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

Up next is JPMorgan. With us this year is Mary Erdoes, CEO of Asset & Wealth Management. This includes private banking or wealth management as well as global institutional asset management and retail asset management. Client assets totaled $4 trillion. There's $14 billion roughly of revenues, and it's 10% to 15% of overall JPMorgan, depending on what year you look at it. So Mary, thank you so much for joining, and welcome to the conference.

Well, thank you. JPMorgan is super proud to be part of this and very, very thankful that Deutsche Bank included us. So thank you.

So I think we'll just jump right into the fireside chat format here. The firm overall continues to make a lot of investments year in, year out, did recently increase the level of investments for this year. And I think many realize this is a key reason for the strong performance. As I think about your world, clearly, areas such as wealth, ESG, China and just broadly speaking, technology, are areas of focus. So I do want to just dive into these, and let's start with wealth, which gets a lot of attention. You've been adding FAs. You've been leveraging technology to expand. Maybe you can give us a broad update on what's going on here?

Yes, sure. Well, we're really proud of the strong performance that the wealth space has provided for the firm, and especially in the private bank, the leadership position that it has around the world. I always say that if you want to have an understanding of all of JPMorgan Chase, you should become a private banking client because it's really where we bring together the entire firm. We bring the institutional capital markets expertise of the world's best investment bank, the expansive reach of our commercial bank, sophisticated lending, structural tax, entity work, executive comp expertise, and then, of course, access to the outside managers where many of them are exclusive to us, some of the world's best hedge fund, private equity real estate managers. So it's a very, very special part of our firm. And it's the reason, I believe, that it has such high market share in various parts of the world, as high as 10% or 15%, in cities like New York, or Madrid at the high end. But that's really nowhere near where we want to be in the high net worth part of the market, which is much, much more fragmented. And that's really one of the biggest opportunities across our firm, is to continue to take that high end of what we do and just go all the way down.

And talk about closing those gaps because I think you put some metrics out there that the ultra-high net worth is roughly 2x the mass affluent and I think 4x or even more of that of the high net worth. So how are you at closing that gap? And is that reasonable to think that, over time, that gap can be closed?

Yes. One of the -- I think one of the most special things we've done in this firm over the past couple of years is create a partnership across my line of business, the Asset & Wealth Management business and the CCB, especially between the private bank and what we call Chase Wealth Management, it's really been one of our greatest successes. We've been able to empower the Chase advisor in the branch and be able to provide them with the private banking products and services. And it's really -- it's a finely tuned machine. Eric Tepper, who's at the helm of that, work super hard to give customers across all 4,872 branches the ability to have the investment help across what we do for the private bank, which is a simplified version for the clients that walk into the branch. And we've tweaked it over time. We began really with just one balanced module. And today, it's a fuller range of brokerage, investment, insurance, advisory at a very fast-growing area. To enable that scale, we've spent a lot of time on the modernization of all of the tools at the fingertips of the people in the branches from the CRM system to the goals-based planning, and we also spent a lot of time on intense training so that we have the standard of care for our advisers who are out there. The pandemic surprised us even more so. Since COVID began and the lockdown, we've had 75% of our branches have been open every single day, some of them 6 days a week, and we're now in 48 states across the United States of America. So it's just amazing, as stressful as it was and still is, what they've done with gusto and the fortitude to help clients to navigate. I previewed it at the 2020 Investor Day that I thought this would be a record growth of accounts, clients, revenues. And I underestimated really what it was. As recently as now, we're averaging about 10,000 clients a month to become investment clients. And it's a real reminder to all of us, the difference of an in-person interchange with clients, remembering that 70% of everything that we do in life is nonverbal communication, and I think that, that's what's really translated itself to these results, which is also making me excited about the wholesale business. We've, thankfully, just 2 weeks ago, opened up 55 offices across the United States of America, finally. We've been traveling nonstop, Seattle, San Fran, L.A., Chicago, Texas, Miami, Boston, on my way next week to Geneva and Milan, and any part of the EU that will let me in. But -- and so many clients are coming also here to New York. We've had a lot of international clients come in, several a day, and we're really excited that we're the first meeting that they've had, the first bank they've come into. So that's making us feel quite proud. But this morning, even I -- I'm getting some of the fields saying the limitations that we've got currently in place of 50% capacity in our offices are already being bumped up again. So there's really -- we just want to make sure that we can continue to keep up with the fact that people do want to be back in the office and working together, really high rates, and especially places like Hong Kong, Shanghai, where we're back at 70%.

And it seems like everyone is trying to expand in wealth from a global perspective and whether it's banks as globally focused as you or even just kind of more plain vanilla regional banks in the U.S.? It's an area that everyone wants to expand. Do you think we'll see meaningful consolidation from here? Or is it just going to stay fragmented?

Yes. No, it's a very good question. I mean wealth management is really one of the most fragmented parts of financial services. The top 10 firms globally only capture about 20% of the aggregate market share. And if you think about that compared to like sales and trading and investment banking, where the top 10 firms have now 65-ish, 50% market share, respectively. So it's -- I think it's going to stay very fragmented. Having said that, I think you're going to see meaningful consolidation at some of the higher end through both organic and inorganic efforts. On the organic front, the largest managers just continue to grow. And it's just -- it's harder to stay smaller and undifferentiated. If you just look at the past couple of years, the largest 8 wealth management firms, think about JPMorgan, Morgan Stanley, Schwab, Bank of America, et cetera. They increased market share by about 2 points or $6 trillion. The AUS grew about 23% in 2020, despite actually the global wealth contracting by about 3%. So I think it's a tale of many cities. I personally believe that the business ingredients for the successful endgame winners is a combination of a local presence, which I just mentioned is just so important in this business, plus a global reach and access, which is equally important. And then the higher you go on the spectrum, the more important it is to deal with the whole balance sheet of the client. And so first, you got to be able to connect locally and not just the offices across the United States of America and the branches, but also the 21 countries that we operate in around the world. Very few wealth management competitors actually have gotten that right. Some have chosen just to focus on the U.S., and that's fine. But I believe, in today's world, global is really -- it's really an important component of this. And so I think that's the winning form. I don't know how you deal with things like global execution and money movements, inbound, outbound, on-the-ground research, cyber protection, I mean, we spent $12 billion in technology alone. It's super hard to keep up with that. So I think all of those are part of the equation.

And how about margins? Wealth is one of the areas where margins have held up, especially kind of in the upper end of the customer base here. What's your outlook on Wealth Management margins? Obviously, keeping in mind how much competition there is out there right now?

Yes. I think that the margins are going to continue to be quite healthy. On the ones that have the scale, scale is the most important part. Everything else, you're going to need to outsource. You'll see that change in the outsourcing side of the business. But I think that the endgame winners and the ones that have those 3 ingredients, local presence, global reach, dealing with the whole balance sheet of the client, loans are a very, very important part of this equation, that those are the ones that will be able to take that and constantly reinvest. And those reinvestments and making sure that the client have everything at their fingertips from the digital access that is so critical. Everything that needs to be done in an old-fashioned way, you just -- you won't stay up with the fintechs of the world and the like, unless you're constantly reinvesting there.

So every bank investor is waiting for loan growth to pick up in aggregate. In your world, it's actually been quite strong. And maybe you could just remind us what's driving that? And how sustainable is the loan growth as you look out medium and longer term?

Yes. So the industry has had a hard time with =or harder time with loan growth recently. The private bank is an exception to that. It's the one area of the firm that continues to grow at a super healthy pace. Many of you asked at our Investor Day many years ago is double-digit growth really sustainable? Isn't that too much of risk? What is it that you're doing to get it? And I pointed out 2 very important things. I said, one, we have a very small market share on this lending side. And so there's plenty of room to grow. And there's plenty of great clients out there that we don't provide lending to. And the second is that the majority of what we do is really balance sheet lending. Think about it as full recourse. Think about it as senior secured in most cases. And that's been resulting in these net charge-off rates of about 2 basis points roughly through time, and our facility grades have remained fairly constant. And so our loan growth was 17% year-over-year, and that's across the board. That's on mortgage. That's on lending. That's on margin. That's all regions, all channels. And it's a very important reminder, as you go up into the wholesale market, it's just not a commodity part of what we do. Lending can be a commodity part in other places, but not here. It's a very important part of the overall advice. You have to figure out how much you're borrowing, if at all. You have to figure out where you hold it, how do you hold it, how do you structure it? What are the tax implications? What are the generational parts of how to think about transferring it? And with interest rates where they are right now, we're working as fast as we can to help clients through this whole thing. And for those of you who haven't done a GRAT, you think about these hurdle rates, these are really important times to think about assets that might appreciate, and how do you get them taxed efficiently to the next generation. And so it's a super exciting time for all of that.

So switching to another area of focus, ESG. Obviously, it's very important to JPMorgan overall and your space. How important is ESG from a perception point of view, call it, more playing defense versus playing offense and also being able to monetize it for JPMorgan and the industry and clients?

Yes. It's -- well, ESG is a funny term. Personally, I believe, it's sort of strange to lump the 3 letters together. It's -- all 3 of them have always been a really important area of focus for our firm. Let's just start with the G. The G is governance, right? The -- you have to have good governance. It starts with the good governance of JPMorgan Chase. We spend an awful lot of time constantly refining that. And then we take all those lessons learned of how we do it ourselves, and we apply that when we're evaluating each and every firm that we look at. So that's not new. And all of us as the fiduciaries and research analysts and deep thinkers, we think constantly about, is the governance setup right for the sustainability of the success of these companies that we're all looking at investing in? So that's not new. It's just thrown in and lumped in with the E and the S, I believe. Now the S is really giving back to these communities and ensuring that the companies that we're -- that you're investing in, they're ensuring that they're using their voice for change. Certainly inside JPMorgan Chase, we have a culture of diversity at every level. It makes it a really great place to work. The make up of our 259,000 employees and the respect that we have in the communities that we work in around the world, I think that really speaks for itself and speaks for the power of diversity. We've recently made a $30 billion commitment to racial inequities. That's also including our partnership that we announced with REO alternatives, and that's an effort to really make a difference in the Black and Latinx leaderships roles and responsibilities across private companies in the U.S., and we're really excited about that. So the S is equally important. And then the E. And the E has 2 components. One, just from our firm's standpoint, we've recently leaned in very heavily here after signing the Paris Agreement to get to net 0 by 2050. We -- by the way, our own firm is already at a net 0 emissions as the output of what we have as a footprint for our firm. And we've made a very important $2.5 trillion environmental commitment over the next 10 years. And notably, $1 trillion of that is in the green space. So we're excited about that. But when you move over the asset management side, the asset management industry, I think the industry has a lot of work to do. Just to get a common language and just to figure out how everyone's transparency is going to be absorbable by clients in the same sort of digestible fashion, and you understand what one company is saying versus another, I think many clients might be super surprised that their carbon readiness fund is -- the top 5 holdings are Apple, Microsoft, Amazon, Google, Facebook. So I think that's just -- there's just a lot of progress we need to make to get it to where clients are putting their money where they want it and how they -- specifically they want to make a difference in the world, not necessarily how an index provider wants them to make a difference in the world, and I think that's a big change that's coming. Each and every one of our portfolio managers that we have across asset management is fully engaged in the research that they do with each CEO, each CFO, each strategic plan that they review with the clients that they're investing in and making sure that they hear that as part of what they're thinking about investing. So that's fully integrated across everything we do on the research front around the world. But clients are very hungry for this, and much more so than I've ever seen in 25 years that I've been here at JPMorgan. And just across the Wealth Management side of our business, we've had 30 different funds be launched on our platform during the pandemic. And so it's something we're spending a lot of time on. As a management team, we're spending a big portion of this helping clients. Our off-site last week on the wealth management side spent a lot of time on that. And then this week, actually, we've been spending a lot of time on the asset management side on that off-site that we've had. So it's -- yes. It's a lot in -- what we're doing, and I think it's here to stay. I think people are going to start to be much more purposeful about their wealth.

It does sound like there's a lot going on, and that's helpful. Another growth area is China. And you recently announced plans to purchase China International Fund Management. I guess just to start with the basic. Like what exactly are you buying here? And is it going to be fully folded into JPMorgan? Or how will it be operating?