JPMorgan Chase & Co. (JPM) Earnings Call Transcript & Summary

Yes. Ben has reminded me that yesterday was the single worst day in the past decade for bank stocks relative to the market. But maybe more importantly, 9 out of the 10 worst days for bank stocks, relatively speaking, in the past decade were in the year 2020. So if you're sitting there feeling like it's a little rough and a little volatile, you are in the eye of the storm in the sector that you are following and that we are living in. And so it's a reflection of the world in the midst of great change and particularly with interest rates and monetary policy around the world, coordinated in an unprecedented fashion. So that will eventually come to an end and that will be reflected. But it's really the -- just on the bank side, you didn't ask me this, but you did. And since Ben was so wise to stop his long short portfolio in December of last year, he's been helping us to think through many of these things. But it's -- the banks that will prevail as they go through are the ones that focus on different areas of the portfolio, just like Asset & Wealth Management. Asset & Wealth Management has again been a key steady performer for JPMorgan Chase over the many years and will continue to be so. But being a well-diversified institution will get you through these good times and bad. And so as you think through your relative positions, those are the ones that will do well. And that's the same for clients' portfolio. So when we think about when clients come in, where are they putting their money? First, it was a rush to cash. It was 2008 and 2009 just shrunk into -- and condensed into a very tight time period where you first had the rush to cash, then you quickly moved out the yield curve. Then you found yourself getting out of investment grade and finding in the high-yield markets. Once you did that, then you went to the private credit markets. Once you did that, you started thinking about dividend stocks. Once you did that, you started thinking and on and on and on. And that's why today, 6, 7, 8 months later, we're talking about emerging markets equity. Why? Because that's the last part of the train. And so that's exactly what clients have done. The longer-term larger pools of money got there much faster. Emerging markets has been a discussion that we've been having since probably the end of May. Private equity, private credit infrastructure, we had conversation this morning about clients continuing to do commercial real estate transactions. And so that's actually picking up. So you've had money being gathered on the sidelines for asset classes that you would think like, I'm not sure. I want to touch that for a while. And surprisingly, just as a side note, we talked about the fact that some of the long-term leases that are going in some of these big commercial real estate buildings are coming from the tech firms themselves who are saying one thing on one side and renting long-term leases on another. So the office markets will come back. The world will eventually get to some semblance of normalcy where people are traveling around the world again and the sectors that have been the hardest hit will return. And so people that have the wherewithal to get through that and to take advantage of the monetary policy and stimulus that has been provided for this risk on world that we live in and just making sure that they're not over their skis. So we've seen it across the board. I would just also add that almost every conversation that we have with clients where we are also their lender has to do with borrowing. And so making sure that the right-hand side of their balance sheet is also thought through in the right way. Have they thought about proper lending and interest rates where they are? Can we lock them in? Can we think about where we are from a prudent standpoint? Can we also make sure we're not out over our skis? Can we refinance where possible? And how do you think about doing that in the smartest way? So a lot of good conversations around that and activity then has spilled over into our results.

Further extending your point, you said with the movement in the cash to equities with the volatility in the markets this year, are you guys seeing any demand for different asset classes? And if there is for different asset classes, is it a secular change? And what could be -- what are the macro factors that could be driving that shift into a different asset class outside of equity?

Yes. I would say it's a continued push into the less liquid markets. So just almost every asset class goes into the less with liquid sector of where they are. So credit into private credit, the REIT markets into the private real estate markets, the private equity markets, the venture capital markets. So anywhere where you can put those assets to work where you don't have the daily volatility of mark-to-market and you're going to ride through on a very long-term basis has continued to be that way. In our alternative fundraising business, I think we are on track for our largest asset gathering that we've had in well over a decade. So it's -- you're seeing very strong of those. You're also, by the way, just aside from the asset classes themselves, you're seeing the clients having just a little bit more time in their life to stop and say, "What am I doing? Like how many providers do I have? How many large-cap equity managers do I have?" And so there's just been a general consolidation of how institutions and individuals are managing their assets and they're just getting a sharper focus on who are the ones that are helping me to do the right thing, through the long term. And so I think that's going to also continue to be a trend. So it will be a trend with the clients and then that's why you're also seeing it's a trend in asset management companies themselves consolidating because scale is so important to be able to invest in the talent. The talent is very expensive. Talent is -- the best talent in the world is attracted to the financial services industry. Some of it is. And within that, particularly in the Asset & Wealth Management business, where you have to pay the portfolio managers and the research analysts and the traders for very long-term activities and they could go through a bump in the road, but you're paying them on behalf of the end client. And so you have to have the wherewithal to be able to constantly invest in that talent. And that's why scale is becoming just a critical factor in asset management firms, which is actually disappointing because we've also talked about this before, Gerard. In the old days, when you and I started in the industry, you could dream about starting your own asset management company and you could have 5 of your partners and you could get $50 million and you'd be off to the races. That $50 million is $500 million now, and you're still sort of scraping through. And so just the scale of everything has just changed the landscape, especially in our industry here.

Speaking of scale, it ties in, Mary, to some questions that are coming in over the dashboard here. And when I look at the questions, they are talking about mergers and acquisitions in the asset management space. You just touched on scale. There have been some stories about maybe some company's asset management businesses may be up for sale. I'm not asking you to talk about that. But just what are your views when you look at how you run your business about acquisitions, whether it's just pure asset management? Or is it in other areas within wealth management that you would like to depend upon through acquisition?

Yes. So many things to answer. So scale is important. If you don't have it, you're not going to survive. And it doesn't mean you have to -- again, you don't have to be the biggest. You just have to have enough to be able to constantly reinvest and get yourself through the inevitable cycles that are going to happen in these markets. So scale is really important. And then back to my earlier conversation about you can't just be a one product show because it's hard to have the solutions-based dialogue with a client if you're -- you only have one answer to every question that they ask. So making sure that you have a diversified set of offerings for the client, depending on what they need, where they are in their life cycle, risk tolerance, et cetera. So not every firm has that, being able to find a perfect match of another company that has the complement is a very important part of what you do. So scale the full spectrum of things and then excellent talent. So as the industry consolidates, there's just talent out there. When someone says that they're going to put their company up for sale, like the people inside are the most valuable thing. They're basically saying they're selling the people. So those people want to figure out what's their best home. So I always think of growth as organic first, teams and great people second and then whole firms third. In Asset & Wealth Management space, it's 100% about the people. And so making sure that culture is the most important thing you think about, that's critical. And therefore, the third one, a whole purchase of a whole firm, you've got to spend a lot of time making sure that, that's the right culture and that's the right fit because you can't ruin the thing you have while you're trying to get to the next plateau that you want to be in life. So I think that, that's really important. And then there's the last sort of wrinkle I would add to that is from a tech and digital space. You always want to think about where the puck is going. And while a lot of what we do in the Asset & Wealth Management space is good old-fashioned relationship management, stock picking, bond picking, thought process, there's so much that needs to be digitally enhanced and provided then down into a much more scaled business. And so I think that's also a factor that people don't necessarily think of when they think about asset management M&A activity.

Mary, another question just has come in tying to the answers you're giving us on this mergers and acquisition-type question. And the question is, how do you think about -- granted it's not your -- it's the third priority of acquiring an entire company or a division of a company and you were very clear about the culture, though we understand that, but how do you value -- how do you guys go about valuing asset management companies? Is it based on assets under management or revenues? Any thoughts there?

I mean it's always a full spectrum, and it's going to be very different for each acquirer as they look at the acquiree, I guess, the target because it will have to do with the revenue synergies, the expense synergies and then the plug-and-play that what might be missing. And so for one acquirer, that has a very different net present value than another acquirer just depending on where they each are in their life cycle. So yes, it's always about revenues, it's always about assets and it's always about expenses. But really, it's about predicting where that's all going in the future. And whether the disruption of what might happen if you go through an M&A transaction sort of how that plays itself out. And so that's always the trickiest part, particularly, in the asset management space where consultants and the like have very much a distaste for going through any kind of transition event like that, putting everybody on watch, thinking through those things. So you have to do that eyes wide open. And again, in all of the activity that we've ever had here at JPMorgan Chase, and we've done lots of M&A over the many years, it's always come down to the people and it's always come down to the culture. So you've got to get that right. Figuring that out during this, again, strange period of COVID is really hard. It's even harder in asset management. But as I told you, of all of the sectors and industries in places that I think will come back to work in the office and be face-to-face fastest, I would put asset management at the end of that list. I think that the asset management industry, in particular, has found it is quite productive to be able to work from home. You have much more thinking time, which is what people need. The traders are a little different, but even that, the electronification of everything that we've done has enabled most everybody. And we moved to -- 97% of Asset & Wealth Management moved to a work-from-home environment within those first 2 weeks of March. That is just absolutely unheard of, not even thinkable on our side. And I don't see that coming back anytime soon. Many of us here at JPMorgan Chase are here where the floors are busy, but that's not the case for my asset management unit and it's -- and I think that's going to be different. So back to M&A. If you can't have that face-to-face and really figure it out, it just makes those things a little bit harder, not at all insurmountable, just a little bit harder.

Yes, very good. Pivoting a bit, another question that's come here a little different. Obviously, fee revenue to your business is very important and the driver of the revenues. But net interest income, which is about 23%, I guess, of your total revenue is also a factor. Can you share with us what the trends are on this low rate environment? How you're trying to manage that part of the revenue stream within your area?

Yes. So manage that part is a good question because we purposely -- it's a great question. And if you run a traditional institution, that's how you would think about it. But in the Asset & Wealth Management space, we can't think about it that way. I don't let us think about it that way. Because then we would drive to outcomes for a client that may not be in the client's best interest. And so constantly thinking about what does the client need and if what they need we don't have, we try and get it elsewhere. And if we have it, we try and make it as competitive as possible. So that portion of what we do continues to have compressed margins. But what we're doing everywhere else across Asset & Wealth Management has more than made up for it. And so the net new clients at record levels, the net new flows at record levels, the net new products and services, 125 new ESG offerings that we've launched, continuing to have very strong performance, continuing to help clients, innovating things like Morgan Money, helping clients to come on our portal, to think about their whole money, their whole money market platform and how do they navigate that, there's just a number of things. You have to stay innovating. You can't sit there and look at the thing that might have compressed margins and say what are we going to do about it because that's not going to get you anywhere. So we just approach it very differently and it's worked for us thus far. And I think that if we continue to keep our eye on what does the client need, where are we going in investment performance, first and foremost, at the beginning of every day, the middle of every day and the end of every day, that will work out to be the best long-term strategy.

Very good. You touched on earlier and this also ties into a question from the dashboard here about being in every state, so you've got touch points in every state. So can you share with us on the wealth management consumer banking branch consolidation strategy, how has it been affected by COVID? And if COVID continues to be a real challenge for everybody through the summer of next year, will that alter -- or how does that maybe alter the strategy if it does?

So the branches were the thing that functioned all the way through COVID for JPMorgan Chase. We continue to remain in branch, providing clients even if it was with the remote cash or sending it through the teller window. We were there for them. We were there on the telephone lines, obviously. But we're there with a presence in person. So that has continued to help us. The wealth management component of that in the branches followed suit. And while we didn't have everyone back in the branch every day, they were there for the days that they needed to be. And now the statistics are that they are there and more engaged than they were pre-COVID. So already here at the beginning of November on the onset of who knows what will happen over the next coming months, that's what we've been able to do. And that's really important because the more we focus on the world after COVID, the more you realize that there's not an after-COVID world. We are going to be living with COVID for a very long period of time. There's not like it's going to rain vaccines down and everyone in the world is going to get it at the same time. And they're going to get the one the next 30 days later, and it's going to come fully refrigerated and everyone will be vaccinated. That's not going to happen. This is going -- we are going to be living with this for a very, very long period of time. And so learning to live with it has been the most important thing that we have done. Learning how clients want to absorb that advice, particularly, on their assets for their families, for investing, even if they're first-time investors, right, using our You Invest platform, how do I think about that first dollar? What -- how do I diversify it? What does it mean? What does the stock market mean? What does the bond market mean? All the way up through the largest pension funds and sovereign wealth funds in the world. And so that's been really good for us and we've learned a lot. So we are testing and learning through every one of these steps, and we're finding things that you don't need to do anymore, right? You don't need paper of things anymore. You don't need notaries in the branches to be able to notarize everything. Very few things are left in the world. We still have people with business cards that have a fax machine number on the bottom. You don't need that either anymore. So there's a lot of things that are changing, that changes the work flow, that changes the things that need to be done on-premise versus where they can be done elsewhere. And so we're optimizing that. And what you'll find is the end result will be a whole bunch of more people that are there just to help you with advice as opposed to helping you with the more rote processing things. And I think it's the most exciting thing that could happen to the branches. And so, while real estate feels like a scary thing, that's why we're continuing to go into each and every one of these new cities, open branches, be there in the communities and help people get through this and learn to live with it.

Very good. We're running out of time here, Mary. We've got a minute or 2 left, but I did want to bring up one topic that's on everybody's mind in the wealth management, asset management space, which is ESG. You touched on it very briefly earlier in your comments. Maybe in a few minutes, can you just share us how important is it to have ESG products in that business mix?

So I don't think of it as ESG products, although that's what people come and ask us for and it's a very real thing. But it's much more real outside the United States than it is here. So 70% of the new product growth in ESG, I mean, there's -- in Europe, it's been a 70% growth of ESG products in the past year, where it's only about 15% growth in the U.S. So you do just see -- again, it's a little bit like the effects of COVID, how they transfer around the world at a different rate and a different pace. That's the same thing with ESG. I think Europe is on the forefront and it's really a leader in terms of how you think about it. But for us, ESG is an integrated part of what we do. And so we have a whole team led by Jennifer Wu, who's helping us to think through how do you make sure that everything you do from the research questions that you're asking when you sit with the CEO and the CFO of a company, and how you're reading that in. It can't be an afterthought. It can't be something else that you do. That's our responsibility as an Asset & Wealth Management company is not to apply our judgment on anyone. It's to ask those questions, to integrate them into the thinking and integrate them into the way that we're thinking about the present value of what they're going to offer in the future. And then it's giving the clients the ability to say, I either want to exclude certain things from my portfolio or I want to increase the factors on a particular area. And that's client by client. And that's really the only way I see this happening. I don't think it's anyone's job in life to apply their own environmental, as for instance, opinions onto a portfolio and say this is how it should be. You can have portfolios that offer you one flavor or another, but really, at the end of the day, it's up to the client to say where they want to put their assets and how they want to invest their money for the long term. And that's what it's all about. So I'm really excited about what the future holds for that. I think everyone -- I think this is the time on our planet where people are thinking about how to make a difference and using your assets to do that is the best way that I know how.

Well, with that, I want to thank you, Mary. It's been a real privilege having you here at the BancAnalysts Association of Boston Conference. On behalf of the Board of Directors... [Audio Gap]