Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

If Jamie Dimon's annual letter to shareholders is any guide, he can play a mean game of whack-a-mole.

The JPMorgan Chase & Co. chairman and CEO took a swing at every hot topic in his 45-page missive released Tuesday, from bank regulation, immigration, and infrastructure to taxes, technology and, yes, how "something is wrong" with the U.S. (but banks, freed from pesky regulations, could help make it better). Most of his positions are known -- he'd either raised them in last year's letter or during one of his many public appearances. But the addition of some specifics should give Dimon watchers, bank investors and even policymakers in Washington something to chew on. 

Regulatory loosening: Dimon claims that "too big to fail" has been solved, reiterating his opinion that if one U.S. bank were to collapse, it's unlikely that any others would follow -- adding that an overly burdensome regulatory regime is hampering growth. Some of his suggestions on how to fix it -- while valid -- are a little idealistic. It's hard to believe, for instance, that Washington will be willing to follow through on his hopes for a single primary regulator, or that regulators will set rules with full consideration of the costs and benefits to banks. But other ideas carry merit. Bemoaning the "enormous buffers" of excess capital that banks are forced to carry on their balance sheets, he rightly said lawmakers could implement less onerous rules to free up those funds for more lending. And it's hard to argue against the thought that stress tests should be part of the regular exam process rather than the current annual checkup.

Overcapitalized?
Per Jamie Dimon, banks have significantly larger loss-absorbing resources, or more than 10 times than what they'd require to cover losses in a crisis
Source: JPMorgan Chase annual report (SNL Financial, Federal Reserve Bank)

Infrastructure: It's clear that infrastructure in the U.S. is in need of repair, and the issue has been atop President Donald Trump's to-do list recently. That partly prompted a post-election surge in bank stocks, on the prospect of economic growth driven by hefty infrastructure spending and related job creation. Dimon said that infrastructure "should not be expensed as a government debt but should be accounted for as an investment that could be financed separately." The read-through is that he supports the idea that the bulk of any spending should come from the private sector, where private equity firms are raising funds in fast fashion. Such a move would be positive for banks like JPMorgan, which are well-placed to provide debt financing at relatively lucrative rates compared to government-backed infrastructure bonds. 

Shifting Tide
JPMorgan's roughly 45 percent climb over the past 12 months has led to several downgrades by Wall Street analysts
Source: Bloomberg

Technology spending: JPMorgan spent more than $9 billion on technology last year (similar to 2015) and a third of this figure was dedicated to new initiatives. If all goes to plan, these investments should drive growth and eventually bolster the bank's bottom line. For instance, if more clients lean on companies like Digit, a startup that JPMorgan has partnered with to automate savings, the long-term impact on its deposits base -- a key source of bank funding -- could be meaningful. Dimon hinted about some new collaborations in the payments arena -- a decent solution to combating rivals such as PayPal Holdings Inc. without having to make acquisitions outright.  

The bank's valuation: Another key takeaway is that despite the surge in JPMorgan's shares, Dimon believes there's plenty of runway left. That's highlighted by his remark that it makes sense to buy back stock "at or around" two times tangible book value (a move that I've written will help the bank achieve its profitability targets). Based on a tangible book value of $50.54 as of Dec. 31, this implies JPMorgan will happily repurchase stock at up to $101, or thereabouts. So for anyone looking for a signal that he believes in the bank's ability to push past its record high of $93.60 reached last month, there's your answer. 

Buybacks
Currently at 1.75, JPMorgan's average price to tangible book is at its highest since the crisis but it's still willing to repurchase shares
Source: JPMorgan annual report, Bloomberg

Dimon's words were apparently reassuring: JPMorgan shares closed 21 cents lower on Tuesday when in theory they should have shed 50 cents because the stock is now trading ex-dividend. Not bad for a day's work, Mr. Dimon. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Regarding bill payment and business services, Dimon teased that "While I can’t reveal much at the moment, suffice it to say there are some interesting developments coming as we integrate our capabilities with those of other companies"

  2. Dimon said that the fear of failing stress tests translated to banks being less aggressive in making some small business loans, lower rated middle market loans and near-prime mortgages

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net