6 takeaways from Jamie Dimon's letter to shareholders

April 7, 2021 4:26 PM

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A pandemic. A recession. Nationwide unrest over racial injustice. The events of the past 12 months have demonstrated with crystal clarity that banks have a role to play in society that goes far beyond taking deposits and making loans.

It’s now more critical than ever for banks to understand what it means to be good corporate citizens — and that entails more than just philanthropy, JPMorgan Chase Chairman and CEO Jamie Dimon said in his latest letter to shareholders. In some cases, it means engaging at the national level on certain policy issues, he said.

“We engage at this level because companies (like ours) have an extraordinary capability to help,” Dimon said. “We help not just with funding but with developing strong public policy, which can have a greater impact on society than the collective effect of companies that are responsible community citizens locally.”

In a 66-page letter published Wednesday, Dimon said he expects the U.S. economy to come roaring back from the pandemic-induced recession, but he leveled criticism at regulators for imposing capital rules that he said prevented the industry from doing more to prop up the economy during the past year.

He also had a message for his fellow bankers about the threat to their dominance from big technology companies and upstart fintech firms. “While I am still confident that JPMorgan Chase can grow and earn a good return for its shareholders, the competition will be intense, and we must get faster and be more creative,” Dimon wrote.

Here are six takeaways from his letter:

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The U.S. economy is ready to take off

The U.S. economy is poised to expand — as long as COVID-19 variants don't spread and inflation is held in check, Dimon said. In fact, the good times “could easily run into 2023," he d.

A few reasons for his rosy outlook: the size and scope of the various programs rolled out by the U.S. government and Federal Reserve to head off some of the economic turmoil caused by the pandemic, vaccine distribution and the possibility of a federal infrastructure bill under the Biden administration.

“I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more [quantitative easing], a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the U.S. economy will likely boom,” Dimon wrote.

Still, uncertainties remain about the variants and whether inflation is on the way, Dimon acknowledged.

“The new COVID-19 variants may be more virulent and resistant to the vaccine, which could obviously reverse a booming economy, damage the equity markets and reduce interest rates as there is a rush to safety,” he wrote. “And the increase in inflation may not be temporary and may not be slow, forcing the Fed to raise rates sooner and faster than people expect.”

He also cautioned that the lasting impact of any such boom depends on the “quality, effectiveness and sustainability of the infrastructure and other government investments.” Rolled out last week, the $2 trillion American Jobs Plan runs the gamut from fixing highways and bridges to upgrading water drinking systems and broadband access to building more housing and modernizing schools and day care facilities.

“I hope there is extraordinary discipline on how all of this money is spent,” Dimon said. “Spent wisely, it will create more economic opportunity for everyone.”

Capital rules hindered banks’ response to the pandemic

Dimon used the shareholder letter Wednesday to question regulatory constraints and large bank capital requirements that, he claimed, prevented JPMorgan Chase from doing more to support the economy during the darkest days of the pandemic.

He takes a particular focus on the U.S. Treasury market, which was upended in March 2020 when investors, bracing for long business closures, sold their government debt holdings en masse to raise cash. Dimon said that capital requirements put in place after the 2008 financial crisis prevented large banks like his from absorbing the sell-off in Treasurys, because they had to maintain higher amounts of capital reserves against these holdings.

Federal regulators in April 2020 temporarily exempted reserves and Treasurys from the calculation of banks’ so-called supplementary leverage ratio, or SLR, which along with other moves from the Federal Reserve helped balance the market again.

In his letter, Dimon said reducing the “regulatory costs” of U.S. Treasurys would have freed up JPMorgan to supply “hundreds of billions of dollars of additional [U.S. Treasury] financing to the market.”

JPMorgan had called on regulators to make the SLR exemption permanent to ensure large banks could help facilitate the buying and selling of Treasurys in times of stress without as much intervention from the Fed. Those in favor of putting the tougher capital rules back into place argued for maintaining stricter rules so that banks could easily absorb losses while the economic damage drags on, while capital that has been put toward stock buybacks and dividend payments could be redirected to meet reserve requirements.

Feeling that the Treasury market was on sound enough footing, regulators ultimately decided to allow the SLR relief to expire on March 31 but opened up the rule again for further tailoring. Dimon argued in his letter for a re-examination of stress tests and capital requirements during crises and said the banking industry “stands ready to do more” during these episodes.

“One day, someone is going to ask why the banking system has $4 trillion either in the form of cash or deposits at the Fed or Treasury securities. Shouldn’t we use some of this liquidity to help the economy?” Dimon wrote. “It’s a good question, and I’ve yet to see agreement on the right answer.”

Big Tech, fintech competition is 'here to stay'

Competition from fintechs and Big Tech companies such as Amazon, Apple, Facebook, Google and Walmart is “here to stay” and banks must get more aggressive to handle the threat, Dimon said.

While JPMorgan has “an extraordinary number of products and services, a large, existing client base, huge economies of scale, a fortress balance sheet and a great, trusted brand,” it needs to do more to make those products and services easier to use and move faster to adopt artificial intelligence and cloud tools and resources “so we can make better use of it to better serve our customers,” he said.

“While I am still confident that JPMorgan Chase can grow and earn a good return for its shareholders, the competition will be intense, and we must get faster and be more creative,” Dimon said.

A big part of the strategy could be scooping up competitors, he said.

“Acquisitions are in our future and fintech is an area where some of [our] cash could be put to work,” Dimon said. “This could include payments, asset management, data and relevant products and services.”

Dimon has been plenty vocal about his interest in buying ancillary businesses. In December, he said the company is open to merger-and-acquisition ideas and urged bankers to call him with M&A ideas.

In his letter, he called for regulators to level the playing field between banks and nonbanks in terms of how products and services are treated, but acknowledged that there may not be much that changes.

“As tough as the competition will be, JPMorgan Chase is well-positioned for the challenge,” he wrote. “But our eyes are wide open as the landscape changes rapidly and dramatically.”

‘Many employees’ will return to offices full-time

Not every JPMorgan staffer is coming back to the office and some of those that are won’t be there full-time.

Dimon — one of the first U.S. bank CEOs to push last fall for a return to the office, citing reduced productivity and alienation among younger employees — said “many employees” will work onsite permanently. Meanwhile, others will split time between the office and home and “a small percentage of employees, maybe 10%, will possibly be working full-time from home for very specific roles,” he said.

Of the company’s 255,000 workers, those who will be onsite include “nearly all” retail branch workers as well as jobs in check processing, vaults, lockboxes, sales and trading, security and medical staff, he said.

“In all cases, these decisions depend upon what is optimal for our company and our clients, and we will extensively monitor and analyze outcomes to ensure this is the case,” Dimon wrote.

The decrease in the number of onsite staff means there will be less demand for real estate to house those employees, he added. The company plans to “move quickly” to adopt an “open seating” arrangement that could reduce the number of required seats from 100 to 60 on average, Dimon said.

Meanwhile, JPMorgan will keep building branches as part of a market expansion strategy, Dimon said. One hundred offices will be opened in low- and moderate-income neighborhoods across the United States while another 16 will be launched as “community branches” in traditionally underserved areas and 150 “community managers” will be hired by 2022, he said.

The “community branch” model — which aims to expand outreach to small businesses and financial literacy to consumers — has already been deployed in Chicago, Dallas, Minneapolis and New York.

“We want to build trust in the communities we serve and become our customers’ primary bank,” Dimon wrote.

Carbon tax would blunt impact of climate change

Climate change is “a critical issue of our time” that will require serious collective action by both the public and private sectors, but abandoning fossil fuels altogether isn’t the solution, Dimon said.

“We will need resources such as oil and natural gas until commercial, affordable and low-carbon alternatives can be developed to meet all of our global energy needs,” he wrote. “This is where business and government leaders need to focus their time and attention.”

Dimon said JPMorgan will work with existing corporate clients to meet sector-specific targets to cut greenhouse gas emissions by 2030. The bank has also established a new Center for Carbon Transition as a resource for corporate clients, while internally, the firm is looking to reduce its carbon footprint by generating its own solar power to fuel its operations.

Dimon lauded the 2015 Paris Agreement as an important initial step toward addressing climate change, but he also urged policymakers to go further. A carbon tax and dividend, for example, would essentially set a price on greenhouse gas emissions while also returning money to communities most affected by the transition to a lower-carbon economy.

“Without a benchmark like this, businesses and economies won’t be able to properly factor the cost of carbon and the benefit of alternatives into their long-term strategic planning and capital investment decisions,” he said.

Corporations shoulder some blame for racial, income inequality

Dimon said bluntly that the nation’s economic stability has been threatened by the “the brutal murder of George Floyd and the racial unrest that followed.”

A banking industry that has historically shied away from social issues and had been blamed for doing too little to address racial and income responded forcefully to theproteststhat swept across the U.S. last year, committing billions of dollars to bridging economic gaps while pledging to improve diversity within their own ranks.

Dimon laid out what JPMorgan is doing, including offering assistance for people of color to better afford housing and eventually purchase homes, providing more financing to Black and Hispanic small-business owners and placing branches in more underserved communities.

Still, Dimon acknowledged that business leaders have played in widening the economic inequality in the U.S., which he said lies at the heart of last year’s protests.

“Many of our citizens are unsettled,” Dimon wrote, “and the fault line for all this discord is a fraying American Dream — the enormous wealth of our country is accruing to the very few.”