Jean Pierpont Morgan Releases Annual Report
-By Sam B | [email protected]
Warren Buffett recommended, in his 2011 annual report, to read a Jamie Dimon, of J.P. Morgan (JPM), annual report. Therefore, some investors look forward each year to Dimon's report. In 2016, JPM said its net income was $24.4B, EPS $6.00 a share and return on tangible equity 13%. Dimon said, in the annual report, that the company hopes to achieve a 15% return on tangible equity over the long-term.
Dimon discussed new regulations, which included a discussion on non-operating deposits. The esoteric term can be defined as deposits that the FDIC would not insure because they are too large—for instance deposits from another bank or hedge fund. Basel III regulations require banks to hold 40% of high quality assets against hedge fund non-operating deposits and 100% for non-operating deposits assets from other financial institutions—only 3% is required for operating deposits—or regular customer deposits. The new rules assume banks will have 100% withdrawals, in a period of stress, from other financial institutions, a situation which is unrealistic because it assumes all banks withdraw their money at once .
Dimon stated that regulations have led to bumpier markets and less robust activity in certain markets: "incomplete and sometimes confusing rules around securitizations and mortgages... we have not had a healthy return to the securitization market." The full annual report can be read here.
Dimon mentioned JPM's commitment to diversity, "our women leaders represent more than 30% of our company’s senior leadership, and they run major businesses." Though many would argue that it is incumbent on companies to hire the best people regardless of sex or color, and that this should not be a consideration. Another article discussed the detriments of companies taking corporate social responsibility rather than allowing individuals to do so. Dimon discussed the rise of FinTech , which is a broad category that describes technologies that are being created by banks or non-banks to conduct financial transactions. JPM spent over $9 billion last year on technology. JPM maintained its commitment to mortgages even though the regulatory environment has pushed down returns; this is because, the mortgage business is important to establish long-term customer relationships.
Dimon noted that U.S. Banks as a percent of total GDP are smaller than most other countries indicating that US banks are not too large. Dimon suggested some rules that should be modified, such as modifying the liquidity coverage ratio, simplifying mortgage rules, and ensuring capital rules are less cyclically based.
Dimon despite being critical of regulations for years said, "by any reasonable measure, the financial system is unquestionably stronger, and regulators deserve a lot of credit for this." It is possible this remark was made because JPM has benefited greatly from reduced competition due to regulation. The report was a little different than prior years, reading more like a FAQ rather than Dimon's usual report, perhaps Buffett will tell us next year if it is still worth a read. Investors can find a copy of the report here