In his previous annual letter to shareholders Jamie Dimon wrote in a sometimes upbeat way of the U.S. entering a post-Covid “Goldilocks moment” as it entered 2021. Just a year later his letter is much darker.
The 46-page letter — part of the JPMorgan Chase 2021 annual report — is more than ever a worldview of a man who may be the most influential person in American business. The 66-year-old Chairman and CEO of JPMorgan Chase describes a far more somber outlook in which optimism comes only from the hope that the nation’s government and business leaders take a hard look at where they are headed and make appropriate choices.
Against this backdrop the banking industry faces a battle for survival that Dimon expects some to lose.
“We are facing challenges at every turn,” wrote Dimon in the 46-page letter, which has become an anticipated annual event, rivaling the annual letter of Berkshire Hathaway’s Warren Buffett. “A pandemic, unprecedented government actions, a strong recovery after a sharp and deep global recession, a highly polarized U.S. election, mounting inflation, a war in Ukraine and dramatic economic sanctions against Russia.”
While that should be enough to depress bankers and credit union executives, Dimon also returned, but more darkly, to a theme from his 2020 annual report letter: banking’s battle for market share against fintechs, big techs, and “shadow banking.”
This increasing encroachment isn’t new, but the prediction Dimon made resets the debate. The leader of the nation’s largest bank basically described a game of financial musical chairs — except with more players and fewer chairs at the start:
“It seems unlikely to me that all the banks, shadow banks and fintech companies will thrive as they strive to take share from each other over the next decade. I would expect many mergers among America’s 4,000+ banks — they need to do this, in some cases, to create more economies of scale to be able to compete. Other companies will try different strategies, including bank-fintech mergers or mergers just between fintechs.
“You should expect to see some winners and lots of casualties — it’s just not possible for everyone to perform well.” (Emphasis added.)
Clearly Dimon intends his own organization to be a winner. JPMorgan Chase is a major fintech investor and purchaser, and Dimon wrote of how the bank now processes payments for eight of the world’s top ten big techs, up from only three five years ago. In addition he detailed major technology investments, such as conversion of thousands of operations over to private and public clouds and development of over 1,000 application programming interfaces, that Chase is spending on.
Dimon’s View: Inflation Specter Demands Strong Fed Reaction
The U.S. economy sits at a critical crossroads and much will depend on how the Federal Reserve handles things.
The Fed and the government, said Dimon, took dramatic steps to avert disaster in the wake of the pandemic.
“In hindsight, it worked,” wrote Dimon. “But also in hindsight, the medicine (fiscal spending and quantitative easing) was probably too much and lasted too long.”
Dimon said that a Fed that reacts strongly to data and events will earn more public confidence.
“If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede.”
— Jamie Dimon, JPMorgan Chase
War in Ukraine and Sanctions Could Damage World Economy
Dimon pointed out that over the past half-century even major conflicts between nations haven’t disrupted the world economy, but the Russian invasion of Ukraine is different.
“The hostilities in Ukraine and the sanctions on Russia are already having a substantial economic impact,” said Dimon. “They have roiled global oil, commodity and agricultural markets.”
(The letter notes that Chase will likely take a $1 billion hit from exposure to Russia, over time.)
Dimon said major changes in attitudes towards military power and international trade are coming in the wake of the Ukraine war, and that the war could affect geopolitics for decades.
“How the West comports itself, and whether the West can maintain its unity, will likely determine the future global order and shape America’s (and its allies’) important relationship with China,” said Dimon.
Dimon believes global order requires America to strike a balance between leadership and orchestrating the collaboration and compromising necessary to avoid chaos.
Among the measures that could result, in an effort to confront Russia, is an energy “Marshall Plan” that would address European allies’ dependence on Russia fuels.
Dimon’s Diagnosis: Banking’s Economic Role is Shrinking Globally
New forms of competition from nonbanks worry Dimon. “The pace of change and the size of the competition are extraordinary, and activity is accelerating,” he wrote.
“Last year alone  $130 billion was invested in fintech, allowing them to speed things up — and at scale.”
— Jamie Dimon, JPMorgan Chase
In the table below, taken from his shareholder letter, Dimon illustrated key trends as big techs, fintechs and other nonbanks continue to move into banking’s turf with both familiar and innovative approaches. Besides big techs, fintechs, and retailers, he targeted “shadow banking,” in which Dimon includes bank-like activities by hedge funds, money market funds, assets under management by private equity firms and more.
|$ in trillions||2010||2021|
|SIZE OF BANKS IN THE FINANCIAL SYSTEM|
|Total U.S. debt and equity market||$ 57.6||$ 136.4|
|U.S. GSIB market capitalization||$ 0.8||$1.5|
|U.S. bank loans||$ 6.6||$10.9|
|U.S. bank liquid assets1||$2.8||$8.6|
|Total U.S. broker dealer inventories||$4.1||$4.5|
|Hedge fund and private equity AUM2||$3.1||$9.7|
|U.S. private equity backed companies (K)||1.6||10.1|
|U.S. publicly listed companies (K)3||1996 – 7.3||4.2||4.8|
|Total private direct credit4||$14.0||$20.4|
|SIZE OF NONBANK COMPETITORS|
|Google, Amazon, Facebook, Apple market capitalization||$0.5||$6.9|
|Payments market capitalization||$ 0.1||$1.2|
|Private and public fintech companies market capitalization6||NA||$1.2|
|Cryptocurrency market capitalization||NA||$2.2|
|U.S. neobanks – # of users (M)7||–||>50|
|Global exchanges and financial data companies market capitalization||$0.2||$1.0|
|Nonbank share of mortgage originations8||9%||68%|
|Nonbank share of leveraged lending||2000 – 54%||82%||87%|
Sources: FactSet, S&P Global Market Intelligence, Assets and Liabilities of Commercial Banks in the United States H.8 data, Financial Accounts of the United States Z.1 data, World Federation of Exchanges, Pitchbook, Preqin and CoinMarketCap
GSIB = Global Systemically Important Banks AUM = Assets under management NA = Not applicable K = Thousands M = Millions
Footnotes refer to the original JPMorgan Chase annual shareholders letter footnote section. You can access it here
He pointed out that while bank loans have grown, they have shrunk drastically as a percent of the overall U.S. debt and equity market. Bank credit now represents only 8% of the total. Banks’ share of mortgage originations has shrunk to 32% in 2021 from 91% in 2010.
Dimon pointed specifically at the banking activities of Walmart and Apple as examples of major fresh competition.
“If banks want to compete in this new and increasingly competitive world, they need to acknowledge the truth of this new landscape and respond appropriately,” Dimon said. “Sometimes it truly is change or die.”
Dimon Questions Role of U.S. Banking Regulation
Dimon criticized how U.S. financial regulatory thinking often ignores the likely results, especially in how new rules interact with the thick web of existing regulation. “This is particularly true when trying to determine what products and services will remain inside the regulatory system as opposed to those likely to move outside of it.”
He gave multiple examples of rules that chartered financial institutions face — such as Community Reinvestment Act requirements — that nonbank entrants don’t.
“Neobanks, now with over 50 million accounts, bypass the Durbin Amendment and so earn higher revenue per debit swipe,” Dimon wrote, “and they don’t have to abide by certain other regulatory or social requirements.”
A final major concern for Dimon: The severe drop in the number of public companies in the U.S. By contrast, the number of companies backed by private equity has been booming, rising from 1,600 in 1996 to 10,100 in 2022.
“It’s incumbent on us to figure out why so many companies and so much capital are being moved out of transparent public markets to less transparent private markets — and whether this is in the country’s long-term interests,” said Dimon.
He suggested shareholders of public companies ask whether the volume of rules imposed on such firms “actually make them better.”