A reversal of fortunes within the financial industry is illustrated in few places more vividly than JPMorgan Chase.
A few years ago, the company’s consumer bank, Chase, was struggling under the weight of the mortgage crisis and a slow economy while the JPMorgan investment bank thrived.
More recently, however, it was the head of the consumer bank, Gordon Smith, who was sounding upbeat and jocular as he spoke, with his English accent, about his growing business during a presentation at the company’s annual investor day, pointing to opportunities like the bank’s new mobile app and the improving credit of the American consumer.
A few hours earlier that same day, Daniel Pinto, the Argentine-born head of the company’s investment bank, was notably less cheery as he reviewed billions of dollars in cuts his division will be making and reductions in his future financial projections, even as his team has gained relative to competitors.
It was not discussed during the investor day last week, but it is Mr. Smith who is in line to succeed Jamie Dimon should JPMorgan Chase need a new chief executive in the near future, according to company executives briefed on the matter who were not authorized to speak publicly.
In the past, the succession line at JPMorgan Chase was generally thought to run through the more complicated and, at the time, more profitable investment bank.
When it came time for Mr. Dimon to speak to the company’s investors, he joked about the unexpected nature of a situation in which it is the Wall Street power brokers who are on the back foot.
“I tell Daniel and all the guys, all the folks from the investment bank, it’s really weird to feel sorry for the investment bank, isn’t it? You have to confess,” Mr. Dimon said, drawing a laugh from the audience.
The diverging prospects for JPMorgan’s biggest businesses reflect a split within the broader financial industry. Investors are betting that banks like Wells Fargo and U.S. Bancorp, which focus primarily on American consumers, will grow much faster than firms like Goldman Sachs, which are concentrated on Wall Street business.
JPMorgan is a particularly stark indication of the trends because it has maintained dominant operations in both consumer and investment banking.
The investment bank led by Mr. Pinto has been improving its position relative to competitors, gaining market share in areas like stock trading and European banking, cementing its place as the largest investment bank in the world.
But while profits at JPMorgan Chase rose to a record level last year, profits from the investment bank fell 16 percent from the previous year to the lowest level since 2011.
Mr. Pinto still oversees an enormous operation that accounts for about a third of JPMorgan Chase’s total revenue. When judged by the returns it provides to shareholders, though, the investment bank has become the worst performing major division in the company. The return on equity — a commonly used measure of profitability — was around 20 percent in the consumer division last year. In the Wall Street operation it was half that.
Moving forward, Mr. Pinto lowered his projected returns for future years to 13 percent from 15 percent, bringing it below even the struggling mortgage lending operation.
The gap between the different businesses inside JPMorgan is a large part of the reason an analyst at Goldman Sachs suggested that the company might be worth more if the investment bank was broken off as a separate business.
JPMorgan’s executives resist any suggestion that the bank should be split up. But the lagging performance is forcing Mr. Pinto to consider cutting expenses more sharply than other divisions of the company must.
Over the last four years, the investment bank has already reduced costs by 10 percent, largely by cutting front-office salaries. And last week Mr. Pinto outlined another round of cuts that he expected to bring expenses down an additional 13 percent.
“It is a point where you really need to embrace the change, disrupt your model and do what it takes in order to maintain the leadership position that we have going forward,” he said.
The recalculation is being brought on by several factors, some of them temporary. The regulatory pressure on the investment bank remains strong as it faces potential fines over accusations that traders colluded to manipulate various financial benchmarks; it is not alone in facing this pressure.
The continuing low interest rates have also reduced activity on trading desks across the industry, something that Mr. Pinto suggested was likely to change soon. Indeed, he suggested that trading revenue during the first weeks of 2015 had improved significantly.
But even if that continues, the trading desks that provide a majority of the investment bank’s revenue face major headwinds that are not likely to fade away.
In 2014, the single biggest driver of falling returns was the increased amount of loss-absorbing capital that JPMorgan needed to allocate for every trade it did — a result of the stepped-up capital requirements put forward by the Federal Reserve. Such capital costs the investment bank real money that is not required, to the same degree, by the consumer bank, and reduced returns for Mr. Pinto by 1.8 percentage points last year.
In the coming years, JPMorgan is likely to have to raise even more capital, and more so than other banks because of JPMorgan’s size and complexity. Most of the rising capital requirements are tied to the capital-intensive operations under Mr. Pinto’s purview.
Mr. Pinto said he was taking several steps to curtail business lines that require disproportionate amounts of capital. That could force the firm to potentially stop clearing certain derivatives trades for customers and holding deposits for some clients, like foreign banks.
Mr. Dimon said that he got a note from one of his top deputies, reminding him that in past years it was the investment bank that was “carrying the load while we were sucking wind in card and mortgage. And it’s hard to remember today.”
The bank chief said the situations would most likely reverse again, but his executives provided no timeline for when that might happen.
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