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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a former investment banker and author of ‘Power Failure: The Rise and Fall of an American Icon’
JPMorgan Chase announced recently that the bank, under its gifted chief executive Jamie Dimon, had just earned $50bn in net income in 2023. That is the most money the bank has made in its history and the most money any bank has made ever.
A few days later, Goldman Sachs announced that it had made far less over the same year, about $8.5bn. That must make for some painful comparisons among David Solomon’s troops at 200 West St in Lower Manhattan.
The market is still at present a roughly equivalent valuation on Goldman and JPMorgan profits — a share price equivalent to 11 times its expected earnings. But that does not tell the longer-running story. It is not just a case of the gulf in earnings or relative market capitalisations — $500bn for JPMorgan versus $125bn for its rival in investment banking. JPMorgan trades on a valuation multiple of 1.6 times its estimated book value compared with 1 times for Goldman.
That indicates faith in the quality of the assets and breadth of businesses that underpin the earnings machine that Dimon has built. The relative strengths have been obvious for a long time of course — a huge and profitable retail bank, a highly lucrative credit card business as well as much larger asset and wealth management and corporate and commercial loan businesses.
Goldman is a very different business, even more so after scaling back its failed foray into retail banking and with its credit card venture with Apple on the verge of being unwound. It is ultimately an institutional securities and advisory business based on generating deal or asset management fees. Its profitability has been improving and the bank should be lifted by any pick up in deal activity. But last year has shown just how valuable JPMorgan’s powerhouse spread of business is for the bigger bank — and the confidence that instils in investors, depositors and clients.
One reason the profits are gushing at JPMorgan, compared with many of its peers, is that the bank has a much lower cost of capital. It uses that dirt-cheap capital to lend out at much higher rates and reaps the resulting spread as nearly pure profit.
The bank admitted as much in its fourth-quarter earnings reports, when it shared that it made $24bn in net interest income — the difference between its cost of capital and what people pay the bank to borrow its money. Across the full year, net interest income surged 34 per cent to $90bn. As the Financial Times reported, that is more than double the increase of the next bank, Wells Fargo, which reported a 16.5 per cent rise.
In fact, the bank gets much of its moneymaking raw material — its $2.4tn of deposits — nearly for free. For instance, despite rising interest rates across the debt spectrum, and some money market funds paying interest rates of 5 per cent or more, JPMorgan is taking a very different tack.
It pays 0.01 per cent annually on its checking accounts and 0.02 per cent annually on its savings accounts (or at least mine). That is about as close to zero as you can get, giving it access to trillions of dollars of raw material for just about nothing. No wonder that as interest rates have risen since the Federal Reserve started pivoting in 2022, JPMorgan has been raking in profits. It is still paying depositors interest payments from the previous, zero-interest rate cycle while charging its borrowers interest rates based on the current much higher rate card. Bonanza!
You may wonder why the bank does this. The answer is simple. Because it can. JPMorgan is perceived as the safest place to keep your money, thanks to the so-called fortress balance sheet that Dimon tells people he has created. And when the various US regional banks melted down last year, where did depositors run, if they could?
To JPMorgan, of course. Depositors were promptly rewarded with the same near-zero reward that I get but at least they could get their money out when they wanted it. Goldman, on the other hand, pays up for deposits. The investment bank’s Marcus saving accounts are still around despite the general unwind of Goldman’s retail thrust. They pay interest at an annual rate of 4.50 per cent.
In effect, JPMorgan is paying less for its cost of goods in a business that is much bigger for it than Goldman. This benefit might reduce this year as interest rates decline but it remains a serious competitive advantage and much of that is about perception. There has never been any question that Wall Street banking is a confidence game. The whole banking system, in fact, depends on faith — faith that your money will be there when you want it, faith that borrowers will pay back the money they owe. It is just not that often we can see the real-world effect of confidence in banking so clearly at work.