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

Good morning, everyone. This is Gerard Cassidy from RBC Capital Markets. I want to welcome you. Similar to Derek Neldner and Dave McKay, welcome. Thank you for joining us for our Annual Financial Institutions Conference. We're very pleased to kick off the first morning session with JPMorgan Chase. As many of you know, JPMorgan Chase is our largest bank in the United States. As of last night, it had a market cap of about $380 billion. The stock trades at about 1.5x book value. And the dividend yield today is about 3%. We're very pleased today to have Troy Rohrbaugh, Head of Global Markets. Troy has been with JPMorgan Chase for 25 years. He heads up JPMorgan's leading trading franchise in both fixed income and equity trading. And he's a member of the operating committee at -- and the CIB management team. Thank you, Troy, for joining us today.

Thank you very much for having me.

Troy, as the head of the global markets at JPMorgan and again you folks are blessed with the largest trading franchise in the industry and a member of the firm's Operating Committee, can you tell a little bit about your role in what aspects of the business that you're more involved in on a daily basis?

My primary role is running the trading franchise. So that's global markets. That's both fixed income and equities, emerging markets and all our requisite businesses. So I sit on the operating committee, but that is 100% my day job.

Very good. And maybe we could start with a question about the operating environment we're seeing today in the markets business. Jeremy Barnum, your CFO, recently guided that markets revenues we're remaining fairly robust here in the first quarter compared to a year ago. In fact, he pointed out they'd probably be down about 10% to a very strong first quarter of 2021. With what's going on in the world today, how are the activity levels? And what are the major drivers in these activity levels today?

Sure. I'll start off with a bit of comment on where we are. As of Friday, our quarter-to-date performance was down 10% in markets. But things have changed a lot since then and since when Jeremy provided similar guidance for the full quarter. So at this point, we're not going to provide any further guidance on the quarter. The markets are extremely treacherous at the moment. There's a lot of uncertainty. There are a lot of clients that are under extreme stress. That creates potentially very significant counterparty risk exposure. And the movements here are extremely significant and playing out in real time. So I would suffice to say that the full ramifications of the current conditions are still uncertain and unknown at this point.

And can you show this -- since you head up both the equities and the FICC area, where are you seeing the greatest turbulence? Is it more on the fixed side or the equity side?

I mean we're seeing turbulence across markets. Obviously, emerging markets related to Russia and then stress around the sanctions, which spills over to multiple markets, commodities, particularly there's obvious real stress there. So I would say it's broad-based, but clearly relating to sanctions, whether it be sanctioned counterparties, sanctioned products, unwinds and then in the commodity complex.

Very good. Can you share with us the last 2 years, as you know, in 2020 and 2021, which seem kind of bit ways away, we've had record trading levels. Obviously, the other side of the house, the investment banking areas had record levels as well. And how much do you expect that these trading levels may -- is tough with what's going on with the Ukraine and Russian situation, and I understand that. But as we normalize, as the economy normalizes, where do you see the trading levels reaching? Are they going to end somewhere closer to 2019, do you think? Or are we here a new kind of level that is not going to approach those 2019 levels?

Sure. I mean it's obviously -- it feels a bit strange to predict the medium term when we're dealing with such a significant crisis. I would say prior to the current crisis, and we still believe on a medium-term basis, that while we were expecting normalization from the 2021 levels, we expect that medium-term run rate to be above the pre-COVID crisis 2019 run rate. So if you look at 2016 to 2019, while there was some increase in overall wallet, it was modest and the run rate was pretty similar. We believe that medium-term run rate will be above those levels. How far above? It's a little bit hard to tell at this point.

No, no. Very true. If we look longer term, if that's possible, and you look at the fee pools and market shares including the trading prospects that may arise because of the expected tightening cycle, maybe even QT and I know those expectations have shifted because of the situation Ukraine, but when you look out longer term, what is that kind of outlook to you in this normalization period?

Yes. Again, I think we based our projections of 2022 before the current moment and the medium term with a slight normalization of that fee pool. But part of the reason we feel it will be above that 2019 run rate is that those fee pools should stay elevated. And we think there's a couple of really strong factors that will be a tailwind to markets businesses really across the street and certainly here at JPMorgan. We've had significant growth of assets under management. The path of rate increases in QT and normalization among central banks potentially creates real opportunity for clients in fixed income. Overall, we think as we exit quantitative easing, enter a period of rate hikes and quantitative tightening, more than likely, you're going to have increased volatility, which creates trading opportunities for a wide range of our client base on the investor side and then creates the need for corporates to be more active and engaged in hedging. All of that, we feel like our support of the overall fee pools and, clearly, we hope to continue to gain market share, we've successfully done that during the entire post great financial crisis period. We still think there's real opportunity. A lot of the easy market share or the further market share gains are going to be really challenging, but we believe there's opportunity there for us to capture.

Very good. When you look at the business, obviously, a lot of it has to do with volume versus margin. And maybe if you can share with us what you see in that volume versus margin, what's really driving the business. Is it more of the volumes? Or how important are margins if volumes start to flatten out? And are there certain products that are more profitable and work better for you guys as well?

Sure. I think the simple answer to the question is both, if that's an answer at all. We're really focused on both. I think, ultimately, we feel strongly if we are getting the vast majority of our clients of volume market share that ultimately, like that's the successful strategy. If you look at a large number of electronified products like cash equities or foreign exchange, it's really a volume game. And then in periods of stress, when the margins increase, that market share and those volumes become potentially more profitable. But for the vast majority of the time, it's really about creating the largest franchise flow machine you can. And we've been really focused on that, both in the equity space and in fixed income. The products that are electronifying continue to grow. And if you look at the electronic wallet, it continues to be a more and more important part of what we do with clients. And it's also a part of what clients evaluate when they do some of the higher-touch, higher-margin business. So we feel that 2 of them are interconnected that you can't win the higher-margin, high-touch business without having a fully complete, what I would say, volume-focused lower-touch business. So for us, getting both right is really integral. And I think if you look at '20 and '21, you see an environment where you have like sort of both coming together. You see market share gains on the volume side with increased volatility that then have higher margins. But ultimately, we plan for the normal run rate, not those specific one-off events. And we feel like winning volumes with clients and being key counterparty is critical, and then the margins will come either in other products with them or when the opportunity presents itself.

Very good. And tying into the volume versus the margin color you just gave us, how important is a strong investment banking business, meaning feeding new issues whether it's FICC or equities into that volume/margin discussion?

We think it's extremely important. Having a complete offering across the entire CIB is really, really advantageous to us. So having an incredibly strong investment banking business, both the DCM and ECM platform for primary issuance. We work very closely with them, the corporate derivative franchise that comes off the back of these relationships, not to mention the custody and fund services piece. Our large number of our largest investor clients are also a client of Teresa's business in custody and fund services. So all of this is interconnected. And when we think about the total wallet that we want to gain clients, we think about it holistically. And I think that's really a differentiating offer for our clients and has been really helpful in gaining market share.

Got it. You talked about the gains in market shares. Are there any other specifics either in the FICC or equity business that, as you've identified, the market share growth has been impressive, that you can point to that also contributed to this success?

Sure. I mean we've made equities in particularly our prime platform, a key investment area. We're really happy with the payoff in that. We're solidly in the #2 space. I'd argue when we started, we were -- even if we were third, the distance to first and second were quite large. We started with a very U.S.-focused narrower platform. We feel that, that platform is complete. It's global. It has both cash and synthetics. We continue to grow it. And the spillover into the rest of the equity franchise has been significant. It's really helped our cash equities business. We've obviously made investments there as well. We always had a very strong equity derivatives business, but now we feel we're really complete. But that prime investment has been significant, and the market share gains have been extremely meaningful. And I think that puts us in a position to have both a complete markets business, not just what was once like a very large dominant FICC business, but we also have a complementary significant equity business that is very favorable when the 2 are put together. And we can also look at client wallet about across both. And I think when you think about clients and how they distribute their wallet, having that complete offering is very important.

No doubt. No doubt about it. In fact, it's interesting when you look at the concentration among the biggest players, obviously, you're up there with the biggest players along with few of the obvious names. And what do you think has been the big drivers behind this trend over the years where the bigger players seem to be gathering more of the wallet share and market share. And those drivers, do you think that they could continue on a go-forward basis?

Yes. I mean, look, I think the part of the driver of concentration, it probably won't continue to start with the reason that it may stabilize, is that post great financial crisis, you had a lot of institutions that weren't in a position to focus on market share gains. And the concentration of the wallet went to the institutions that were, and that was predominantly U.S. institutions. Coming off the back of COVID, we're in a really different position. The revenues accreting to markets businesses across the street have been significant. Virtually, all banks that stayed in the business have the ability to invest. They are investing. So I think that tailwind among the top banks, particularly U.S. banks, isn't quite as strong as it was. There's a lot of significant competition coming back to the market. That said, the rest of the reasons for concentration are still very much there: The requirements to invest in technology; the requirement to have scale, both in your overall offering but in the ability to manage large amounts of flow and do that on a global basis. The operational capacity to do that is really difficult. And that investment not everyone can make, and that's going to continue to be a differentiator. I also think clients are looking for someone whose full service. The ability to provide balance sheet and things beyond just execution are very important to clients. And I think clients are becoming more sophisticated around how they allocate their wallet in a way that continues to drive share to the largest counterparties. So we feel quite good about the position we're in, like how much more it concentrates in the top banks is hard to say. It's definitely going to be more challenging from here, but we don't see any reason for that trend to reverse.

Very good. You touched on the U.S. large global players have been able to gather or gain this market share at the expense of probably the Europeans, of course, because of the challenges that they've had. Do you see any changes with the Europeans? You mentioned -- I think you alluded to in your answer that already it's going to be more challenging, you obviously said that. But are they picking up some momentum now that they've seen to have gotten back up on their feet after struggling for a number of years?

Yes. I mean I think they've stabilized. They have had a consistent business model for several years now. And the opportunity in 2021 on the increase in the fee pool, it benefited everyone. So I think that they're a much more solid footing, and I would expect them to compete very aggressively moving forward.

Got it. Another area that's interesting is that there's been a number of nontraditional players that have come into this market and made inroads, as you know. Can you share with us your thoughts on the nontraditional players and how you're competing against them?

We spend a lot of time on this. My background originally was in FX options. So in FX, for a very long time, we've competed against nontraditional players. And we have a great deal of respect for them. And we compete with nontraditional players or nonbank large universal banks all over the place in a lot of markets, whether that is smaller niche players in a particular emerging markets location or some of the very large electronic, what I would say, nontraditional market-making shops. And they're very good at what they do. The environment again in 2021 was very conducive. We plan to compete very aggressively. We think about that competition a lot. We're not shrinking away from it. We've invested heavily in electronic trading, which is where the primary competition with them is, and we're going to continue to do that. I think the really key point is we don't assume that our size and scale means we'll win. We assume they're going to be successful, and we attack the problem that way. And I think it's really important not to underestimate them. Otherwise, like they'll continue to gain share.

Is there any regulatory issues, meaning everybody wants a level playing field so that it's -- everybody can compete effectively? Is there any regulatory advantage that the nonbank, nontraditional players have over a full-service bank like yourself or Citigroup or something like that?

I mean there are definitely some areas where they have advantages from a regulatory perspective. A lot of that plays out on the control front. They're just much less heavily regulated and the requirements in terms of being such a significant player that we are, are different. I just don't think we want to ever use that as an excuse. I mean the rules are the rules. We're going to compete on the field as the rules are drawn up. We may have some views on what would make it a bit fair, but we're definitely not going to use that as an excuse not to compete aggressively with them.

Yes. We talked earlier in the conversation about your focus on the equities business, how you've built it out, you built out the prime business, prime brokerage business quite effectively. Can you give us an update of just where you see it going forward in the equities business? How are you going to drive that business as we look out over the next 2 to 3 years?

Yes. I mean I think in some ways, while we had lots of room to catch up, the strategy was quite clear. We were a significant arguably best-in-class equity derivatives house. We've always been very strong there. And we were missing the prime and cash businesses. Like I think at one point, we were ranked fifth or sixth in cash, and we were, as I said, third in prime, but a distant third. And we've meaningfully close those gaps. We feel that we are a best-in-class competitor there. So I would say the easy sort of solutions and the easy growth in our market share, not that it wasn't hard to deliver it, it was, but the obvious places that growth is going to come from have broadly been closed. That doesn't mean we can't keep growing all 3 of the key components of our franchise, both our equity derivatives, the cash business and prime. And we plan to continue to invest in all 3 of those areas. Where we're really focused is on client wallet and filling out either the geographical footprint, our electronic trading offering, our direct market access offering, our algo portfolio. We're also extremely focused on incorporating machine learning and data-driven trading strategies, ultimately, AI. I think sometimes people overuse that term, but we're aggressively investing in what I would say the latest in data. We plan to be a leader in the space. I think, ultimately, in equities, if you're not, you won't be able to be in that top tier. So between continuing to invest in the 3 core lines of business, heavily invest in our data platform, our data offering to clients and our own traders, embedding machine learning and AI into our trading, both for ourselves and our clients, building out our algo platform and then just filling in the gaps, both on an individual desk level and also where we have market share to gain clients. If you look at our client base, and this is arguably true for FICC as well, we're not #1 or not even top 2 with every single of the major clients. Like overall, we have an incredible market share, but there's definitely room for opportunities even with some of the largest clients.

Do you see the opportunities better in what you just brought up about getting deeper in the existing clients? Or are there better opportunities in adding new clients that you just don't do business with that you do find opportunities to do business with as we go forward?

I mean I think the answer is both. I mean, clearly, much like the wallet is concentrated in the top banks, the wallet on the client side tends to be similarly concentrated. And if you look at the largest asset managers, they continue to get bigger. It's an incredibly competitive business. So I would say, absolutely getting it right with the largest clients. And you can define that whether that's the top 50, 100, 200 or 500, people use different metrics. But getting it right with that top core clients is absolutely critical. And so we spend a lot of time focused there. The interesting thing about electronification, it also allows you to cover a broader range of clients that are outside that group in a way that you wouldn't have been able to do before because of the people intensity or the cost. So we clearly aren't ignoring that either, and we think that our electronic platform gives us that opportunity. So we're going to do both. But getting it right with the largest clients is absolutely critical because of the concentration of AUM with them as well.

Yes. You talked about the success of the prime brokerage business, the cash business. When you look at it geographically, is there a part -- is it U.S. where you had that best success and now the opportunities are in Europe or over in Asia Pacific? Where geographically when you look out that you can think you could really start to see some growth?

Sure. I mean like our prime business was really a U.S. business when we started. So needless to say, we grew that business in the U.S. because that's where our core strength was. But on a percentage basis, Asia and EMEA grew very significantly because we really want that president. Now that I feel like we're geographically complete and we've leveled most of the regions, I think if you think about the investor environment, the U.S. continues to be a real area of us continuing to gain market share. But it's not at the expense of any other area. I would probably have to highlight Asia. I think there's real opportunity in the coming years for our prime platform with a growing Asia footprint. So again, I think we'll see growth in Europe. We definitely believe really strongly in the U.S. platform, and that's a significant opportunity even going forward. But from like a geographical place, maybe in percentage terms, Asia offers some of the biggest opportunity.

Very good. And pivoting over to the FICC business, fixed income trading. What do you see the greatest opportunities to grow this business over the next couple of years?

Yes. I mean it's a bit of a different story, I mean, than our equities business. Like we were and have been a leading franchise for quite some time. We're extremely complete. I think, ultimately, there aren't any obvious pockets of significant gaps or weakness. But again, it's really the blocking and tackling of a client-centric model. While our market share is really big and there's not an obvious client that's missing or an obviously product that's missing or geographic location, it's really important to get it right with those large clients that AUM is concentrating in. And we still continue to believe whether it's with a given part of a large client, some of these clients have large numbers of traders working for them, others are structured differently. But getting it right on the client side, filling in any individual geographic gaps or product gaps where we might not be best-in-class, really, ultimately, we'll increase our market share in a way that our wallet goes up and our share of the fee pools. But it's challenging to deliver that. We're totally committed to it. we're totally client-focused. It's just -- it's a lot of hard work. But that's really where we took the opportunity. The other piece of fixed income really is electronification. I still think there's a lot to do there. We've invested heavily historically in our FX platform and rates. We're very focused on building out our electronic offering in credit. The ecosystem there is really changing. If you look at electronic trading for individual bonds, the combination with portfolio trading and ETF trading, getting that ecosystem right is a really big opportunity for us.

Very good. And we've talked obviously a lot about growth in your business. And can you share with us some of the constraining factors that you have to manage, the G-SIB and the SLR, for example? How do you manage the trade-off between managing your resources and growing the business?

Yes. I mean I think we're particularly happy with how we've managed it so far. We've been able to grow our footprint with clients. We've clearly grown our G-SIB and our financial resource footprint. But we've also found a great deal of efficiency. So I would argue that we've been able to grow with clients, but not use our resources in an inefficient way. So obviously, part of the key pillar is continuing to be efficient in how we allocate those resources. We're now at a point that we view them as finite resources. They're not infinite. So as we move forward and as our businesses have gotten to scale, it's really important to be efficient, it's really important to evaluate where we get the best return for the firm. And I think we've done a good job of it. We just have to continue to be sort of laser focused on this topic.

Sure. One of the biggest areas of discussion amongst investors, institutional investors as well as consumers, of course, is crypto. Can you share with us what you're thinking of how this trend is developing and how you're positioning your business in this space with crypto trading possibly down the road?

Sure. I think people spend a lot of time debating the value of a particular cryptocurrency or crypto asset. I try to shy away from that because, ultimately, these assets can go up or down significantly. For us, which I think is really critical to the franchise, is that we're broadly investing and preparing for an environment where clients trade a larger number of what we would call tokenized assets or digital assets. It's probably less important to get a specific assets value correct for us, but it is critically important for us to be there as these asset classes develop, as clients trade more digital assets, as you get potentially tokenization of existing assets. The firm itself has invested a lot in blockchain technology in the underlying decentralized finance world. And as we get more regulatory clarity, as our clients become more significant investors in these products, particularly our asset manager clients, we plan to move with them. But obviously, getting some regulatory clarity would be helpful. And then ultimately, as clients move that direction, we plan to be prepared to move with them.

Great. I think we have time for one last question, Troy. And maybe you can share with us what you're thinking about the comp and expense dynamics of the business within markets? And how is that -- as the retention of employees changed or -- how does that play into it as well?

Sure. I mean I think everyone would tell you in every industry, ours is being no different that the war for talent has never been higher that the price of good talent is going up. And our industry is no different. JPMorgan is no different. I feel really strongly with Daniel and Jamie's backing along with the Board that we are very competitive, that we can continue to compete for the best talent. And we'll be thoughtful about it. We'll be efficient about it. It's a resource as well in terms of compensation. But I feel like we'll be able to compete and retain the best talent as we always have, and I feel that there's a great deal of support from the most senior levels of the firm to do that. It's obviously critical to get the people part of it right. The other piece is really the investment in technology. I think one of the big differentiators at JPMorgan is our ability to invest in technology over the long run for very long periods of time. And that's a huge competitive advantage. Doing that efficiently is challenging. I feel like we do a good job of it. But getting that done, continuing to vast, making sure those investments are the right ones is really important. And that's the 2 places I'm focused, the people investment and the technology investment. I feel we are in a really good place to compete, but there are challenges there across the industry.

Well, Troy, it's been very enjoyable. And I really thank you for joining us today. We've run out of time. And I look forward to meeting you and seeing you at your Investor Day in May, and thank you again.

Thank you very much. It's been a pleasure. I really appreciate you having me here today.

Very good. Take care. Thank you.