing a national rival bank is prohibitive. The credit cards sold by JPMorgan rely on large amounts of historical data and insights into customer habits. Goldman Sachs is one of the competitors who tried and failed to build it from scratch.
Technology doesn’t even out the pitch any further. The biggest financial institutions are pouring tens of billions of dollars into faster payments, artificial intelligence and more sophisticated customer experiences after the pandemic accelerated the digitalization of everything for their customers. JPMorgan spends $17 billion a year on technology. Few banks can compete. According to LSEG data, only nine U.S. banks have such high overall operating expenses.
Customer inertia also helps. Dimon said Friday that the “deposit beta” turned out to be lower than what the bank had modeled. In layman’s terms, this means that account holders are settling for lower savings returns than they would have expected given interest rate trends.
Tied to these spoils is the same regulatory bureaucracy that drives bankers into chaos. Bank executives continue to complain about the new capital rules the Federal Reserve plans to introduce, even though they are already watered down. But in reality, such rules, if crafted wisely, create a moat around the largest lenders. The more stringent the regulations, the more customer trust will increase.
Not all big banks are equally fortunate. If you apply a 10% return on equity hurdle over the past 10 years to JPMorgan’s rival Citigroup, its actual profits are more than $60 billion lower. This suggests that Mr. Dimon’s steady hand had a major impact on JPMorgan’s huge profits. And by destroying shareholder value year after year, Citi is perverting the norms of capitalism in its own way.
john.foley@ft.com
